A sentence that usually sets off alarm bells for CFO’s is “It’s strategic”. This is usually code for a decision that seems to make no economic sense, but is so important to the business, the company “has to” do it anyway. Examples of this include, but are not limited to (1) an acquisition that the numbers don’t really justify, (2) launching a new product line that’s not correlated with the current one, (3) geographic expansion to a far corner of the world, (4) overpaying for a certain employee, and (5) going all-in on a particular trade show exhibit or booth construction.
Mainly, I have 2 issues with this approach.
First of all, most things that management teams call “strategic” are actually tactical. M&A is a tactic. It should get you into a market segment, a geography, a product category, and be tied to a broader strategy. In theory, your company will have done a build/buy/partner analysis against that strategy and decided that M&A is the tactic that best gets you there. Even in build stage companies, where deals are often opportunistic buys of smaller or faltering competitors, it’s only a tactic. If you’re chasing a deal because it’s “strategic”, something has gone awry already.
Second and maybe more importantly, a major decision that cannot be grounded in numbers of any kind is almost certainly going to go badly. For example: an acquisition that is dilutive on its face should get to being accretive because it helps you raise prices, lower costs, increase sales volume, cut G&A, something that has an economic return. This return should be based an assumption that an investor can see clearly and question, including seeing the sensitivity analysis around it. After all, it is their capital or stock you are proposing to use.
If an acquisition does none of these ‘strategic’ things, and is still dilutive except with heroic assumptions, it doesn’t make sense. Full stop.
Trade shows are trickier. I shiver a bit when I hear that a particularly splashy trade show presence for a build-stage company is necessary because I know from experience that nine times out of 10, it leads to heartache and lost ROI. I shiver even more when I hear that it’s for “brand building”. Brand building is a very expensive game. And, if we’re spending a lot to build our brand at a trade-show, I would advocate that this needs to be part of a broader strategy including customer service, how we package and deliver our products, fit and finish, you name it. You can’t overspend at CES and make these other things go away.
As CFO, you have to keep your eye on what matters. In my experience, something that is truly strategic will show up in the numbers.
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.
Because I work in build stage companies, and often early ones at that, the general ledger (G/L) system I encounter the most is Quickbooks Online. Often one of the first questions I get is whether we need to make a change to a more robust system. Always my answer is no.
My philosophy on this is that until a company is much bigger, having an accounting system that knows all isn’t worth the workflow change, the financial investment, and the upfront systems hassle. Quickbooks Online (QBO) is fine. It’s not great — but it’s fine. It does the basics and has the benefit of having tens of thousands of qualified people who know how to use it.
What I would rather do is invest in smart systems around it that do their functions well, and integrate with it. This can be A/P (bill.com), ERP-lite (Fishbowl), payroll systems (any of them), expense management (Expensify), cap table management (eShares, Carta), sales tax (Avalara), and on and on.
If a build-stage company is going to invest in systems, it probably should be in optimizing Salesforce. Or if it’s an e-commerce company, better to get your Shopify instance really singing. Building a sole source of truth about all things customer is way more important than implementing an expensive G/L system.
I’m a believer in keeping the G/L’s functions limited. I use it for management and Board reporting and as a transaction repository. That’s it. For anything else, there is a better system out there and most are not expensive either.
I’ve seen $50M software businesses backed by some of the most sophisticated venture investors in the world run their businesses and do their reporting based on QBO. If they can do it, I figure I can too.
I had lunch yesterday with a COO who I respect at a business that I think has legs. He was telling me that they are within days of closing a large Series A. Almost immediately, I felt a little sorry for him. Not because his investors are problematic or because the dilution is substantial (respectively — they probably aren’t, and yikes), but because the young, scrappy and hungry place he works probably is about to change.
I’ve seen this movie before. I once took over as CFO of a once-bootstrapped software startup that immediately after its large Series A proceeded to (a) dramatically upgrade its office space and furniture, (b) buy brand-new computers for everyone, (c) hire a bunch of engineers in under 30 days and (d) start flying business class. Another company had hired a suite of C-level people despite having only a tiny business to manage (and they all got C-level titles). Still another decided that they’d run a lot of expensive marketing promotions without really knowing how to test them.
Another decided to spend on a tradeshow booth whose one-time cost made me gasp and had no possible ROI justification. But they wanted to show their new investors that they were putting their money to work.
It reminds of what Richard Dreyfuss said about his rocketing to superstardom at a young age after Jaws: “too soon”.
Beware the Series A culture problem, where a sudden influx of money turns the oxygen thin (related problem: “ping-pong” conundrum, where a table is a signal that a startup is very focused on culture, and not so much on work.) It creates a lot of headaches if you’re not aware of it.
My advice: run for at least 30 days as if there had been no Series A. By all means, clear some payables, and make the job offers you’ve been hanging onto just in case the round doesn’t come together, and if you need to true up people who are below market, go ahead. Other than that, try to hang on. Run the business. And, make sure everyone is aligned on the fact that it’s still a startup where the demands on the company’s resources still greatly outstrips the supply.