Sell it to Yourself

This meeting invite is real – no kidding…

I once took a red-eye flight to Israel to help manage an audit of a software company where I was CFO that was technically based there.  We sat in a windowless conference room for many hours.  In case you are under the impression that this something you would like to do to yourself – believe me, it’s not.  I wasn’t afraid that I would die in that room.  I feared that I might live and have to do it again the next day.

Somehow I came all the way around and instead tried to act like it was the most fun thing I had ever done in my life.  With that, some good humor from the partners from the Tel Aviv office from Deloitte, and a lot of coffee, we got through it somehow (and my company did fine in the audit, too).

This technique really worked for me and I find myself going back to it all the time.  When dealing with insurance and worker’s comp reviews.  In prepping analysis for the investor who just can’t seem to get enough of it.  In re-jigging a chart of accounts, which can happen quite a bit in a build-stage company that is constantly pivoting. 

If you fake that it’s fun, eventually you can (almost) make it so. The term for this was once “grasp the nettle”.

I think it’s rubbing off on people I work with.  The above was a screen shot of a meeting invite I just received for an hour-long session sure to be a brain twister as we figure out some inventory ordering and accounting issues.

As a TechCXO partner of mine often says, “life is a sales call”. Not everything in startups is glamorous – so sometimes, you have to sell it to yourself.

Fundraising and governance

Typically when raising money at the build stage, the item that entrepreneurs focus on most is valuation. Makes sense. Usually by the time you get to build phase, the number of dollars is high enough and the valuation low enough that it matters (unlike a friends and family round, or a Series F). One item that is often overlooked at the company’s peril is governance.

Governance put simply is the list of rights, or lack thereof, that investors get. Usually when you raise preferred stock, which is how build rounds work, you have to give up certain rights. No longer can you decide to raise more money or sell the company without agreement from each block of investors. I have seen companies where the “block” of investors is exactly 1 person, meaning that this single person’s consent is required for any significant transaction to go forward. No bueno.

I also have seen companies where current investors have very few rights compared to a small number of insiders who effectively control both the ownership and day-to-day management of the company. Convenient for them and helpful when it’s time to make quick decisions, but less helpful from the standpoint of attracting new investors who will want some protection.

This also comes up when writing convertible notes. A convertible note isn’t equity yet, so it doesn’t have typical rights of preferred stock. Convertible note investors need reassurance that when it does convert, it will do so and grant their block certain rights that are on par with existing investors (just get more than 1 investor in this block).

Finally, I also have seen blocks where if you don’t get a particular investor to assent to an action, it’s very difficult to construct the necessary margin. This can happen when you have 1 or 2 large investors and then a large group of very small ones.

My advice to CEOs with whom I work is to think almost as carefully about this as they do about valuation. For sure you want to keep as much of the company as you can, but you want to make sure you can still run that company and make it possible to attract future investors to it if you need to.

 

Build to Prove

I call myself a build-stage CFO, meaning that I tend to work with companies that have found product-market fit.  They’ve passed the “prove” stage.  My goal is to get them to the “scale” stage, where the foundation of the house is sturdy and they can start to build more stories onto the building.  I’ve succeeded at this a few times and yielded to a full-time CFO after a significant fundraising round.

Startups being what they are, sometimes this goes the other way.  That is, a company hits build stage and either the world changes, or the niche they thought they’d found isn’t so attractive after all.  Then they have to pivot, and sometimes, that means moving back to prove mode.

Moving back to prove mode is hard.  You have people on payroll who no longer match the direction you are going.  You’ve built processes and reporting that may not be relevant anymore.  The cap table likely has people who invested in one vision who need to be brought along to the new one.  The sooner you do this though, the better.

For a CFO, it means a few things.  Likely you need to skinny down the infrastructure you built.  Almost certainly you will have a re-forecasting exercise that will involve a new way of showing KPIs and financials to the Board and other stakeholders.  Probably you will be part of letting people go and opening up hiring in a different part of the business.  It is also possible that one of the people you will need to let go is yourself.  Because I am “on demand”, I can scale myself and my team down (another reason to hire a fractional person).

The bottom line is that startups that hit the build stage have not hit escape velocity.  Far from it.  Sometimes they start to fall back to earth and as a CFO, I’ve had to develop tools in my toolkit for when this happens.

COVID and Toothpaste

There’s a common phrase that “you can’t put toothpaste back in the tube”.  Or, you can’t put a genie back in the bottle (although how would they know?).  You hear this often about trends in business, and this time is no exception. But maybe this time really is different. We’ve been forced to run a lot of experiments that no one would have signed up for willingly. As a result, the toothpaste is out of the tube on a number of business trends. I’m seeing these in my companies and personal life and I don’t think we’re going back.

  • Working from home – this is not an option for everyone and doesn’t work as well for large in-person brainstorming sessions. However, the days of companies organizing around large downtown offices where everyone comes to work every day are over. Why lose hours every day of productive time commuting to a desk where you’re going to work on what you could have done at home anyway? This is a bit of an Industrial Revolution holdover. The implications for large downtowns are mind-boggling. I’ve worked somewhat/mostly from home for a long time and gotten to watch my kids grow up as a result.
  • (Most) companies being in it together – I work with multiple companies that have needed help from landlords and other key suppliers. Most have recognized that if we go under, it does them no good, and that helping us is good business for them. The companies I work in have done what they can for their customers, employees and other stakeholders. Not all – but in 2009, I think it was none. HBR wrote a piece about this last fall. This accelerating trend will change how companies deal with one another when things go wrong.
  • Business performing public roles – the PPP program, in effect, was designed to help companies “keep” employees even if there wasn’t much business to attend to. But if you think about this, this doesn’t make much sense.  It only happened this way because (a) companies are where most people get their health insurance and (b) the unemployment insurance system in America was designed in 1938 and not up to the modern challenge of paying millions of people short-term benefits. In almost every other society, business isn’t asked to perform these roles. In ours, it was. The fact that companies have to do this is going to change the relationship between companies and government, and companies and their employees, in ways we can’t quite see yet.

There are many others, but I thought I would start with a few. We’re in the 1st inning of this thing and there will be plenty of time to identify and track others.

Your Home is a Coworking Hub – now what?

Here is a copy of a post I wrote for Workbar, which is one of my companies.   When all of this is over, companies will discover that they don’t need to have massive offices, and individuals will find that working from home looks great on paper until you try it all the time for real.  Workbar is right in the middle of these 2 trends.

Here’s the link to the blog post on their site (which looks a lot nicer than mine, I admit)…

And here is the text…

……

I have a friend who hates his commute and sometimes will idly say something like “I wish I could work from home all the time!”  I’ve told him that this might sound great, but trust me: it’s not what you really want. He’s always ignored that advice because there are some things you have to experience to understand.

After the last 5 days experiencing working out of his busy home with small children running around, I think he is starting to understand. 

My home too is now a coworking center.  My wife works from home, my teenage daughters are doing school online, we have an extra guest here all week, and our dog continues to expect to be walked, fed and entertained.  He is greedy that way. We are on top of each other all day, and still have to get stuff done.  

Luckily I work at Workbar (I’m the CFO) so I’ve learned a few things along the way about to get set up for success.  We’ve implemented some of these best practices in my house, and maybe they’ll help in yours too.

    • Write it down – we developed a “coworking constitution” (see pic) that we all agreed to and signed.  It’s important to have rules and buy-in, especially if you have teenagers who tend not to be interested in either of those things.  Workbar has an operating manual, so we decided we need one too. What are the operating hours? Who can come and go? How do you register guests?  
    • Have “neighborhoods” – one of the things that makes Workbar go is that our spaces are separated into quiet areas, collaboration areas, call-centric areas, and common spaces.  We did the same in our house. This required some imagination; for example, our dining room (which we don’t use at the moment because no one is coming over anyway) is now the quiet area.  My wife’s office is next to the main TV room, so we had to compromise and make that TV room a collaboration area instead of a loud space. Etc. Make this specific and try to stick to it.  
    • Set limits – We implemented a rule around lighting candles (again, see pic).  This one is for me. Basically it means “no scented candles when dad is downstairs because they smell like a store in a mall and it makes him crazy.”  Set “must haves” in your rules.
    • Take reservations – just as you can reserve conference rooms at Workbar, we set up a Google calendar for different rooms in the house to block them off if needed.
    • Decide on roles – At work, I usually hide that I once used to be an IT person, because once people know this, you will be tech support forever (BTW – don’t tell my Workbar co-workers).  I can’t pretend at home though, so I am the technical support person of the family. My daughter Lily is (more or less) the Community Manager. We all load the dishwasher with dirty glasses by the way; some jobs are too much fun for only one person.
    • Get tech enabledWorkbar invests a lot of time and money in our systems.  If you can afford it and haven’t done so yet, invest in a good printer/scanner and in a webcam if you don’t have one on your laptop already.  Get good headphones for long days on calls that used to be meetings. We can help with recommendations if you need us to. Another form of technology that you haven’t thought of is your chair.  We buy chairs for Workbar that you won’t notice after 8 hours in them; that’s on purpose. We want people to be comfortable and productive. A dining room or folding chair, believe me, is not going to work for long.  If you can, invest in something with decent support.
    • Be socialWhat makes Workbar more than a place to work is the community and other people around you. It’s harder to enjoy that these days, but that doesn’t mean you can’t check in with each other occasionally.  If you have young children and can swap off who is watching them for specific periods of time, I recommend that too.  

 

 

 

 

 

If you are working from home in these uncertain times, consider yourself lucky.  I know I do. Hopefully, these tips will help make the best of that situation and keep you productive and sane.

 

2 kinds of people, analyst edition

In an earlier post, I suggested that there are 2 kinds of people in business, those who have the money and those who need the money. I stand by this oversimplification. To it, I added another about accounting people vs. finance people.  I stand by this one too.

Let me add another: analysts and operators.

Generally, operators make things happen in the present, and analysts look at the past in an effort to predict the future.  Analysts often say they are really “operators at heart”, which might be true, but they almost never are operators in practice.  Operators know how to get sales comp plans published, manage a hiring funnel, place ads on the MBTA, use LTV/CAC to make marketing decisions today, implement a travel policy, blow out a pipeline to make a quarter when it’s desperately needed, perfect a cash conversion cycle, time product introductions, make a hire when no one else can recruit… you name it.

Analysts can’t do many of these things.  What they can do is look at a dizzying array of data on the business and figure out what is really going on, and what that suggests about what might happen in the future.  Most importantly, they how to tell the story, and because they are not in the weeds about, say, comp plans, they can stay big picture and compare the right broad metrics across companies, or industries.  The part they play is not more important – but as a company gets bigger, it becomes at least as important.  It is challenging to be a very effective operator and a good analyst at the same time.

Over a drink many years ago, a colleague I respect suggested that I had to choose between being an analyst (which I think I was then) and an operator (which I think I am now).  I like to work with build stage companies where making things happen is valued over broad-based analytics, so this suits me well.  In raising money, you need just enough analyst so that you can point to broad metrics, but much of attracting and closing captial is about managing a process and a pipeline.  I still have some of this DNA as well even if I don’t work these muscles as often as I could.

In a few of the companies I work with, I collaborate with Board members or advisors.  In almost all cases, they like to say that they are entrepreneurs or operators at heart.  (Note: maybe they are, but if you’re a venture capitalist and not a founder of your firm, almost by definition you are not an operator.  Self-awareness is important).  The best ones collaborate by providing a view across similar businesses or industries using data that the management team already has.

Put another way: effective (and self-aware) analysts paired with effective (and self-aware) operators make a great combination.

Re-trading the job offer

In many of the companies I work with, I sign candidate offer letters.  This isn’t always something a CFO does, but if possible, I prefer that I (or the CEO) am the final check on this particular business process.  One obvious reason is that I know what’s in the budget for a given position.  One less obvious one is someone with a touch of OCD will find errors – incorrect years, language from an old template that doesn’t belong in this particular letter – that someone else might not.
Another reason is that recently for somewhat junior positions, I am seeing a lot of negotiating by candidates who have received a verbal offer, accepted it, and now wants to re-trade.  It’s hard for a hiring manager to resist this.  With rare exceptions, I always do.
A candidate who has accepted verbally a salary of $100, but then when they get the letter and ask for $105, is setting him or herself up for failure.  He’s now signaled that either (a) everything is going to be a negotiation, (b) I can’t necessarily trust him to keep commitments or (c) my offer is the stalking horse for another one.  In my experience, most often it is (c), but (a) and (b) do also come into play.
I have sales managers tell me that this is just someone who is valuable in the market negotiating hard for themselves.  I don’t see it that way.  Maybe I am biased because credibility is my only product.  In my view, once the parties agree, a negotiation is done.  If someone really is a superstar, we’re going to find that out and likely make an adjustment upward anyway.  Or if they have variable comp, they’re going to crush their numbers anyway so the base salary doesn’t really matter.  Needless to say, it’s nearly impossible to adjust down.
Because I work with build stage companies, the hiring managers often are young and haven’t had the scars yet of candidates re-trading their job offers because what they really want is more money to stay where they are. My advice is to resist.

Bcc:

As a CFO, I’m often included on cc:lists. Because I started my career in larger companies, I get why people cc: a lot of people on messages even though I try to limit this myself. And CFO’s often need to know when something is happening: a major contract negotiation, a sales discussion about an important customer, HR matters, you name it. It’s a core part of the job to be the second pair of eyes on something.

One thing I never do, however, is use bcc:

In my experience, it rarely does any good, and almost always causes issues. Example: someone who is bcc’d does a reflexive ‘reply all’ with a salty response instead of just to the person who bcc’d him. I once had a CEO who was bcc’d commit this sin and it was, to put it mildly, a problem.

This is why someone bcc’s me, I immediately ask them not to do it again. If they really want me to see something without having their recipient know it, then just forward it to me after the fact. This happens sometimes in sensitive situations where someone is on a performance plan and whoever put them there wants me to know. Even more reason not to do it via bcc:.

I mention this in a blog post about build stage companies because these tend to be populated by dreamers, which by extension means people who are young and inexperienced. You need some element of youth and inexperience to believe you can change the world. It’s not required but it helps.

So to those of you lucky enough to have these traits going for you, I’ll just say that this is an experiment I can save you the trouble from running. Just say no to bcc:.

Payroll

I had a TechCXO partner meeting last week.  I always learn a lot at these and this session was no exception.

One of my colleagues who is a long-time CFO told us about a rule he had in his companies about people who see payroll data.  Which is: you cannot get another job here that doesn’t involve payroll.  Once you see how much everyone makes, you either stay in that role, or you have to leave the company.

This seemed extreme when I first heard it.  But the more I consider it, the more sense it makes.

In truth, many build stage companies trust this extremely confidential information in the hands of office managers who double as the people who “do” HR, which includes running payroll.  Few of these people have bad intentions.  Many are inexperienced.  And not many things blow up culture faster than exposing this information in the wrong way.   Once that toothpaste is out, you cannot put it back in the tube, and it is very difficult to clean up.

So, today I plan to have a reminder conversation with everyone who works with me and handles payroll data.  Not because I don’t trust them – mostly because once you’ve seen this information a thousand times, you can lose sight of how sensitive it really is and how important it is to keep it confidential.

On a related note – another build-stage company payroll risk I frequently see is the “single press of a button” problem.  Meaning, one person can both enter payroll and submit it without an approval step.  I understand why this is tempting in the early stages, and yet: it is a really terrible idea.  (The same goes for bill pay and especially wires, by the way).

Systems like TriNet and ADP actually make it hard to do an approval step in their PEO implementations, which I don’t really understand.  That said – always put in a second pair of eyes on this.  That pair of eyes too is probably bound by the same rule that my partner puts in place: once you see payroll, you can never go back.

It’s strategic

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.