???????? Hi friends!

The end of November is always a bittersweet for me. It is the period when I am excited by the advent of a new year, whilst also being really conscious of what I have achieved – or failed to achieve – over the course of the last year.

It’s also the time of year that there are waaaaaaay too many events on, so many so that I inevitably have to turn a bunch of them down even if I would love to attend.

On a separate note, I recorded a live show with Eghosa Omoigui and Jonathan Sun last week. We dived into what we thought the real story behind the OpenAI craziness was and what we thought was in store for the venture ecosystem over the next 12 – 24 months (spoiler alert, it’s not great news).

It was super fun to have done and I’m planning on doing a lot more of them in the future ???? 

Now let’s get down to business…

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

⚔️ Non Dilution Shares and why they’re a No No
????‍???? The CFO Tech Stack – my take on what’s in the market and what’s to come

Also, in this week’s Nothing Ventured, I spoke to Fatou Diagne and Stephanie Heller, founders of Bootstrap Europe. We talk about how they built their relationship taking road trips in the dessert and how they ultimately came to found Bootstrap Europe and, as underdogs, manage to buy out SVB’s Western European venture debt portfolio.

As always, our Primer episode gives you a bit of background on how they got to where they are today ???? 

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?

Times are a changing people. The startup and venture market look like they’re going to go through a fair amount of turmoil over the course of the next few months (and beyond) and what this may well mean is the return to founder unfriendly terms.

I got my first glimpse of this when a founder I had been speaking to pinged me to ask a question.

He had managed to secure a decent (close to 7 figure) investment from an angel (so not an institutional investor) but, almost as an afterthought, the angel had asked if the founder would, on top of the investment, consider non-dilution shares.

It was a good job the founder reached out to me, because it would have been a very bad idea for him to have considered offering this type of shareholding to the angel – and here’s why.

Non-Dilution Shares are a class of shares that don’t get diluted in any future funding round.

Let’s slow down and think this through for a second. Let’s say you as a founder own 100 shares and offer 20 non dilution shares to an investor. This means on the face of it, you own 83.3% of the business whilst the new investor owns 16.7%.

No problems so far.

But let’s say you then raise an additional round and issue a further 30 shares to the incoming investor. In a “normal” funding event, this would mean that you now own 66.7%, the original investor owns 13.3% and the new investor would own 20%. That feels ok right?

But because of the non-dilution provision, the new investor would essentially end up buying shares for the existing investor so that they can maintain their shareholding (i.e. they would invest the same amount but get less equity for that same investment).

So what the shareholding would end up looking like would be 100 shares owned by you, 25 shares to the original investor and a further 25 to the new investor meaning you own 66.7% but each investor now owns 16.7% but critically the new investor has invested the same amount as they would have to have achieved their 20% share under normal circumstances.

Now imagine you want to create an employee option pool… ???? 

This really has a couple of main effects:

You (and any other investor without non-dilution shares) take all the dilution.

Incoming investors are essentially paying for the existing shareholder’s shareholding which would be a huge red flag for most investors.

In effect, it penalises future investors making raising new capital harder for the startup.

If I were to be a little considerate to that initial investor, I would say that their request for non-dilution shares might be ‘fair’ compensation for the risk they are taking at the very early stages, but as it has the net effect of making subsequent fundraising much more difficult, it would be pretty shortsided for an investor to demand this type of share structure (unless they are going to commit to fund the business on an ongoing basis).

The other (arguably more common) form of protection that investors might ask for is anti-dilution.

This is much more common when taking on VC investment, and essentially structures shareholding such that in the event that a future round is at a lower valuation than the valuation at which they originally invested, their shareholding will be maintained.

This would seem like a more palatable situation as most businesses would anticipate an increase in valuation on each subsequent round, however, especially in the current market where many ventures raised capital at inflated valuations over the last several years, it’s much more likely that some will have to go through the pain of a down round as they seek out capital to keep the lights on.

The good news (for what it is worth), is that if the investment is substantial enough and critical for the survival of the business, investors can be negotiated with to waive their non-dilution / anti-dilution rights taking the view that a smaller percentage of something is better than a larger percentage of nothing.

What all of this means is that as founders in this environment, you are likely to come up against all kinds of unfriendly terms in term sheets as the balance of power shifts back towards investors (having been pretty founder friendly for the last several years) and you need to be prepared for it.

The same advice I gave the founder is what I’d give here:

Take the time to familiarise yourself with investment terms – obviously by reading this newsletter but also by reading books like Venture Deals by Brad Feld and Jason Mendelson (this book is the gold standard for understanding the various types of terms around economics and control in venture fundraising).

If you’re not sure, don’t bluff. Tell the investor you’ll come back to them once you have understood the implications more fully.

Talk to a CFO or a lawyer – do not fall into the trap of false economy. A bit of money (or none for that matter if you’ve got someone friendly like me in your network ????) today, may save you a huge amount of time, energy and money in the future ???? .

Generated with AI using DreamStudio

Off Balance

As we run (crawl?) into the back end of 2023, I’ve been thinking about the future format of this newsletter – I’m pretty sure of the direction I’m going to be taking it in (less dense, more personal and potentially less frequent ???? ) but for now, I thought it would be good to give you a bit of a guide to the CFO Tech stack as we move into a world where there is a ubiquity of tools out there and it can be quite confusing to know what to use – and when.

If you’ve got a tool in your CFO or finance tech stack that you couldn’t live without, I’d love to hear back from you and add it to my list to explore ????.

The CFO Tech Stack

I am frequently asked whether there’s a product out there for some part of the CFO tech stack but, whilst there often is, that doesn’t mean you should actually be using it.

I tend to see a lot of the tools out there that have ‘democratised’ access to operational (and to some extent strategic) finance as being quite useful for non financially minded founders or teams, but they often fall short when a finance pro gets their hands on them.

First of all, it’s worth understanding how finance moves from the transactional to the strategic layer. This is something I thought about quite deeply when I was building Projected and continue to think about at EmergeOne now that Projected is pretty much done and dusted, but drawing from one of the slides in our deck you can see what are the broad layers within finance:

Transacting – This is about ‘doing stuff’, making and receiving payments, issuing documents and pretty much BAU activities.

Record Keeping – This is everything from accounting records to purchase orders, recording and reconciling ledgers and more.

Reporting and Compliance – Getting management reports out, getting financial statements and tax returns out of the door, ensuring that you have adequate insurance and other compliance activities.

Financial Planning – Normally financial planning and analyis, this is about forecasting, scenario planning and using data to better understand the business.

Strategic Finance – This was the holy grail from my perspective and what is currently entirely done by CFOs like me. It’s taking all that information and tying it together to help the business make better long term decisions.

From my perspective, most of the bottom half of this stack has been productised in various ways, whilst the upper half is still being figured out.

From a market perspective, the bottom half is high volume and low value (from the perspective of decision makers inside the business, for investors in that transaction layer of the stack it’s valuable because there is such a large market!), the upper half is lower volume but, in theory is where the value lies.

Let’s put it this way, no business failed because someone didn’t automate how invoices are processed, they did fail because someone didn’t understand the impact not processing an (or several) invoices might have on cash flow and business sustainability.

With all of this said, I don’t think anyone could argue with how much ‘easier’ existing tools have made the lives of small finance teams in small and growing businesses so it is worth understanding the landscape.

Payment Processing Solutions

These were some of the first tools to have been developed (naturally given the volume of transactions processed on a daily basis) and have become for most of us an integral part of our experience either as consumers or customers and as finance teams building out payment infrastructure fit for the businesses we work with.

Examples: Stripe, PayPal, Square, GoCardless, neobanking.

Pros: These products facilitate seamless online transactions, support multiple currencies and offer robust security features. With the explosion of open banking, payment processing has become seamless in some jurisdictions and the ability to take payments via Stripe or GoCardless, for example, mean that business are no longer reliant on chasing customers for their payments, freeing up their time for other value add activities. (And let’s not forget in the US you still have companies ‘cutting checks’ – that’s writing cheques for us Brits – so there is a huge amount of opportunity yet to be disrupted in one of the biggest markets in the world). But it would be hard to argue against how much positive impact these products have had on streamlining revenue operations and opening up the opportunity for a cambrian explosion of online propositions all able to take payment over the internet.

Cons: But in order to take advantage of the payment infrastructure, companies are hit with transaction fees which can be substantial and, depending on how your product is placed, may eat into already thin margins. Coupled with this, you have the potential for chargebacks and the costs that those can imply along with compliance with varying international regulations as you operate across borders.

Advancement: We have seen various attempts at the integration of blockchain for enhanced security – though with limited breakthrough thusfar (and let’s not forget that one of the biggest use cases for Bitcoin is the creation of infrastructure that allows for the seamless transfer of funds cross border), AI for fraud detection (I still recall someone in the space telling me that in the past, one of the major credit card issuers used to use ‘charge attempted in Canada’ to flag fraudulent use of a UK credit card – we’ve come a long way), and expansion into banking services as we have seen with the (ongoing) explosion of neobanks in various jurisdictions.

Accounting and Bookkeeping Software

It would be hard to argue how impactful cloud based accounting and bookkeeping software products have been on early stage businesses. They have allowed non-financial founders to start taking control of their accounting in a way that simply wasn’t possible in the past. Whilst I would never recommend doing your own accounting (I’ve seen it go wrong too often), it remains possible, and even more importantly means that founders, CFOs and decision makers have instant access to their numbers.

Examples: QuickBooks, Xero, FreshBooks.

Pros: The biggest unlock brought by these tools is the automation of routine tasks such as invoice and expense processing, increased accuracy and, as mentioned above, cloud-based access. Previously, this all remained within the domain of ‘the accountant’ with your business’ numbers being gatekept by the people who booked them – often not the same people as those that need to make decisions about the future of the business. Let’s not also forget that these tools can be quite ‘cheap’ based on their SaaS pricing so don’t require a large upfront cost to implement.

Cons: Most CFOs who use Xero and similar tools will tell you that there is limited customisation available, you often have to build from within the constraints of the product – for example if you run a manufacturing or stock holding business Xero can be quite painful to use and you may find yourself having to use any number of plugins to solve for your specific needs. Scalability can become an issue quite soon though, I have seen tools like Xero stretched way past breaking point – mainly because the jump to a more sophisticated tool can be incredibly costly.

Advancement: As the space evolves, it is likely we will see greater AI and ML integration allowing for smarter categorisation and reconciliation which means there will less need for human input (and hence human error) in these essential processes. I don’t think we’re at the point where there will only be need for minimal intervention from a human, but I for one would be incredibly happy if there was a tool that raised invoices, recorded bills and reconciled itself in real time and flagged any inconsistencies or potential gaps in the data (ok, I appreciate that’s a sad thing for someone to be happy about!).

Expense Management Systems

Just as how Xero has opened up access to accounting to non finance types, so have tools in the expense management space to the wider employee base. Rather than having to seek approval on spend manually, these tools allow companies to set limits, issue virtual cards and submit expenses easily. My first job out of university was in a shared service centre running Accounts Payable and, more importantly here, Employee Expenses for a multinational company across the whole of EMEA. To put it bluntly, we would receive paper claims with paper receipts attached to them and have to run them manually through the system ???? 

Examples: Expensify, Concur, Zoho Expense, Spendesk.

Pros: These tools allow for streamlined expense reporting, policy compliance and mobile accessibility allowing for closer and better reporting and approval mechanisms.

Cons: Some of these tools can be a little complex which is a deterrent to user adoption challenges and, importantly, can lead to challenges when trying to integrate with existing systems.

Advancement: As OCR and AI improve, there is more opportunity for automated receipt scanning technology as well as real-time policy violation alerts allowing teams to flag and deal with issues as they arise rather than (often) well after the abuse has occurred.

Payroll and HR Management Solutions

As companies scale, ensuring that employees are paid accurately and on time can be quite challenging. Until recently, ensuring that tax codes were updated and that bank details were maintained accurately was often a highly manual process, but as automated payroll software solutions have come to market, they have greatly reduced this large pain point for growing organisations.

Examples: Gusto, ADP, Paychex, Pento.

Pros: The obvious benefits of these systems are simplified payroll processing, enhanced tax compliance and employee self-service portals. In theory, they also reduce the likelihood for error in payroll calculation (which, if you’ve ever been at the wrong end of an incorrect pay cheque can be quite upsetting).

Cons: These can be relatively easy to work in a smaller organisation, however they can quite quickly become costly and complex in larger scale multi-jurisdictional operations – even in the US, state tax laws can be quite different, but imagine you had staff in the US, Europe and the UK, it can be quite hard to find a one size fits all solution.

Advancement: Over time, we are likely to see further automation to assist with things like tax filing alonside more integrations with HR systems to give a seamless end to end experience for employees and HR teams alike.

Financial Planning and Analysis (FP&A) Tools

This is where we start getting into the more strategic part of the CFO Tech Stack, but also where the tools are less widely adopted and often harder to solve. Having tried to build in this space myself, there are numerous challenges, not least of which is the fact that every organisation is incredibly different, and the minute you try to productise something as complex as forecasting, you naturally constrain some of the nuance in any given operation. Think about it this way, how you record invoices, run payroll or make payments will largely remain quite consistent across most businesses, but how you forecast revenue or plan headcount will be vastly different even in two businesses that ostensibly do the same thing.

Examples: Anaplan, Adaptive Insights, Vena Solutions, Casual, Abacum,

Pros: When the tools manage to solve some of the obvious problems associated with FP&A, they can be incredibly powerful providing real-time data analysis vastly improving forecasting accuracy and can handle quite complex scenario planning. Given that most of these tools are collaborative, it means that you can bring different team members into the forecasting process on platform meaning you can update and challenge changes in real time from key budget holders from within the company.

Cons: There are several issues with these tools, however, that can mean adoption is limited. Firstly, it’s whether or not they are able to integrate with existing systems – ensuring that data is clean and consistent all the time. As finance pros are wont to say: ‘garbage in = garbage out’. There is also, often a high level of complexity in setup making onboarding a challenge for finance teams as well as wider users and, finally, these tools can be quite expensive making them cost prohibitive for most startups meaning they are only valuable for mid cap businesses and beyond.

Advancement: The obvious opportunity here is for further integration of these tools with AI to provide predictive analytics. Essentially this means that the tools will learn from the real time data being fed in and update the model in real time in turn. This will give businesses a huge opportunity to course correct as new data surfaces on the go rather than waiting to see results after the fact before changing tack.

Business Intelligence (BI) Tools

Business Intelligence tools are essential for CFOs, especially when navigating scale. These tools help leaders make data-driven decisions by transforming raw data into actionable insights. These tools are used in conjunction with FP&A tools to give decision makers an ability to look deeper into the data, spot trends and inform business strategy on an ongoing basis. Tools like Tableau and Power BI offer powerful data visualization capabilities, allowing CFOs to create interactive dashboards and reports. And because BI tools can integrate data from various sources, including accounting software, CRM systems, and market data, they can provide a comprehensive view of the business.

Examples: Tableau, Microsoft Power BI, Looker.

Pros: By providing real-time data insights, BI tools help CFOs make more informed decisions about financial strategies integrated with business growth. Automated reporting and analysis reduce manual workloads (ever spent hours trying to run analysis on an Excel workbook?!), allowing CFOs to focus on the strategic initiatives that are critical for growth.

Cons: Similar to FP&A software, some BI tools can be complex, requiring significant time to learn and implement effectively, though this gives an advantage for those that can get their heads around them. I’ve seen businesses hire in data scientists and analysts to try and ensure they are able to really get to the bottom of the data and what’s happening in the business. Advanced features and scalability can come at a high cost, which is (as always) a huge consideration for startups.

Advancement: Modern BI tools are increasingly incorporating AI and ML for predictive analytics, offering forecasts and trend analysis meaning that they will become further integrated into other FP&A tools over time.

Treasury and Cash Management Tools

It is interesting that many startups did not even think about how they needed to manage where their cash sat until earlier this year when SVB went under. Most founders had their cash sat in one or two bank accounts and hadn’t thought about the risk that this could entail (and also the opportunity to take advantage of higher interest rates). But as people were once again reminded of the fragility of some of the financial system and the fact that there was now an opportunity to earn yield on their cash, we see increased interest in and adoption of treasury and cash management tools.

Examples: Kyriba, TreasuryXpress, CashAnalytics, TreasurySpring.

Pros: These tools allow for enhanced liquidity management, risk assessment and management as well as real-time cash visibility. Some of these products allow you to spread cash across a variety of products yielding different returns over different periods rather than having to settle on one fixed term deposit as would have been the case in the past.

Cons: Again, for smaller companies, there is a challenge that arises due to complexity of integration and there can be a high learning curve as teams have to reorient themselves in a world where cash not only comes at a cost, but can earn a return. Some of these products also require you to have a minimum amount of cash on the balance sheet (or raised) and a minimum amount of cash deployed into the products.

Advancement: At the risk of repeating myself, the main opportunity here is to integrate AI into the products to provide predictive cash flow forecasting so that CFOs and others can manage runway much more closely.

For me, the pinnacle will come when we see the next generation of CFO Co-Pilots driven by generative learning with fine tuned LLMs.

I’ve been playing around with some things in this vein and I’ll be sure to share my findings as I continue to dive into what is possible.

This landscape is going to keep evolving as more pain points are identified and solved and, critically, as we see machine learning and AI continue to add opportunity and differentiation in the way we think about and handle finance within organisations.

One thing is for sure, many finance pros who have lived in a world of ‘just’ excel are finding themselves having to understand the value that technology can bring to their business and allow them to increase their efficiency and value to the organisation.

I hope you found Off Balance #21 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

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