Off Balance #18

???????? Hi friends!

Been a busy return to the UK since I got back from my break in the Maldives – from catching up with the team, getting ready for my first live show with Peter Walker (Head of Insights at Carta), to recording three back to back podcasts last week ⚡️ 

Here’s a sneak peek behind the scenes of what, I can assure you, is not the bridge of the Startship Enterprise ???? 

In this weeks Off Balance, I’ll be chatting about:

???? The grey world of fundraising brokerage
???? Financial modelling Part III

Check out this weeks Primer where I sit down with my old friend, Shruti Ajitsaria, Head of Fuse, Allen & Overy’s legal tech incubator where she tells me a bit about how she got to building Fuse, what it does and who it’s for ????????‍????

Also, if you have any feedback, or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

If you like what I’m putting out, do give me a follow on LinkedIn, Twitter and Instagram.

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Off Balance” and, more importantly, tell me why you’d like to connect ????????)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing – you can find links to these (and more including my Office Hours) right here!

Now let’s get into it.

This edition of Nothing Ventured is brought to you by EmergeOne.

EmergeOne provides fractional CFO support to venture backed tech startups from Seed to Series B and beyond.

Join companies backed by Hoxton, Stride, Octopus, Founders Factory, Outlier, a16z and more, who trust us to help them get the most out of their capital, streamline financials, and manage investor relations so they can focus on scaling.

If you’re a CFO working with venture backed startups and want to join a team of incredible fractional talent, drop us your details here.

If you’re a growing startup that knows it needs that strategic financial knowhow, drop your details here to see how we can support you as you scale ????

How can did I add value?

I had a chat with someone that had a couple of companies they were involved with that were looking to raise some external capital but didn’t feel like they had the experience or the network to make that happen.

They were essentially looking for a broker that would make a bunch of introductions with a contingent fee in either equity or cash post fundraise.

I have some quite strong feelings on this subject and won’t do ‘introductory / broker’ work which I explained in a fair amount of detail.

Here’s what you need to know:

Brokerage is a ‘grey area’
The FCA in the UK has rules around ‘promotion’, that is, the promotion for sale of financial products (of which equity is one) especially to retail investors. Now the case is often argued that most people investing in early stage businesses are sophisticated investors and should be aware of the risks of investing, but the reality is, if a deal goes south, the ‘broker’ could leave themselves open to issues down the track.

Skin in the Game
I run a team of CFOs that work with venture backed businesses. There is a level of trust that is placed in us as individuals as well as collectively. When we recommend a course of action, implicitly we are putting our name to that action. But in the introductory / brokerage game, you are typically not involved in the business in any kind of deep capacity (financially it would not make sense – see below). What this means is that you are creating reputational risk should things not work out and, as most of you will know, it takes decades to build a reputation and only seconds to demolish it.

Contingency is for suckers
One man’s opinion, but let’s say I get over these issues and spend time understanding the business, refining the model or deck, reaching out to investors, providing updates, following up and all the rest of activities entailed in raising investment. At that point, I’ve put in substantial time and effort into a business which is only going to pay me if I secure them investment. And, whilst the numbers may seem sexy, let’s break it down:

Standard fees in this space are 5%. So let’s say a business is raising $1m, that means you have the potential to earn $50k right? Well kinda.

Firstly, you only earn the $50k if you raise the whole $1m.

Secondly, it can take 6 months+ between starting a fundraise and cash hitting the bank.

Thirdly, only the founder can raise the money (I can make an intro, but it’s the founder that has to sell the opportunity) so I have no control over outcomes.

Fourthly, it’s unlikely that as a broker you raise the full amount, much more likely that you raise a portion of it – and here’s the kicker – it requires just as much time and effort to raise $200k as it does to raise $1m (often more)

Finally, there are enough stories in the market to suggest that it is not uncommon for these agreements to not be honoured.

Founders are the front line
When asked to assist in these situations my first question is why can’t the founder do it themselves? I mean, it’s kinda their job isn’t it?

And the reality is that investors get so much direct deal flow, when they see a broker in the arrangement (especially if they are VC investors) they are likely going to red flag it.

Because the reality is that great founders (and great businesses) get funded – so what does that leave.

Now don’t get me wrong, there may be some legitimate reasons the founder thinks they can’t raise (no access to networks of capital, don’t know how to approach term sheet negotiations) but these are solveable (i.e. just read this newsletter, use LinkedIn or other tools and start building a network).

More likely, it’s that the opportunity is just not interesting enough for people to sit up and want to invest. (As a side note, I get very frustrated when I see people trying to ‘engineer’ FOMO when raising a round – you can’t engineer it, it happens because your product / business / fundraise has momentum).

So, at this stage, I’ve no doubt you’re saying ‘this doesn’t sound particularly helpful Aarish, you’ve just told this person all the reasons why you won’t do it’, and you’d be right.

But I didn’t stop there.

I offered to speak to the founders, review what they’ve done and give them a bit of guidance (pro bono of course) on how they might want to move their fundraise forward.

After all, that’s why I set up my office hours, precisely to help founders like these struggling to figure out a way forward.

So no, I won’t be a broker. But I will try to be helpful. Always 🙂

Off Balance

So in Financial Modelling Parts I and II I gave you an overview into financial modelling it’s value and use to CFOs followed by the core components of a model, from inputs through to calculations and outputs.

Today I’m going to wrap up the topic with some of the best practices as well as common pitfalls I see with financial modelling as well as what’s happening in the software space right now and where I think that’s heading.

Building a Robust Financial Model: Best Practices

Start Simple

The biggest problem I see when people build a financial model is that they overcomplicate them right from the start.

The first thing to do when building one out is to focus on where the business is today, and to understand all the various elements of the business. I would normally do that on a discovery call with the founders and other key internal stakeholders in the business to figure out exactly what the business is, does and how it does it, namely:

Products
What is the product suite of the business? Are you selling one, two or three products? How are they priced? Are these going to change in any way in the period under consideration for the model you’re building?

Business Model
How does the business make money? Is it a SaaS business or a market place? Is it a mobile application or a services led business? Is it mass market or D2C? What, in short, is the business model?

Demand Generation
How does the business find customers? You will have a very different model if the company runs a B2B enterprise SaaS model than if they are a D2C eCommerce brand. Does the business rely on outbound sales activities or is it more reliant on digital acquisition marketing?

Lifetime Value
How long do those customers continue to buy? Is it a one off purchase followed by some repeat rate, or is it an ongoing service with some churn? Will there be the potential for up sell or cross sell of products / services and how does that profile tend to look?

Margin and Contribution
What are the costs associated with servicing that revenue? If it’s a D2C product business this will likely be the cost of purchasing the physical product whilst for a SaaS business this may include elements of hosting costs or client onboarding activities as well as ongoing customer success activities. There may well be delivery costs (of which customer success is one) or actual physical delivery of getting a product from warehouse to customer.

Staffing
Staff costs are important to understand in depth.

One of the biggest failures I see in models is under-assuming the level of staff required to deliver on the business’ objectives. For software businesses, it’s understanding how increases in engineering costs may impact efficiencies in either sales or efficiencies (and hence gross margins). For a physical goods business it may well be the operational staff required to receive, monitor and then deliver the product.

Of course there are other staff that are going to be necessary to deliver on the company’s objectives as well, whether they be finance teams, marketing teams or sales support teams.

Making sure that you neither under-assume who will be required nor over-assume the impact that they will have on growth is essential so understanding when to layer in growth in the team is essential.

One thing worth thinking through is what the additional payroll costs are, but also the costs of hiring new team members, as well as the cash flows that come from paying out wages followed by costs to state and central tax coffers.

Operating Costs
Other opex costs beyond staffing costs are critical; there are other big ticket items it’s always worth looking out for, things like rent which may need to increase as headcount increases (you will rarely pay the same amount on rent for a 10 person team as you do for a 30 person team), marketing costs (outside of direct acquisition) such as brand, content and online presence are often one of the largest ‘discretionary’ areas where cash is spent so it is critical to look at where that money is being spent.

For example, you may found that there are substantial travel costs in the business either as part of business development efforts, operational requirements or even attending conferences and other significant events.

Legal Costs
There are often more legal costs to the business than one would anticipate so understanding both operational as well as extraordinary legal costs is important. For example, there may well be costs associated with fundraising that can be quite substantial, so understanding when these are likely to flow can have a large impact on the overall cash profile of the business.

Debt
If the business has debt, then modelling in repayments of principal as well as interest costs is incredibly important.

Most early stage businesses won’t have these considerations, however as a business scales, the likelihood of having some debt in the capital profile grows and will have substantial impact on the cash flows of the business so it’s worth understanding what plans there are to raise external debt.

Even in smaller businesses today you will find some working capital facilities in place which will impact how the the business is funded as well as the cash profile.

And speaking of working capital, it’s also useful to understand the sort of terms a company works on with both debtors (customers owing money) and creditors (service or product providers to the business to whom you owe money). If you are paying creditors within 30 days but only collecting debts within 45 days, you will have a working capital gap that needs to be modelled in.

The point here is that before you even open your spreadsheet, you will need to know and understand the business in a great deal of detail to be able to model it well. So whilst I’m advocating to start simple, the detail you will need to get into is quite complex.

Use Consistent Assumptions

Once you have gathered information, you need to start thinking through how to build these into assumptions that will then drive the rest of the model.

I always try to break things down into constituent parts and build out the model in a consistent way. This means not changing the way revenue is booked half way through the model (or if you need to, creating a separate revenue calculation for it).

If your model contains inconsistencies, it will be harder for users to ‘audit’ the model and the potential to allow errors to creep in increases with the more complexity you try to build in.

It’s worth using the same periods for each driver in your assumptions so that you’re always changing everything on a monthly or a quarterly basis rather than trying to build revenue on a monthly basis whilst you’re modelling out opex on an annual basis.

The other point here is that however you build your assumptions out should be consistent with how you report your numbers already (assuming you have numbers to report).

For example, you want to be able to look at why your actual performance varies from what you have modelled and if you have not been consistent throughout, you will run into issues in analysis.

Sensitivity Analysis

Wherever possible, you want to build in multiple scenarios into the model so that assumptions can be viewed in a best case / worst case manner. Not only this, but you may want to include things like breakeven analysis (at what level of revenue you are able to cover your costs). Though, admittedly, this is less critical in an early stage business.

The point is always that financial modelling is not an exact science and neither is building a business.

The likelihood that you don’t hit numbers can be quite substantial and so you want to understand what happens when you fall short (or for that matter when you exceed them) as this will impact the range of investment you might look for or indeed how quickly you might hire additional team members.

Regular Updates

At early stages financial models should be dynamic, updated regularly to reflect new data and changing circumstances. They should be reviewed and ‘rolled’ on a regular (at least quarterly) basis to take into account what has changed in the business since the last time the model was reviewed.

This is particularly important in early stage businesses where the things can move quite fast.

In an enterprise SaaS business, just having one client delay by a few months could leave a substantial 6 figure gap in your cash flow which you will need to figure out how to plug. In a D2C business, if you assume a repeat rate of 50% but this actually turns out to be 30%, you could similarly see a substantial hole in your numbers.

The point is that if you are using your model the way it should be, it can provide a really useful map to help you navigate your business as it grows. The more information you capture up front whilst leaving room for adjustment in the future, the more value you will get from it.

Common Pitfalls and How to Avoid Them

Over-Complexity

Whilst a business will likely be complex, it is not wise to transfer that complexity into your model. By this I mean that you cannot replicate the business fully and neither should you try. People often think that it is the complexity of the model that signals its usefulness, instead it is the quality of the output and the ease of adjustability.

While detail is crucial, an overly complex model can be hard to understand and maintain and, in my experience just leads to multiple rounds of rebuilds over time. KISS is your friend (Keep it Smart and Simple).

Static Modelling

A model is not a one off output that should be built, circulated and then left in someone’s inbox.

It should be updated and maintained on a regular basis as I have already argued. Not updating the model regularly can lead to outdated and irrelevant insights.

Tangentially, it is important to avoid hard coding figures into the model. The value is in the ability to test the assumptions, so each element of the Income Statement, Cash Flow and the Balance Sheet should all be traceable back to the assumptions you have made as opposed to being a number that someone has ‘decided’ to enter and hard code for a reason that may have made sense to them, but is unlikely to make sense for anyone else.

Over-Optimism

We’ve all seen the hockey stick models showing revenues climbing from $1m to $100m over a couple of years.

Reality is rarely that good, and all these sorts of models tend to show is naivety in the person building it or signing it off.

Does this mean you shouldn’t be ambitious?

Of course not, especially if the model’s primary purpose is to raise investment you need to show an achievable path to scale. However the point here is to avoid overly optimistic projections that lack a testable and provable grounding in reality.

The Role of Technology in Financial Modelling

Modern Software Solutions

For many finance pros, Excel, and latterly, Google Sheets have been the main tools used in modelling. However with the growth in platforms offering modelling capabilities, I think we’ll see a portion of financial modelling moving over to some of these products.

However, as I have already explained, every business is unique and uniquely complex.

The problem with many of these platforms is that they have been built to abstract away complexity which means that you are unable to achieve the sort of flexibility you can achieve in a spreadsheet.

Conversely, spreadsheets are limited by the users ability to build out formulaic relationships between different dimensions in their assumptions. Productised modelling tools are far more able to cope with these types of complexity.

What I typically see is that for businesses over a certain size with strong FP&A (financial planning and analysis) teams and requirements, these tools are starting to be used more frequently.

One of the reasons they tend to be used in these sorts of businesses is also because they carry a relatively significant cost that most earlier stage businesses cannot support.

Check out my conversation with Julio Martinez, Co-Founder and CEO of Abacum where we explore this in more detail.

 Automation and AI

The explosion of generative AI has led to a lot of companies scrambling to build predictive modelling tools, these tend to be quite expensive and niche however as the cost of building continues to fall, it’s likely we’ll see some really interesting things in this space.

With that said, currently I would say that it is tools that allow you to extract, clean and use data from various systems (accounting platforms, ERPs, CRMs, payment providers, open banking and more) that are providing a lot of value to people focussed on financial modelling – at least in those businesses that have the data to feed into their assumptions.

And that’s it (for now) on financial modelling.

Remember, modelling is not a static. As businesses evolve, so do the tools and methodologies that CFOs like me and my team employ.

Staying updated, embracing technology, and continuous learning are the keys to leveraging financial modelling to its fullest potential.

And if you’re feeling a little like this????️? Just give me a shout ???? 

Gif by Jasmine-Star on Giphy

I hope you found Off Balance #18 useful. As always, I’d love to get your feedback and understand the sort of topics you would love to hear about.

Just hit reply to this mail or drop me a line at hello@emergeone.co.uk and let me know ????

????And that’s a wrap for this edition of Off Balance – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

???? And if you think someone else might love this, please forward it on to them,

???? Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aarish

The Lowdown #9

???????? Hi friends!

Back in bleary London after a wonderful trip to the Maldives with my better half and quite a lot seems to have been happening in the world of tech and venture.

So here’s this Friday’s Lowdown to give you a taste of what’s caught my eye this last week.

We’re going to look at:

???? WeWork looks like they’re WeDone
???? Carta’s State of Private Markets report for Q3 2023
???? UK hosts AI Safety Summit

Also, if you have any feedback, or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

If you like what I’m putting out, do give me a follow on LinkedIn, Twitter and Instagram.

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Lowdown” and, more importantly, tell me why you’d like to connect ????????)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing – you can find links to these (and more including my Office Hours) right here!

Now let’s get into it.

This edition of Nothing Ventured is brought to you by EmergeOne.

EmergeOne provides fractional CFO support to venture backed tech startups from Seed to Series B and beyond.

Join companies backed by Hoxton, Stride, Octopus, Founders Factory, Outlier, a16z and more, who trust us to help them get the most out of their capital, streamline financials, and manage investor relations so they can focus on scaling.

If you’re a CFO working with venture backed startups and want to join a team of incredible fractional talent, drop us your details here.

If you’re a growing startup that knows it needs that strategic financial knowhow, drop your details here to see how we can support you as you scale ????

The Lowdown

WeWork is WeDone
A couple of days ago news broke that storied scaleup WeWork may be filing for bankruptcy protection as early as next week.

From it’s $47bn valuation some years ago, it’s aborted attempt to IPO (community adjusted EBITDA anyone?), Adam Neumann’s departure, debt restructuring to this latest news, one cannot help but think that WeWork’s journey is one for the text books.

It is also a strong case study in why business models matter and how, if you aren’t a software business, it does not pay to pretend you are one (at least from a valuation perspective).

But whilst WeWork may be in its final death throes, Adam Neumann certainly rose as a phoenix does from the flames, securing $350m in funding from Andreessen Horrowitz last year.

I’ve said it before, and I’ll say it again – don’t be surprised if there are more large scale closures over the coming months. The markets are still unsettled and lots of businesses simply haven’t been able to hit the milestones they needed to in order to survive.

Carta’s State of Private Markets Report Q3 2023
Next week, I’ll be doing a live YouTube interview with Peter Walker, Carta’s Head of Insights – I’ll circulate details as to how to access closer to the time.

We’ll be talking through some of the key findings from their Q3 report on the state of private markets.

Here are some of the key takeaways:

The downturn has continued into Q3 2023 and startups on Carta saw a 38% decrease in capital raised from Q2 to Q3, and the number of venture fundraising rounds fell by 27%.

But despite the downturn, the median pre-money valuation in venture deals increased at nearly every stage, suggesting that founders are retaining more ownership when raising new cash (i.e. less dilution).

Investor-friendly deal terms such as liquidation preferences and cumulative dividends also saw a sharp decline in Q3 and early-stage valuations, particularly at the seed and Series A stages, have risen for the second consecutive quarter.

Startups are having to ensure that they have sufficient fuel in the tank between rounds as it is taking longer to move from one round to another however, deal count and capital raised are expected to increase as more transactions from Q3 are reported.

The number of Series A rounds fell significantly, indicating a gap in the market for startups seeking to raise their next round.

Late-stage venture activity has declined, mirroring a major decrease in the IPO market.

So it would seem that there is relatively mixed news coming out.

On the one hand, the number of deals and dollars invested have decreased, but on the other, Carta is reporting less predatory deal terms.

This suggests that we are indeed seeing (potentially) a reversion to quality as only the strongest of businesses get funded.

Check out the report here and, of course, tune in to hear what Peter has to say next week.

UK Hosts an AI Summit
There has been a lot of talk (especially on Twitter) about whether or not regulation of AI is a good thing.

This week the UK took on the reins by hosting its first AI Safety Summit to start discussing and potentially tackling some of the (perceived or actual) challenges countries, businesses and people are likely to face as AI continues to change the way we live and work.

UK Prime Minister Rishi Sunak emphasised the “responsibility” of world leaders to address the dangers of artificial intelligence.

While acknowledging AI’s potential for “transformative” change, he also pointed out the risks of social harms such as bias and disinformation.

The summit, attended by 28 countries, tech leaders, and academics, resulted in the Bletchley Declaration—a joint statement calling for global cooperation to tackle AI risks.

This declaration, signed by countries including the US and China, as well as the European Union, advocates for AI development that is “human-centric, trustworthy and responsible.”

The summit’s focus is on mitigating AI risks, including privacy breaches and job displacement, while maximising benefits. Sunak highlighted AI’s potential to enhance economies and societies but also cautioned against new dangers it brings.

The UK’s initiative comes alongside significant moves by the US, including Vice-President Kamala Harris’s announcement of the US AI Safety Institute and President Joe Biden’s executive order to ensure America’s leadership in AI.

Despite concerns about the absence of some key leaders and the inclusion of China amid tense relations, the summit has been hailed as a “diplomatic coup” for the UK.

Whatever your feelings on regulation, the fact that this event took place is a strong signal that nation states are both enthusiastic as well as concerned about where AI is heading.

I have no doubt we’ll be seeing more of these events as technology continues to progress.

And finally, back to memes from our favourite meme master…

The tinder bio vs real life

— Dr. Parik Patel, BA, CFA, ACCA Esq. (@ParikPatelCFA)
Oct 30, 2023

????And that’s a wrap for this edition of The Lowdown – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

???? And if you think someone else might love this, please forward it on to them,

???? Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aarish

Off Balance #17

???????? Hi friends!

And I’m finally back on home turf having landed back in the UK earlier today. I won’t spend another moment dwelling on how amazing the trip was in case I get lynched the next time one of you sees me on the street – but one last cherry to top off the whole experience was being bumped to business class on our flight from Abu Dhabi to London last night.

Let’s put it this way, without that level of (unexpected) comfort, I doubt I would be in any shape to have gotten this edition out!

Here’s to some amazing memories under the sun 🙂

Just me and a tree by the sea

In this weeks Off Balance, I’ll be chatting about:

⌛️ Office hours with Aarish and 45 lessons learned over 45 years
???? The importance of the modern day CFO in tech
☯️ Getting away from black and white thinking

Check out this weeks Primer where I get to know Nathaniel Harding who went from building in the oil and gas industry to raising Oklahoma’s largest VC fund at Cortado Ventures, serving the less explored mid continent ???? 

Also, if you have any feedback, or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

If you like what I’m putting out, do give me a follow on LinkedIn, Twitter and Instagram.

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Off Balance” and, more importantly, tell me why you’d like to connect ????????)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing – you can find links to these (and more including my Office Hours) right here!

Now let’s get into it.

This edition of Nothing Ventured is brought to you by EmergeOne.

EmergeOne provides fractional CFO support to venture backed tech startups from Seed to Series B and beyond.

Join companies backed by Hoxton, Stride, Octopus, Founders Factory, Outlier, a16z and more, who trust us to help them get the most out of their capital, streamline financials, and manage investor relations so they can focus on scaling.

If you’re a CFO working with venture backed startups and want to join a team of incredible fractional talent, drop us your details here.

If you’re a growing startup that knows it needs that strategic financial knowhow, drop your details here to see how we can support you as you scale ????

How can did I add value?

Well having been away for over two weeks, I’ve been focussed on me internally more than I have on external factors but, one of the questions that came up in a chat with some of my CFOs was what would be the ideal corporate structure to scale what I’m building at EmergeOne.

Now this is a pretty big topic so I’ll cover corporate structures and when and why they’re the right choice in a given situation in a separate fuller Off Balance episode because it’s clearly a question that is not always clear cut to everyone.

In the meantime, here are 8 thoughts from 8 days in the Maldives that could only really come from having the time for a bit of introspection – which I fortunately had plenty of time for especially when it decided to rain heavily.

Always verify, don’t believe marketing brochures.

We booked another resort initially, excited by the offer. Was tired, old and barely 3*.

Should have researched more.

You can work when you’re on holiday, but you can’t holiday if you’re working.

I am the only person running my 7 figure business. I’d be anxious if I didn’t check my mails sporadically. But don’t bother with holidays if you’re spending all your time working.

Just because it’s all inclusive, doesn’t mean you have to include it all.

You shouldn’t feel the pressure to take advantage of everything on offer. Do what works for you, or do nothing. It’s your time.

Don’t pile your plate high, moderation leads to more enjoyment.

I find it quite depressing seeing folk taking things to excess. There is gratification in scarcity. Learning how to have a scarce mindset helps you to enjoy things more.

You never know when it’s going to rain, so enjoy the sun whilst it’s out.

Don’t put things off. Circumstances will always change. Take advantage today, don’t wait for tomorrow cos it never comes.

Touch the land lightly, don’t leave a mark.

Whatever you’re doing in life, it pays to tread lightly and leave the world a better place. If you want to leave a mark, leave it in peoples’ minds.

Find enjoyment in the things you wouldn’t normally do.

Exercise your body and your brain, get used to doing different things. It’ll only help you to get better at the things you normally do as a result.

Live each moment fully, you’re always a minute closer to leaving.

Sadly, time is both the opportunity and the enemy. Don’t leave with regrets. Ever.

Created using DreamStudio

Off Balance

Last week we started exploring financial modelling and, I thought I’d be able to cover off the balance of what I had to say in one more post today.

Turns out I’m not so you have one more to come at you next week where I’ll tie up the final bits and pieces of how to actually go about building your model whilst today, I’ll concentrate on what is actually in your model and what it needs to output.

Core Components of Financial Modelling

OK, so we discussed at quite some length what a financial model is for and why CFOs use them, but what should the model itself contain?

As always, it depends.

There are some key overarching elements that should be in every model, however often there will be different levels and requirements for detail depending on who the intended audience is, whether internal or external, if it’s being used for the purpose of raising investment or securing a loan.

But as, ultimately a financial model is a financial model, there are a few things that have to go into it and a few things that aren’t ‘traditional’ parts of how you would present financial statements.

I would typically group the various components of a financial model as follows:

Inputs
Calculations
Outputs

Inputs

As the name suggests these are all the numbers that go into a model and from which the final model is built and outputs derived.

Firstly, it is good practice to have a sheet that lists out all the assumptions that you have made in written format so that people can follow your logic.

Then, probably the most important part of your entire model – the Inputs tab. This is where you will create the adjustable assumptions that will drive your model.

Why is this the most important part of the model?

Well because it’s what shows the model’s audience how you think about your business, how you drive leads, are you B2B or D2C, what drives revenue, how costs flow through and how they vary based on the level of activity, how does headcount change over time and so on.

So for example, if you are a B2B enterprise business and haven’t got a reasonable indication of your forward looking pipeline, it would be a bit of a red flag.

Calculations

As the name suggests, the Calculation tabs in a financial model are where the actual calculations and formulas are performed to power the financial statements and other key outputs.

These sheets serves as the back end of the model and are an essential part of understanding how you get from the inputs (static) to the outputs (dynamic).

The formulas contained in the Calculation sheets take into account various factors such as revenue drivers, cost structures, growth rates, and other key financial and non financial metrics from which the output statements are constructed.

It is essential to have these Calculation tabs separate to and driven by the data in the Input tab. By manipulating the Inputs CFOs and other users can analyse different scenarios and use sensitivity analysis to assess the potential impact on the company’s performance.

This function of scenario modelling, which is crucial for strategic decision-making, should not be underestimated. CFOs use these scenarios to explore different growth strategies, pricing models, cost structures, and investment scenarios which in turn helps in identifying the optimal path for the business and in making informed decisions to drive the business forward.

Furthermore, separating out the Calculations from both the Inputs as well as the Outputs provides better transparency and visibility to the model as well as allowing other users to audit the construction of formulas and how they flow from one statement to the next.

It is therefore important to ensure that the calculations sheet is well-structured, organised, and documented. Wherever possible, you should use clear labels and comments to explain the purpose of each formula and calculation. This ensures that the model is easy to understand, review, and update as the business evolves.

Outputs

Whilst, as I have mentioned, the Inputs are probably the most important component of your financial model, and the Calculations are imperative to be able to audit how the model was built the various Outputs are also critical to be able to analyse the overall shape, direction and impact of Inputs on the model.

The obvious Outputs are the financial statements which, as we’ve discussed in other Off Balance articles comprise of:

– Income Statement: The Income Statement captures revenue, costs, and profits so that you can gauge how the business is performing over time. This is always included in a financial model.

– Balance Sheet: A snapshot of assets, liabilities, and equity – the company’s financial position at a specific point in time. In many early stage businesses – especially software businesses – it is not essential to include the Balance Sheet as an output. Investors will rarely ask for it and it can be quite complicated to build out.

– Cash Flow Statement: This is probably where most investors will focus, as it chronicles the inflow and outflow of cash, highlighting operational, investing, and financing activities. More importantly, it shows how much cash the business requires to reach the next stated milestone (this may be a revenue target, a usage target or something else altogether – it will depend on what stage you are at and what vertical you are in) as well as how long that cash will last (runway). For example a SaaS business is likely tracking getting to a certain level of Annual Recurring Revenue (ARR) whilst a deep tech or tech bio business milestones will likely not be linked to revenues in the early years, but more towards R&D outcomes.

Essentially investors (and you) want to sense check whether it is going to be feasible to continue to raise capital to fund growth or if the business is so capital intensive that there is greater risk it won’t reach the milestone or worse, will require a lot more additional capital to get there.

The non obvious ones are normally then more meaningful ones – at least at early stage.

You want to be able to capture the key metrics (leading not lagging) and the non-financial indicators that represent how your venture is going to grow.

Some of them are quasi financial and relatively standard, things like monthly recurring revenue (MRR) or net revenue retention (NRR), churn / revenue churn, users / customers, lifetime value, customer acquisition costs and growth.

Others are not derived from the financials such as acquisition channels, funnel metrics, downloads (if a mobile app), market share (though rare at early stage), customer satisfaction (again rare in a financial model, but if a key metric, you may wish to show direction of travel) and various others that will depend on the business you are building, the vertical you are in and the business model you are pursuing.

I will always include a summary tab which shows numbers annually, the total cash need, when the business runs out of cash and wherever possible show several scenarios (which may include achieving lower or higher revenues, employing fewer or more employees or changing another variable that impacts the income or cash flow statement (investors at earlier stages and especially in software businesses are rarely going to worry about the balance sheet for forecasting purposes though this becomes important if your model is going to a bank or lender).

It is also good practice to create a series of graphs plotting key metrics (financial and non financial) as these will often be valuable for investment decks or even as visual explainers for internal team members.

On DCF and valuations.

I personally don’t believe that for most financial models being used to seek investment in the venture space, DCFs are particularly valuable.

Firstly, what is a DCF?

It stands for Discounted Cash Flow which we have talked about in the context of investment decisions in previous writings. In the context of valuations, it is the traditional method by which analysts would value an established (likely publicly listed) business.

They are able to do this because cash flows are typically stable by the time a business is listed on the stock market (by stable I don’t mean constant, but there is a higher degree of predictability based on previous growth, analysis of management’s strategic plans and more).

Essentially by summing the discounted values of all the cash flows into the future, you are able to derive a value for the business today.

But.

Obviously we’re not talking typically about stable businesses here. Startups are by their very nature unpredictable. Not only is there a lack of consistency in cash flows to date, but the very nature of how those cash flows are derived will likely change multiple times before approaching some level of consistency.

Then layer on the fact that finding a suitable weighted average cost of capital (risk rate) will be a moving target given these businesses will rarely have debt and given how illiquid the market for their shares is and you’re left with the overall impression that trying to do a DCF in a financial model of an early stage venture is probably more about showing off your understanding of how to calculate one (though peversely, also showing off that you don’t have an understanding of when it is sensible to use one).

So to assume that you can forecast out cash flows sensibly and then use an appropriate discount factor to work out a valuation is optimistic at best. There are just too many factors that you cannot control.

However, if you do want to provide a range of valuations based on the numbers you present, you may choose to look at recent transactions in your space, the sort of multiples on revenue those companies have been valued at – or even looking at public markets and using proxy figures to calculate a valuation for your business – for example, you’re building a social network and look at Facebook which has a market cap of x (valuation) and y numbers of users. You could therefore say that each user is worth x/y in value. Multiply this number (maybe discounting it down a bit because, let’s face it, you’re probably no Facebook yet) by the number of users you currently have and voila, your own back of the envelope valuation calculation.

Again, I typically don’t include valuations in my models as I feel it is somewhat hubristic. Investors will negotiate a valuation, by putting one in your model (which as I have previously discussed is going to be 99% inaccurate in any case) seems like you are anchoring on a position that is highly mutable and subject to discussion.

Next week we’ll wrap the whole financial modelling piece up with some thoughts on a process to actually build a model, the sort of models you might find yourself building (and to what end) as well as where software is heading from a modelling perspective.

That’s a wrap for this week as I try to get on top of my 2 weeks’ absense whilst also fighting the urge to just jump on a plane and head back out into the sun.

I hope you found Off Balance #17 useful. As always, I’d love to get your feedback and understand the sort of topics you would love to hear about.

Just hit reply to this mail or drop me a line at hello@emergeone.co.uk and let me know ????

????And that’s a wrap for this edition of Off Balance – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

???? And if you think someone else might love this, please forward it on to them,

???? Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aarish

The Lowdown #8

???????? Hi friends!

As I’m still camped out in the Maldives (sigh!) just a brief one from me today.

I thought it would be worth refreshing your memory on some of the pods we’ve released since the beginning of Series 5 a few weeks ago so you can make sure you’re all caught up 🙂

Normal service will resume from next week onwards.

Me looking maybe a little too smug in the Maldives ???? 

Also, if you have any feedback, or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

If you like what I’m putting out, do give me a follow on LinkedIn, Twitter and Instagram.

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Lowdown” and, more importantly, tell me why you’d like to connect ????????)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing – you can find links to these (and more including my Office Hours) right here!

Now let’s get into it.

This edition of Nothing Ventured is brought to you by EmergeOne.

EmergeOne provides fractional CFO support to venture backed tech startups from Seed to Series B and beyond.

Join companies backed by Hoxton, Stride, Octopus, Founders Factory, Outlier, a16z and more, who trust us to help them get the most out of their capital, streamline financials, and manage investor relations so they can focus on scaling.

If you’re a CFO working with venture backed startups and want to join a team of incredible fractional talent, drop us your details here.

If you’re a growing startup that knows it needs that strategic financial knowhow, drop your details here to see how we can support you as you scale ????

The Lowdown

With Season 5 of Nothing Ventured well under way I thought it would be useful to give you a rundown of where we’ve been and, where we’re going.

Here are the first few guests we’ve had on and some of the up-coming guests from all around the world of venture ????

Building the Investor Accelerator for Africa with Mark Kleyner

Our first guest, Mark Kleyner has had a pretty interesting journey so do check out our Primer episode to understand more.

In our main conversation, we talked about the untapped capital and potential in the African venture ecosystem and why, rather than trying to accelerate founders, Mark and the team at Dream VC are accelerating VCs.

Geeking out Finance Bro Style with Julio Martínez

My second guest was the founder of Abacum, an FP&A platform for mid cap companies ???? 

In our conversation, Julio and I chatted about why we both think there’ll always be an excel (at least for now) and why it’s pretty damned difficult to try and build a universal platform for CFOs.

In our Primer episode, we talked about Julio’s dream board and how he moved from his dream of being a Paella chef to 20 years in finance!

Tackling the Trillion Dollar Market for Disabled People with Martyn Sibley

In the third and most recent episode of Nothing Ventured, I spoke to Martyn Sibley, previously co-founder of Accomable, an Airbnb style platform for disabled people which then exited to Airbnb itself. He’s now the founder of Purple Goat Agency.

Martyn and I spoke about why language matters. We also talked about the immense opportunity for those servicing people with disabilities and, how by catering for those with disabilities, you end up building better products overall.

Nothing Ventured on the Move

Last month I was able to take the studio on a bit of an excursion and recorded a bunch of short interviews with some VCs and founders in a candid setting.

Hosted by the London Venture Capital Network at the Dream Factory, you’ll see these (occasionally beer or wine fuelled!) conversations every Friday throughout the season.

Here are the first few.

Dan Pandeni Idhenga – Investor at 1818 Venture Capital and Co Founder of the London Venture Capital Network

Dami Hastrup – Founder at MOONHUB, VR driven corporate training

And coming up you’ll get to hear from:

Nathaniel Harding, Managing Partner at Cortado Ventures driving venture in the mid continent

Fatou Diagne and Stephanie Heller talking about how Bootstrap Europe is championing venture debt in Europe having bought out SVBs German debt portfolio

Shruti Ajitsaria on building Allen & Overy’s legaltech incubator, Fuse, after coming up with the idea on maternity

Dom and Elliot Chapman on building, scaling and exiting agencies

Sam Beni on the fall of Tech Nation and why he’s building the agent based networking platform for tomorrow at Platin.

And, as always, we’re just getting started!

And finally, back to memes from our favourite meme master…

Crypto investors last year vs crypto investors this year

— Dr. Parik Patel, BA, CFA, ACCA Esq. (@ParikPatelCFA)
Oct 24, 2023

????And that’s a wrap for this edition of The Lowdown – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

???? And if you think someone else might love this, please forward it on to them,

???? Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aarish

Off Balance #16

???????? Hi friends!

I know I’ve been sending these out on the fly of late – quite literally.

This week finds me in the Maldives spending some quality time with my (immensely) better half. It’s really the first time we’ve taken a holiday without the kids for over 20 years so you’ll forgive me for feeling a bit chirpy about where I’m at at the moment!

Here’s a quick snap of my view right now – pretty sweet right? 🙂

But before I gloat too much, whilst this view is lovely, our experience at the resort has not been – I spoke more about that in this post I’m titling ‘Trust but Verify is a Fallacy.’

In this weeks Off Balance, I’ll be chatting about:

???? What’s the value of valuing your app?
???? The CFOs Guide to Financial Modelling.
???? Apple fan boy? Not quite, but not as unhappy as I thought I’d be.

Check out this weeks Primer where I get to know Martin Sibley and understand the challenges – and opportunitiy – in building businesses focussed on the market servicing disabled people.

Also if you have any feedback or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

If you like what I’m putting out, do give me a follow on LinkedIn, Twitter and Instagram.

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Off Balance” and, more importantly, tell me why you’d like to connect ????????)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing – you can find links to these (and more including my Office Hours) right here!

Now let’s get into it.

This edition of Nothing Ventured is brought to you by EmergeOne.

EmergeOne provides fractional CFO support to venture backed tech startups from Seed to Series B and beyond.

Join companies backed by Hoxton, Stride, Octopus, Founders Factory, Outlier, a16z and more, who trust us to help them get the most out of their capital, streamline financials, and manage investor relations so they can focus on scaling.

If you’re a CFO working with venture backed startups and want to join a team of incredible fractional talent, drop us your details here.

If you’re a growing startup that knows it needs that strategic financial knowhow, drop your details here to see how we can support you as you scale ????

How can did I add value?

Valuation continues to be one of the things first time founders get their proverbial underpants in a twist about.

I recently talked to a founder who had asked for assistance on valuing their app.

Their accountant had told them it made sense to attribute a value to the cost of building the app on the balance sheet.

The founder wasn’t sure how to go about this, and assumed this would be necessary to raise investment.

Here’s what I learned pretty quickly after a few initial questions:

They had self funded development of the app for quite a bit less than £50k.

They weren’t going out for investment any time soon.

They were pre revenue, however had created a community app which they planned to monetise through an in app marketplace (tough).

They had a decent number of users (it was a b2b2c acquisition model in the education space – though not precisely edtech).

Their accountant had little or no experience in the tech space (and in fairness, the founder was pretty new to it all as well).

So here’s what I told them:

From an accounting perspective, you would be hard pressed to argue a usable lifetime of more than 5 years based on current accounting standards.

This is because technology moves so fast, that unless you can argue your IP is provably enduring, you’re not going to be able to carry it (leave it on the balance sheet and depreciate) for any length of time.

That effectively means that, assuming a cost to develop of approx £30k, you would be charging the P&L with £6k per year until the app has been fully depreciated.

Again, due to accounting regulations, you can’t add any intangible value (goodwill) to something you have produced internally. You can only do that if you acquire, say, another business whose assets are worth x and you pay x + 1,000. The 1,000 would be booked as goodwill as it is the value you have paid over and above the value of the assets.

But a lot can happen in 5 years, and in the tech world, you don’t value any business (especially at the earliest stages), on the carrying asset value. You might do that for a traditional business with plant, equipment, debtors and creditors, but for a tech business it’s all about the future opportunity and how much you have de-risked the business.

So the long and short of it was that I told the founder to ignore what their accountant had told them and not worry about trying to create a value for the app on their balance sheet.

But, should they have wished to value the business, there would be ways of doing that if they were post revenue or, in the case of this pre revenue business, they may have looked at equivalent community apps (whatsapp?) and worked out the value per user using public information. They could then use that to calculate the business value based on the number of users currently on the product.

This founder was visibly relieved when I told them they didn’t need to lose too much sleep about this right now, as it meant they could focus on building out the app, acquiring users and building the community.

And let’s face it, that’s far more interesting than wrangling numbers on a balance sheet.

The long and the short of it is that you don’t need to overcomplicate your thinking or your business by trying to get cute with accounting.

The only time valuing your business really matters is when you are seeking investment.

And that value? Well that’s a negotiation between you and your investor, rarely a value that is set in stone.

Generated using AI via DreamStudio

Off Balance

Below is part 1 of 2 posts where I dig into the financial model from understanding what it’s for to its importance for CFOs.

Financial modelling is one of the things that we get asked for help on all the time, either as a discreet project in preparation for a fundraise, or more often than not, just a core part of the initial work we do walking into any business.

Next Tuesday, I’ll talk through some of the best practices and how you go about constructing a model – what’s important and what’s not, so keep your eyes on your inbox for part 2!

Let’s dig in…

The CFO’s Guide to Financial Modelling

If there is one thing I can wax lyrical about, it’s the financial model.

Not only have I spent over two decades building them in various forms for the businesses I’ve either been running or advising, but as a small time angel, I often spend time unravelling a model to get right to the bottom of the how a founder thinks about their business.

I’ve also delivered sessions on financial modelling to a tonne of founders via cohorts at Founders Factory, The Centre for Entrepreneurs NEF+ programme as well as Morgan Stanley’s Inclusive Venture’s Lab, so I feel like I have a modicum of authority when I’m discussing financial modelling – especially in the context of growth ventures.

As it stands, financial modelling is one of the most invaluable activities that a CFO can undertake. Here’s why:

It provides CFOs and business leaders with a snapshot of a company’s financial health today and over time.

It allows leaders to think through how their business works.

It provides a plan to aid decision-making, resource allocation and the impact on the long term health of the business via the use of scenario modelling.

Whilst I won’t be attempting to walk through all of the mechanics of building a model in this piece, nor will I be showing how to construct every formula, I will attempt to give you a framework you can use when you next find yourself in need of modelling out your business.

The Role of Financial Modelling

What is a Financial Model? 

A financial model is a representation of a company’s financial performance, both past and projected.

Typically covering the main financial statements (though not always – more on that later), a financial model uses a combination of existing company data, assumptions on how certain financial levers may change over time, market data and a generous helping of crystal balling to map out a representation of a businesses future performance.

The earlier stage the business is, the less data there is and hence the more a model is reliant on informed assumptions.

As the company progresses and there is more information flowing, those assumptions are tweaked and refined to get closer and closer to an ‘accurate’ numerical representation of the business.

The reality is that for venture backed companies, your model will change constantly. Firstly as a result of moving from states of uncertainty to (more) certainty, but also due to rapid progress, the fabled pivot, market expansion and any number of other factors that high growth companies may be impacted by.

A financial model can cover any period into the future, however unless looking at a specific project timeframe, it is normal to model out a business (on a going concern basis) for 12, 36 or 60 months.

You may well imagine modelling out a business 5 years into the future is less driven by ascertainable facts than it is by an element of future gazing and you would be right.

As I am fond of saying, the only thing I can tell you with 100% accuracy is that your model will be 99% inaccurate – fun right?

Why is this and what are the implications?

Well the obvious answer is that your financial model is the map, not the terrain.

In other words it is a model of a thing, not the thing itself.

This sounds obvious but you would be surprised at the number of people who are also surprised when actual business performance varies substantially from ‘what the model said it would be.’

One of the purposes of a model is to allow users to play with a limited set of levers and assumptions (hopefully the key ones), rather than try to replicate and then adjust every element of the business.

It has uncertainty and inaccuracy built in.

One great way of thinking about this is an actual map versus the actual terrain. I am sure we have all used tools like Google Maps or its equivalents. They are great tools to navigate your way around a city, but you don’t expect them to show you every pothole, every minor diversion, every pedestrian and every traffic light.

Not only would that be too much information to ingest, if your map could provide you with all that information, you wouldn’t need a driver, you’d just allow it to navigate and drive for you.

But by providing only surface level information, it allows you to get from A to B relatively accurately whilst still forcing you to pay attention to the various obstacles that turn up from time to time.

So given the inherent uncertainty baked into a financial model, why do CFOs put so much store by them?

Why are financial models so important for CFOs?

I am yet to come across a CFO who doesn’t like a good financial model and there are a number of reasons why.

To understand these, you really have to think about the principle activities that CFOs are responsible for:

Capital Management – (Burn and runway)

Capital Allocation – (Where do we invest our dollars)

Capital Raising – (Where from and, when do we raise money)

Risk management – (What are the problems we might face, and how do we overcome them)

Now there are, of course other activities as well, but most of them fall into a subset of one of these and all within the overall category of financial strategy.

A good model will help a CFO – and other users – manage these various streams in fairly specific ways:

Capital Management: As a core component of a financial model is understanding cash flows in the business, it can help CFOs navigate and plan for periods with lower cash balances by pulling at working capital levers or looking at the capital needs of the business more holistically. Essentially, the model helps CFOs to ‘see around the corner’ at what is coming up and plan accordingly. This, of course, feeds into capital allocation, capital raising and risk management as well but it starts with understanding the cash profile of the business.

Capital Allocation: A financial model acts as a resource plan which could at one level help CFOs and other members of the leadership team when it is most appropriate to hire more people (and what the business can support in terms of remuneration). At another level, it can help CFOs with inventory management and procurement. It essentially tells CFOs how much cash is available to spend and therefore allows them to choose where to spend it.

Capital Raising: A good model will always show where cash reserves run low, as mentioned above, or where they run out altogether. This is the most ubiquitous use case for early stage / venture backed startups which traditionally are not profitable or cash generative, instead using outside capital to fund growth. So a CFO can look out for when the business is likely to run out of cash and plan for that eventuality by going to the market to look for fresh funding, whether from equity investors or debt providers. Of course, a model isn’t just good for telling you when you might run out of cash, it may tell you when you start generating cash and hence when you might want to seek out non-dilutive capital to provide a boost to growth.

Risk Management: As mentioned previously, a model is the map, not the terrain. But a good map still shows you if there is a river in your path or where elevation increases. Because the model is built on a set of assumptions, it requires whoever builds it as well as whoever uses it to think through the potential hurdles they may face along the way. Typically CFOs will manage risk through the use of scenario planning and, as those risks crystallise, they are able to steer the company in the right direction.

Overall, it is the key strategic tool that CFOs use to plan and drive the business forward.

The caveat to this, or course, is that unless a model is used and updated regularly, there is a risk that it becomes obsolete (and can do so quite quickly).

So you should always treat it as a live document and change it as the data changes.

Hopefully that serves as a simple intro to financial modelling from the perspective of a CFO. Obviously they will become critical for different reasons at different points of a business’ lifecycle.

Next week we’ll dig into some of those, alongside how you actually go about constructing one ????????

New set up, who dis.

Last week I went a bit heavy, so I thought I’d switch things up with some personal reflections – no doubt many of you will have already been Mac users for a long time, but I have been a Windows maverick for the last 25 years, so the move was tough.

But a month into my journey to the dark side into the Apple universe, I’ve got to say I’ve been more than pleasantly surprised.

Working with a Mac has been predominantly a joy.

The ease of navigation, the strong battery life, the simple and intuitive UX have all seemed like a veil being lifted from my eyes.

As I spend more time on content creation – predominantly writing – and running EmergeOne which is mainly done on zoom calls and putting in place systems for scale, I find myself less frustrated than I was with my windows device.

As James Alexander – my podcast producer – said to me when I was making the decision to switch “it just works.”

So much so, I bought the iPad Air and Magic keyboard so that I had a smaller device to work on whilst I’m on the move (as I more frequently am) – watch out for a few sneak peeks with me and the iPad on the beach ???? 

At the moment the only difficulty I have found has been deep work with spreadsheets (kinda critical for a CFO, I know).

Having to unlearn all the keyboard shortcuts I had in my muscle memory for the last 25+ years and figure out how to navigate on a Mac is not simple.

But, as they say, maybe you can teach an old dog new tricks.

So yes, one month in, I’m a convert.

I’m not so dogmatic as to say I’ll only ever use Apple devices again (you have to be flexible in life) and still have an android phone, but for now, I’m happy I made the switch and am enjoying learning how to become even more productive with a couple of devices that just work.

I hope you found Off Balance #16 useful. As always, I’d love to get your feedback and understand the sort of topics you would love to hear about.

Just hit reply to this mail or drop me a line at hello@emergeone.co.uk and let me know ????

????And that’s a wrap for this edition of Off Balance – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

???? And if you think someone else might love this, please forward it on to them,

???? Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aarish

The Lowdown #7

???????? Hi friends!

This week’s Lowdown is going to be a little shorter than normal as I’m parked up in Abu Dhabi (travelling again, I know ????). I’m surrounded by family members so it’s a smidge difficult to delve quite as deep as I would normally into all the happenings in the world of venture.

With that said there are a couple of incredibly interesting pieces that, if you haven’t already done so, are worth digging into, so here they are:

???? Techo Optimism
???? The State of AI Report

And in this week’s episode of Nothing Ventured check out my conversation with Julio Martinez, founder of Abacum, the FP&A tool for scaling and mid cap companies.

We geek out on finance tools, looking for the universal platform for the CFO stack and discuss why neither of us think Excel or Google Sheets are going anywhere anytime soon.

Also, if you have any feedback, or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

If you like what I’m putting out, do give me a follow on LinkedIn, Twitter and Instagram.

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Lowdown” and, more importantly, tell me why you’d like to connect ????????)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing – you can find links to these (and more including my Office Hours) right here!

Now let’s get into it.

This edition of Nothing Ventured is brought to you by EmergeOne.

EmergeOne provides fractional CFO support to venture backed tech startups from Seed to Series B and beyond.

Join companies backed by Hoxton, Stride, Octopus, Founders Factory, Outlier, a16z and more, who trust us to help them get the most out of their capital, streamline financials, and manage investor relations so they can focus on scaling.

If you’re a CFO working with venture backed startups and want to join a team of incredible fractional talent, drop us your details here.

If you’re a growing startup that knows it needs that strategic financial knowhow, drop your details here to see how we can support you as you scale ????

The Lowdown

These two pieces are long but well worth the read. If you, like me, are excited about the potential for technology to truly change lives, then the first serves as a bastion call for just that. The second gives you a flavour or where we are and where we’re going as the world of AI continues to explode.

Are You a Techno Optimist?

This essay by Marc Andreessen is quite the read. He’s the founding partner of the mammoth Andreessen Horowitz which has something like $35bn assets under management and whom have backed companies like AirBnB, Facebook, coinbase, Github, Oculus and countless more.

Throughout it, Marc takes us through his vision of an abundant future, fuelled by technology and how it can harness and augment human ingenuity and ability as it has done throughout the ages.

Critics say that it comes off as overtly libertarian and unrealistic, but as someone who believes (and has seen first hand) the power and empowerment that technology can bring to people, I broadly agree with his thesis – even if I disagree with some of the specifics. (I’m not sure the planet should get to 50bn even if it can, and I’m not sure all the UN Sustainable Development Goals are evil!)

This phrase in particular is what stood out to me… I don’t buy into the fact that this is ‘trickle down economics’ in disguise, even though this is what some have purported it to be.

Instead, I think that this is a manifesto of hope in the ability of mankind to solve problems and bring abundance to the world.

Yes, Marc may be talking his own book here, but it’s also a message to view the future optimistically and strive to make it better rather than view the present pessimistically and assume any attempt to make it better will only serve the few.

Would You Look at the State of This – AI That Is

Nathan Benaich and the team at Air Street Capital are known as the ‘go to’ guys in AI. As one might imagine, their 2023 report is bursting at the seams with developments over the last 12 months.

In this director’s cut from Nathan, he surfaces some of the key messages, such as the fact that open source is fading away, training data is drying up and where AI is being used in industries like defence.

One of the interesting points he raises is that without the boom in generative AI (GenAI), funding into AI as a vertical would have plummeted by 40% according to their research. This is pretty incredible given how much we take for granted how prominent AI has become (because of GenAI).

He also notes that some of the largest rounds have been led by corporates rather than VCs showing how much of an edge businesses believe AI will bring to their product set.

The reason (other than the fact that it is the one report on AI that should be read) I decided to include it in today’s Lowdown was because I think when read in conjunction with Marc Andreessen’s Techno Optimist manifesto, you get not only the big vision from the latter, but can start seeing how (at least in part) that vision can be brought to fruition using technology such as AI.

If you don’t get a chance to read the whole report, do check out Nathan’s thread and have a look at their top 10 predictions for the next 12 months as well.

????The @stateofaireport 2023 is now here.

Our 6th installment is one of the most exciting years I can remember. The #stateofai report covers everything you *need* to know, covering research, industry, safety and politics.

There’s lots in there, so here’s my director’s cut ????

— Nathan Benaich (@nathanbenaich)
Oct 12, 2023

And finally, back to memes from our favourit memester…

It’s a good thing that we don’t need food, energy or shelter to live

— Dr. Parik Patel, BA, CFA, ACCA Esq. (@ParikPatelCFA)
Oct 12, 2023

????And that’s a wrap for this edition of The Lowdown – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

???? And if you think someone else might love this, please forward it on to them,

???? Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aarish

Off Balance #15

???????? Hi friends!

October is a heavy month on the emotions (and the wallet) for me ???? As I mentioned last week, we celebrated my wife’s birthday in Italy and this weekend we celebrated mine. In a week or so we’ll be celebrating our anniversary too.

Milestones like this are a great way to reminisce and, as you’ll soon see, I certainly took the opportunity to do just that.

Every day’s one to be happy about 🙂

In this weeks Off Balance, I’ll be chatting about:

⌛️ Office hours with Aarish and 45 lessons learned over 45 years
???? The importance of the modern day CFO in tech
☯️ Getting away from black and white thinking

Check out this weeks Primer where I get to know Julio Martinez and his journey into building Abacum the FP&A platform for mid cap businesses ????

Also if you have any feedback or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

Give me a follow on LinkedIn, Twitter (do I really have to start calling it ‘X’ soon?), Instagram and drop me a note 🙂

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Off Balance” and, more importantly, tell me why you’d like to connect ????????)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing!

Now let’s get into it.

This edition of Nothing Ventured is brought to you by EmergeOne.

EmergeOne provides fractional CFO support to venture backed tech startups from Seed to Series B and beyond.

Join companies backed by Hoxton, Stride, Octopus, Founders Factory, Outlier, a16z and more, who trust us to help them get the most out of their capital, streamline financials, and manage investor relations so they can focus on scaling.

If you’re a CFO working with venture backed startups and want to join a team of incredible fractional talent, drop us your details here.

If you’re a growing startup that knows it needs that strategic financial knowhow, drop your details here to see how we can support you as you scale ????

How can did I add value?

Maybe it’s the fact that I just turned 45.

Or maybe I just started formalising the things I have always done.

But over the last few weeks, I’ve been approached by a bunch of people asking for my advice on everything from personal growth, through to raising investment, to advice on taking the next steps in their career so they can move from finance ops into more strategic CFO roles.

And so, in order to really try and open my door to as many people who might want to get my help as possible, I’ve opened up Office Hours so folk can book a time directly in and chat about whatever is on their mind (for free!). If you’re someone that wants to explore an idea, get some help on your startup or your career, just Pick My Brain via this link ???? 

In the meantime, as I crossed the threshold into my 46th year on the planet, I reflected on some of the lessons I’ve learned over the years.

Here they are for posterity:

1. Play long term games with long term people.

2. Balance is where you find it, don’t let others dictate your path to fulfilment.

3. Define your own success.

4. If you’re not learning, you’re not growing.

5. Your issues as an adult reflect your pain as a child.

6. Forgive yourself first.

7. Back yourself, always.

8. Don’t wait for permission.

9. Know when to bend the rules, think before you break them.

10. Don’t remove obstacles from your children’s path, it teaches them life isn’t tough.

11. You can only fail if you don’t get back up.

12. Love yourself first, if you wish to love others.

13. You can’t force serendipity, but you can create an environment for serendipity to flourish.

14. Listen. Then talk.

15. Read widely, learn deeply.

16. Purpose doesn’t pay the bills, do what you are good at and you’ll find purpose emerges.

17. An eye for an eye and the whole world turns blind.

18. Cherish this moment, right now.

19. Your future is unwritten, it is up to you to write it.

20. Marriage takes work, every day, having someone to share your life is a blessing.

21. If you learn how your parents grew up, you’ll understand how you were raised.

22. Sorrow comes from attachment, detach yourself from attachment, find joy.

23. If you cannot manage your health, you cannot manage anything else.

24. Move daily. Lift heavy things. Stretch and strengthen.

25. Cold showers won’t manifest your success, but they will set up your day the right way.

26. Learn to breathe. To still yourself.

27. Create periods of boredom, creativity happens when the mind is not busy.

28. Your legacy is not what you’ve done, it’s what endures in people’s memories.

29. Learn to say no, it will free you in ways you cannot imagine.

30. Surround yourself with people smarter than you.

31. Formal learning is not for everyone, some people need to find their own path.

32. If you have an addictive personality, channel those addictions into positive habits.

33. Learn to sell, whatever else you learn.

34. Understand how businesses work, how money circulates, what leverage can do.

35. Celebrate when your children succeed, support them when they don’t.

36. Money is never the object, time is the object. Money is the means by which you get it.

37. Find leverage in your life. Make it a force multiplier to achieve amazing things.

38. Compounding is not just something that grows your money.

39. If you haven’t found yourself, start with where you are right now.

40. Get a therapist. Thank me later.

41. Don’t let your ego get in the way.

42. Give to others freely, with no expectations.

43. Family always comes first.

44. Write often. When you write you learn.

45. I likely have ~1,825 weeks left on this planet, I want to leave not having regretted one moment.

Off Balance

I recently held the first of what I hope to be a regular co-working day for the CFOs that work with me at EmergeOne.

I believe strongly that hybrid and remote work are here to stay – especially for those involved in the clumsily named ‘knowledge economy.’ But I also know nothing beats a bit of face time to get the creative juices flowing.

And as I was sat there chatting with these CFOs who only over the last month have taken our clients through large rounds or are getting the prepped for the next one, it struck me that the importance of the CFO in tech ventures has really become much better understood over the last couple of years.

So here’s my take on why.

The (Ever) Increasing Importance of the CFO in Tech

We all know that the tech ecosystem is growing at an incredible pace. Moore’s Law first saw the cost and speed of computing drop exponentially, and now with the platform shift we’re seeing as a result of AI tools, it’s an exciting time.

But even as technology shifts, finance has too. Over the last couple of years especially we’ve seen a reversion to ‘sensible’ valuations and a focus on efficiency tied to strong growth in the venture ecosystem.

This means that runways are having to be extended, costs need to be managed and equity rounds are based on proven traction rather than vibes.

Enter the CFO.

In the past, the office of the CFO has been little understood. With many early stage founders hiring in at best a controller and at worst some accountant that has never operated and called them a CFO.

This over inflation of titles is dangerous as I have seen on numerous occasions.

When you do not have the experience of navigating the complexities of a fast growth business, you are likely to make (a lot of) mistakes – normally at the cost of traction, cash flow or, at potentially even survival.

Instead, a truly great CFO (or even just a half way decent one), can help navigate this evolving landscape. Bringing a mix of business acumen and street smarts that come from years of operating to the table, they are often well placed to support founders as they battle with the changing complexities that startups face.

We are seeing this all the time with our team of CFOs being called in by VCs looking to validate business models, understand true revenue / revenue growth, get under the skin of the metrics, extend runway or plan towards the next fundraise.

This is an incredible validation of the trust they, and their portfolio companies put in our expertise, and an intense priviledge that we take very seriously.

So let’s dive into the role of the CFO and how, as an advisor to Google’s DeepMind once told me, they become an indispensable part of the strategic growth of startups as they embark on scaling.

The Evolving Role of the CFO

Traditionally, CFOs were seen as gatekeepers, beancounters and the folk behind the scenes that managed a company’s finances. But they were never known to drive growth.

We were the people that took care of compliance, taxes and making sure that the periodic functions a finance team had were taken care of on time, every time.

I would argue that this representation of the CFO has always been flawed, however it is a matter of perception. The better way to look at finance today is to split it into two, interlinked, activities.

Finance Operations and Strategic Finance.

Finance Operations comprises all the activities I’ve noted above, whilst Strategic Finance deals with the true value of the CFO.

So what are they?

Well, today, certainly in fast growth companies, the CFO tends to wear multiple hats. They still remain an integral part of Finance Operations, ensuring that those teams deliver requirements both internally and externally, but they are not the ones doing these activities.

Instead, they are involved in a host of strategic initiatives (hence Strategic Finance):

Capital management

Understanding the capital stack

Using leverage where necessary to seek out non-dilutive growth capital as well as more typical equity investment

Driving the data operations of the organisation to ensure that it is being driven by leading rather than lagging metrics

Helping the senior leadership of the business to map out the strategic and financial plan that marries the strategic goals of the organisation with the operational delivery of the same.

The way I always describe this difference is as follows:

Finance Operations is involved with those activities that look inside the business and look backwards; processes, controls, tax, stats, management reporting and financial accounting – all the things that keep the wheels turning.

It’s what one might call BAU: business as usual.

Strategic Finance is involved with those activities that look outside the business and look forwards; revenue activities, competitive landscape, fundraising, metrics and ultimately growth.

Strategic Planning and Vision

Firstly, CFOs are front and centre when it comes to defining a company’s growth trajectory (though these days that growth may not always follow the ubiquitous hockey stick).

This means truly understanding how all the functions of a business marry together:

How marketing drives leads

How sales converts leads

How contracts are written to ensure revenue is recognised correctly

How customer success teams minimise churn

How operations support the revenue generative activities

How the above activities are funded and how capital is managed throughout the organisation

As the business becomes more repeatable and predictable (i.e. scalable), CFOs start getting involved in pushing growth through inorganic means. For example, driving Corporate Development, searching out M&A activities (buying companies) and leveraging the company’s inherent strengths in one market to expand into others.

Ultimately, CFO’s are responsible for ensuring that every investment a company makes – whether in a product, a hire, a business or a market – is aligned with its long term vision.

And this comes down to one of the least understood but most crucial activities of the CFO: Risk Management.

Many people equate this to that old vision of the beancounter CFO… someone who always says ‘no’ whenever something is brought to the table.

Instead, I always tell founders that my job as CFO is to get to ‘yes’ whilst ensuring that we manage all the potential risks associated with doing any given project.

It’s about looking forward to what might happens driven by experience, research and scenario planning and utilising all those factors to provide a path forward, rather than putting obstacles in the path.

Today’s CFO understands that there are two ways of driving efficiency into a business’ P&L – cutting costs or, more importantly, driving revenue.

Great CFOs opt for the latter whilst managing the former.

Which leads us to a broader remit of the CFO – Driving Operational Efficiency.

Driving Operational Efficiency

This can be paraphrased as doing more with less, but doesn’t always mean cutting costs. It may instead mean investing wisely so that over the long term you can achieve more with the same level of resource.

It is hard, as a CFO operating in a tech company, not to see the value of technology in this area.

Tools like Xero, Pleo, open banking, Spendesk, Payfit and others have brought the cost and efficiency of the transactional layer of finance (mainly involved in operational finance) right down. Not only in terms of dollar investment but also in terms of the operational complexity required to manage them. They do a lot of the heavy lifting so you can get away with less qualified staff (to a point) to manage these systems.

But it’s not just tools that can be brought to bear. Rather, it is understanding processes and using data to optimise those processes further.

For example, if you know demand follows a cadence, you can plan customer service shifts in a way that you are able to match resource to demand.

But the trick is having the data in place to understand those patters in the first place.

Over time, optimisation leads to cost efficiency which ultimately drives bottom line.

But it is not just in costs that the CFO should turn to data.

Understanding customer profiles for revenue is immensely important.

I once worked with a business and advised them to deprecate a number of contracts when I figured out the cost of servicing them outweighed the revenue generated from them.

CFOs are always looking for that edge – how to increase lifetime value, how to improve margins, how to bring efficiency and lower costs.

There is always a lever to pull.

CFOing is essentially about resource allocation.

It’s about how and where to invest capital – both financial and human – to maximise returns to the business.

That is why finance should be heavily involved in the hiring process. Old school beancounter type CFOs (or just controllers) may look at hiring as purely a cost excercise, but a forward looking CFO will understand that hiring is an investment in future revenue.

Yes they will push back on unfettered hiring (or should do, though sadly over the years of capital on demand this discipline was lost on newbie founders and finance folk), but that does not mean they are adverse to hiring in general.

One of the shorthand metrics I use to measure this is revenue per headcount or people costs as a percentage of revenue.

You want to see the former scaling and the latter reducing over time – this shows your business is scaling without adding marginal cost, which for a software business, should be the reality.

Managing – and Raising – Capital

This is the area where a truly great CFO comes into their own.

Fundamentally this means getting to understand a company’s burn rate and runway intimately (the net amount of cash being expended periodically by the company and the length of time available before the company runs out of cash).

The difference between a tech or venture CFO versus a CFO in a more established company is that we (tech / venture CFOs) do not have the luxury of calling up head office when it looks like there is going to be a shortfall in cash.

I remember once interviewing someone (the wrong someone) for a role in one of the ventures I was working in. I asked them how large a balance sheet they managed in a spin out of a larger company – it was in the order of $100m+ – and asked them what would they do if they were running up to month end and making payroll was looking dicey. After looking at me blankly for a minute, they said they’d request a transfer to make sure it was covered.

Sadly, tech and venture CFOs don’t have a batphone. This means intimately understanding these timeframes and proactively finding solutions in advance to deal with them. This may include pushing sales to close contracts, even at a discount, looking for working capital funding, delaying payments to creditors or, if caught well in advance, going out to the market to source some bridge financing.

And this leads to the other area that, in my opinion at least, distinguishes a ‘true’ CFO from a tourist.

The ability to source capital from a variety of sources, including VCs or debt providers, to ensure that the company is appropriately funded to the right levels, and importantly at the right price.

This means taking in debt at terms that are affordable to the business (though typically in scaleups this will be via venture debt which is a different risk profile to more traditional debt products) and equity at valuations. Both are an indication of where the business currently is with hopefully a premium, but not so high a premium that the company risks a painful downround in the future through over valuation.

Championing Innovation and Technology

CFOs operating in the tech and venture ecosystem know how important it is to continuously invest in research and development (R&D).

This is not only because R&D can be leveraged for growth or factor into investment decisions by making the business more attractive to future investors (R&D is often an asset that can have an attributable value above and beyond the core financial performance of the business) but, also because R&D is often treated favourably from a tax perspective.

There are a number of jurisdictions where R&D can be claimed back to reduce tax payable or even have a percentage granted back as a cash refund to the business. For the smart(er) CFO, they also know that this can be used as security against which they can secure a loan which can assist with working capital.

But they are also investing in tech themselves as previously discussed. Beyond the transactional, this is often in areas that allow them to forecast and scenario plan better.

This not only requires an understanding of data and ETL (extract, transform, load) processes to prepare and clean data, but also how to interogate that data. Which means knowing in advance the sort of patterns you should be looking for:

‘What happens when prices go up?’ ‘Which cohorts tend to stick to the product longer?’ ‘What types of customers buy from us, and where can we find more of them?’

Using a series of tools to process and query this – often non-financial – data pulls the CFO outside the realm of being the numbers guy (or gal) to being the data chap (or chapess).

It again moves them from looking inwards and backwards to looking outwards and forwards.

Building Investor and Stakeholder Confidence

This leads us to one of the most crucial aspects of being a tech CFO.

The CFO as a story teller.

Now, let’s not get confused with telling stories that can – and have – landed folk in jail.

I’m rather talking about turning numbers into narrative and data into information.

CFOs use this skill to report internally (to management and the board) and externally (to current and potential investors).

This is a critical function that should not be underestimated. The nature of the work that CFOs do is highly skilled and carries with it a great deal of trust.

CFOs need to develop this skill in abundance as not only will they be doing this on a routine basis (monthly, quarterly or annual updates), but also on an ad hoc basis.

When they prepare numbers or a report, or hold a call with stakeholders, it is taken as a given that when they speak, they are speaking from a position of knowledge and authority.

This is why it is incredibly dangerous to have a ‘CFO in name only’ running your finance. (Whilst I would agree that most founders should be all over their numbers and also be able to communicate them, at a certain size of business, this is not a job they should be doing unless it’s part of their DNA).

But it is not enough for CFOs to be talking to investors just when they need to raise capital. They should be out in the market understanding the players and priming future investors to participate in future financings as the business continues to scale.

Ultimately, your CFO is more than just your finance guy, they span roles across the organisation and are an integral part of the strategic leadership team.

Ask yourself this – are you willing to risk not having one batting your corner, especially in this market?

And there you have it, my take on why it’s imperative to have a CFO by your side if you’re a scaling venture backed business – though I can see why some might say I’m biased ???? 

So let’s hear your thoughts on bringing a CFO along for the journey. Where have you found one to be invaluable or, indeed, not right for where you’re at right now?

(also, if your CFO looks like this guy… you’re going to jail ???? ).

Gif by theoffice on Giphy

On the death of nuance

As someone that spends a lot – probably too much – of his time online, I’ve noticed more than ever how much people struggle to think through issues that have more shades than simple black and white.

So much of modern life is wrapped in all sorts of nuance, but the perpetuation of platforms like Facebook, Twitter and even LinkedIn these days has meant that people not only get wrapped up in the immediate emotional response to (often purposefully) clickbaity headlines or comments, but they then lack the ability to think critically about the response and counter response.

The reality is that life is rarely, if ever, black and white. We are constantly faced with decisions that require a balanced understanding of a variety of sides.

CFOs, like me, spend much of their time working in these probability spaces looking across multiple scenarios to present a path forward based on the balance of those probabilities.

It feels like the world would be a much more sensible place if people spent more time trying to understand the multiple sides to a debate rather than anchoring themselves on one side and prognosticating on that matter alone.

For example, we can all agree that over the last few years we saw a lot of hubris in the venture capital market. That doesn’t mean that venture capital is bad or that it doesn’t have a place in the market. If anything it forces us to look at the negative externalities that may arise when capital is unfettered (as it was over the last several years). It also encourages us to think through the situations when venture capital adds immense value – for example in the creation of drug vaccines or new deeptech products that transform the way we live or work.

There are numerous other areas where this nuance should have been applied but where we collectively fell short, all too willing to take words on the side of the metaphorical bus for a given rather than thinking through both the motivations behind having written them or the veracity of the words themselves.

I long for a world where we can have discussions that bring our understanding of each other and the issues we are passionate about to a higher level. Where debate doesn’t lead to further distancing, but to greater proximity to each other and, though I may be both naive and idealistic here, finding common ground rather than further entrenchment.

/end rant

I hope you found OffBalance #15 useful. As always, I’d love to get your feedback and understand the sort of topics you would love to hear about.

Just hit reply to this mail or drop me a line at hello@emergeone.co.uk and let me know ????

????And that’s a wrap for this edition of Off Balance – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

???? And if you think someone else might love this, please forward it on to them,

???? Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aarish

The Lowdown #6

???????? Hi friends!

In some personal, non venture related news, I turn 45 tomorrow ???? 

I’d like to take a moment to thank all the people along the way who have made me who I am, who have supported me, who have lifted me up when I needed lifting and who believed in me when I didn’t even believe in myself.

I’ll be dropping a post tomorrow on LinkedIn exploring some of the life lessons I’ve learned along the way. Be sure to check it out ???? 

So what’s the lowdown this week? Well, we’ll be diving into:

???? PE firms pass the buck… to themselves?
???? Loom exits to Atlassian
????‍♀️ California mandates VCs report on diversity

And Season 5 of Nothing Ventured is now LIVE with a new look and some awesome new guests! Check out the first episode with Mark Kleyner from Dream VC who are building the Investor Accelerator for Africa ????

Also, if you have any feedback, or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

Give me a follow on LinkedIn, Twitter (do I really have to start calling it ‘X’ soon?), Instagram.

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Lowdown” and, more importantly, tell me why you’d like to connect ????????)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing!

Now let’s get into it.

This edition of Nothing Ventured is brought to you by EmergeOne.

EmergeOne provides fractional CFO support to venture backed tech startups from Seed to Series B and beyond.

Join companies backed by Hoxton, Stride, Octopus, Founders Factory, Outlier, a16z and more, who trust us to help them get the most out of their capital, streamline financials, and manage investor relations so they can focus on scaling.

If you’re a CFO working with venture backed startups and want to join a team of incredible fractional talent, drop us your details here.

If you’re a growing startup that knows it needs that strategic financial knowhow, drop your details here to see how we can support you as you scale ????

The Lowdown

Much of the news I’ve been consuming over the last week has naturally been focussed on the evolving crisis and events in Israel and Gaza, but there is some stuff of note that has been happening in the venture ecosystem that is still worth touching on.

The Private Equity Ponzi

The FT article below is quite an eye opener for those that pay attention to how the private markets operate and the issues that arise when there aren’t great routes to exit.

As the article states, PE funds are resorting to sell their assets back to themselves (under new funds with potentially new LPs) in order to provide liquidity back to their previous funds and investors.

Whilst the IPO market might be depressed, there’s just something about this that feels… off.

I mean, what does it mean when the ‘greater fool’ is your own fund? How do you justify an arms length attitude to valuation mark ups?

The funds doing this cite keeping the strong cash flows from these businesses in the portfolio, but this sounds like the sort of argument you make when you’re trying to convince yourself rather than others.

We’ll see if, and when, markets picking up these assets can exit through more traditional routes, or, if these funds end up holding the bag and having to explain to themselves why this was an okay thing to have done.

Loom-icorn

Given the last bit of news, here’s one that goes in the other direction.

Loom, the video recording platform used by founders, product teams, students and pretty much anyone that wants to communicate and demonstrate without having to write a 100 page email, has been acquired by Atlassian for $975m.

Now, given the value, I toyed with headlining this ‘Soonincorn,’ but that would be snarky for the sake of snarkiness – the business has raised over $200m and was purportedly valued at $1.5bn in its last round in 2021.

I’d guess that those series C investors in the last round probably had preference shares, so probably came out whole. But whatever happened in that last round, one has to imagine that the founders, employees and earlier investors have come out of this with a big smile on their faces.

As someone that has used Loom on and off for some time, and generally only has good things to say about the product, it’s great to see the team seeing this through to a successful outcome.

It’s something to cheer about in an otherwise seemingly tough time for startups looking to exit.

Exciting news today. @loom is joining @Atlassian.

The company has entered a definitive agreement for Atlassian to acquire Loom for $975m.

25 million users.
1.5 billion minutes recorded.
1.8 million workplaces.
8 wonderful years in the making.

— Shahed Khan (@_shahedk)
Oct 12, 2023

Reducing Bias or Increasing BS?

Those that know me and who have listened to my podcast for any time will know that I am a massive advocate for increasing funding that flows to under represented groups, whether that’s female founders or people from minority backgrounds.

California has just signed into law a bill that mandates funds in California or funds that have invested in businesses principally based in California report on the demographic information of their investee companies.

I always have mixed feelings when governments get involved in these sorts of activities. Whilst I think that shining a light is positive, I also assume that these things just become exercises in bureacracy without any real impact.

And, because of the way reporting will occur (% of founders rather than % of dollars invested), it may not really represent the actual diversity of investments that a fund has made.

I guess we will see how VCs react and, over time, whether this will make a real difference in what kinds of founders their funds flow to.

For now, I’ll buy into the fact that it’s a step in the right direction.

And finally, I created a midwit meme which pretty much explains how I feel every time I open twitter, especially as I hit the big 45…

????And that’s a wrap for this edition of The Lowdown – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

???? And if you think someone else might love this, please forward it on to them,

???? Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aarish

Off Balance #14

???????? Hi friends!

It’s been a bit of a whirlwind weekend as I surprised my (much!) better half with a trip to Italy to celebrate her birthday with her family – for the first time since she moved back to the UK back in the early 2000s to boot.

We reminisced over all the moments and memories we’ve shared over the last 20 years. I’m pretty sure we made a few new ones to keep us going over the next twenty.

My better half, Debora, on her birthday ???? 

But, of course(!), I found the time to get a few words down and provide a bit more actionable insight and context to whatever you’re building and to your day ????

On a side note, I’m super excited to be leading the CFOs and Financial Modelling session for the EMEA cohort of Morgan Stanley’s Inclusive Venture Lab this week. It’s always such a pleasure to meet these incredible, diverse founders and learn more about what they’re building ????

In this weeks Off Balance, I’ll be chatting about:

???????? A brief word on the events in Israel
???? How to think differently about where to get your debt
???? Employee Equity Schemes – understanding the basics

Oh, and the new look Nothing Ventured Season 5 went live today!

Check out this Primer where I get to know Mark Kleyner and why he’s building Dream VC, the investor accelerator for Africa ????

Also if you have any feedback or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

Give me a follow on LinkedIn, Twitter (do I really have to start calling it ‘X’ soon?), Instagram and drop me a note 🙂

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Off Balance” and, more importantly, tell me why you’d like to connect ????????)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing!

Now let’s get into it.

This edition of Nothing Ventured is brought to you by EmergeOne.

EmergeOne provides fractional CFO support to venture backed tech startups from Seed to Series B and beyond.

Join companies backed by Hoxton, Stride, Octopus, Founders Factory, Outlier, a16z and more, who trust us to help them get the most out of their capital, streamline financials, and manage investor relations so they can focus on scaling.

If you’re a CFO working with venture backed startups and want to join a team of incredible fractional talent, drop us your details here.

If you’re a growing startup that knows it needs that strategic financial knowhow, drop your details here to see how we can support you as you scale ????

A brief word on events in Israel

Events that have unfolded over the weekend with mass devestation caused by attacks on Israelis by Hamas has been met with condemnation by leaders across the world.

I have no doubt that Israel’s response will be swift and will likely be brutal and, as the conflict escalates, will almost certainly cause more civilian casualties and losses on both sides.

I have no skin in this game and I don’t wish to opine on something where I neither hold expertise, nor where it does not immediately impact me or those around me.

However.

I do have family in the region and many Israeli and Jewish friends
I have interviewed several Israelis on my podcast, most of whom are ex IDF
I am concerned about the impact this has on innocents on both sides
I can’t assume that conflict will not spill over in impacting the rest of the world

I would love for there to be a swift and peaceful resolution to what has already been declared a war but I do not hold out much hope.

One thing I can say unequivocally is that there is no excuse for terrorism nor the premeditated and gleefull taking of innocent lives, that should be abhorrent to anyone whatever your thoughts on the politics of it all.

How can did I add value?

A couple of weeks ago, an angel I know asked if anyone could introduce one of their portfolio company founders to any debt providers.

I actually knew the company and the founder having done some work for them way back in 2019. (Side note – do you also intuitively bucket everything into pre and post pandemic eras?)

The business is already established and doing quite well and has a hardware and software element to it.

After speaking to the founder, it was clear that what they were after was a working capital facility that would help them fund inventory.

This would help them to grow further.

If you’re ever in this situation, there are a number of routes that you could consider taking:

???? Speak to your existing bank / financial institution

Pros: Should have a variety of products that you can access and there is an existing relationship which should mean a ‘quick’ decision.

Cons: Traditional insitutions are not known for having the hungriest of risk appetites so you may get to a yes but only after having jumped through a few hoops and having had to offer up a variety of different securities like personal / directors’ guarantees, a lien over the business or even a physical asset (like your home). Oh and a bunch of covenants that you have to maintain (things like interest cover, debt ratios, quick ratio and more) and report back on regularly (typically monthly).

???? Use a revenue based financing company

Pros: There’s typically a very quick turnaround once hooked into your systems. Repayment scales up and down with your revenue (i.e. if your revenue drops so does your repayment).

Cons: Restricted number of products, and although most do offer some form of inventory financing, others won’t. Fees and equivalent interest costs can be quite substantial and they may not be able to lend the sort of quantums you may need.

???? R&D Funding

Pros: Once you have a track record of submitting and being repaid for R&D undertaken in your business, you will probably qualify to secure a loan from specialist lenders specifically against the R&D due in your next claim.

Typically the lender will just add the interest to the principal loan amount and the whole lot would become repayable at the earlier of the R&D claim being paid out by HMRC or a long stop date normally set to a couple of months after you would expect to get paid out. This helps avoid the need for planning monthly payments, and if you are confident your claim will be paid by HMRC then the loan is pretty much covered.

Cons: You are likely to only be able to draw down a maximum of 80% of the total claim value, which may not be sufficient for your working capital needs. In the current environment, HMRC is pushing back hard on what qualifies for R&D, so whilst you may have claimed in the past, you are not guaranteed to qualify now. If the claim isn’t paid out, you’re still on the hook for the capital and interest.

????Venture Debt

Pros: Lighter touch diligence than traditional lenders and potential to pay interest only.

Cons: Venture debt is a specialist type of product which many institutions do not offer, so it can be hard to secure. Equally, it is often issued as part of a significant institutional equity round (so you need to raise from a VC). You may still have negative covenants (things that you are not allowed to do without specific approval) and you will likely also have to issue warrants (an instrument giving the lender the right to purchase shares in the future at an agreed price). This means more dilution – given that one of the main reasons to take out debt is so as to not dilute existing shareholders any further.

And there are no doubt other lenders and debt products out there that this founder could have looked at.

BUT

What I actually told them to think about was approaching an existing investor (especially an angel) to see if they would lend the required amount.

This is something that the founder had not considered, but realised that it made sense. They also had individual angels who had invested 7 figure amounts into the business and had the ability to write large cheques.

Overall there are several pros to going to an existing investor:

➡️ They have an existing relationship with you and the business.
➡️ They are able to make decisions quickly.
➡️ They are incentivised for your business to succeed.
➡️ They are also incentivised to not have further dilution.
➡️ They are less likely to insist on further security.
➡️ They are more likely to negotiate a good interest rate.
➡️ They are more likely to renegotiate in good faith in the event of trouble.

The biggest con would be a potential falling out with the investor should you become delinquent with the debt.

With that said, and having done and seen this done in a number of business, given the fact that your investors want your business to succeed, there is already huge alignment and a great opportunity to strengthen your relationship with them.

I’d love to hear if anyone has done this themselves and what your experience was. Drop me a message!

Generated by AI using Dream Studio

Off Balance

Most people involved in the startup and venture ecosystem will almost certainly have come across the notion of employee equity schemes and options at one time or the other.

In recent months there have been lots of articles about employee options being ‘underwater’ as valuations have cratered and I’ve no doubt that people have legitimate questions and concerns about how options work – whether you’re a first time founder or have just landed your first role in a startup.

In this Off Balance article, I’m going to try and give you a quick and dirty run down so that the next time you run into the issue of employee options you feel like you’ve got a base understanding you can build further on.

As always, you should always seek advice from your lawyer, whether you’re a founder or an employee, as every scheme will have variations and complexities that will be very specific to the particular company issuing the options.

With that said, let’s get into it ????????

Employee Equity Schemes

Why do companies have Employee Equity Schemes?
Equity Schemes are a way of incentivising employees and will often form part of their total package alongside salary, bonuses and other benefits they may receive such as gym memberships, health insurance or a company car.

They allow employees to participate in the future upside the company might have in a way that allows both the company and the employee to protect themselves from potentially negative outcomes.

For startups who often lack the cash to be able to pay full market salaries, allowing their employees to participate in the equity of the business helps to make up for the potential shortfall in salary and, because the employees can become future shareholders (owners) of the business one could argue that their incentives align more closely with both the founders as well as other investors and shareholders in the business.

One of the main ‘instruments’ that companies use for employee schemes are called Options.

So what’s an Option anyway?
When we talk about an Option in a business or finance context, we are talking about a contract between two parties giving them the option to buy or sell something at a future date and at a pre-agreed price.

In the context of startups especially, we are usually talking about the Option to purchase shares in the business at a future date at a pre-agreed price which is normally at a discount to the last traded share price (normally defined as the ‘price per share’ offered during the last funding round).

We’ll get into some of the details shortly, but for now just think of an option as:

A contract to purchase a defined number of shares in the future either defined by a date or on completing certain milestones, for a pre-defined price.

Why use Options over straight equity?
There are a few reasons why issuing straight equity may not make sense either to the company or the employee”:

Firstly, if equity were to be simply given to an employee in lieu of salary, there would be an immediate tax consequence – especially to the employee. The tax man would essentially argue that the equity is equivalent to the cash value it is being provided in lieu of and will charge personal income tax on that value.

Secondly, from the company’s point of view, if it has issued equity to an individual, it is pretty unlikely that that equity can be clawed back in the event that the employee ends up not adding value – or worse, is actively toxic.

Thirdly, most widely used Option schemes have had legislation drawn up around them which means that there are other tax benefits to using them. In the UK, for example, under the EMI scheme, if you have agreed a valuation with HMRC, even if the valuation has increased by the time an employee exercises their options (see below), they won’t get hit with any kind of tax bill. Instead, the tax impact only comes when there is an exit event. And, at that point, again on the assumption that the correct process has been followed with HMRC, you’ll be taxed on a capital gain rather than as personal income tax*.

Finally, from an employees perspective, there may be a reason they don’t want equity in the business after they have been issued the options (rare, but it can happen i.e. if the company behaves unethically). If they had been issued straight equity, they would be stuck on the cap table, unless they were able to find a buyer for their shares (which in early stage companies can be very difficult).

*In the UK, and indeed the US, there are various actions that must be taken to make sure that the option scheme is approved by the tax man and that the tax impact is minimised on the employee. These range from getting the valuation agreed in the first place, to only being able to issue the options within a specific window after the valuation agreed, to reporting back to the tax man on a regular basis.

Always take external legal advice and set up your scheme in the most sensible way for your company and employees.

Glossary of Terms

As with most contracts, the devil is in the detail. Thankfully there tends to be some pretty standard terminology used when setting up a scheme and in Option contracts specifically, here are the main ones:

Option Pool: A number of shares (often expressed as a percentage of the total shareholding) that are agreed to be set aside for issuing to employees, contractors, advisors or other external supporters of the business.

Scheme Rules: The overall rules that govern the option scheme irrespective of individual terms in individual options.

Option / Option contract: The commercial contract that specifies the terms by which the option holder must abide.

Vesting: The process by which options become available for purchase.

Vesting Schedule: The contractual timeline over which options vest.

Cliff: An initial period that must be completed before any options vest at all (thereby allowing for the eventuality that an employee leaves the business after a short period of employment).

Periodic Vesting: The process by which options may vest over a certain period (monthly, quarterly, annual etc).

Milestone Vesting: The process by which options only vest on completion of certain targets. Often used with sales teams and tied to revenue targets, however could even be used to incentivise a CFO to source and close additional investment etc.

Exercise: The act of purchasing options that have been issued to you.

Strike Price: The price at which the option can be exercised.

Exit only options: Options that can only be exercised at the time that a company goes through some form of a liquidity event (sale, IPO or orderly windup).

Good / Bad Leaver Clauses: In some instances, employees may be allowed to exercise options even though they have left the business – often before their options have fully vested, and normally at the discretion of the board of director. The terms of their rights to exercise will be defined under a good / bad leaver clause. As you would expect, a Bad Leaver would unlikely be allowed to exercise their options.

Approved / Unapproved Schemes: In the UK, an Approved scheme is one that can be issued to employees after having been agreed with HMRC and provides the tax efficiency I’ve mentioned earlier. An Unapproved scheme simply means that there won’t be any tax efficiency and these schemes are typically used to issue options to people who are not employees of the company.

Fully Diluted Equity: Whilst this isn’t a term that is used ****in**** options contracts, it is a fundamental concept to understand when talking about equity. Fully diluted equity is the ownership of existing shareholders, expressed as a percentage as if all options (and any other instrument such as share warrants) have been exercised. It essentially tells shareholders what their minimum ownership sits as as of right now.

Being ‘Underwater: An option is underwater when the exercise price exceeds the current price per share of the company (i.e. the company is valued lower than the option would suggest). This is obviously a critical issue for employees who have a large part of their compensation made up by the option scheme they participate in.

A word of caution

When talking to employees about options, never discuss it in terms of a percentage of equity (as this moves every time new shares are issued). Rather talk about it in terms of value, or preferably an absolute number of shares over which the options are being issued.

Wherever possible you should refrain from putting these things in writing until you are ready to issue the options. This is to protect the company as far as possible in the event that someone mis-speaks.

Types of Employee Equity in the UK and USA:

Right, we’ve got the basics covered, so et’s take a quick look different types of Employee Equity schemes in the UK and across the pond in the US.

UK:

Enterprise Management Incentives (EMI): These are a tax-advantaged share option scheme specifically designed for smaller companies and hence widely used by startups. There are certain conditions, for example a £250,000 limit on the value of shares over which options may be granted to any one employee. But it is quite flexible and relatively easy to set up and implement.

Company Share Option Plan (CSOP): This allows companies to grant options to selected employees who can then acquire shares at a fixed price. CSOPs offer tax advantages if certain conditions are met.

Share Incentive Plans (SIPs): Use in more established companies, employees can buy shares out of their pre-tax salary, often at a discounted rate.

Unapproved Share Options: As discussed earlier, these don’t have the tax advantages of the schemes above but are more flexible. They’re also relatively easy to set up and issue.

USA:

Incentive Stock Options (ISOs): These are exclusive to employees and come with tax benefits, but they must meet specific IRS requirements.

Non-Qualified Stock Options (NSOs or NQSOs): Unlike ISOs, these don’t have the same tax benefits but are more flexible and can be granted to anyone – similar to unapproved share options in the UK.

Restricted Stock Units (RSUs): Used in established (and often listed companies), employees receive shares once they vest, without needing to buy them. They’re taxed as income when vested.

Stock Appreciation Rights (SARs): Employees benefit from the increase in share price without having to purchase shares. They receive the appreciation amount in cash or shares.

How the Schemes Work:

EMI & CSOP (UK): Companies grant options to selected employees at a fixed price. When the options vest, employees can exercise them, purchasing shares at the previously set price. If the company’s share price has risen, employees stand to make a gain.

ISOs & NSOs (USA): Similar to the UK schemes, companies grant options at a set price. The main difference lies in the tax treatment upon exercising the options and selling the shares.

Impact on Valuations, Shareholders, and Accounts:

Valuations: Employee equity schemes can dilute the ownership percentage of existing shareholders. However, they can also align employee interests with company growth, potentially driving up the company’s value.

Shareholders: Dilution can be a concern, especially if a significant number of options are granted. However, motivated employees can lead to increased company performance, benefiting shareholders in the long run.

Accounts: Companies need to account for share-based compensation. In the US, for instance, the Financial Accounting Standards Board requires companies to estimate and report the fair value of stock options they grant. And given the reality of most early stage businesses where fair value can be very hard to define, this leads to using pricing models like Black Scholes to arrive at a price. This may lead to a charge to the income statement as equity is credited.

To really bring it home, check out this worked example based on a (simplified) UK Unapproved vs Approved EMI Scheme.

Who fancies paying an additional $29,500 in tax?

Hopefully this has given you a good primer in the basics of what you need to know about Employee Equity Schemes, whether you’re the founder responsible for issuing them, or the employee being granted them. And, of course, this is non exhaustive, not only are there other types of equity products out there (like Growth Shares) but legislation will also move over time.

Make sure you know what you’re getting and what it’s going to cost you!

Gif by dynastydrunks on Giphy

I hope you found this useful, as always, I’d love to get your feedback and understand the sort of topics you would love to hear about.

Just hit reply to this mail or drop me a line at hello@emergeone.co.uk and let me know ????

????And that’s a wrap for this edition of Off Balance – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

???? And if you think someone else might love this, please forward it on to them,

???? Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aarish

The Lowdown #5

???????? Hi friends!

I’m off to Italy (again!) for a long weekend as a surprise trip for my wife. We’ll be celebrating her birthday with her family out there for the first time in over 20 years ????

So this newsletter may be a little bit lighter than my normal verbal extravaganza!

For this week’s Lowdown, I thought I would highlight some of the reasons to be positive about the state of venture today.

There’s been a couple of huge announcements here in Europe and one that’s not quite as big in Kenya, but it’s important nonetheless!

???? Atomico raises 1bn Euro
???? Dawn bags $700m
???? Greylock lands $1bn
▶️ Enza Capital closes $58m

Keep reading to get the full lowdown on each of these…

And remember to check out this week’s Nothing Ventured pod where we take a look back at some of the operators we’ve had on in Season 4, sharing all their wisdom.

Also, if you have any feedback, or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

Give me a follow on LinkedIn, Twitter (do I really have to start calling it ‘X’ soon?), Instagram.

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Lowdown” and, more importantly, tell me why you’d like to connect ????????)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing!

Now let’s get into it.

This edition of Nothing Ventured is brought to you by EmergeOne.

EmergeOne provides fractional CFO support to venture backed tech startups from Seed to Series B and beyond.

Join companies backed by Hoxton, Stride, Octopus, Founders Factory, Outlier, a16z and more, who trust us to help them get the most out of their capital, streamline financials, and manage investor relations so they can focus on scaling.

If you’re a CFO working with venture backed startups and want to join a team of incredible fractional talent, drop us your details here.

If you’re a growing startup that knows it needs that strategic financial knowhow, drop your details here to see how we can support you as you scale ????

The Lowdown

You would be forgiven either whilst reading this newsletter or, indeed venture news in general, for thinking that the venture ecosystem was in a pretty sorry state.

Indeed articles like this one from Pitchbook paint a picture of an industry struggling to get out of declining returns with IRR dropping into massively negative territory in 2022 as hyped up valuations started getting marked down.

But the reality is that despite those declining returns, there is still a huge amount of dry powder out there waiting to get deployed.

LPs are still looking to deploy into funds that they think can still generate those outsized returns of yore.

So let’s take a peek at some of the firms that have just announced new mega funds as well as one slightly smaller, but still important, fund in the context of the region it’s in.

Atomico Raises 1bn Euro

First cab off the rank is Atomico which has raised 1bn Euros, with a bullish stance on where Europe is heading.

Despite the continent seeing a likely 39% decline in funding in 2023, this new fund which will be deployed across venture and growth is testament to the fact that founding partner, Niklas Zennström, believes that Europe has the chance of becoming a true tech superpower. It’s evident that there’s huge value to be unlocked by the continent!

Some might argue that regulation is a limiting factor, but I think in some ways, the tougher regulatory environment in Europe means that new ventures have to think hard about how and what to build in a more meaningful way. It prevents them from assuming they will just be able to fix their problems by throwing cash at them down the track.

With over 200 investments including Klarna, Graphcore, Lime and Gympass across 5 funds, it looks like Atomico is just warming up.

Dawn Capital Bags $700m

Next up, we have Dawn Capital that just raised a $620m early stage B2B software fund alongside an $80m follow on fund.

With $2bn now under management, the fund has backed companies like izettle which are now ubiquitously used in stores to capture card payments and which exited to Paypal, as well as others like Dataiku and Quantexa.

As co-founder and GP Norman Fiore says, we are on the cusp of the next technilogical platform shift driven by AI and Dawn wants to be at the front line to capitalise on the opportunity.

Greylock Lands $1bn

Across the pond, Greylock Partners has launched a $1bn fund to focus on early stage businesses from Seed to Series A.

This, despite the fact that Reid Hoffman (founder of LinkedIn) who has been a GP in the fund since 2009, announced around a month ago that he would be scaling back his involvement and would not be heavily involved in this new fund.

It would seem that Reid will be focussing his time on exploring the AI landscape, just not from within Greylock.

The new fund – Greylock 17 – will focus on Pre-seed, Seed and Series A investments. The fund hopes to grow their track record of over 250 exits including Redfin, Aurora and Coinbase.

Enza Capital Closes $58m

And finally, I wanted to give a shout out to the little guys! You’ll see that in the upcoming season of Nothing Ventured we try to explore the African ecosystem a bit further. I thought it would be great to juxtapose Enza Capital’s recent announcement of its $58m close across 2 funds.

Given the size of the 3 funds we just looked at, which on a standalone basis total almost $3b, you may be asking why I’d be looking at such a small fund.

Well, everything needs to be taken in context.

Firstly, the largest Africa focussed fund, Partech Africa II, sits at 245m Euros. This $58m is over a fifth of the size of that fund.

Secondly, this Enza has been deploying pan Africa across Kenya, Uganda, Nigeria, Ghana, Ivory Coast, Senegal, Egypt and South Africa which is great to see.

And finally, in a move that really shows that they are founder focused, they have reserved 10% of their carry pool for founders – though this won’t necessarily be equally shared.

The point is, it’s easy for us to get carried away with and fixated on the massive numbers we’re seeing here in Europe and across the pond.

But it’s worth remembering that in some markets, you can have a much smaller base but much bigger impact.

And finally, a word from everyone’s favourite meme master…

People in 1980: “I can’t wait for flying cars and all the other amazing inventions we will come up with in the future”

People in 2023:

— Dr. Parik Patel, BA, CFA, ACCA Esq. (@ParikPatelCFA)
Oct 1, 2023

????And that’s a wrap for this edition of The Lowdown – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

???? And if you think someone else might love this, please forward it on to them,

???? Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aarish