Category: #fiveminutefinanceforfounders

Other Finance Options for Start-Ups Beyond Angel and Venture

Maximising cash, extending runway

As startup CFOs it should come as no shock to anyone that we are constantly looking at ways of maximizing cash, extending runway, and optimising the capital structure of the businesses we advise.

Over the last several years, there has been a proliferation of new options available for startups – especially here in the UK – that are looking for ways to finance their business without going out to angel investors or Venture Capital firms.

So here are some options available to founders and their businesses that you might not have thought of before.

Startup Loans

These are government loans available from a number of sources and are ideal for founders that need a small amount of capital to get things underway, maybe to get a prototype built, or to buy your first stock or whatever might be that first step that gets you on your way.

These loans are aimed at UK residents over the age of 18 who pass necessary credit checks. They are currently structured as unsecured, personal loans repayable over 5 years at a cost of 6% per annum. You can find out more and check to see if you’re eligible via the startup loan website.

Convertible Future Earnings Agreement

There have been a few iterations on the income share agreement that has led to the Convertible Future Earnings Agreement (CFEA), but at its simplest, it’s an instrument where you pay back a fixed percentage of your income for a predefined period of time after you reach a certain level of income. The convertible element comes into play if the business then goes through a more traditional equity financing round and the balance is converted normally with a discount or cap to the round.

This type of finance is more suitable for founders that don’t want to sell a lot of equity in their business, who are looking to grow efficiently rather than the sort of fast growth associated with venture-backed businesses. You can find out more about the CFEA via one of its biggest champions, Horizan VC.

Grants

Grants can be issued from a number of different parties, from charities and foundations to government institutions. They are typically funds released to businesses in the pursuit of some form of research and development activity that leads to an innovative breakthrough or commercial activity. The application process can be quite difficult to navigate depending on the nature and size of the grant so be prepared to put in a fair amount of effort and wait a fair amount of time before you get a response.

Whilst some grants are given without the expectation of repayment, others may need to be repaid dependent on some predetermined conditions (such as securing match funding, hiring a certain number of people in an area, or commercialisation of the research and development activity). In the UK you may wish to check out Innovate UK to see what grants may be available right now or you may wish to speak to a specialist such as GrantTree who will write your applications for you – for a fee of course.

Working Capital Solutions

Next up are the more traditional forms of business financing, the most common of which are overdraft facilities and credit cards, access which will depend on your trading levels and your bank’s appetite to offer them. Bear in mind that with overdraft facilities in particular you may be asked to provide personal guarantees or even offer up security by way of your, or other directors’ properties as collateral against the debt.

Other types of working capital solutions that are tried and tested are things like inventory financing where you take out a loan or establish a revolving line of credit to finance your stock or invoice financing (sometimes called invoice discounting) whereby you ‘sell’ your debt to a company like MarketFinance who will advance you a percentage of the value of an individual invoice (or potentially your entire debtor book) and charge you interest on the balance until it’s repaid by your customer.

Revenue Based Financing

In today’s digital world and yesterday’s low-interest environment, it’s unsurprising that a number of companies came out to try and provide value to the plethora of eCommerce and SaaS businesses that have continued to flourish – especially during the pandemic where online sales jumped up substantially.

Companies like ClearCo, Out Fund, Uncapped, and PayPal, to name a few, hook into your payment providers such as Stripe, Braintree, or Chargebee to assess your trading volume. They’ll then advance you some cash based on their risk structure and recover it (plus a fee) by taking a cut of your ongoing revenue until the advance has been fully paid. The advantage of this is that if you see a dip in your volumes, your repayments decelerate unlike with a traditional loan which is a fixed monthly payment.

Pipe is driving the way for SaaS businesses to do the same by allowing you to transform recurring revenue into upfront capital.

R&D Credit Financing

Many technology companies in the UK take advantage of the Government’s attractive Research and Development (R&D) tax credit scheme. Via this scheme, you can either offset engrossed R&D expenditure against your corporation tax or, if you are loss-making, claim 14.5% of the engrossed expenditure back as cash.

What many people don’t realise is that there are some companies such as Fundsquire who will advance you a percentage of your anticipated tax credit as an interest-bearing loan with no repayments until the tax credit is approved and paid out by HMRC.

Crowdfunding

Whilst there are a number of equity crowdfunding platforms out there which we may explore in a future post, here we’re talking about the OGs such as Kickstarter and Indiegogo which are platforms that allow you to promote a product or service and solicit preorders. That way, you kill two birds with one stone – gauge the appetite for the product you’ve built and secure the cash (and sales) for your first release.

Loans

A huge number of intermediaries have been established in the UK such as iwoka, Funding Nav, and Swoop providing a marketplace for lenders on one side and businesses looking for financing on the other. Loans range from £1k microloans all the way up to 7 figures.

As with any loan, you need to make sure that you can afford the repayments and do your diligence before taking on any debt.

Summing up

There are a variety of solutions out there that might help you to finance your business without having to source angel or venture capital (and let’s face it, most businesses shouldn’t be looking for that type of funding in the first place) – you just need to work out what makes the most sense for you and your business.

Looking for investment? We can help.

What is a Cap Table?

What is a cap table?

Finance for growth - knowledge for founders

One of the things we are regularly asked to do as startup CFOs here at EmergeONE is to review, fix, model, or even build a company’s cap table. A cap table is fundamental to any growing business – especially one that raises external investment – but many founders and employees don’t appreciate its importance so, in this post, we’re going to go right back to basics and discuss what a cap table even is in the first place.

Cap table is shorthand for the term capitalisation table and at its simplest, it is a record of who owns how many shares in a company – i.e. its ownership structure. From that, one can understand a number of things, including percentage ownership or degree of control.

However, as companies grow, the cap table can become more complex, here’s how.

Employee (or other) options

Options are a financial instrument that gives the holder the right, but not the obligation, to purchase something in the future. Keeping it simple for now, we would normally see options granted to employees, advisors, or others in return for services or as part of their compensation package.

In order to grant options, a company will normally create an options pool from which they will issue them.

Fundamentally, an option means that an option holder can buy ownership in a company in the future without having to outlay any cash right now and often on preferential terms. They can normally exercise (i.e. pay) to convert their options to shares at any point after the option has vested (cleared an artificial time-bound hurdle imposed by the company).

The option pool is ‘added’ to the cap table to reflect this potential change in the future ownership structure.

Warrants

Most startups and scale-ups won’t need to worry about warrants until they are quite advanced and can be considered quite similar to options for our purposes in that like options, they are an instrument that gives the holder the right to purchase a company’s shares at a particular price on a particular date.

Whilst an employee may hold their options all the way through to an exit, because of the time-bound nature of a warrant, once the exercise date passes, the warrant lapses.

Preference shares

As a company scales, it may take on institutional investors like venture capital (VC) firms. Often, these VC firms will not purchase ordinary or common shares, instead, they will buy preference shares. These shares may carry special rights which means that VCs get a multiple of their money back before anyone else if the company exits. This helps them protect their downside.

So, whilst this doesn’t necessarily change the nature of a company’s cap table itself, it creates a challenge when calculating the waterfall distribution of cash when the company exits.

Example

Let’s walk through an example. Let’s say two people, Laura and Sam decide to launch a startup. When they incorporate, they agree that they will each own the same number of shares in their business. Their cap table may look like this:

Shareholder Name	Shares Held	Share Class	% Ownership
Laura	100	Ordinary	50%
Sam	100	Ordinary	50%
Total	200		100%

Laura and Sam work really hard to create value in their business and are soon able to hire their first employee. Because they have limited cash, they agree that it makes sense to reward employees with share options given they will be paying lower salaries. They agree to create a 20% share option pool in order to allow them to do this. Their cap table now looks like this:

Shareholder Name	Shares Held	Share Class	% Ownership
Laura	100	Ordinary	40%
Sam	100	Ordinary	40%
Option Pool	50	Ordinary	20%
Total	250		100%

Note that when we bring options into the mix, we talk about reporting the cap table on a fully diluted basis – i.e. as if all the options have been issued and converted into shares.

Now let’s assume that with the increased capacity and some great milestones under their belt, Laura and Sam go out to secure investment. They talk to a VC fund that agree to acquire a 10% stake in the business on a fully diluted basis (i.e. taking into consideration any options or warrants outstanding) but they agree that in the event of an exit, they will get their investment back first, so Laura and Sam have to create a new class of preferred shares. Their cap table now looks like this:

Shareholder Name	Shares Held	Share Class	% Ownership
Laura	100	Ordinary	36%
Sam	100	Ordinary	36%
Option Pool	50	Ordinary	18%
VC	28	Preferred	10%
Total	278		100%

One thing to note is that when we are going through financing rounds, we don’t usually sell existing shares. Instead, we create new shares to issue to incoming investors. This is why Laura and Sam continue to hold 100 shares each and their shareholding gets diluted down every time they issue new shares.

So there we have it. A cap table helps people interested in a company to understand the ownership structure of the business, a model for future fundraises, do a waterfall analysis of proceeds at exit, and more.

As companies issue more shares during a financing event or create new option pools to incentivize staff, their cap table reflects those changes in the capital structure.

EmergeONE provides finance services for growth companies, and our team regularly gets involved in understanding the cap tables of the businesses we work with, maybe we could help yours too.

Building business models is hard, we can help?

March modelling mayhem webinar, watch the catch-up.

March modelling mayhem webinar

Get the lowdown on how to build models with EmergeONE's start-up CFO expert Aarish Shah.

This webinar was originally delivered to a cohort of some of Founders Factory’s best and brightest.

EmergeONE’s Aarish shares his knowledge on finance for growth companies, building forecasts, and models for countless start-ups and growth ventures.

In the session, Aarish will help you understand who you’re building models for, what they want to see, the drivers and assumptions that make sense, and how all of this comes together to help you get funded.

Don’t have time to watch the video?

Here are the slides to peruse at your leisure.

Financial Modelling Mayhem from Aarish Shah

We're changing the finance function, find out how we can help you grow.

What a good start-up CFO brings to your venture.

Photo by Steven Kamenar on Unsplash

What a good start-up CFO brings to your venture.

It's not always obvious so we've broken down the 5 essentials any good start-up CFO worth their salt should be bringing to the table.

It’s not always obvious what a good start-up CFO brings to a venture. or certainly, that’s what we hear from newer ventures who have a love-hate relationship with finance. What we’ve learned through this process is that finance people come with a set of expectations that are very often not aligned to how modern, fast-paced, digital-first businesses operate.

It’s as much a change in expectations on the part of ventures that will be the key driver to framing the CFO role and it will take both sides to drive that change. Our job at EmergeONE is to educate around what a good start-up CFO brings to the table, how this very often steps outside of “finance” and how it can be a key asset in a growth trajectory.

But why isn’t it obvious?

Before making the case it seems sensible to understand why the value isn’t obvious in finance. We think it comes down to a few key points, namely:

Perception is 9/10th of the law. Most people look at finance as a bookkeeping exercise and a monthly chat with an accountant. It doesn’t scream growth it screams necessary evil.
Finance isn’t seen as cool or innovative, especially where tech is concerned. Don’t worry we’re changing that 😉
For a lot of growth companies getting serious about finance can be perceived as boring and structured. It’s like your first job after 3 years of parties at Uni. It’s a big turning point for founders.

It should be, here’s what a good start-up CFO brings

As our founder, Aarish says the CFO is often the first grey hair into a young business. No comment on the colour of his hair! But the point is relevant, a good start-up CFO brings experience and that’s important when you want to move quickly because it helps avoid making mistakes, running out of money, and not making it.
A good start-up CFO drives growth way beyond managing the numbers. They can be invaluable when setting strategy. They help shape the culture of a business and that’s the point they come on board when it could be argued you’re not a business you’re just a project. They change that.
If you’re raising money a good start-up CFO will know where to go to get it. They will understand the financial landscape and how to cut the best deal for your business. So many times we see founders who’ve raised money but tied themselves into deals that do more harm than good. It can be avoided.
As a business grows it needs process and structure. That doesn’t mean red-tape it means being rigorous, avoiding waste, and creating a structure and culture that pulls in the same direction. It’s valuable because it’s financially efficient, it also sends all the right signals to the people you will want as investors in your business.
The final attribute is something that ties into the general perception of finance. Most people look at finance as an inwards and backward-looking exercise, scrutinising what has happened and saying what should have happened. A good start-up CFO, and certainly our approach to finance is the polar opposite. We take a forwards and outwards approach, as all growth company CFO’s should, helping guide what needs to happen next. After all, what happens next is where the growth is!

Whilst it certainly isn’t a blueprint for your recruitment drive we hope this opens your eyes to what could be. Finance is a misunderstood and sometimes much-maligned part of any business. It could and can be so much more so long as we have the right expectations.

Keep an eye out for the newsletter pop-up. We only send interesting and valuable things to founders, it’s worth signing up.

Right back to building!!

We're changing the finance function, find out how we can help you grow.

Not another fundraising webinar!

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Not another Fundraising Webinar

OK OK, we get it, there are a lot of people out there giving you their how to’s and top tips on fundraising, whether that’s how to get your pitch deck prepped, what investors (think they) want or how to figure out valuation on a venture with no revenue and a product held together with sticky tape.

At EmergeONE we don’t like to swim in the same lane as everyone else, so we thought we’d approach this topic from a different angle. Most discussions of this nature focus on the founders’ journey or the perspective of the investor, but they tend to lack any detail on some of the really important things that only come as a result of operating.

So on the 24^th of Feb at 3pm GMT, EmergeONE is hosting a discussion with Helen Goldberg, Co-Founder and COO of LegalEdge a team of outstanding in house lawyers focussed on supporting the early stage and growth ecosystem alongside David Pattison author of The Money Train which he penned to help young businesses attract funding, David has been involved in the marketing industry his whole career and set up an agency called Ph.D. now owned by Omnicom, he left to join iLG, a digital venture which he later sold to private equity. David is an angel investor, mentor, non-exec and self-proclaimed wingman. They’ll join Aarish Shah, EmergeONE’s founder who, alongside the EmergeONE team have collectively been working with and advising early-stage ventures for decades.

Together Aarish, Helen, and David will be discussing some of the less sexy but critical parts of fundraising that are often overlooked, things like whether you should be raising external capital in the first place, what are the things you need to think through from a legal perspective, how complicated a financial model you need in place and how to get the best deal without giving up your business.

It’s incredible how often we’ve seen fundraises fall over because the fundamentals weren’t in place, too many ventures think that it’s a simple as sending out a deck and getting a cheque. And maybe for some, it is, but for some, diligence is your friend.

It’s also worth noting that the later the stage, the more complex the fundraising can get, you’ll see new terms start creeping into term sheets, around both economics and control; things like preference stacks, board seats, and restrictive covenants, the panel will give some flavour about things to watch out for and how to navigate these issues as you grow.

Finally, we’ll talk through some of the stories we’ve seen from the trenches (like that time Aarish received a 175 item DD checklist) and help you understand where we’ve seen things fall over, so you hopefully don’t make those mistakes yourselves.

At the end of the conversation, we hope you’ll have a basic checklist of things you need to think about before you go out and hit the road on your fundraising journey as well equipped as you can be and armed with the essentials to make your capital raise as frictionless as possible.

Right back to building!

Sign-Up for the latest EmergeONE webinar

Episode 11 – Pitching by the Numbers

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Episode 11 - Pitching by Numbers

Welcome to Episode 11 of Five Minute Finance for Founders where we’re going to take you through our top tips on how to address your numbers when pitching to investors - whether you’re raising your first round or gunning for growth.

Right, we know your time is valuable, so we won’t waste it, that’s a promise!

Get a grip on what matters most to your business

One of the things I’ve seen trip founders up all the time is a lack of understanding of what numbers are critical for the growth of their business. Particularly the numbers that go into their pitch deck. It’s pointless talking about MRR when you’re a marketplace or downloads if most of your customers are web-based.

Understanding your business model and the numbers that matter the most is critical, not understanding the basics will be a pretty big red flag to most investors, however early on you are. They’ll want to know that you know what you should be measuring, and what success looks like.

Be comfortable with uncertainty

I always joke with founders that the only thing I can tell them with 100% certainty is that any forecast or model I build them will be 99% incorrect.

That doesn’t mean you shouldn’t build one, or understand the drivers behind it, what it means is that forecasting out numbers is just as much about the process as it is about the output. A model should throw out as many questions as it answers to some degree – why this level of acquisition cost, why hire then instead of now, what about the costs of internationalisation.

Remember that especially at very early stages, investors aren’t going to buy your $5m revenue by year 2, so neither should you!

And if they challenge a number and you don’t have a good response, rather than making something up, let them know you’ll get back to them once you have the right information; and that leads us to one of the most important points…

Bullshit stinks – and it sticks

There is nothing worse than watching someone make numbers up. I mean nothing. Really, I cannot emphasise this enough, just don’t do it!

I’ve seen founders pull numbers out of the proverbial and then get flustered when it’s clear that they don’t make sense. If retention is 50%, don’t say it’s 70% – any investor doing their due diligence will pick up on this and just think you’re incompetent, or worse, a liar.

Equally, don’t conjure up a metric and then try to shoehorn your numbers to fit. Investors are all about pattern recognition. They’ll see if you’ve excluded a cohort because it massaged the churn rate or if you use some variant of the ‘community adjusted EBITDA’ wheeze that caught WeWork out as they tried to IPO.

Where to focus

Focus on what you know, if you have revenue then talk about how that has grown over time, what factors have impacted it and what you are doing to grow it.

If you’re already scaling, then talk about your unit economics; you should have a pretty good understanding of lifetime value and your acquisition costs by now and investors will want to see how efficiently you’re scaling.

If you’re super early then don’t talk about future unproven revenue as if it’s in the bank. Rather focus on tangibly provable results you’ve got in the bag like signups, user growth, downloads, or whatever makes sense for the stage you’re at.

The bottom line

There are a few things that are critical to any investor and that you should really be able to address with your numerical narrative

Firstly that there is a large enough market that can be addressed by your product and that you have a plan to address it.

Secondly that the unit economics will make sense, i.e. that you can bring on customers for less than they will spend with you. Investors tend to land on around 3:1 as a good ratio of lifetime value to customer acquisition costs. Less than that means that value is being squeezed and more means you may not be being aggressive enough.

Finally how much cash is it going to take to get you there? Clearly, investors want to be able to invest as little as possible for as large a return as they can get. It is pointless building a billion-dollar business if along the way you keep having to raise capital and investors get diluted down to nothing.

Remember 1% of 1bn is no different from 10% of 100m.

And that’s the great thing about numbers, they can tell a whole host of stories, it really depends on the context you give them.

So there you go, another five(ish!) minute dive into finance for founders and we hope you found it truly useful.

Finally, because we know there’s no cookie-cutter approach to venture building you can let us know what you want us to talk about by emailing us at [email protected] and if you want to ensure you get this straight to your inbox every week, just sign-up for our newsletter. There should be a handy box pop-up to help.

Right, back to building!

Aarish and the EmergeONE team

We're changing the finance function, find out how we can help you grow.

Episode 10 – Getting Match Fit for Fundraising

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Episode 10 - Getting match fit for fundraising

Welcome to Episode 10 of Five Minute Finance for Founders where we’re going to take you through our top 5 tips to make sure you’ve got the most chance of getting funded.

Five Minute Finance For Founders

Your regular quick and dirty on the fundamental finance stuff founders should understand as they grow their ventures.

Last year was obviously a tough one for many ventures, but according to data from Beauhurst, there were over 2000 fundraises in the first quarter of 2020 with over £13bn deployed.

Here at EmergeONE we anticipate a strong start to 2021 as lots of firms who may have held back deploying capital last year now have plenty of dry powder to put to work.

Right, we know your time is valuable, so we won’t waste it, that’s a promise!

1. Know your numbers, know what you need

We often see ventures that aren’t certain about the amount of capital they’re looking to raise. This is often as a result of not having a good command of their performance or sufficient thought given to the milestones they are trying to reach. Because of that they get caught out when investors challenge them on basic questions which lowers their chance of success. Know your numbers, be that traction to date, ownership structure, burn rate or cash need – it’ll massively raise your chances of getting invested.

2. The deck is not the pitch

The best deck serves one purpose and one purpose only – to get an investor interested enough that they want to have a conversation to take things forward. The deck needs to communicate enough information to get an investor interested, but not so much information that it becomes death by powerpoint. That means fewer words, well presented with all the impact up front. If you have users say that on slide 1, not slide 25. Pay a designer and get the deck designed out, appearances matter, as does your narrative. Nail your story if you want any chance of getting invested.

3. Don’t go fishing for whales with a minnow

If you are a pre-revenue, marketplace business don’t go out to talk to someone like Notion Capital who only invest in scaling SaaS businesses. Know what investors are appropriate to your stage, vertical and business model and stay in lane. Most investors will not be rude but it shows that you have not taken the time to do your homework and might put them off down the track. There’s so much public information available nowadays that there’s really no excuse for going after a late stage fund when you’re barely out of the gates.

4. Admin sucks but it’s essential

Save yourself time, money and headaches in the future by ensuring that you have your legal and administrative documents in good shape. That means making sure your articles and shareholders’ agreements are in place and that you use them to guide how the round works. If you need to get authorisation to issue shares, get the authorisation; if your shareholders have pre-emption rights, ensure they have taken them up or waive them, send subscription agreements, file what you need to file at Companies House in the UK (or the equivalent in other jurisdictions) and always keep records straight. It may seem like a hassle now, but in future rounds or if you get to an exit event, having had these things done properly and documented will stand you in good stead.

5. Give yourself enough time

We often get called into a venture when they are only a couple of months away from running out of cash. And whilst there are some interesting products out there that might be able to help extend runway a little, there is no silver bullet if you need to raise finance, and this takes time. Depending on the size of the round, the number of shareholders already on board and likely to follow-on, the likelihood of needing institutional (i.e. venture) capital and – let’s face it – the strength of your proposition it could take 3 to 6 months if not more to finalise a round. Don’t leave it to the last minute, give yourself the time to get it done right.

So there you go, another five(ish!) minute dive into finance for founders and we hope you found it truly useful.

Finally, because we know there’s no cookie cutter approach to venture building you can let us know what you want us to talk about by emailing us at [email protected] and if you want to ensure you get this straight to your inbox every week, just sign-up for our newsletter, a pop-up will appear momentarily.

We're changing the finance function, find out how we can help you grow.

Episode 9 – The folk in your finance stack

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Episode 9 - The folk in your finance stack

Welcome to Episode 9 of Five Minute Finance for Founders where we’re going to take a quick look at the people that make up a key component of your finance stack.

Five Minute Finance For Founders

A weekly quick and dirty on the fundamental finance stuff founders should understand as they grow their ventures.

We’re firm believers in the importance of tech to enable and deliver growth but there are some hard truths in life, one of which is that – for now at least – people sit at the heart of most businesses, and that’s no different in finance.

This blog was inspired by a session we’re doing with SeedLegals next week entitled The When, Why and How of Startup CFOs, we think it’s going to be great 🙂 Why don’t you join us, you can sign up here.

Right, we know your time is valuable, so we won’t waste it, that’s a promise!

The Finance Stack

First things first, what exactly is the finance stack? Well, that’s how we like to describe the various elements that make for a great finance offering in any venture.

We believe there are three components that make for a great finance stack; People, Software and Networks.

We’re going to focus on the people side of things for this post, but it’s worth understanding a little bit about the other two components here too.

As a venture grows, it has a huge range of needs, often flowing from or coordinated by the finance department, one of the best ways to improve efficiency and ensure that your finance operations scale as you do is to implement the right kind of software systems – whether that’s the right accounting system or internally built products that help you to reconcile or report your numbers.

And because as a scaling venture, you’ll have limited resources you’re always going to have a need for specialist services. Making sure you’ve got access to a wide network that can support your growth is imperative – whether that’s legal support, tax advice or investors.

The People

Finance often ends up taking on lots of ancillary roles, basically because there’s often no one else with the experience or expertise to take them on as your venture grows, but something that is often overlooked is how many different roles exist within finance itself.

The first thing to recognise is there’s a really clear distinction between Finance Operations and Strategic Finance within your venture.

The former can be thought of as the ‘business as usual’ part of running your venture, whilst the latter is about ‘where are we going, and how do we get there’.

The next thing is to understand how within the context of finance ops and strategic finance, there are different themes.

Within finance ops, you’ll find transactional roles like bookkeeping as well as more standard operational roles like financial control. In strategic finance, on the other hand, you may find more internally focussed roles that look at how to build out the finance department or allocate resources as well as externally focussed roles that might be more involved in fundraising, M&A or investor management.

Ultimately, your venture’s mix of finance ops and strategic finance roles will be dependent on your short and longer term needs, but it’s worth bearing in mind that you’re rarely going to find one person who can solve it all.

All too often we’ll see ventures bringing in someone more junior and expecting they’ll be able to cope with the more strategic roles. Or they bring in a strategic FD or CFO but have them doing the bookkeeping.

Obviously as a founder, you need to ensure you’re keeping a lid on costs, but there are always ways to resolve those conflicts, if you’re not sure how, dial in to our session with SeedLegals on Thursday 19th November 🙂

So there you go, another five(ish!) minute dive into finance for founders and we hope you found it truly useful.

Right, back to building!

Aarish and the EmergeOne team

Twitter: EmergeOne Aarish

LinkedIn: EmergeOne Aarish

We're changing the finance function, find out how we can help you grow.

Episode 8 – Growth Ventures Should Do Finance as Differently as they Do Everything Else

Episode 8 - Growth Ventures Should Do Finance as Differently as they Do Everything Else

Welcome to Episode 8 of Five Minute Finance for Founders where we’re going to take a quick look at how finance in growth ventures doesn’t need to be stuck in a rut - fair warning, you may see us say agile a couple of times, we can only apologise in advance 🙂

Five Minute Finance For Founders

A weekly quick and dirty on the fundamental finance stuff founders should understand as they grow their ventures.

Your time is valuable, so we won’t waste it, that’s a promise!

We all know that operating a startup or a growth venture is different from running other kinds of business from traditional SMEs to more established larger enterprises. But all too often we see a cookie cutter approach to the finance function that’s rooted in the past and kind of anachronous to the reality of how they could or should operate in the world of growth.

Build Products not Processes

Conventional wisdom would have you believe that in order to be successful in business, you need a set of repeatable processes that you can leverage to grow.

In a startup or a growth venture though, a bias towards overly complicated processes may actually lead to negative consequences on growth because you end up constraining innovation too much. Instead, the focus is on building products and getting those out to the market such that it can fulfil Steve Blank’s definition of a startup, i.e. a “temporary organization designed to search for a repeatable and scalable business model.”

The Takeaway for Finance

Finance is known for its love of process and control and there is no doubt that this is important as a business scales, however, at early stage you need flexibility. Rather than over burdening a startup with processes, finance should try and build out systems that are easy to use and that assist the venture achieve its goals.

Agility in Everything

Agile as a methodology has become somewhat cliched in recent times with lots of organisations purporting to be agile and much verbiage expended on how one can transform their business into an agile one.

But cliches always have a grain of truth, it is clear that businesses that are stuck in the paradigm of top down hierarchies, complex approval chains and waterfall development processes are today’s dinosaurs.

By ensuring their approach is scientific and iterative, startups don’t get swamped with overhead or sunk costs that are then hard to recover. Instead, they use short feedback loops to continue to learn and improve.

The Takeaway for Finance

As new business models are developed, traditional concepts in finance are being dismantled. The finance team shouldn’t be in the background managing debtors and creditors, but rather working with commercial and product teams to understand how they impact growth and how they can reduce the friction that finance often brings to an organisation. Rather than coming in with all the answers, finance should start with a blank slate and build incrementally in a way that means it is not starting with a solution, but rather hypotheses to be tested and answered.

Startups are Lean

There is always tension in a startup as you manage the balance between needing to grow and the need to preserve cash.

In a more traditional business, you’d set a budget and work to it, mainly because there are fewer constraints on the business’ ability to generate fresh cash flow but also because ‘that’s just how it works’.

It’s not rare to be in a startup that has fewer ops people than it needs or is shy a senior engineer because it’s just not time yet. In larger organisations you’ll often see bloat which is then hard to scale back on.

People are often the largest cost in a startup, and it is emotionally incredibly difficult to have to let people go if things don’t go well, so adding headcount indiscriminately can lead to bad outcomes.

The Takeaway for Finance

We rarely see ventures that are pre Series A needing a full time finance team. The traditional model of having a FD, controller and management accountant (and more!) is just overkill in most cases.

As the world moves further towards remote first and as technology and networks replace concentrated teams of people, there are better ways to build your finance stack taking advantage of flexible working patterns. Portfolio CFOs can provide incredible value allowing startups to manage their costs efficiently, they provide the expertise needed without layering in the overhead associated with full time employment.

Startups look forwards not backwards

Larger organisations often seem to be forever stuck in the past, looking at last month or last quarter’s results, trying to replicate prior successes or at worst, assuming that they are always safe because they have been till now (r.i.p. Kodak).

Startups, on the other hand, are continuously looking to improve, they don’t sit on the laurels of past successes but strive to be better all the time. By the time last month or last quarter’s results are out, they know it’s already too late. The best startups have real time information which they use to course correct in the moment.

The Takeaway for Finance

Here at EmergeONE we talk about finance needing to move from backwards and inwards looking to forwards and outwards looking. What we mean by that is that finance shouldn’t be hyper focussed on month end close and reporting what happened, instead they need to figure out how they can report and influence numbers in real time through forecasting, dash-boarding and obsession over what is going to happen, not what already has. They need to be out sniffing the air to understand the wider macro perspective, who is doing what and where and how their startup can leverage that intel to grow better, faster.

Startups are comfortable with uncertainty

Larger organisations tend to have less uncertainty (though COVID has thrown a spanner in that reality), their revenue streams are more predictable, they are able to smooth out peaks and troughs in performance because they know it’ll average out. They can rely on head office to fund any shortfalls or at worst can go to the bank and leverage their assets to borrow enough to tide them over or invest in other areas.

Startups are founded in environments where the founders have no real certainty about anything, they’re searching for a product, a business model (and often for enough cash to make it through the next month). There isn’t room for complacency because it could literally mean the end of someone’s job or worse, the whole enterprise.

The Takeaway for Finance

Finance professionals have a reputation for being risk averse and many get comfortable in long term roles in one or maybe even two organisations across the whole of their careers. If you’re working in finance in a startup you need to be massively comfortable with uncertainty; you’re quite likely to be one of the more senior people in the business (as opposed to a cog in a massive machine), and your input – and output – matters. And because the most important thing to monitor in a startup is cash and runway, finance has to be comfortable figuring out ways to stretch it out and on occasion flirt at the edge of it running out altogether. But by being prepared to operate in uncertainty, finance can provide incredibly creative solutions that may never have even been considered in more incumbent organisations.

So there you go, another five(ish!) minute dive into finance for founders and we hope you found it truly useful.

Finally, because we know there’s no cookie cutter approach to venture building you can let us know what you want us to talk about by emailing us at [email protected] and don’t forget to look us up on social.

Right, back to building!

Aarish and the EmergeONE team

Twitter: EmergeOne Aarish

LinkedIn: EmergeOne Aarish

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Episode 7 – The Top Five Finance Fixes We Get Asked All the Time

Episode 7 - The top 5 finance fixes we get asked all the time

Welcome to Episode 7 of Five Minute Finance for Founders where in a break from the norm, we're going to give you a quick rundown of the top five things we get asked as CFOs and FDs constantly.

Your time is valuable, so we won’t waste it, that’s a promise!

There tend to be some recurrent themes in early stage ventures, and as CFOs and FDs we often get asked to get involved, assess and normally sort out these areas as a priority when we start building finance stacks for our clients. We’ll give you a quick rundown of what they are and the basics of how to tackle them.

1. What’s my runway?

The most important issue for all startups (and businesses in general) is cashflow. This should come as no surprise to anyone, but forecasting cash is one of the hardest things to do in any post revenue business, but especially startups. Runway is the period of time your cash is set to last you and is a constant barometer that you as a founder should be checking regularly.

First thing to do is forecast out your costs, this should be simple as they are almost entirely within your control.

Once you have forecast out your costs, you should model out your revenues, this should be based on data from prior periods, and estimates on future growth.

Given that most startups operate under massive uncertainty, we recommend modelling out a worst case, steady state and best case scenario for cashflow forecasting and course correct as you go.

Don’t forget to deal with periodic cash flows like R&D credits, VAT, investments, debt or capital repayments or one offs like legal costs.

Ultimately, your runway is the number of months within which your bank balance will drop to zero after adding in your revenues and deducting your costs.

Simple right?!

2. How do I value my venture?

This is a common question and it is, in early stage ventures, a lot of art rather than much science.

At very early stage, your business will be predominantly valued on the perceived strength of your team, product, size of market and where you sit in the competitive landscape.

As you grow and start producing results, valuation shifts from being a finger in the air affair to some slightly more methodical process and will often be based on multiples of revenues, or a value per customer, multiples of profit or any other such method that an investor might think is suitable. These are often based on industry comparatives, so they’ll look at what others in the sector have achieved and how they’re valued (both in public and private markets) and assign a multiple accordingly.

As your venture starts stabilising, valuation may shift to more traditional methods such as discounted cash flow or net asset valuation. It’s rare to see this in most private ventures as they are still in growth mode and the expectation is that the cash flows will still be quite uncertain; on net assets, as ventures don’t often own hard assets or capitalise software costs, this might be a meaningless exercise.

Finally, remember that different ventures will be valued in different ways – you can’t plug a SaaS multiple on an eCommerce platform because their economics are completely different – and value will ultimately be defined by the price an investor is willing to pay for shares in your venture.

3. My cap table is a mess, how do I fix it?

Your cap table is a hugely important tool as it is not just a record of your shareholders, but it tells you who holds control and who participates in the economics of your venture and to what extent.

Most cap tables can be quite simple if there are few shareholders and there aren’t multiple classes of shares, but unfortunately the likelihood is that as you grow you’ll both add new shareholders, but you’ll also start adding in non voting shares (often through crowdfunding rounds) and preference shares (typically when you get a VC or institutional investor on board).

The first step with fixing a cap table is understanding what’s on it already, so we’ll tend to build it out from first principles so that we can work on it properly thereafter.

This means listing out each individual investor, how much they’ve invested, when they invested, what class of shares they have and summarise that into a table showing their percentage shareholding.

From there you can model out what it means to change the capital structure based on new investment coming in, maybe a secondary investment round, or creation of an option pool or ultimately what the capital distribution looks like at exit.

There’s heaps more that you need to be wary of, like options, warrants, convertibles and other instruments which is why it’s super important to be on top of your cap table from the get go.

4. How are we tracking?

Frankly, this is one of the most important things that we get involved in as CFOs, figuring out what are the key drivers of your venture, tracking and maximising performance and helping you make the right decisions to keep growing the right way.

The first step is identifying what’s important for your venture and that’ll depend on what you do and what your business model is. For example, a SaaS business will be focussed on monthly or annual recurring revenue, whilst a D2C venture is probably going to be more concerned about gross merchandising value, basket sizes and repeat rates. The right metrics for your business don’t necessarily need to be purely financial, for example customer NPS might be a much better leading indicator than last month’s gross profitability.

The next step is to ensure that there is consistent and regular monitoring of these data points such that the business can take action in real time to correct or maximise based on what the data is telling you, whether that means pumping more fuel into marketing or reprioritising the product road map.

The metrics that matter to your venture are important to get right so we always spend a fair amount of time figuring these out.

5. When should I raise money and how much should I raise?

Let’s face it, in early stage ventures this is an ongoing conversation and balancing out raising enough money to keep the venture going versus diluting existing shareholders too much or taking in so much capital that it ends up getting squandered is a balancing act that most CFOs are used to dealing with.

First off the bat, it is *always* better not to have to raise money at all, equity financing is the most expensive form of financing (revenue being the “cheapest”) so if you can get away with bootstrapping, you should. You may grow slow, but you’re fully in control of your destiny.

If, however, you feel that the only way to be able to invest in growth in the right way is to raise external capital, then the first step is to build out a model that acts as a roadmap for the business over the next few years.

You should build it in such a way that you can easily change assumptions and stress test in low revenue or high cost environments.

We typically recommend raising enough cash to last you 18 months, however in a post pandemic world, it has been the norm to raise even more than that – why? Because you want enough cash to be able to reach your stated milestones (for example x number of users or y revenue) and enough wiggle room if things don’t go precisely as planned (top tip they never do!).

You should always factor in a good 3 to 6 month period for fundraising, it’s not simple and takes time to go through the process from building out your deck, getting it out to investors, having conversations, taking term sheets, going through due diligence and finally signing long docs and closing your round; I’m exhausted just writing about it!

So there you go, another five(ish!) minute dive into finance for founders and we hope you found it truly useful.

Right, back to building!

Aarish and the EmergeOne team

Twitter: EmergeOne Aarish

LinkedIn: EmergeOne Aarish