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Kirsty Nathoo - Managing Startup Finances — Transcript

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0:00morning everybody thank you for coming
0:01in at 9 o'clock it's an early start
0:03so as Kevin mentioned my name is Kirsty
0:07Nathu and I'm the CFO here at Y
0:10Combinator so I've actually helped now
0:132,000 companies almost as they've come
0:16through Y Combinator so seen a lot seen
0:19a lot of successes and seen a lot of
0:21failures so I'm going to help you just
0:24understand some of the big mistakes that
0:26we see some of these companies doing
0:27based on their cash based on their money
0:31and so for every business whether it's a
0:33start-up or a mom-and-pop shop
0:36cash is its lifeblood and if you run out
0:39of cash then the business dies there's
0:41doesn't really no going back at that
0:42point and it's actually surprisingly
0:44easy to run out of cash and we see many
0:47startups not realize that they they have
0:50done that until it's too late to
0:52actually be able to turn it around and
0:53do something about it
0:56so we're going to talk about these three
0:59early-stage pitfalls so this is probably
1:02most relevant to you right now and then
1:06we'll talk through another three that as
1:08you start to raise money and are
1:09starting to think about hiring some
1:12other other mistakes that companies make
1:13so we're going to look at what the
1:15numbers you should be looking at how
1:17often you should be looking at them
1:19whether your expenses are realistic and
1:22then thinking a little bit more about
1:23hiring and looking at responsibilities
1:27alright so let's move on to the first
1:29one um so the first mistake is really
1:31not knowing what numbers to look at to
1:33make sure that the health of your
1:34company is is good and really there are
1:38three things that you should know your
1:40bank balance the money coming in and the
1:43money going out and these are not
1:45difficult you don't need anything fancy
1:47to be able to do this this is all
1:49information you can get from your online
1:51banking or your bank statements you
1:53don't need bookkeepers you don't need
1:55financial software this is super
1:57straightforward but you would be amazed
1:59at how many companies don't look at this
2:01and then using these three numbers you
2:05can then calculate some other things you
2:06can look at burn you can look at your
2:09runway you can look at growth rate and
2:11you can figure out whether the company
2:13default alive okay let's go through
2:17these in order your burn is purely money
2:21in - money out again you can get this
2:25from your bank statements it's
2:26effectively just the change in bank
2:28balance between two dates here's an
2:31example super easy
2:33you have 25 K expenses you have 10 K of
2:36revenue so your burn is 15 K if your
2:40expenses are a little bit lumpy some
2:42companies you know you might have a
2:44one-off month where where you I don't
2:47know paid a legal bill or something
2:48that's super high you can do this you
2:50can look to average expenses as well to
2:53figure out your burn and that's often
2:55referred to as average burn so you might
2:57look at this over three months to kind
2:59of get it get more of an idea so then
3:03once you know your burn then you can
3:05start to look at what your runway is and
3:08what this means is how long do you have
3:10until you run out of money and the way
3:13that you calculate that is you look at
3:14your existing bank balance divide it by
3:16your average burn and that gives you a
3:18number of months so here we have 150 K
3:22in the bank we've just calculated our
3:25burn rate to be 15 K and so we have 10
3:28months of runway again super
3:32straightforward but you'd be amazed at
3:34how many companies or how many founders
3:35don't know these numbers for their
3:37company and just a point here that again
3:45the burn might change over time but this
3:49is a number for you this is not a number
3:51to try to make things look good this is
3:54for you to not lie to yourself so
3:56looking at the burn and going well this
3:58month it was 15 K but let's just pretend
4:00it was 10 K so then that makes it look
4:03like that we have 15 months of runway
4:05left all you're doing is lying to
4:08yourself you're still going to run out
4:09of money on the same day it's just
4:11making you feel better right now so it's
4:14super important to really be honest with
4:17yourself on these you can also look at
4:22your growth rate and so this is just
4:25looking at two periods of
4:27time so your money in a month to minus
4:30you money in in month one divided by
4:32your money in a month one so this is
4:35looking at the the rate that your
4:36revenue is increasing so in our example
4:39here we have 10k of revenue in July 12 K
4:43in August and so our growth rate is 20
4:47percent and just a note for the for the
4:50people that weren't the the math whiz
4:52was as at school a constant growth rate
4:55is what's going to give you the J curve
4:58in growth of revenue because if you have
5:0120% growing each month as your numbers
5:04increase each month that 20% caesar is a
5:06larger number okay and then the final
5:10one is whether the company is default
5:12alive or the other the other side of it
5:15is is it default dead so the way you
5:17calculate this is if your expenses are
5:20constant and your revenue growth that
5:22you've just calculated continues have
5:25you got enough cash to reach
5:26profitability and there's a handy little
5:30calculator that Trevor Blackwell who's
5:32one of the founders of Y Combinator
5:34created for you to do this and basically
5:36there are three things that you can you
5:39can play with so you can look at your
5:41monthly expenses which is the red line
5:43you can look at your monthly revenue
5:46starting point which is the green point
5:48over at the start and then you can
5:51change the gradient of that line to be
5:52your growth rate and it will calculate
5:55where you become profitable and how much
5:57capital is needed now this example isn't
6:00the same numbers as the ones that we've
6:01just been working through so in this
6:02example this is assuming that you will
6:05need 150 K of money to get to
6:08profitability and it will take you two
6:10years and so those are really key things
6:12to know because if you only have 100 K
6:15of money in your bank account you know
6:16that you've got a problem and you know
6:18that you either need to find a way to
6:19increase your revenue growth or you need
6:21to find a way to cut expenses because
6:24the whole goal here is to be at the
6:26point where you can find a path to
6:28profitability because it gives you
6:32freedom being profitable gives you
6:34freedom because you aren't in a position
6:35to need to raise money and kind of like
6:38dating if you don't need to raise money
6:41you appear less desperate so your the
6:43investors want to give you money more so
6:46it's easier to raise money so it's
6:48actually really important to have that
6:50option it can sometimes you know it can
6:54be it can be a switch as well you don't
6:57have to necessarily be profitable right
6:59now but if you know that you could turn
7:01off one specific expense or do one
7:04specific thing and be profitable then
7:06that's also a great safety net there's
7:09also a really great essay that talks
7:11about this in more detail this was
7:13written by Paul Graham and you can see
7:16the the link here to where that that
7:18gives you more information on this and
7:21again is the kind of thing that when
7:23we're doing office hours with founders
7:25it's one of the first questions we ask
7:26and you'd be amazed how many people
7:28don't know the answer these numbers
7:31super easy to calculate super
7:33straightforward the next problem is that
7:36people go along and they say ok I've
7:38looked at my runway I've looked at my
7:39revenue I know all my numbers and then
7:41kind of forget about it but actually
7:44this needs to happen pretty often you
7:47shouldn't be looking at it every quarter
7:49or every month you should be looking at
7:50it at least every week and if your
7:54runway is getting low or things are
7:56looking not very constant consistent you
8:00should be looking at it very often like
8:02sometimes daily and whenever anyone asks
8:05you should know your numbers have a have
8:08a think now how many of you know how
8:11much money is in the company bank
8:13account if you already have one great
8:16how much have you know your runway
8:19slightly less number slightly less hands
8:22but that's that's pretty good I like it
8:24I'm impressed
8:25okay the next one is under representing
8:29your expenses so if you think back to
8:30that default alive' calculator that
8:33assumes that your expenses are going to
8:36remain constant and actually in reality
8:38that's probably unlikely most startups
8:41their expenses will ramp up over time
8:43and you should you should understand how
8:46that's going to happen you know what
8:48kind of expenses are going to increase
8:50and what are they going to increase to
8:51so some examples of
8:54expenses that may change over time is
8:57the first one is undervaluing your own
8:59time particularly in the early days
9:01where you're doing everything and you're
9:03either paying yourself minimum wage or
9:05some very small amount which by the way
9:07in California or everybody should pay
9:08themselves minimum wage and you're also
9:12doing things that don't scale in order
9:14to acquire users and that's totally fine
9:17and that's what we recommend that people
9:18do but it can make your customer
9:22acquisition costs look lower than really
9:25they are and so you should be aware that
9:27over time as you start to hire people to
9:29look into these that those expenses are
9:32going to go up hiring people is not just
9:37their salary for every person that you
9:39hire you need to provide them with
9:41equipment you need probably desk space
9:45you need health insurance probably
9:47depending on where you're based and so
9:50all of these things cost extra money on
9:52top of the salary and so depending on
9:55location a good rule of thumb is that an
9:58employee will cost about 25 to 50
10:02percent more than just their salary so
10:05if they're being paid 100k year then
10:08your fully loaded cost to the company is
10:10going to be somewhere between 125 K 250
10:13K and again that's super easy to forget
10:16about you think oh I'm going to hire an
10:17engineer I'm gonna pay the 100 K that
10:19means you know that's all it's going to
10:21cost but it's it's amazing how those
10:23numbers do add up so just be aware of
10:25those finally assuming paid acquisition
10:29costs remain constant is another another
10:32mistake that we see people make a lot
10:34whilst it may not seem like this often
10:36times in the early days it's actually
10:39easiest to find your early users because
10:42they're the ones that are totally
10:43motivated to use the product and
10:45actually over time it gets harder to
10:47find and convert users and so the cost
10:50of doing that goes up and so again you
10:54know you should be thinking about that
10:55you should be looking at what your costs
10:57are right now and seeing thinking are
10:58they reasonable what do we think they
11:00might go up to because if you can look
11:02at things in the worst case scenario and
11:04you have you know in the worst case
11:07scenario you
11:08callate that you have eight months of
11:10revenue eight months of runway left but
11:13actually then things are better than
11:15that and you end up with ten months of
11:17revenue then that's bonus right you've
11:19got you've got a bit longer to figure
11:20things out
11:22runway is not a vanity metric it's not
11:25one of these things that's supposed to
11:26make you feel good is not one of the
11:27things that's supposed to be used to
11:30compare yourself against other companies
11:33is for you to know the health of your
11:34company and so don't ignore this stuff
11:37don't lie to yourself don't you know try
11:41to massage these numbers to feel like
11:43it's making yourselves better because
11:44all that's gonna happen is you're
11:46running out of money and it'll become a
11:48shock all right so these ones now are
11:51starting to get a little bit more as you
11:52raise money as you starting to hire
11:54people so it's good to bear in mind
11:56right now but these are probably less
11:58relevant to a lot of you for now okay
12:02the first one is outsourcing
12:03responsibility and often the CEO will
12:06hire a bookkeeper and to prepare the
12:09finances for a company as they start to
12:11get a little bit more complex and that's
12:12a total normal thing to do we recommend
12:15that people do that it's usually once
12:17people raise some money it's not a good
12:18time it's not a good use of the CEOs
12:21time to be doing the books and the CEO
12:23can be doing much more high leverage
12:24things but the things about in mind is
12:27that even though the bookkeeper is doing
12:30the books and preparing those numbers
12:31the responsibility is still everybody's
12:35in the company particularly the CEO but
12:37all the founders everybody should know
12:40what these numbers are an external
12:42bookkeeper isn't going to know the
12:44business like you know the business you
12:46know oftentimes they will the way that
12:48they they work is that they will get
12:50hold of bank statements and they'll see
12:51money coming in and they'll see money
12:52coming out and they'll do their best
12:54guess about what these things are and
12:56they won't always be right and you can't
12:58really expect them to always be a
13:00hundred percent right because they're
13:01looking at it from a very removed
13:03position and so it's up to the founders
13:06and it's up to the team to look at those
13:10reports that the bookkeepers send every
13:12month and to make sure that you
13:14understand them and to make sure that if
13:16anything that comes through that looks
13:17strange you question it's not
13:20necessarily
13:21think I think a lot of it is that people
13:22are concerned that asking questions will
13:26make it look like they don't understand
13:27their numbers but usually what happens
13:29is if you don't understand what these
13:31numbers are looking like it's usually
13:33because there's there's been some
13:34misunderstanding in the reporting of the
13:36numbers and so if you're like well I
13:38thought my revenue was going to be a bit
13:40higher this month for what's going on
13:41why is why is this you know why is this
13:44this number then you can actually go in
13:46and look and query what's what's going
13:47into that and you know you might find
13:49that there has been a mistake made and
13:52this is this is probably one of the
13:53number one things that I get founders
13:55coming to me complaining about they'll
13:57come up to me in this total panic and be
14:00like the bookkeeper messed up and they
14:02told us all this wrong stuff and now I
14:04don't know I have no runway and I don't
14:06know what's going on and actually what
14:08happened is the bookkeeper sent them the
14:10monthly reports they were like tick done
14:12my work founders didn't look at them the
14:14report didn't figure out what was going
14:16on and now there isn't enough time left
14:18for them to turn the business round
14:20either to get profitable or to raise
14:22money to figure things out and the
14:25company dies because it runs out of cash
14:27so super super important to be on this
14:30all the time hiring too quickly and
14:34scaling the company too quickly is it's
14:37really easy to do to hire too quickly
14:41because you're under a lot of pressure
14:42to to hire people it feels like it's a
14:47it's a really easy really measurable
14:53piece of information you know you talk
14:55to founders and one of the first
14:57questions that they will often ask is
15:00also how many employees are you at right
15:02now and you say alright you know I'm at
15:0525 and you're thinking oh no I've only
15:06got 10 employees that means that you
15:08know way more successful than I am and
15:09actually that's totally not true so we
15:12already mentioned that hiring employees
15:15cost more than just their salary but you
15:20should also be conscious that every hire
15:21is actually an investment into the
15:23business and you should be making sure
15:25that you're getting a return on that
15:27investment and now for some types of
15:30employees that's super easy to measure
15:31so you know think about a salesperson
15:34they're not bringing in more sales than
15:36it's costing the business to hire them
15:38then clearly you're not getting a good
15:39return on investment but then think
15:42about a community manager or a you know
15:45as a support manager it is much harder
15:49to measure that and that's kind of one
15:52of the things that as a CEO you need to
15:54be looking at and you need to be
15:55figuring out to make sure that all the
15:57people in your company are actually
15:59working to make the company more
16:02valuable and sadly this is the point
16:05where you know if people aren't working
16:07out you should be prepared to fire fast
16:10you know if people aren't pulling their
16:12weights then they need to they need to
16:14leave the company and like I say it's
16:17easy to fall into this trap that the
16:18more people you have the better you
16:20doing but actually the best companies do
16:22more with less
16:23and so actually the real way that you
16:26should measure yourselves is what's my
16:29ratio of revenue to employees because
16:32the higher that is the better you doing
16:34you're doing more with less
16:35and that's the path to being profitable
16:38from an early stage which then takes the
16:40pressure off to the the worry about
16:43whether the company is going to continue
16:45and it's also easy to feel like you have
16:47to kind of compete with with all the
16:49flashy startups that have raised bunches
16:51of money and they're all hiring data
16:52scientists right now and you know oh
16:55that means I must need a data scientist
16:56so I'd better hire a data scientist
16:58actually don't you know that the again
17:01the best companies do more with less and
17:05if you can if you can build a really
17:07great company with less employees then
17:09that's amazing for everybody involved
17:11and bear in mind you know you should be
17:15treating this money carefully it's not a
17:16case of just oh I need to hire this
17:18person I need to hire that person
17:19because what the investors who are
17:20giving you this money for they're asking
17:23you to do something basically a miracle
17:26they're asking you to take their money
17:28and turn it into ten or a hundred times
17:30that amount of money to give back to
17:32them and the way you're going to do that
17:34is by being careful with your expenses
17:36and making sure that your revenue grows
17:38as a follow-on to that scaling before
17:42you get product market fit is also
17:43another dangerous thing that people fall
17:46into quite easily
17:47at the point where he's still figuring
17:49out what your product is and you're
17:50trying to find product market fit you
17:52should be spending as little as possible
17:53and then that will give you the runway
17:55to have time to figure out what it is
17:58that you you should be building and then
18:00you know people will be beating down the
18:03door to buy your product more employees
18:06will not help you get to product market
18:08fit it will not help you get there
18:09faster it will not help you get there
18:11more efficiently and one of the
18:15conversations that I have with founders
18:17is something along the lines of oh my
18:20sales are low because I don't really
18:22have enough sales people so if I hire
18:24another couple of salespeople they're
18:26marseilles will obviously increase that
18:30doesn't sound like product market fit to
18:32me you know if it if you have that then
18:35customers are beating a path to your
18:37door and you know it it feels like the
18:40wheels are trying to wheels are falling
18:42off as you're trying to look after all
18:43those customers so just hiring more
18:44salespeople isn't necessarily going to
18:46be the thing that sets that going also
18:51convincing yourself that you need more
18:53developers or you need more people to to
18:55get the thing that gives you the the
18:57product market fit another conversation
19:00along this is something like I need for
19:04more developers because then I can build
19:06feature x y&z and then obviously
19:10everybody will buy it but again if you
19:12have product market fit then even your
19:14junk ev0 that doesn't have all of these
19:17fancy things is solving a big enough
19:20problem for everybody that they're
19:21willing to pay for it and they love you
19:23for it anyway and then you can start
19:25building up on the more features and
19:27then you can start hiring to do that
19:29this is this is the one that there's no
19:31coming back from the other ones if you
19:34make these mistakes you can you can
19:35probably solve this Sonique and you know
19:37if you hide too quickly you can figure
19:38that out if you don't know your I spent
19:40I don't know your numbers you can learn
19:42your numbers this is the one that is you
19:45know no going back so if you let your
19:48runway get too low before raising you're
19:51going to have problems raising your
19:53money so the first thing is you should
19:55always assume that you will never raise
19:58any more money always assume that the
20:00previous
20:01money that you raise will be your last
20:02and that you should be aiming to get to
20:05profitability on that money so again the
20:08conversations that I have with founders
20:09where they say oh it's fine my investors
20:11are gonna put in another million dollars
20:13it'll be totally fine that's kind of
20:16scary if you're relying on your
20:17investors to do that because they don't
20:19always sometimes they might but they
20:22don't always so Steve's stage money is
20:25the money that you'll raise off and on
20:26just an idea you know you'll be able to
20:28talk to investors about a an idea for a
20:32product you've got a hypothesis that you
20:34you want to be able to check and they
20:35will give you some money once you get to
20:38series a and beyond that becomes much
20:40much harder you know you need sustained
20:42growth you need to have more of an idea
20:44you need to have product market fit this
20:47is why it's a lot harder to raise money
20:49as you go through the life of the
20:52company and in particular don't leave it
20:55too late because if you're running out
20:57of runway your leverage goes down as
21:00you're trying to raise money so if you
21:03have six months of runway let's say and
21:06you think you're about to go and start
21:08raising money that's pretty scary it
21:10could take three months more to actually
21:13get an investor to agree to put money in
21:15and as your cash balances are decreasing
21:19over those three months you know you're
21:22losing leverage you can see from here
21:23that probably at six months you maybe
21:26you can just about pull it off but
21:29really you want to be thinking about 12
21:31months runway that's the point where
21:32you're thinking okay maybe I need to
21:35think about whether I raise money or
21:36whether I'm thinking about getting to
21:37profitability and also if you get to six
21:40months and you're unsuccessful in
21:43raising money you really don't have a
21:44lot of time to turn this around to get
21:46to profitability for the company to
21:48succeed again there's a really great
21:51essay on our blog that goes into this in
21:53more detail linked down here so you can
21:57you can read that at your at your
22:00leisure
22:00and hopefully take that on board okay so
22:05in conclusion
22:07most companies die because they run out
22:09of money it's super easy not to run out
22:12of money just by looking at
22:15number of things knowing your cash
22:17balance in your runway understanding how
22:19your expenses are going to increase
22:22understanding that the ratio of revenue
22:24to employees is a better metric than
22:26just the number of employees and having
22:29a plan to get to profitability because
22:31you should assume you're not going to
22:32raise any more money all right thank you
22:35very much okay so a few minutes for
22:44questions so the question is how do you
23:17how do you balance the the two sides of
23:21you should do things on a shoestring and
23:23be profitable as early as possible
23:24versus you should just throw money and
23:26get market share as fast as possible I
23:28know I think it depends on the stage of
23:31the company as well you know in the
23:34early days then probably being careful
23:36with your money and making sure that you
23:38are you have a plan to get to
23:40profitability is a good thing just
23:42having a plan doesn't mean that you
23:44necessarily have to actually be doing it
23:45you know so so an example might be maybe
23:48you're plowing all of your revenues back
23:51into marketing in some description or
23:55rather and knowing that you could
23:58actually slow you you you know the way
24:00to the way to reduce your expenses is to
24:02reduce your marketing which might slow
24:05your revenue a little bit but it would
24:06conserve that cash to preserve the
24:08runway it's just it's a balancing act
24:11and you know I mean the other thing you
24:14have to bear in mind is that obviously
24:16the investors want you to spend money
24:18super fast they want you to come back to
24:20them cap in hand with you know please
24:22please give us more money so there is
24:26that there are some tensions there but
24:27it's all
24:28just being responsible with it and
24:30giving yourself enough time and enough
24:32runway to be able to to figure it out
24:39and I'm just curious at what stage do
24:41you see a four-on-four engulfed in that
24:43company do you start with the quiet exit
24:45CFO first then I can probably see a bow
24:49falls out okay so the question is when
24:51do you bring in a CFO it's surprisingly
24:53late actually even probably post series
24:56a you probably don't need a full-time
24:58CFO at that point and there's a lot of
25:01services that do you know consulting
25:03CFOs and and will do will do sort of
25:07strategy or you know help you to figure
25:09out your numbers to raise to create a
25:12deck or whatever for raising money a
25:15full-time CFO is actually pretty late on
25:18just to bear in mind that the difference
25:20between a CFO and a bookkeeper at least
25:22for the for the u.s. is that generally
25:24the way that this works is the
25:26bookkeeper you would you would have
25:27earlier and they're they're the people
25:29who are just going to get your your
25:32numbers that are coming through your
25:33bank statements into a balance sheet
25:36into an income statement into the
25:38accounting system so they're providing
25:41the reports for that and then separately
25:43to that you would hire a CPA an
25:46accountant who would prepare the tax
25:47returns and file those for you each year
25:51so there's actually two different sets
25:52of people so a bookkeeper you would need
25:53earlier a CPA you need annually to do
25:56your tax returns and then a CFO who's
25:58going to sort of oversee that and do
26:00more of the building our forecasts
26:03building out budgets and things like
26:07that are probably a little bit later on
26:08as well before that it's really the
26:09founders they should be doing it
26:25so so why can you have any calculate it
26:28I mean there are tools online personally
26:32I think it's actually better to build it
26:33yourself because I I think it makes you
26:36think about it in your mind and so
26:39usually just doing good old spreadsheets
26:41for me works well but certainly that
26:44there are other ways that you can you
26:46can do it and there's there's a lot of
26:48services and and a lot of startups we
26:51see a lot of startups applying to us
26:52trying to help to make it easier to see
26:55forecasts and things okay maybe one more
26:58question and then we'll move on you have
27:08a product market fit
27:10Oh for investors so are you raising seed
27:19stage money yeah okay so at the seed
27:22stage so the question is should you
27:24provide forecasts in your deck if you
27:27haven't reached a product market fit and
27:28the answer is probably no certainly the
27:31seed stage if you're talking to
27:33professional investors or experienced
27:34investors they probably aren't really
27:36going to look or ask you for that number
27:39they'll they'll ask you for things like
27:41so how could how big could this get and
27:43what's the total market size and you
27:45know questions like that but they're not
27:46going to be looking for here's our
27:47monthly growth predictions probably if
27:52you're being asked those kind of
27:54questions from investors and you're
27:57raising money at the seed stage it
27:58probably means that those investors and
27:59not actually that's experienced at
28:00investing in early-stage companies so
28:03that's a data point for you to decide
28:05whether it's it's a good person to to
28:07work with certainly by the time you get
28:10to series a however you should have you
28:12should have some plans but you know the
28:14point of a Series A is that you've got
28:15product market fit and that you know you
28:18know you have more of an idea I mean
28:20forecasts are always forecasts you don't
28:22know for sure but yeah okay I think we
28:25are up so thank you very much I'm doing
28:29an AMA on Friday so if there's questions
28:32didn't get to then feel free to drop
28:34them in there and I will answer as many
28:36as possible of those thank you
28:39[Applause]
28:50you

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