NOTICE: Keating has joined the EisnerAmper family.
NOTICE: Keating has joined the EisnerAmper family.
RUNTIME: 30:40
FULL TRANSCRIPT
Trae Nickelson: Hello and welcome to Starting Up & Right: Conversations with a Startup CFO, a new web series focused on the finance side of startups. I'm Trae Nickelson. I'll be your co-host. For the last 20 years, I've worked as a marketing and technology consultant, dealing mainly with startups, and more specifically, with the earliest stage startups trying to establish traction, proof, and product-market fit. For the last eight of those years, I've been lucky enough to work with my friend and this show's co-host, Ryan Keating. Ryan is the Startup CFO promised in the title, and is also the CEO and founder of Keating Consulting Group, based here in sunny San Mateo, California, right in the heart of Silicon Valley. Ryan, thanks for doing this with me. It should be fun.
Ryan Keating: Yes, I'm looking forward to it.
Trae: Ryan, we're going to talk a little bit about your background here in this episode, but first, I want to set the stage and talk about what this show intends to be about. I already mentioned it's going to be about things startup but with a very specific lens on the finance side of things. First of all, as the name implies, it's going to be good conversations. We’ll have great guests. We're going to have startup founders, investors, venture capitalists, angels, consultants, board members, advisors, some really smart people in the startup ecosystem. We're going to have some tactical and practical good conversations with them, but we're always going to try to keep it framed around the finance side of things.
The way we're going to go about that is to use three central themes to the show. Those three central themes are fundraising, financial modeling, and the board room. For each episode, we're going to try to tie back to one or more of those themes each time. Ryan, in this episode, I thought we'd pick your brain a little bit about these three central themes for the show. Before we do that, let's frame your perspective a little bit. Tell the audience about your background and how you got here.
Ryan: Sure, yes. Thank you. I started this company about 20 years ago. Initially, when I started, I would help companies build financial models. That started to evolve, as the clients I would work with, the companies I'd work with were successful in raising money, they would turn to me and say, "Hey, how else can you help us?" Things related to the back office. As we started to grow, our offering expanded, as our clients asked us and really dictated what we do to the point where we're now where we focus on the back office. The back office, we really think of it as four key areas:
There's the finance piece, which is a lot of your financial modeling, so your CFO, your financial analysts. I like to think of the finance piece as everything kind of forward-looking, over the horizon, how are we getting to where we want to go, how do we measure ourselves along the way, how do we manage investors and the board of directors, banks, capitalization tables, metrics, and dashboards. It's really kind of how do you measure and steer and make sure the company is going in the right direction. That's the finance piece.
The second large piece that we focus on is accounting. It's often, in our clients, that we are the initial accounting folks that show up. Usually, we get involved very early on. Oftentimes, we're setting up the initial technology stack of accounting tools and creating the very first monthly close procedure and process. We'll come in and take care of every aspect of accounting from really entering the bills into say QuickBooks, all the way through the monthly gap, financial reporting, and close.
A third area we help with is HR. I like to think of it as people. Basically, the reality that most of our clients when they raise that first round, that round is largely intended to go out and build a company around an idea. Oftentimes, growing from an initial team of four, five, six to 20, 25, 30 people with that one raise. Helping with all of the aspects of HR and adding employees' handbooks, benefits option grants, you name it.
Then finally the fourth area as part of the back office is what we think of as compliance. Making sure that companies always registered and paid and in good standing really based on where they have employees, where they have customers. Really just being the one to keep an eye out for these things. The founders, the executives can really focus on building and selling their product. We come in and try to take the other off their plate that not only frees them up with time but also brings in our expertise, just knowing what's coming and knowing what we need to anticipate and keep an eye out for them.
Trae: You've specifically--Very important here is that you have managed to build an offering for very early-stage companies. You're usually the first person in the door that's thinking about these back-office functions. At this stage in a company's growth, they need some things, but it doesn't make sense a lot of times to hire internally. Talk a little bit about just outsourcing how you fit in early, how a founder should be looking at when do they need to reach out to get their accounting. Reach out to an interim CFO, a little CFOhelp.
Ryan: We've been able to identify a couple of key inflection points when clients reach out to us and when we can really step in and help clients. To your point, yes, we work with very early-stage companies and we're usually one of the first surfaces that can come in and take some of these tasks, these time-consuming tasks off of a founder's plate. One of the areas at which the inflection point that brings us in is a founder saying, "I want to free up my time." I need to focus on things more strategic than say payroll or closing the books. Then the second inflection point, which is an interesting one for a lot of our client base is as soon as they take other people's money. I always like to coach our groups that when this happens the rules change, you have a different expectation in terms of how you keep your books, how you do your reporting, how you measure your progress when other people's money comes into play, you need to step up and put procedures in place and put reporting in place.
Oftentimes we're brought in by those investors to say, "Hey, we've given you some money. It's time to bring these services in and through the right technology." Also, investors don't want to see a founder spending five, 10 hours a week dealing with back-office stuff. I mean, that's valuable time that an investor wants a founder to move the company forward in terms of its product and its market strategy. We can actually come in and take a lot of that off of a founder's plate or an executive's plate and give them that time back to focus where their time should really be focused.
Trae: All right. Let's talk a little bit more about the three themes of this show. In particular, the first one fundraising, that's a big topic. Every founder out there is looking for funding. Not every, but pretty common. They're looking-
Ryan: Pretty much.
Trae: We're going to have the chance to talk about fundraising during the show and the different steps involved in fundraising and different phases involved in fundraising. Talk a little bit about the progression, if you would, just starting out with an idea all the way to series A or B, I'm sure it's very different steps along that path.
Ryan: It really is. I find this really interesting, but I'm probably... more so than most of the average person, but it has changed a lot. I said, but we were doing this for 20 years. When we first started, your traditional Series A was referred to as a Series A because it was the first. Nowadays it could be your fourth or fifth actual investment capital that you raise.
It's an interesting shift of how we work with companies. What we see today is that most companies will come in with some A, either friends and family usually in the form of a convertible note or a SAFE as it's called S-A-F-E which is, forgive me, but it's generally interchangeable. I'm sure there's a lot of people that could point out many reasons why, but for the purposes of fundraising, that's often your first amount contributed. The benefit there, it is that you don't have to put a value on your business initially. You can defer the conversation which is what is my pre-money valuation okay? That's something that is available to almost every company today. I think largely because of how cost-effective it is to get your idea started. You have things today that you didn't have 20 years ago like Amazon Web Services. Where when we first started out you would have to take a PowerPoint presentation up and down Sand Hill Road, try to get $5 million for your idea, just so you could get your first servers in your office space to start developing. You don't have to do that anymore, right? You can do it with much more pay-as-you-go services even--
Trae: In fact, you would look crazy these days if you try to do it that way [crosstalk]
Ryan: The investors really want to see progress. They want to see some way of you taking risk off the table, whether that's giving them a prototype of your technology or sometimes even showing certain traction with actual customers or users before they'll put money in. What you'll see today in the landscape of fundraising is, you'll often have this initial money-in that is in the form of some convertible note or SAFE, right? You could be anywhere up to we almost often see a half a million even a million dollars.
It used to be that there was some restriction I guess, on the amount of convertible debt you should have, nowadays it is used so openly as your first and often significant financing source. I've seen convertible note balances in the five, six million before they've even converted at that first priced round. After your convertible notes, there's options, if you take it through each step you'll see companies could have what's called a Pre-seed round and then a Seed round and then finally a Series A. You could see where all these rounds have been put in place before what you would normally see today as the Series A.
A lot of that is based on that there are so many large venture funds out there nowadays with 500 million even billion dollar funds, that for some of these smaller venture capital funds to actually get access to deal flow, they've had to go earlier and earlier to get a seat at the table. Once a company really starts to get traction and shows some promise and they become sought after, smaller funds have a hard time competing for that round. What it has done is it's created these rounds that are actually in front of a Series A now so that there's more shots I guess for smaller funds to get in.
Now they're taking on substantially more risk than, is this what the Series A is today but that's what they have to do to really access some of this deal flow.
Trae: Right. Thinking of the evolution, the terms have changed, and you're right, there's so many now early-stage divisions in the fundraising stepping stones if you were from bootstrapping pre-seed, seed, Series A, Series A prime, Series B, you can divide that up in a lot of ways. In your time and thinking about fundraising with a startup, how much is geared towards getting them fundable? You kept mentioning traction and how that's now expected, how often do startups-- Are they ever naive, come to you with we're going to raise this much, here's our hockey stick graph, now let's go out and get some money. How often do you have to reel them in and start CFO'ing them, to start getting fundable first?
Ryan: It's most often. It's an important ingredient. I think one of the thing that I really am attracted to about working with startups and founders is, a founder has to have that almost unbridled optimism about his or her idea. I would be concerned, if I didn't have to reign in an entrepreneur because you really have to get people to get on board, and if it doesn't come through in terms of that much optimism, it can be a struggle. I think our job is to rein them in but not to dump in their enthusiasm, because that has to be there. We try to match the two ends, where it's an investor can see how the dots connect to that ultimate hockey stick is just that's one of our jobs and to maybe decrease the angle of the hockey stick on many occasions.
Trae: That's interesting, that naive passion of the founder is almost one ingredient that needed to make them fundable. Like venture capitalists, they want to see that passion as well.
Ryan: Especially early stage, so much of the investment in my opinion, from what I've seen, is based on the team, there's not a lot of business history for an investor to go on. When you're starting out when you're pre-revenue when you haven't built your first beta product. Yes, they look at the vision, they look at the market size. They look at the competition, but they really look at the team. It is inevitable that whatever the team or the company is presenting for this first initial investment, to what ultimately gets funded and goes to market and is successful, will be different. It will shift, it will change and that team, the investor has to feel confident that that team is going to know how to pivot and take advantage and push through new openings that weren't necessarily there.
It's a fine line, you want that enthusiasm from the investor, but you also want from the founder. You also need that founder to be able to adapt and pivot without being so focused that they'll just run it into the ground, even if the signals and the market is changing. The team to me it's very important, especially at this early stage from an investor standpoint. In that enthusiasm needs to be there, but you also need them to be coachable. It's a fine balance of ingredients that all need to be present, but need to be all workable.
Trae: Yes, that's good. It's interesting. It's a rare bird for a first-time founder to have all those ingredients. Usually, if a founder has some humility, and can be coached, but still has that enthusiasm and comes with that credibility. It's usually an experienced startup founder. Either has to have that track record, like you're saying that team is so important, in fact, some investors, they'll come up straight up and tell you the team is the most important thing to them. What have you done before? What's your track record? Are you going to be able to pivot when I need you to pivot or lead when we need you to lead that sort of thing, or you've got to have some very impressive real traction? Usually an idea is not enough? [crosstalk], it's still an idea.
Ryan: Yes. These days, especially when you're talking to venture capital, they will want to see traction. It's very different based on your business model. You could have a dating app, that might cost you a couple hundred thousand to actually get released. In that situation, there would be a lot of expectations for potential investors to want to see adaption, to want to see User metrics, to want to see time spent on the app, and who's converting to pay. You would need to show a lot of traction.
However, you could have a business model like maybe more biomedical, where you're three years from revenue no matter which way you approach it. They'll look at different types of traction that they'll want to see. It varies very much based on your business and go to market. There are some models like a consumer mobile app that they'll want to see it actually in the marketplace and want to measure downloads, for the most part, there are exceptions, of course, but this is something where they will put very specific requirements like, come back to us when you have 10,000 users or 100,000 free users.
It really does vary on the business that you're trying to get funded, but the expectation of showing traction for your venture investors is very common these days. The days have been able to go up and down, at least here as we call it, Sand Hill Road, in Silicon Valley with a PowerPoint presentation. You can't do that anymore. That's not the way the fundraising happens nowadays.
Trae: Let's talk about the second theme. The second theme is financial modeling. That's where you got your start. That has become your bread and butter. That was a seed that grew the whole, the whole firm. How important is financial modeling, when should a startup consider financial modeling. What is a financial model in the first place?
Ryan: Yes, as you've- properly pointed out, I have a little bit of a history in financial modeling so I really think that they are one of the key pieces to have if you will in your briefcase when you go out to raise. Plus, one of the key tools that you have to speak to when you're dealing with your board of directors and you're giving updates. A financial model essentially is a road map of not only how your business is going to execute and spend money and invest your funding but also it's painting a big picture for the investor of where you think this business is ultimately going and how big it can be.
When we build financial models, we like to build them for both of those purposes. One, the investor who we're trying to show the efficiencies at scale, the year at which we hit certain inflection points, the amount of total investment required to get to profitability. Pretty big picture trying to bring them into the full idea and promise of what we're trying to bring to market.
The second function is very tactical. It is, it should act as a road map for this startup to execute against. Even [unintelligible 00:21:19] granular cash flow forecast essentially that's part of the model and it can tell you, for example, if you close a particular, say we project, we're going to close a client in month three, we know when we close that client we're going to be able to hire those two new engineers, but if that client shifts, that close gets pushed out or goes away, the model will help us understand what we are able to push out or pull in accordingly.
It's really a way to execute your business from a standpoint of where you're spending your money. Are you hitting the milestones? Is your cash runway being supported or what adjustments do you need to make if things are either happening or not happening as you project. Then, with, for example, when we deal with financial models in boards, a board of director meetings, the financial is a tool that we constantly update.
We want to show that board, basically, we tell them, "Here's what we thought we were going to do that we told you last month. Here's what actually happened and here's the differences and why." A lot of times those differences will actually have an impact on what comes next. Sometimes they don't, sometimes it's we spent more money on travel than we thought because we wanted to go to another conference that wasn't in the budget. Sometimes it's significant like we did not hire this senior head of sales.
That could actually have an impact on when you start generating revenue, for example, or when your sales fleet gets in place and up to speed where they’re fully carrying their quotas. Really understanding that relationship of how does new term hits or misses impact our outlook and what are the implications on perhaps a cash runway or hiring or where we're going to end revenue profitability at the end of the year. We constantly keep an eye on those and want to have the latest information when we go on to board meetings. The model, it's not just about building the model. It's about keeping the model relevant so that it's constantly your, really your guide for how to execute and what steps to take.
Trae: I've noticed - t ell me if you've seen different, but first-time founders you have to convince them of the value of the model. Experienced founders, they usually show up with their own model. They realized that's one of the first things they need and they come to you to enhance the model, but it becomes that important. It becomes part of that experience level.
Ryan: Yes, and most of the clients we work with, it's the first time that they've raised. They brought in other people's money into a business. The first time they're dealing with outside investors, the first time potentially dealing with a board of directors that are made up of these outside investors. A lot of what we do is even almost coach how you prepare for those board members. How you use the model. How you use your monthly board meetings and your updates. How you even communicate with your board outside of the monthly meeting or quarterly meetings. The financial model itself I think, again, coming back to it is one of the main tools that you will use to find the conversations that need to be had with your board so it's really a good again, a road map or a dashboard to alert you to what things need to be discussed, what things need to be brought to the attention of the board and the investors.
Trae: That brings us back to the third theme of the show which is those board meetings. I know you've had the opportunity to sit in so many board meetings across the table from founders and VCs and listen to those conversations, participate, and even lead those conversations. I think that's one of the most valuable aspects of this show potentially is talking about the board meeting. You're going to be able to talk about what makes a good board meeting, some war stories, what you've seen. What are your thoughts on the board meetings and how do you go about board meetings? What are the tools you like to walk in with?
Ryan: Sure, board meetings-- You're right there's a lot of good stories we've seen quite a bit, good and bad coming out of board meetings, some interesting stories. Board meetings are an area that we actually help a lot of our clients. How do you actually run a board meeting? What information should be discussed and shared with your board? The answer to that one is most everything. One of the big shifts of mindset we try to work with our clients on is once you take that person's money and they become a board member, the relationship changes and you really need to understand that now that investor, that board member, only wants you to succeed. They are inside the fold. A lot of our clients, especially first-time founders, will still have this kind of friction in their mind that every month they're going in front of the board to save their job.
Trae: Still pitching, right?
Ryan: Still pitching, still justifying that things are good and that they're making progress. I was given a great piece of advice when I first started this a long time ago and it was that nothing new should ever be discussed in a board meeting. Which if you think about that it implies, it flat out screams that you should be communicating to your board frequently. It's not about sending them a deck 24 hours before that monthly meeting and going in there and not having any conversation outside of that.
A board meeting should be where you are getting the advice and the guidance, from that group of people about the problems that or the issues or the topics that have come up. You don't want to share those topics in the board meeting, you want to decide how to react to those topics so communicating outside of board meetings is really important. The preparation is key I think. One of the areas we really focus on is making sure that there is a solid financial component to the board update and again, that comes back to the financial model as one of the key tools at which we speak to, but also things like governance, option grant approvals, prior months board minutes, getting things approved by the board that rise to that level say venture debt, an office lease, a senior hire. Boards will oftentimes be involved in those decisions.
That kind of understanding that relationship, helping our clients identify how to get the most value out of their board and really working with them on the fact that there is probably nobody that wants you to succeed more right now than the people that just put money into you so bring them into the fold. Don't keep things from them. Really put… almost shift -- Expect them to help you. Ask for help and be open to the guidance that they give you. They do this a lot. Most of them are professional VCs. They sit on many boards. They've seen a lot. They have a lot of experience they can share and so really probably the number one thing is working with our clients. Don't treat them like they're somebody you should restrict information and only dole out positive things to not get yourself in trouble. It's the wrong way to approach a board.
Trae: Right. We'll get to talk about successful boards. How to interact with a board successfully. Not just board of directors but board observers, boards of advisors, really to reach out and ask for help and to effectively use that help. That's going to be an interesting part of the show.
All right let's wrap up. That's what the show is going to be about. Again, startups from a CFO's perspective, conversations between me and Ryan, Ryan and a few great guests that we're going to be bringing in to talk in-depth about some of these issues. We are looking forward to this. It's going to be fun. Ryan, thanks for spending some time today to set the stage here with me.
Ryan: Appreciate it.
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