The Series A Culture Problem

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.

 

Sign of the Times

This is a picture from the inside of a new South Boston development called “The BEAT”. It’s significant for what it will be, which is a multi-use commercial, retail and shopping hub on the Red Line, 2 stops south of downtown Boston. From my work in the co-working world, and some other ventures in the past, I know that this is where the world is going.

People, many of them millennials, will be able to work, eat and play without having to leave the complex. Of course, an IPA-centric brewery is in the plans as well.

What is also significant is that this gap is where the printing press for the Boston Globe used to be. It is a symbol of a by-gone era.

I don’t know if replacing the printing press of a venerable journalistic institution with a wonderful place to work and a big improvement in the neighborhood is good or bad. It just is. Now we get our news differently and develop our sites differently. But I do know that this picture captures what is going on in ways that most of my pictures don’t.

What CFOs do

Often I am asked what a CFO does. Usually this happens with a smaller (build stage) company that doesn’t have one, or has hired a part-time CFO who mostly focuses on being an excellent controller. There is nothing wrong with this – but it’s different from what a CFO does.

In build stage companies, CFOs first and foremost help predict and manage cash. This means some level of forecasting of the future (finance) which controllers can but don’t often do.

Side note; CFOs are not credentialed, unlike (say) licensed service providers like plumbers or electricians, so it’s not surprising that many controllers hang a shingle and call themselves CFOs. Some are excellent. Some manage that transition less well.

CFOs also help drive understanding and optimization of unit economics. In retail, this is almost always on a square foot basis. In staffing, it’s on a per hour basis. Getting to this point requires some insight and continual honing. CFOs should be good at constant, incremental improvement and knowing how to fine-tune what comes out of the accounting function. The result is that they should be helpful on the top line, in addition to managing costs.

Finally, a CFO needs to be able to build a team. I use the term ‘team’ expansively as this includes not only employees and contractors, but also insurance brokers, lenders, auditors and outside accountants, systems gurus, benefits experts…. on and on. Litmus rest: If you are taking to one of the top growth company lenders in town, a CFO probably will have them on speed dial already. This is part of what you are paying for.

What is a build stage company?

“Build stage” companies are the adolescents of the growth company world: not cute infants whose mistakes are still sources of joy and amusement, and not quite fully grown adults in full command of their faculties and their identities.  They’re somewhere in between, like teenagers.  It’s a phase that is exciting and a little dangerous.

These companies, by and large, have found product-market fit, meaning that they have made sales and have some idea of who their early customers are.  Their product exists, it works, and they’ve sold it for money.  In the world of high growth startups, they likely have some institutional backing: seed financing, or a modest Series A of about $5M or less.  And they are starting to professionalize; there is a great Medium post on this phenomenon from earlier this year.  One sure sign is that in “prove” mode, there are no swim lanes.  Everyone does everything because that is the nature of things at that stage.  In “build” mode, you want to start to establish swim lanes, while making sure that the entrepreneurial mindset of the prior phase is accessible.

I tend to focus on the G&A stack for these types of businesses.  Usually when a CFO arrives on the scene in a company just maturing into build phase, he or she finds some combination of the below:

  • Bookkeeping is done by a relative of one of the founders, or a local accounting firm
  • Benefits are scarce – until now it hasn’t affected the ability to attract talent, but in the back of everyone’s mind, they know it will soon
  • The financial forecast is either (a) numbingly complicated or (b) comically simple, and almost always lacks a cash flow forecast so that everyone can carefully track when the money might run out
  • “Sales ops” capabilities are limited – spreadsheets, not Salesforce
  • There is minimal understanding of the company’s “unit economics”, and how to really track this effectively
  • The economics of acquiring customers is not yet well-understood (see above on sales ops).
  • Very expensive lawyers from the company’s top-tier law firm are doing everything for the company
  • There might be some insurance, or there might not
  • HR hygiene (signed handbooks, travel policies, etc.) are minimal.
  • Board meetings, if they happen, likely lack cohesion.  Decks are distributed less than 10 minutes before the session begins
  • The cap table is kept in Excel, and/or by the aforementioned very expensive lawyers
  • The company uses Google Drive (great), but there is no structure to it (not great)

This is a natural phase of a company’s evolution.  This blog is about how that evolution progresses, how CFOs in these companies can add value and thrive, and some of the particulars of the industries in which I’ve seen companies in this phase.  Put another way: adolescence is exciting, but no one wants to stay there long.