14 tips for leveraging finance at a startup
Finance has traditionally gotten considerable flack as a role that wasn’t necessary at a startup until the company thinks about an IPO.
This is flawed wisdom.
Finance can be strategic, operational and when done right can amplify the performance of an already rocket ship startup.
Here are just a couple things a great strategic finance hire can do:
- Compute your real metrics (yes, you may be calculating CAC or even revenue wrong)
- Benchmark you accurately (because a lot of these SaaS metrics are calculated differently, GAAP is the only legitimate benchmark)
- Get you cash flow positive (this has happened, lenient accounts receivable (A/R) means you may not be getting paid by your customers)
- Avoiding a de-railed financing round (Series A and beyond) where metrics were calculated incorrectly or… important metrics weren’t calculated at all.
Given finance can be transformative, what are the key pieces of advice for a startup looking to scale?
A couple weeks ago I interviewed a good friend, Ada Del Rosso, about her experience getting finances in shape for startups aiming to IPO in the future. Ada has worked in public and private technology companies of all stages where she leverages her knack for numbers and her people skills to make sure businesses meet their financial goals. As Head of Finance at Heap Analytics, she was brought into the fast-growing analytics company to make sure growth goals are complemented with a realistic financial and operating plan.
Below is a summarized and edited list of Ada’s helpful tips for startups looking to make strategic finance their super power. Some of the tips touch upon sales, a key function of the business that effects finance.
- Get your numbers right earlier rather than later.
The most common issue Ada has seen with startups that she’s worked with is inaccurate numbers. Inaccuracies happen because of the trade-off between moving quickly and acquiring customers as fast as possible, and entering information correctly into a google doc, excel or your CRM, which early on, doesn’t seem as important.
As you start out focus on just making sure the few metrics that are key to your business are accurate. As you scale, start building the systems and processes to support accurate numbers. If you can’t track it correctly then you have to go back and look at every contract you’ve signed. If you realize you have inaccuracies at $25M in annual revenue it’s a lot tougher to go back retroactively and fix the bad habits that have led to those inaccuracies.
2. Align incentives to ensure data integrity.
Easiest way to avoid salesforce being out of date or with incorrect data?Make commission plans tied to accurate data in the CRM so that if data isn’t inputted sales reps don’t get paid. It makes sure sales reps maintain the data integrity and a culture of truly being data-driven. You want to be able to trust the numbers.
Lastly, the way you pay commissions can also be used to align sales reps to the mission of the company and the success of customers. Some companies choose to pay commissions 50% at signing the customer and 50% once the customer is on-boarded. This ensures that sales reps are have a vested interest in the overall success of the customer.
3. Set up processes to de-silo the data.
As companies scale different departments end up using their own systems and data starts getting siloed. For example, your ERP might be NetSuite, your CRM might be Salesforce, marketing probably has multiple systems they are using, and so on. Know how you are going to bring all these systems together so the CEO doesn’t have to log into these systems individually to get the metrics that are important to understanding business. There are multiple systems that bring disparate data sources together into consolidated dashboards and reports including Looker and RJMetrics.
4. Benchmark with GAAP numbers.
Board members at post Series B and later care about GAAP based financing because of the standards around how these numbers are calculated meaning benchmarking is easier. You can apples-to-apples compare two SaaS startups like Salesforce to Heap when you are using GAAP numbers. But with the simple SaaS metric of ARR, calculation can differ across startups. One startup might be calculating ARR at service start date while another can be calculating ARR when they book it.
6. Understand your metrics holistically, not in isolation.
Failing to contextualize a metric can cause you to become myopic and lack a full picture of your company’s health. Most SaaS metrics interact with each other and a change in one can have a direct or inverse affect on another. The graph below is a visual representation of the relationship between a handful of important SaaS metrics. Lastly, tie your metrics to your overall strategy. For example, Ada mentioned how a company might be ok with a slight increase in SMB churn, given a strategic focus on selling to enterprise account.
7. Care about your employee efficiency metrics.
Startup CEOs measure their key metrics of overall burn rate and revenue run rate. However, many forget about measuring expense/employee and revenue/employee. You want to make sure that over time these numbers aren’t changing in a negative direction. These are core efficiency metrics and can indicate that the business is hiring well, achieving economies of scale, improving the sales cycle or compressing a sales reps ramp up time. Tomas Tunguz has a great post from 2014 on benchmarking and evaluating employee/revenue trends among category defining SaaS companies.
8. Remember the Sales Learning Curve.
Mark Leslie’s seminal and oft cited piece on building an analytical go-to-market strategy remains timeless. Track sales yield over time and adjust your go-to-market strategy as you move along the curve.
There’s two major errors that can be made at either end of this curve that Ada has seen. One common error is ramping up a sales force before the company has a sales ready product, leading to high burn and potentially causing the company to flame out before it even has a chance to get to market. This happens on the left side of the curve during what Leslie calls the “initiation” phase. The second error happens on the right side of the curve as a company enters the “execution” phase. Once you have 2x sales yield (the average annual sales revenue per full-time, fully trained and effective sales representative) it’s time to scale your sales reps. Ada has seen companies at this phase not hire quickly enough. If you fail to hire those 5 sales reps that were part of your Q2 hiring plan, it will have a ripple effect on your ability to make forecast down the road.
5. Invest in sales ops.
Sales is a science, not an art. A good sales ops hire is critical and should be a priority hire. Sales operations oversees sales performance analyses and reporting, aligns compensation plans and goal setting, manages pipeline, and improves upon sales automation processes. Sales Ops ensures a metrics driven approach to sales.
9. Get paid!
Another number that SaaS companies don’t focus on early enough is accounts receivable (AR aging). If you charge someone you should be able to get that money.
10. Know who your red customers are.
You want a good metric for a red customer early on. Red customers are customers that are likely to churn. Red customers may be defined by different predictive variables depending on their industry. Make sure you can track your green (little to no probability of churn), orange (no directional probability on churn) and red (high probability they will churn) customers. Examples of red metrics may be certain engagement numbers, the customer ignoring emails, the customer has literally said they will not renew, or verbalized that the product is not meeting their needs.
11. Know your pipeline and dig into pipeline variances.
In terms of managing your pipeline, at a basic level you want to understand deal dynamics like 1) average deal size, 2) how long it takes to close a deal and 3) sales pipeline coverage (SPC) (how full your pipeline is relative to your quota for a given period.) 4) setting good stages in your CRM and understanding conversion rates between stages. The top of the funnel is also important: where are leads coming from and what are the marketing ROI metrics associated with each lead source? Pipeline is the machine that drives the transformation of customer acquisition costs into revenue. Ultimately, as you look for growth capital, these investors are looking at the reproducibility and robustness of this machine and your pipeline is a key driver.
Lastly, during pipeline analysis, the biggest numbers that a Head of Finance will look at are the variances and trends in the pipeline. If I closed 50% of my pipeline what happened?
12. Funds aren’t endless.
Sh*t can happen. Have money for a rainy day. Ada spoke of a growth SaaS company that was 2 weeks away from making payroll (in this case the company over-ramped sales in the “initiation” phase of its sales learning curve). Make sure this isn’t you.
13. Get on board with your board.
Some board members may care about certain metrics more so than the founders. Ensure board, the founders, and the C-level suite are on the same page. Make sure that what you pitch during fundraising and what you track during your board meetings are consistent.
14. Hire a head of finance comfortable with getting her hands dirty.
Ada mentioned that she’s seen hires that haven’t worked out because they don’t want to get in the weeds. If ARR is wrong the head of finance needs to not ignore it or cite it as someone else’s job to fix. Make sure you screen for a Head of Finance that isn’t too elevated in their previous role. Someone too high up most likely will be more comfortable administering than setting up systems and processes and digging into the excel.
* Many thanks to Ada Del Rosso for sharing her perspective and advice.
