Integrity

A colleague once told me that as CFOs, we don’t really have measurable output. Salespeople have bookings, engineers launch products, marketers drive leads, manufacturing has a whole set of statistics. Our only product is integrity.

This saying is always playing in the back of my head when I’m asked to pull things in a certain direction. Can’t we show that cash will last 18 months instead of 15? Can’t we show that those months where we got rent abatements were profitable? Can we just up the size of a few deals in the pipeline so that it looks a little fatter?

It is difficult to push back against this sometimes. It is also difficult to push back against what you can show is expansion that is way too fast.

This happens all the time, and I mean all the time, in the SaaS world where companies flush with cash feel obligated to spend it as quickly as possible on a much bigger sales and marketing operation. Their investors often want this too. Sometimes growth does not materialize, for which there are usually adequate warning signs (examples – not enough leads per salesperson, salesperson tamp is taking way longer than expected). A good CFO can see this coming a mile away. But there is tremendous pressure not to “be negative”, so many say nothing. Then one day there is a reckoning, and a restructuring. For some CFOs, this is when they too find themselves looking for a new job.

I have left a client over this before, and I’m sure it will happen again. I understand the prsssures in growth build stage companies and consider myself an optimist and someone who helps management teams set stretch goals. We’re not A/P at IBM after all. But I remember always that my only product is integrity.

Time kills deals

I’ve been in the middle of a lot of transactions: fundraisings, M&A, partnerships, and deals within and across divisions of the same business. They all have one thing in common, which is that they are not done until they are done. More and more, hiring is becoming a high-stakes transaction, and it too is a perishable one. Put another way: time kills deals.

It kills me when people celebrate prematurely on deals. So much can go wrong between “almost there” and crossing the finish line. People leave companies. New management or investors can have new priorities. The market can shift. Fashion changes. Employees or other franchisees can do stupid things. Cash becomes more scarce, or if you are the one looking to invest it, the your target company may rethink if they need it. Geopolitics have killed more deals than I can count.

This is why I give transactions very high priority in juggling different clients. If I have one raising money, those phone calls get priority. I sometimes have to juggle a lot of things around for this (it’s one reason I hired an assistant). The others know that when it’s their turn, they’ll get the same treatment. I suggest that when you’re in deal mode, you do the same and insist that your advisors do as well.

Choose your words

Recently I’ve had to get particularly pedantic with a couple of my clients about language. Specifically, how they talk about certain metrics in the business.

A common one things that young companies conflate are bookings and revenue. It’s not just an accounting nuance that they aren’t always the same thing. It’s an important business problem to be solved. My client that sells fashion online? The credit card swipe is nice, but until we ship, it’s not revenue. It’s actually a debt: we owe someone a hat. In the SaaS world this debt is called deferred revenue and it sits on the balance sheet for a long time.

Another is on the opposite side: cancellations and churn. Or for my co-working client, cancellations and move outs. If someone cancels on November 10th, their move out is December 31st. Without getting into which one is more important to track, they are different and tell you different things about the business.

These distinctions matter a lot when you’re looking at unit economics (more on this topic later). Put simply – per widget that I sell, how am I doing? A widget can be a hat, or a square foot, or for a staffing company, an hour. My new client services cars in mobile trailers. Our unit is the trailer (like a store). It makes sense to know how each trailer is doing. But I could argue, and might continue to, that once the trailer exists, it’s the appointments that matter. Optimizing those is the whole ball game.

My point is that this stuff actually matters. Once you choose a unit, it becomes the root word, so to speak, in the language that your team and your investors are speaking.

Pick 2

A useful shortcut in build-stage companies is the project manager’s mantra: Good, Fast, Cheap – pick 2.
Here’s a real-life example from the world of fast-food burgers, which because of my Five Guys franchising experience, I know something about.  People sometimes complain to me that Five Guys is expensive compared to other “similar” options.  True.  Good and fast, yes.  We strive for 8 minute ticket times and perfectly cooked food.  But it’s not cheap.  In ’N Out, which I’m a huge fan of, is good and is cheap, and I’ve waited there for 20 minutes when it gets busy.  Burger King is cheap and fast.
Part-time CFOs are similar.  This is my business right now and I had to decide which 2 I would be.  I picked good and fast.  Some prospects don’t want this, and that’s OK.  It means that I (and all of TechCXO, really) am not a good fit for them.
I think in what I do that this is the best way to provide a lot of value.  If things get to a point where being cheap is more important, then I will bow out.
I’ll say that on average, it is simply not possible to be good, fast and cheap at the same time.  It is also not optimal to be kind of good, kind of fast, and kind of cheap.  It’s hard to get initial traction this way and even if you can, it eventually gets companies killed.
In the world of being a CFO, where this shows up in product companies is in the combination of pricing, margins and lead times.  I have one client right now that is good and fast, but not cheap.  High margins.  I had one in the past that was good and cheap, but not fast.  When they tried to be fast, they had to do it at low margin because they had staked out a position on being cheap.  This had huge impact on how much cash they would need in the next 2 years, and therefore how much they had to raise, and therefore on how much dilution they had to take.
All things being equal, startups with big ambitions that don’t have access to limitless VC financing often optimize first around “good” as “fast and cheap” is otherwise limited to  companies with either scale or very skinny cost structures.  If you’re a startup going for fast and cheap, that’s great – then you need to limit your expenses anywhere you can.  If you’re going for “good”, also great.  Then the question is: do you want to be good and fast, or good and cheap.  Either one works.
But all 3 together – that can’t last long.

Company holidays

Tomorrow is Thanksgiving, which it seems is one of the few days of the year that anyone not affiliated with public service, the NFL, or the Macy’s parade is not working.   Maybe I should include retail in there because of the unfortunate trend of stores open on this holiday.

A few notes on holidays in the build-stage company world.  This is especially relevant now as many of my clients are setting up their 2019 Holiday Calendars.

First, which ones?  Although I’m a CFO, I am in favor of giving employees off for the day after Thanksgiving.  This is a holiday about being together with family, which for many of us, means travel (or that people have traveled to spend time with us).  Because I’m in the Boston area, where you can count the number of nice-weather months on one hand, I also believe in either the day before or after July 4th, depending on how the calendar falls.  This is not a day when a lot of productive work gets done, and it’s early both in the month and the quarter.

The same goes for January 2nd, although not necessarily for December 31st, which often is the mad dash to close the quarter and year.  It can be a stressful and fun day to have everyone together driving to a common goal.  Better still if you’ve hit your numbers for the year and can give this day off as a bonus.

Then there are the holidays which are commonly considered optional: MLK Day, President’s Day and Veteran’s Day.  I’ve seen companies decide different things about them.  The markets are closed, as are schools, but I think many companies tend to be open and functioning fully on these days.  Good Friday is another example of this.

Again, I am in favor of having these as days off.  I think it’s important to recognize MLK, our democracy, and our men and women in uniform.  Easter is an important day for many people, and a time for family.

A related question relates to the Jewish holidays in the fall, or Passover.  When I was young, I always found it a little unfair that my holidays (especially Yom Kippur, which I dreaded for the fasting part anyway) required me to take vacation days, but Christians had off for Good Friday and Christmas.  I got over that though.  This is what float days are for, and besides, when I was young I didn’t need to take days off to take care of sick relatives or children.  Now I appreciate more how important that was.

Another reason I favor more holidays is that many people work on their days off, and/or don’t take all of their vacation.  Time off is very important.  I know that is not a common utterance from many CFOs.  But it’s true – if you don’t a recharge a battery, it not only runs down, it loses the ability to be recharged.

So, even highly motivated build-stage startup employees have to take time off.  And sometimes, you have to force it.  The holiday calendar is one way to do this – and by the way, set yourself apart from other startups competing for the same talent you are.

Have a Happy Thanksgiving.

 

2 kinds of people

Someone smart once told me that in business, there are 2 kinds of people in the world: those who have the money, and those who need the money.  I have a lot of “2 kinds of people” sayings in my life, but this one pops up for me all the time.

I don’t mean this in an Ayn Rand kind of way.   It’s more of a practical saying to think about what’s going on in a transaction, a term I use loosely.

Example: you’ve just raised financing and “have the money”.  Now is when the non-formula lenders of the world will offer you options for having more.  When you “need the money”, and they have it, you often can’t get it.

The corollary is that you shouldn’t try to raise financing when you have your back all the way to the wall.  This is something that seemingly every startup knows, and yet the number of close calls I’ve seen suggests that it’s an axiom often unheeded.

Example 2: you have sold to a customer but haven’t collected on your invoice yet.  They ask for changes to your product, or a little more help installing it.   They have the money.  You need it.  It’s difficult to extricate yourself from this, especially if it’s an enterprise B2B sale.  If you are in a B2B world selling with real COGS and lead times, always try to get 50% up front.  Extend credit reluctantly.  It seems tempting and almost always comes back to bite build-stage startups.  To use a phrase – you don’t “have the money”.

Example 3: you have a consultant who is performing poorly in all areas except sending invoices.  We’ve all had consultants like this.  I’m not suggesting that you don’t pay someone for services rendered under a contract you’ve both signed.  I am suggesting that because you have the money, and they need the money, you have the ability to force timing on a much-needed conversation.  At some point, even if they have been very difficult to get in touch with, which happens, they will contact you.

Example 4 (last one): you are running a company that is shutting down.  I have personal experience with this unpleasant experience.  However, once you have fulfilled your legal obligations to your employees and the taxation authorities, you actually are in the unique position of having the money while your vendors need the money.  The axiom holds true even if “the money” you have isn’t sufficient to meet your obligations.

Which is why — while it’s natural to be in a position to need the money (that’s business after all), ideally your CFO can keep you in a position where you don’t need all of it.

Board compensation

Recently I got a call from a CEO who asked me a question about options for a Board member.  This got me thinking about some of my build-stage company experiences in the world of Board compensation.

Generally, build stage companies do not compensate their Board members who represent the early investors.  These directors usually represent their general partnership’s interest on the Board so their compensation comes indirectly that way.  Or, if they are Board observers, they had to negotiate for that right and so winning the right also to be compensated for it would have been pretty challenging.

They will all almost always have their travel reimbursed.  I have seen this run the gamut, from very successful senior partners at top firms who fly inexpensively and try to split the costs among portfolio companies, to Board observers who appear allergic to any hotel other than the Four Seasons.  Ironically, these are often the ones who want startups to remain “scrappy”, meaning cheap.

I’m making a joke, but they are onto something – build stage companies don’t have a lot of resources.  This also goes for options, for which there is a fixed pool.  Occasionally, I’ve seen a Board member who spends a lot of his or her time actively helping the company receive an options grant.  Unfortunately it happens more when the Board tends to be “clubbier”, meaning the investors all know each other.  Or, it happens more with first-time CEOs, and/or management doesn’t feel it has clout to push back.

Usually these grants top out around 0.5%, although more often I have seen closer to 0.25%, which is about where many advisory board members’ grants land.  Startups have a limited option pool and granting them to a Board member who is there to represent his or her fund’s interests takes those options out of circulation for others.

It is not the end of the world, but once this cycle starts, it is hard to stop.  Better not to start it at all.  If you do, try to signal that this is going to be rare.  I usually recommend a polite, professional and protracted discussion that is not over in an afternoon.

I also recommend that instead of doing one grant for X% that vests over 4 years, do it as a smaller grant of (X/4)% that vests in a year.  Continued service is a requirement for continued vesting.  The signaling of this is important — plus, it is nearly impossible to shut off vesting for someone on your Board even if that person is missing most meetings and falling asleep in the others.

I’ve seen options grants for Board members that vest in 3 years instead of the more standard 4, so in this case, just divide by 3.  Close enough.

One final note: outside Board members, on the other hand, usually do receive some compensation in the form of a monthly stipend.  Usually this is on the other of $1,000 per month in the build stage.  An options grant on the order of 0.25% usually accompanies this.  By the time an independent Board member is added, the company is usually closer to “scale” mode,  0.25% is a more significant grant than it was a short time ago in the company’s life.   Which, despite how much this might hurt, is a sign of success.  Enjoy the high class problems when you have them.