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The relationship between early-stage founders and their finances can be fraught. As Meraki founder Hans Robertson described in our recent Q&A, “You don’t really want to spend a lot of time thinking about finance.” At the same, he thinks startup founders need to build a finance department and operational processes that give their company “a firm grasp of what the cash flow needs are, both today, and what they’re likely to be over the next 6 to 12 months, so you can calibrate your fundraising appropriately.”
From managing burn rates to meeting the expectations of investors, we talked to Hans about what he learned while building Meraki, the first cloud-managed networking solution for enterprises (which Cisco acquired for more than $1 billion in 2012).
Watch the video or review our written transcript to zoom in on his ideas for when to hire different finance roles, what your investors expect to see, and how to recognize when a COO or CEO is spending too much time on finances.
In the early stages of the company, what are the things founders should be putting into place on the finance or internal operations side?
Getting the best people involved is probably one of the most important aspects. Even on the finance side. I think in the early stages, you’re not going to want your own finance team, but getting a good accounting firm early on will take the whole financial elements off your mind.
What tasks are good to do in-house versus outsourcing?
HR. For most companies, you don’t really want to spend a lot of time thinking about finance, so I bias towards doing as little as possible. Ideally, you want someone else to do your expenses and categorize all of your receipts so you don’t have to think about it. You really want somebody who can absorb most of the hours, without you having to really do much.
What high leverage activities should the founders be doing themselves?
Having a firm grasp of what the cash flow needs are, both today and what they’re likely to be over the next 6 to 12 months, so you can calibrate your fundraising appropriately. And then of course, understanding how the venture game is played is also important.
What financial metrics should founders keep an eye on? And how should they manage these?
That depends on what kind of business you’re in. For example, Meraki was pretty careful to run a high margin, relatively conservative cash burn type of business. But one of our competitors raised no venture money, so they were like cashflow positive, which is a completely different route of success, and that company has done great. And then there are other companies which just have a really high burn, don’t really optimize margins until a long time down, and that’s also a successful strategy.
So I think if there’s a combination of like, what kind of business am I in, as well as what’s my general approach. Am I focused on growth revenue over operating margins or sales efficiency? Or do I want to make sure I can show investors that I have a high gross margin? If your business should run at a pretty high margin but your company runs at a 30% gross margin, then you should keep an eye on it. For most SaaS companies where margins are so high, it doesn’t really matter whether it’s 95% or 85%, it’s probably not a metric worth optimizing.
When is the right time to think about those kinds of metric questions? During the seed round, series A, or even beyond?
Speaking generically, I think it’s probably worth having a sense of what some metrics are, but not necessarily spending time optimizing them. I think if you’re the CEO of a start-up, you should know what your burn rate is.
Other questions that you really should know are, what’s your plan for the next 6 to 12 months when it comes to bookings, or revenue, and cash burn? Questions around gross margin may or may not be relevant, but if it seems like it’s a pretty basic number, you should probably know what that is, even relatively early.
Are there particular processes or systems you’d want in place during the seed stage?
Having basic financial statements that are competently prepared is always something you want, and investors want to see that. It’s a useful discipline, so I think you don’t want to go too long without having a reasonably accurate income sheet balance statement, cash flow statement, and a model around your business. It could be a simple Excel model, but those are probably some of the early things that you want to do.
From a software perspective, do you think something like QuickBooks is sufficient, or do they need something bigger?
I would definitely not do anything more complicated than QuickBooks or its equivalent in the early stages, for a couple of reasons. One, those systems really want a dedicated person in-house to set them up. And you don’t want to get locked into a certain type of system before your business has matured because it’s just going to be another thing that makes it hard to change.
Cost is of course another reason. A simple system is the way to go. Some people might tell you that the on-prem versions are still somewhat more sophisticated, but I’ve seen companies use the hosted versions with a couple hundred people and it works pretty well.
At what point would you recommend founders start to improve their financial discipline?
The more complicated or bigger your business gets, the more you can invest in setting up robust processes. As the startups get bigger, it just becomes harder to keep track of everything that’s going on, and that’s when you’re going to want more sophisticated systems to help you do that. For example, if you have multiple product lines, you’ll want systems to say which is more profitable, or the costs for each one. Or maybe you’ve decided to expand internationally. Nobody likes the answer “it depends,” but that’s how you should approach it, as opposed to a set of rules.
Any advice on the right time to purchase a particular tool, or how to evaluate the level of complexity?
When it starts to feel broken is when you probably want to buy a new tool, but don’t prematurely optimize. When you start out, you’ll probably have sales teams and commissions on a spreadsheet. But when you expand to 50 salespeople, it becomes more onerous. By 200 salespeople, it’s almost impossible with a spreadsheet. When it becomes so painful, that’s when you start looking at what to buy, but you don’t need something too advanced too early for a couple of reasons. One, those tools tend to be more complicated to actually use than they appear from the outside. Number two, it also reduces flexibility. Once you’ve gone and taken your process, and essentially codified it in software, it’s harder to change than an Excel spreadsheet.
How do you evaluate software vendors?
My approach that has been somebody relatively senior should actually try the software. And you should be nervous when they don’t let you try it. They might show you a demo, but if they don’t let you try it yourself too, keep looking. It only takes about 30 minutes to know if it isn’t a good idea, or if it’s what you expect. So you can tell a lot pretty quick without really needing to be a domain expert. There are tools that are so notoriously difficult to implement, that they don’t really want you to try it because they’re sort of trying to hide the fact that this is probably gonna take 6 months and $200,000 to get it working.
Another thing you can do when evaluating tools is talk to people that are further along than you. And again, just really making sure that you’re at a point where you actually have to have this.
What are your thoughts on operating plans?
I have found it to be a very useful discipline. Like once a year you go through, and you come up with a real plan for the next year. Presenting it to your board is a good way to make everybody do it. And it should have, what are bookings, and expenses, and cash flow going to be for the next year? It’s a chance for the whole company to come together. The marketing person needs to tell you hey, how many marketing people we’re gonna hire, how much we’re gonna spend on campaigns and advertising. Same with every other department. Of course there’s gonna be uncertainty. But it’s something to measure yourself against. And it doesn’t have to take a ton of time to create, maybe 20-40 hours.
How do you create the operating plan?
Someone needs to be the ringleader or integrator. But a department leader should more or less be able to tell you, “Here’s what I’m gonna do over the next 12 months, 24 months.” You put that into a simple spreadsheet. Here’s my hiring, spending, and revenue plan. And then boil that into a model that just shows what’s gonna happen over the next 12, 24, or 36 months.
Who should present the operating plan to the board?
It could be either the CEO or an operations finance kind of business person. In any case, the CEO should have a firm grasp of what’s in there. If the plan is done well, it should be producing the kind of slides that people refer to, as opposed to one where it just gets done once, and everyone forgets the numbers. Numbers that always stick out in my head are, what’s the bookings target, and then also sort of what’s the cash position? The high-level numbers are useful. Especially if everybody has bought in and agrees that those are the goals.
When is the right time to bring on the first full-time finance hire?
The trigger is when your business gets to a level of complexity that the COO or CEO is spending too much time on finances. Who that person is varies. Most commonly, I’ve seen companies hire a controller. Which is a person who’s been out of school 5 – 15 years, who is going to focus on the accounting expenses, but senior enough they can supervise and get processes in place. Sometimes a VP of finance. Rarely a CFO, that’s probably not a good early stage hire. And then very occasionally, a more junior accounting type person. But I think they’re all possible.
What should be their focus area be once you bring them on board?
It probably depends on the business. What I’ve seen is, they take over the monthly financial processes. They probably help with the planning aspect. Generally they’ll take over that spreadsheet, or the process there, and be the integrator. Although that might still remain with a COO, if such a person exists. And then they take over the daily finance activities that impact everybody – expense reports, accounts payable, accounts receivable.
What could go wrong with a financial hire?
Think about the characteristics you want in this first finance person. Just like the first hire in a lot of functions, you really want to try to get an excellent person. And most of the time, I think founders don’t really know what an excellent finance person is, so then you kind of use your general hiring tactics. Do they have good schooling? Do they work at a firm? Most importantly, do they have great back channel references when you check them out? And then if you make a mistake, you want to recognize that mistake and correct it. This is a person who will ultimately be hiring other people so you want to be careful.
You really just want the books to be closed by themselves, that the accounting is being done correctly, and projections on cash flow are pretty accurate. You want someone you can trust to tell you when something is important, it needs to be fixed, or that it’s going wrong. A great example would be, we said our marketing cost would run at 10% of bookings, but really it’s going be 20%. If you trust this was all calculated correctly, you can either talk to marketing about holding back, or adjust the plan accordingly. As opposed to you having to notice it yourself to the point where you can make those types of decisions.
At what point would you hire a CFO?
In most cases, about a year or two before you think you might go public. And the reason for that is, CFOs want to work at companies where it looks like a sure thing. Just like many other functions you want to get a good one. To attract a top caliber CFO, you have to be on a pretty clear path towards being a big company.
Do you think the main driver to bring someone in is the prep associated with the potential IPO?
Certainly for an IPO, you’re going to need a CFO. That is a firm requirement. Other reasons a CFO role is useful are when your business is just getting super complicated, and you need a more senior person to help run it. Another thing would be if you have a really complicated investor base. Now you’re raising late stage financing outside of the venture community, some CFOs are going to be really good at fundraising. D
Hans Robertson co-founded Meraki and sold it to Cisco for $1.2 billion in 2012. He’s currently the founder of Verkada , a cloud-based security camera company, and he’s an angel investor.