startup cfo basics

Montreal StartupWorkshop DayDec. 6, 2008

Startup CFO Basics

www.startupcfo.ca

AGENDAWho the heck is this guy?The role of finance in a startupRaising moneySpending moneyGetting money without giving up equityMeasuring your business – financial & non-financialFinancial planning – the budgetLinks & resources

Copyright © 2008 - Mark MacLeod

Who the heck is this guy???

Copyright © 2008 - Mark MacLeod

A history (in progress)…1990 – 96: Audit & Corporate finance96 -98: Snowboarding‘99 Startup land: 2002: Downturn 2004: Another startup:2006: Terrascale: A nice exit…2007: Mobivox Today: TUNGLE!

Copyright © 2008 - Mark MacLeod

The role of finance…

Copyright © 2008 - Mark MacLeod

Why do companies fail?MANY reasons, but ultimately…

BECAUSE THEY RUN OUT OF CASH!

My job? Make sure this does not happen!Copyright © 2008 - Mark MacLeod

Finance – Command & Control

Image courtesy of Valhalla PartnersCopyright © 2008 - Mark MacLeod

The role of a Startup CFO…

THIS… NOT THIS…

Copyright © 2008 - Mark MacLeod

The role of a Startup CFO…Financier: Keep the bank flushTechnician: Controls, reportingCloser: Help bring in the big dealsOperator: Process, metrics, disciplineLawyer: Check everything with words & a

signatureSys Admin: Systems, information, data dudeCheapskate: Say “NO” a lotConsigliere: Any Godfather fans out there

know what I’m talking about…

Copyright © 2008 - Mark MacLeod

When do you need a CFO?Advisor: From day 1 (opportunity

assessment)Part time: Early (help with 1st funding,

etc.)Full time: “B” round

Copyright © 2008 - Mark MacLeod

Raising Money

Copyright © 2008 - Mark MacLeod

The fundraising journey…Friends & Family / Seed: Small & easyA round: Local, relatively easyB round: The hardest..C & up: All about traction…

Image courtesy of Healy Jones @ www.startable.com /www.atlasventures.comCopyright © 2008 - Mark MacLeod

The ProcessKnow your

Business – what makes you unique? Industry – key factors, motivations for

buying your stuffNumbers – metrics, financials, cash burnComparables – competition, relevant exitsStrengths & weaknesses – Don’t hide themStrategy – how will you build a big, valuable

business quickly?Audience – why are you pitching me?Needs – how much money till exit?

Copyright © 2008 - Mark MacLeod

The Process (cont.)A sample timeline:Weeks -4,- 2: Prep your deck, exec summ, pro

formas. Assemble your hit listWeek -1: PracticeWeek 1: Launch your attack – parallel, not serial.

Send out your teaser. Book 1st meetings.Week 2, 3: 1st meetingsWeek 4, 5: 2nd meetings – in person. > 1 partner Weeks 6 – 8: Early diligenceWeek 9: ALL PARTNERS MEETINGWeek 10: Term sheetWeeks 11 – 15: Docs & closingWeek 16: Sleep!

Copyright © 2008 - Mark MacLeod

Fundraising tips & truismsLove at 1st sightGo for the “no”Local firstBe prepared!Time is not on your side - Create urgencyTime around something that generates

momentum / buzzGet good advisorsYou will be rejected – a lot!6 months – maybe more these daysNo agents!Copyright © 2008 - Mark MacLeod

Fundraising in a downturn…Will take longerFlat is the new up. Down is the new flatVC alphabet: B level traction to raise an A

roundSmaller amountsAngels are your friendGet to revenue faster

Copyright © 2008 - Mark MacLeod

Spending Money…

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Where to spend…Team! Engineers, Product ManagementProduct & usabilityGood lawyers

Copyright © 2008 - Mark MacLeod

Where NOT to spend…Big management teamsMarketing & advertisingBig outsourcing projectsBonuses (with some exceptions…)Travel (again, with some exceptions…)Outside sales forces

Copyright © 2008 - Mark MacLeod

Common spending pitfallsHiring too many peopleHiring the wrong peopleDoing too many thingsGoldplatingNot getting short-term, hard returnsGiving a % of your R & D refund to a

consultant

Copyright © 2008 - Mark MacLeod

Getting money for free (sort of…)

Copyright © 2008 - Mark MacLeod

Non-dilutive financing sources

R & D tax credit loans: See your bankInvestissement Quebec guarantee ***Not cheap - Private sources may be better

IRAP: http://irap-pari.nrc-cnrc.gc.ca/Grants for researchCurrently out of cash till next year

Investissement Quebec *** or Canada Economic Development:Commercialization loans

Note: *** This is for Quebec-based companies onlyCopyright © 2008 - Mark MacLeod

Measuring your business

Copyright © 2008 - Mark MacLeod

Financial measurementThe basic financial reporting packageBalance Sheet: Assets, liabilities, equityOperating Statement: Revenues,

expensesCashflow: Sources and uses of cashDashboard: Key financial and non-

financial metrics

Copyright © 2008 - Mark MacLeod

My tips for good reportingSummary format: Don’t send your whole GLRound up: $000s of $Narrative: Tell your stakeholders what’s

going onDashboard: Give people a quick pulse of your

Operating metricsUser and revenue trendsHiringCash burn & runway

Don’t spend a lot of time on this early on

Copyright © 2008 - Mark MacLeod

Sample Balance Sheet

ASSETS

Current

Cash & equivalents

Accounts receivable

Other receivables

Prepaid expenses

Long-Term

Capital assets, net

Intellectual property

TOTAL ASSETS

LIABILITIES & DEFICIT

Current

Accounts payable & accrued liabilities

Bank loan

Deferred revenue

TOTAL LIABILITIES

SHAREHOLDERS' EQUITY

Common Shares

Preferred 'A' Shares

Preferred 'B' Shares

Accumulated deficit

Share issuance costs

Contributed surplus

ACME STARTUP

BALANCE SHEET

January 31, 2000

(All amounts in 000s CAD$)

Copyright © 2008 - Mark MacLeod

Sample Operating StatementACME STARTUPSTATEMENT OF OPERATIONSFor the year ended Jan. 31, 2009

(All amounts in 000s CAD$)

REVENUES

COST OF DELIVERYHostingCustomer Acquisition (partners)

GROSS MARGIN

OPERATING EXPENSES

Sales & Marketing Personnel Customer Acquisition Marketing programs Travel & other

Research & Development + QA Personnel Equipment, Licensing & Other

Operations Personnel Equipment, Licensing & Other

Corporate Personnel Recruiting Facilities, Insurance & Office Travel & other Communications & IT Professional fees

Total Expenses

EBITDA

AmortizationSRED, GrantsForeign exchangeFinancial

NET LOSS

Copyright © 2008 - Mark MacLeod

Sample Cashflow StatementACME STARTUP

STATEMENT OF CASHFLOW

For the year ended Jan. 31, 2009

(All amounts in $ 000s CAD)

CASHFLOWS FROM OPERATING ACTIVITIES

Income (Loss) for the period

Other non-cash items

Change in non-cash operating working capital items

CASHFLOWS FROM FINANCING ACTIVITIES

Issuance of Shares (net of issuance costs)

Loans

CASHFLOWS FROM INVESTING ACTIVITIES

Additions to property, plant and equipment

Increase in intangible assets

DECREASE IN CASH AND EQUIVALENTS

CASH AND EQUIVALENTS - BEGINNING OF PERIOD

CASH AND EQUIVALENTS - END OF PERIOD

Copyright © 2008 - Mark MacLeod

Sample DashboardWATERFALL

Acquisition

For every 100 visitors (not including usage)

Registration

Activation

Retention

USERS

New

Total

USAGE

Stat 1

Stat 2

Stat 3

EMPLOYEES

Net change

S & M

R & D

Ops

G & A

Budgeted hires

Actual hires

LIQUIDITY

Cash & Equivalents

Working Capital

Number of months' pure burn on hand

Show at least 3 monthsKey metricsUsage trends

Copyright © 2008 - Mark MacLeod

Non-Financial measurementAll web businesses should be data-driven!Know your

Waterfall & conversion rates – visitors to register to active to paid

Sources of best usersUsage patternsVirality driversCustomer acquisition cost by sourceChurnAdvance screening for low usage users who

may churn and high usage folks who might pay

Copyright © 2008 - Mark MacLeod

Financial Planning

The Budget or Pro Formas…

Copyright © 2008 - Mark MacLeod

Pro FormasTypical ContentsAssumptions – document ALL key

assumptionsCore financials – Balance, Ops, CashflowHiring planDepartment plansCapex plan

Copyright © 2008 - Mark MacLeod

Pro FormasBonus ContentsPer user economics + when do they

become positive?Break-even point for your businessKey metrics

Copyright © 2008 - Mark MacLeod

Pro FormasTips for great budgetsEnable the reader to test different

scenarios just by changing assumptionsInclude sensitivity on revenueInvolve all key people in the processMake people accountable

Copyright © 2008 - Mark MacLeod

Pro FormasGetting budgets approvedDon’t surprise investors – give them time to

understandRemember – once they have invested, budget

approval is the biggest control your investors have. They will use it

Get 1 on 1 buy-off, then ask for official approval

Final thoughts…Not a big fan of multiple versions…(1 for VCs, 1

for running the business)

Copyright © 2008 - Mark MacLeod

Links and resources

Copyright © 2008 - Mark MacLeod

Smart people (oh and me too…)http://cracking-the-code.blogspot.com/ (SaaS

thoughts)http://onstartups.com/http://bostonvcblog.typepad.com/vc/ (great

VC blog)http://www.startable.com/ (ditto)http://startups.alltop.com/Http://www.startupcfo.ca

Copyright © 2008 - Mark MacLeod

THANK YOU!

Copyright © 2008 - Mark MacLeod