Category: Uncategorized

                  To grow faster, follow their footsteps and learn from their mistakes.

For this article, I found a quote from Steven Dunn that says that “You can never make the same mistake twice because the second time you make it, it’s not a mistake, it’s a choice.” Quite fitting regarding how we can learn strategic finance lessons from second-time CEOs and avoid some of the mistakes they made in their startups the first time around. At Burkland Associates, we give strategic finance cover to many CEOs that have been there before, here are some of the lessons we’ve learned from them:

  1. Embark in serious business modeling early on

A few years ago, RedRocketVC came up with a checklist for startup success. One of the items on their list is “Flexibility to fine-tune model and navigate challenges.” We see it and hear it from our CEOs time and again: modeling is one of the very few “must haves” for any startup. For a startup, business modeling and finance modeling is exactly the same thing. It may seem like a theoretically painful process, especially early on, but it is definitely one that will yield many benefits. A sound financial model that you can iterate over time, provides clarity on the current business and also illuminates the strategic choices available. Furthermore, this model will focus product, sales, business development and management on the same strategic plan and the levers available to make it viable.

Another reason to invest time in modeling is that a sound financial model will help you see the holes in your go-to-market approach that an experienced investor will detect at first sight, enabling you to bulletproof your investor pitches. Also, strong financial modeling will help a founder show investors the tangible steps to transform their idea first into a successful revenue model (generates revenue but burns cash) and eventually into a successful business (generates both revenue AND cash!).

  1. Do not confuse accounting with strategic finance

Although good accounting is a basic skill every startup needs, its role needs to be understood. It is natural for a good accountant to become a “right-hand” guy for a CEO early on. After all, the accounting person usually knows more about the overall business than other management team members. Thus the CEO will often use them as a sounding board for discussing future plans for the business.

This is where things can go wrong. Good accountants are trained to look in the rearview mirror to make sure you do not leave out anything from the financial scorecard that provides an honest assessment of historical company performance. What they are not trained to do, however, is look out the front windshield and see what’s coming and/or which strategic turn the company should take.

That is the role of a strategic finance professional, who can use both the rearview mirror as well as look out the front windshield to help a company navigate around the obstacles and find the opportunities in the road ahead. Accounting and strategic financial professional are very complimentary and should be brought in as early as possible in a startup’s life — and remember, they are more affordable than ever since you can rent both in the new sharing economy!

  1. Maintain financial discipline

The third lesson in finance we can learn from second-time CEOs concerns financial discipline. Financial discipline implies running your business based on both your financial model (which is forward-looking) and your accounting (which is backward-looking). Take these two extremes. First, most first-time CEOs have a good innate sense of their monthly burn (they usually are signing the checks!) and yet they are often surprised when the money runs out.

Why? Often founders do not want to really think about what is happening to their dwindling cash and without a true cash flow statement it is easier to not think about what is coming. Real financial statements with a solid cash flow statement provides founders with an unambiguous picture of what is happening to their cash including how important payment terms and collections are to making your payroll in the coming months before that next fund-raising round. This becomes especially important with the big-name clients that often will only accept 60-day payment terms when most of your own expenses need to be paid in less than 30 days.

Strategic finance as an early partner to grow with confidence 

Like second-time CEOs, most successful first-time entrepreneurs eventually come to realize the finance function is more than just parental supervision required by their institutional investors. The only question is how much time (and opportunity cost) passes before they recognize that strategic finance is a vital ongoing partner in company success…just like development, sales, marketing, and customer success.

Photo courtesy of Christopher Michel.

Timing is everything when it comes to finance talent.

Nowadays, when startups raise money from VCs, especially in the early stages, line items in their financial projections do matter. For instance, in an era when all marketing tools give you freemiums or super low entry price points, and social media rules over mass media, your marketing budget can’t be what it was for startups a few years ago. Some VCs will go as far as saying you don’t need money to do good marketing until you grow the business on a dime. The same is true for finance. Why would you need a CFO when you can rent one? After financing is complete, what would a CFO do all day anyway?

Last week I was invited to do a talk at the inaugural Veterans Conference in San Francisco. When thinking how to make my talk useful and memorable to veteran founders and CEOs of early stage companies, I came up with the 2×2 matrix below (I’m an HBS graduate – we’re required to do a 2×2 matrix at least once a week for life!). Anyways, the chart provides a framework to help CEOs and founders distinguish between various finance and accounting roles, and to understand when and how to engage the right resource along their journey.

Framework for Finance Talent

The first thing to note are the axes. The progression to a full time CFO is natural as the level of help you need depends on the age of your startup. In an era when you can rent and not buy everything, finance talent is no exception. You need to strike a balance between looking at the past to ensure everything is in order (bookkeeping) and looking at the future to ensure you grow in the right direction (strategic finance).

The good news is that you can have your cake and eat it too!

Timing is everything

Here’s how it can play out. At the beginning, pre-seed and pre-revenue, you only need a bookkeeper. I recommend you to hire yourself as this guy – it will help you get a good handle on the levers that drive your business, and it will not take more than a couple of hours of your time every week. Then you start growing, the dogs eat the dog food so you raise a seed. At this point, your attention needs to focus on revenue and you need a professional bookkeeper. It is at this point that you also need to rent a CFO who can help you, giving you just a few hours per week, to lay the foundations of your business model so you can think about the future from a finance perspective (remember, bookkeepers are trained to look at the past).

Then comes the point when you will need more CFO cover. From Series A through D you will need to cover all bases. You need your bookkeeper. You also need more time from your on-demand CFO, who can help you with historical and pro forma financial statements, unit economics, raising capital and business modeling. Eventually you need to complete this team with a controller to build and improve processes and systems and ensure GAAP accounting), and maybe FP&A Analysts to support detailed and compressive operational metrics and dashboards and with corporate performance management tools.

Ideally, there comes a point in this journey, usually close to an IPO or an exit, when you stop renting your CFO and buy one. You should feel good – you’ve graduated to the next level and you need not only the full time of a CFO, but her undivided attention and a deep knowledge of what makes your company tick.

There’s a time for everything. Like in all graduations, you’ll have mixed feelings. You’re not a startup anymore.

Photo courtesy of Navy veteran, Silicon Valley entrepreneur and photographer Christopher Michel.

Renting a CFO can help you have a strategic partner to realize your vision (photo courtesy of Silicon Valley entrepreneur and photographer Christopher Michel).

Startups are hard.  Most fail.  Even ones with great ideas.  So, how do you maximize your odds of success?  Hire the best team you can afford.  Including a Strategic Chief Financial Officer with the skills, experience and vision to be your business partner and trusted advisor.  Muhammad Ali had Angelo Dundee.  King Henry VIII had Thomas Cromwell.  Luke Skywalker had Obi-Wan Kenobe.  Who’s got your back?  It could be your part-time CFO.

Can’t you get away with just an accountant?  In a word, “no”.  Accountants are important and help you figure out what’s happened in the past and report the same to your internal and external stakeholders.  But you are an early-stage company.  You need to drive the bus by looking ahead through the windshield, not behind in the rear-view mirror.  Smarter finance is forward looking – it helps you chart the best course.

Shouldn’t you be doing this yourself as the CEO?  Again, “no”.  Best case, you are actually capable of filling this role.  But this isn’t the best use of your precious time. You need to drive the company’s product and sales, build the team and be the company’s face to the outside world. Time spent in finance is time spent away from your highest and best purpose.  Worst case, you screw it up.

But can you afford and attract a top-quality CFO?  Yes!  Because you don’t need this resource full-time and can pay only for what you need.  We live in an on-demand world.  Don’t buy servers – rent time from AWS.  Don’t buy a car – book an Uber.  Don’t buy a vacation home – go on Airbnb.  And don’t hire a full-time CFO (yet) – rent one from a reputable On-demand CFO firm.  You probably only need 0.5-2.0 days per week, can find A-list talent with expertise in your field and be up and running in days.  And when you’re ready to make a change, it’s simple to move on or upgrade to a full-time resource.

Here are 5 key things you get from a part-time Strategic CFO:

  1. Build and maintain your business and financial model. How will you monetize your idea?  How should you price and deliver the product or service?  How much cash is required to hit your next milestone?  When do you need to raise your next round?  What resources can you afford and when should you deploy them?  How do you know if it’s working and when/how to pivot when the market gives you feedback?  Your CFO helps you answer all these questions.
  1. Leverage your management team so you can punch above your weight. The CFO is a core member of your team even if they are not sitting in your office 50 hours per week.  They bring expertise, contacts and credibility to your company and can help you manage all the internal/administrative functions so your time can remain focused on building and growing the top line.  A proven CFO also gives board members, investors and other outside stakeholders confidence in you and the company.
  1. Be your strategic partner and key sounding board. CEO is a lonely job, even in the biggest companies.  The best CEOs have trusted strategic advisors that they can rely on to help them execute their plan and give them honest feedback.  This is hard in an early-stage company where you can’t really afford to build a large team of experienced talent.  And more times than not, the rest of your senior team is drinking from the same Kool-Aid jug that you are – that’s why they’re there.  Your investors and advisors can help play an important role here, but they have lots of other demands on their time and priorities.  Your CFO is dedicated to your success and can bring critical outside perspective.  Most likely, he or she has seen many of the issues you’re facing before – and can access the knowledge of the rest of their firm on your behalf.
  1. Increase your access to the capital you need. Cash is the lifeblood of your company.  Most likely you will want to tap external sources now or in the future.  This could be from equity, debt, strategic partnering, public offerings, M&A or some other source.  Your CFO can help guide you on how to approach these capital sources, how to craft the right story, answer their questions and due diligence requests, negotiate and close the right deal and maintain good relationships with these new partners post-closing.  He or she will also make sure you’re always ready to raise the next round – preferably before you need it.
  1. Immediate return on investment. Because you only pay for what you use, a part-time CFO can be surprisingly affordable.  And if they deliver on even a subset of what they have to offer, they should pay for themselves many times over in terms of both your bottom line and your probability of success.

Rent the CFO cover you need. No-brainer.

We’ve been closely following the emerging trends in the SaaS business model. Several of our customers businesses revolve around it and, as most other tech models, it is going through a transformative change. One of the most insightful articles we’ve read lately about this transformation  comes from Techcrunch. On November 13, our good friend and business school classmate, Sequoia partner Aaref Hilaly wrote a story smartly titled “Why the next great SaaS company will look nothing like Salesforce.” In it, Aaref points out that the newest crop of SaaS models turns the notion that to be sticky, a SaaS model has to become the “System of Record” (SoR) which used to be “the single source of truth, for customers’ most valuable information, such as customer records or employee data” like Salesforce. He adds that the emerging opportunity for SaaS is to become “Systems of Engagement” (SoE), meaning apps that employees actually use to get their work done” like Slack,  one of the most “sticky” business applications, now the most valuable private cloud company according to Forbes.

Check it out here. Aaref’s article is quite interesting and goes deep regarding how this new business model for SaaS not only makes sense, it solves the real problem of “creating systems of engagement that get users and revenue, by leveraging data in the systems of record.”

This Thanksgiving week, Series A startups can be thankful for your funding, but realize that the B Round is now the tougher round and the time to start preparing is now.  This presentation by Jed Katz (https://www.linkedin.com/in/jedkatz), who is the managing director at Javelin Venture Partners (https://javelinvp.com) explains how to do that. Jed posits that your next round of financing is much closer than you think, which catches some Founders by surprise. To prepare, he gives tips on setting 12-month goals, making cash last, managing & leveraging your Board, creating separate roadmaps for Sales & Engineering, and using the right metrics. Note how creating a brand serves recruits and investors in addition to customers. We especially like his final “words of wisdom,” that, unlike the perfunctory summary in some presentations, are useful and action-oriented.

These are valuable tips from a VC pro who’s seen everything. Check them out.

This curated selection of quotes from Marc Andreessen provides insight into how Venture Capital works.  Insights include:
– Almost all of a VC’s return comes from one or two disproportionate successes.
– The breakout successes are from areas that were against the grain of consensus.
– Success begets success as it attracts more capital, talent & word-of-mouth.  Also failure begets failure.
– VCs must go to meetings to learn rather than teach.
– Startup teams trump ideas because teams can adapt.
– Declining to invest in winners is a bigger VC mistake than investing in losers. Most VCs turned down most big successes.
– VCs spend most of their time trying to fix their losers and not on helping their winners [Should they change that? -Ed]
– The shift to software will accelerate innovation because it’s so easy to make & change.
And from the commentary:
– The benefit of disruptive technology is often in breakout value or dramatic cost decreases.  This is missed from measures like GDP (which may actually decline with cost reduction) because those measures only capture transaction value, not consumer value (consumer surplus).
Successful Founders of several marquee startups offered their historic pitch decks along with commentary.  Notice they span different stages & rounds.  Also, see how pitches have evolved reaching back to 2005.

Burkland Associates Principal Keith White conducted a series of two webinars on the basics of business funding & fundraising.  The webinars were produced & sponsored by Xero accounting software and the recordings can be found on their web site through the links below.

Peter Reinhardt, CEO and Co-Founder of Segment, recently wrote a blog post with some insightful tips for startup founders, including his selection of Jeff Burkland as part-time CFO.  Subjects covered:
– Customer Prepayment and its effect on cashflow
– Venture Debt uses
– How a “Shadow Budget” can aid planning without creating bureacracy

This report provides a variety of performance information about SaaS companies for us to compare to.  Caveats:
– There’s a lot of data so try to pare it down to the most relevant to you.
– This blends sectors so be aware that your space may have unique factors (like stage of maturity) that make apples-to-apples comparisons difficult.
Still, there’s a degree of “pattern recognition” among VCs, so it might give insight into the patterns they’re seeing.