The Startup Ideas Podcast - Screensharing $90M of Startup Finance Lessons in 32 Minutes

Starting point is 00:00:00 This whiteboard right here has saved me from shutting down not one, but two companies. It's my founder money rules and it's something I've never shared nine simple rules that keep your startup alive. And I'm dead serious when I say this. Most founders don't fail because they run out of money. They fail because they don't know they're running out until it's too late. I learned this the very hard way. I sold my last company Islands to Wework. When they were flying high, $20 billion raise, offices in every city, expanding like crazy. I became head of product strategy and watched from the inside as one of the most hype startups in history collapsed in like six months. They raised more money than some nations and still went bankrupt.

Starting point is 00:00:50 The product was great. The vision was ambitious. The team was world class. But the financial discipline, non-existent. That experience taught me something crucial. Being strong financially is just as important as having a great product, a talented team or a massive market. You can have all three and still die if you don't master the money rules. Shout out to my friends at Brex.

Starting point is 00:01:18 I hit up a few of my friends who work at Brex to get input on today's episode because they manage the finances of thousands of startups. They're also proud sponsors of today's episode, so thank you for that. In the next hour, I'm going to walk you through the exact operating system I use across my holding company, late checkouts portfolio. Nine rules, the weekly rhythm, the one pageer that keeps you ready in case an acquisition comes. Copy this whiteboard, please. It might be the difference between making it and becoming another we ran out of runway story. We don't want that. Before we get into the nine rules like cash versus accrual and how do you extend runway and how do you master cash flow, you need to understand what I call the rhythm.

Starting point is 00:02:17 Most founders think about money monthly. You know, monthly clothes, a monthly board deck, monthly panic attack sometimes. I was that way, but I think that's the wrong cadence. I'll give you another way to think about it. Daily. Glance at cash daily. and then approve spends above your limit. So maybe your limit is $1,000, $2,000, $3,000.

Starting point is 00:02:40 But do it daily. Make it a part of your routine. Weekly, a 15-minute money stand-up, and that's a non-negotiable. I know we're all busy. We don't want to, you know, have more meetings, but even just put in your calendar 15 minutes non-negotiable. Monthly, that's when you're going to close the books,

Starting point is 00:03:01 run variants, update your one-page, and we're going to talk about what is the financial one pager towards the end. And the way I started thinking about it is kind of like your body. Daily is your pulse, weekly's your vitals, and monthly is your full physical. You need all three to stay alive. Let's get into the rules. Rule number one is the 13-week cash flow system. It's basically about how do you master cash flow?

Starting point is 00:03:29 The truth is your P&L is a liar. It's not really trying to do. deceive you, but it's written in a language that doesn't really care about your survival. Let me explain what I mean by that. Let's say you close a $500,000 annual contract. Your accountant books it as revenue. Woo-hoo. You feel rich. But the customer pays maybe $125,000 quarterly. So your burn is $80,000 a month, and the payroll hits on Friday. You're profitable on paper. It's just on paper. and one pay cycle away from death. So the first rule is build a 13-week cash flow view.

Starting point is 00:04:10 It's not really a forecast. It's not a vanity spreadsheet, so it might not make you feel super good. But it's a living document that you update every single week, and it has three columns. At least, mind us. Starting cash, so what's actually in the bank? Cash in, what are the real payments that have cleared?

Starting point is 00:04:31 I'm not talking about just invoices, not invoices. like actual payments, and then cash out. So where, you know, which dollar, you know, all the dollars that are leaving, you know, your payroll, your vendors, your rent, AWS, OpenAI tokens. You look at this every single Monday and you share it with your team. That's something that I learned is like, you know, we have an LC finance chat on Slack. And there's a few people I trust in there and I share it in that Slack channel. Do you have a Slack channel that's for finance?

Starting point is 00:05:03 And by the way, you don't need to be a huge team or as long as your team more than three, four, five people. Concentrate your cash in one account so you can't lie to yourself. Some people have multiple accounts. Do it in one account. And don't park the money in like very high risk stuff. You know, some people take their cash in their accounts and they're putting it and buying like crypto tokens and stuff like that. You've heard stories like that where it works out and somewhere it doesn't work out. I just use just safe yield, high interest bearing accounts. I do use Brex and I get like 3.8% or something like that.

Starting point is 00:05:43 Yes, I'm not like doubling my money every year, but for me it helps me sleep at night. Know your number every Monday morning. One of my portfolio companies thought they had eight months of runway. In the investor update, it said eight months of runway. When we built the 13-week view, they had 11 weeks. So we had to cut $40,000 a month in 48 hours. The company is still alive today, but that P&L would have killed them. Rule number two, cash versus accrual, speak both languages.

Starting point is 00:06:15 I've never taken a finance class. So rule two, to me, is something I learned, but maybe this is something you know. So there's two languages in business. There's cash, what's real, and there's accrual, what looks good. And you need to be able to speak both. let me explain why. Cash basis tells you whether you're going to make payroll. Accrual basis tells investors or potential people are going to buy your company what your growth curve looks like. Most founders choose one and they ignore the other. But that's actually a mistake. So let's break it

Starting point is 00:06:51 down a little bit. So prepaid expenses. You paid $120,000 for an annual tool. That accrual spreads to, let's say, $10,000 a month. Cash says you're $100,000. $120,000 poorer today, right? So with deferred revenue, a customer could pay $500,000 up front, and the accrual releases over 12 months. Cash says you're flush, but that money is already owed. Bear with me here. I'm going to continue explaining these terms, and by the end, I think you'll understand.

Starting point is 00:07:24 Accounts receivable. Accrual says you've made the sale. Cash says you're broke until they pay. every month reconcile the two build a one-page bridge that explains the gap if cash and accrual diverge by more than say 20% there's probably something that's broken maybe it's collections timing or discipline oftentimes if you're in service-based business it's actually collections invoicing following up with people that sort of thing investors and people who are going to buy your business care about accrual But you care about survival. I know a lot of people who listen to the show, you're building bootstrap businesses. So survival is key. Both are real.

Starting point is 00:08:10 Both matter. But they matter to different people. Now you understand. Rule number three, extend runway without killing growth. In business, you have to understand where to take bets. And it is like bets. Like you are betting on should I invest $100,000 here on marketing? should I invest $150,000 to hire this engineer who comes from meta?

Starting point is 00:08:34 What are the odds that it's going to work out? And you're placing chips. It's like a casino. But, you know, you're the house in a lot of ways because you have more information. Rule number three is the three decision framework for understanding how to extend your runway without killing growth. Let me explain. You have to spend money to grow your business, but spending shortens your life. It's kind of a paradox in that way.

Starting point is 00:09:06 Every founder faces this. The trick is, how do you manage both? So for every major decision, run three scenarios. Maybe the bare case is that revenue drops 10%. Does this decision kill you? If yes, stop. The base case will plan hold steady. Is this the best use of the next 150,000?

Starting point is 00:09:29 compared to the other options, and the bulk case say maybe revenue grows 10%. The question is, will we regret not doing this if growth accelerates? Use these to set budget caps. Tie big hires to milestones. And then rerun the plus 10% minus 10% scenarios quarterly. I'll give you an example. One of our companies wanted to spend $150,000 to hire an engineer. And they asked me, what do I think?

Starting point is 00:10:01 So I looked at the bear case. How does this affect runway? Runway goes from 14 to 19 months. I saw the base case. Okay, runway goes to 14 to 11 months. And then we compared the three alternatives. So like maybe we should do it. And the bulk case is that, well, if you give me $150,000,

Starting point is 00:10:22 I can take that runway to 14 to 16 months that unlocks $500,000 of revenue. would we were getting a hiring that that person. And then I brought it, you know, we kind of just all talked about it and we said, okay, if it's two plus scenarios, say yes, we'll hire. And if two plus scenarios say no, maybe we'll wait. This is the type of framework that you should be coming up with when you're thinking about big financial decisions. So you might meet someone and it's an incredible meta engineer and you're building a social

Starting point is 00:10:58 networking company. You're like, I need to hire someone who worked on Instagram sharing because they're going to really unlock so much. And if you're anything like me, you're emotional about the decision. You go and you actually just do it without thinking too much about it. Oh, it's just going to affect runway two or three months. But you should really, you know, basically be sober. This is like a sobering decision framework. It forces you to figure out what is the bare case, what is the base case, what is the bull case? You know, you can think of it as a spectrum. Like, Are you more bullish? Like, what do you know, are you more bearish?

Starting point is 00:11:31 How do you really feel? And then based on that, you can make your decision. Another example was one of our companies wanted to spend $60,000 on a conference, like a booth and everything. It looked really fun and it looked really smart. All the right people were going. But when we looked at the bear case, the runaway dropped from like 13 months to 10 months below our 12 month red line.

Starting point is 00:11:53 So we passed. Two months later, they closed a major client. And that extended the runway to 16 months. So then there was another sponsorship that came up, came up, and they did a 60K sponsorship there. Basically, it was like the same decision, a little bit different timing, and it's sort of the realization that timing is everything. I've started and sold three companies. So this rule means a lot to me.

Starting point is 00:12:18 Rule number four, be exit ready. You'd be surprised, but acquisitions happen on a dime. They'll email you on a Tuesday. One time someone actually emailed me on like a support email, which is crazy, like a CEO of a large company, just like hit me up on a support email. It just happened to have seen it. The next day, I'm meeting with him in Los Angeles on a Wednesday and they want to buy the business. If you need three weeks to pull it together, you've probably already lost momentum. So it's actually really important that all of us founders keep lightweight data rooms.

Starting point is 00:12:55 ready. So it's usually 10 or so files or less, and let's talk about it. What are those files? You're going to need a deck, and a deck, you know, is like a fundraising deck, basically, but even if you're not fundraising, you're going to want to have that in there. That's going to have things like, what is the product, what is your revenue, user acquisition strategy, the why now. You're going to want a financial model in the data room with probably a three-year projection. You're going to need the historical financials. You'll probably want a fully diluted cap table. Who are your top 20 customers? Why are they buying from you? Who's on the team? Like, what is their bios? Product roadmap. Where are you going from here? And making sure that that's very clean and easy to understand. Who are the key contracts,

Starting point is 00:13:47 the vendors, the customers, putting that in there, the big ones, the legal docs, your certificate of incorporation, what IP do you have, the last three monthly one-pagers that you've created. So, you know, we'll talk about that towards the end, but the financial one-pagers, just putting that in there. The point is you're going to want to update these things quarterly. And even if you're not trying to sell the biz, it's a very important. it's a good thing to have.

Starting point is 00:14:20 You know, a lot of people ask me why. Well, because opportunities don't announce themselves. You'll basically get some inbound interest from an acquire, and you need to act quickly. That is the difference between getting a decent acquisition offer and a really good one. Also, even if you don't sell your company, you'll realize how messy your house actually is.

Starting point is 00:14:44 This basically just forces you to keep a clean house. So it's worth it just for that. When an investor or an acquireer is going to ask you, how much are you spending on AWS? You should be able to answer that in 30 seconds if you're the founder, not in three days. That speed is the difference between we'll think about it and we're going to wire that money tomorrow.

Starting point is 00:15:07 Rule number five, cards and credit, policy over convenience. There are tons of startups that die of 1,000 small cuts, And corporate cards are actually low-key one of the knives. Because founders hand out cards like crazy. No limits. We trust our team. Just give out cards. And then you have a bunch of subscriptions for things that you don't need.

Starting point is 00:15:33 A bunch of just random tools. And then you're wondering why you're burned spiked 10% in the last quarter. And you're like, what are these charges? Trust doesn't scale. Policy does. And I wish it did, though. I honestly wish it did, but it took, I mean, honestly, you know, it's, it, it, I was doing, I was just handing a card for six months, trusted people, but I've got this new system and we've really been able to help with with burn. Like the old way was everyone gets cards, high limits, trust base, monthly expense reports. And then there's like some 10K mistake found 30 days too late. Or, you know, card gets stolen or. You know, card gets stolen. Or, yeah, you know, so the number gets stolen.

Starting point is 00:16:19 So let's talk about the system. You know, you can use a new age fintech company like Brex where you set the spends per limit. You block merchant categories. It automatically captures receipts data. So you don't actually need people to like take photos of things. And then you have to do weekly reviews to see like, what are people spending money on? And also, if you're using Brex, they also have AI flag

Starting point is 00:16:49 review. So it'll literally use their AI to be like this. Oh, you should look at this. One of the things like we do is like we, we block certain websites from for people to use our cards. We do spending limits by role. Maybe it's $500 for most people, $5K for department heads or 10 gay for department heads. So you can actually do that within a product like Brex is just set. set those cards. And you can issue a ton of cards, but there's just limits. And you can lock cards super, super easily. A lot of people do these monthly reviews for cards. We do it weekly and we found a lot of things that we wouldn't otherwise. Because mistakes compound and if you catch it in seven days, you can fix it on a Monday. But if you're catching in 30, you're fighting a fire. One of our

Starting point is 00:17:40 portfolio companies' marketing lead accidentally ran an $8,000 of personal Google ads on the company card. It happens. We caught it on a Friday, but it was fixed on a Monday. If we had waited for a month of your review, it would have become an HR issue. It was actually the AI feature on the Brexit helped us. Friction isn't bad, but friction keeps you aware. Rule number six, track three to five weekly metrics, not 30. Most founders drown in dashboards or fly blind. Both are fatal. You need five numbers. Every Monday, same. Same format. Same Slack message. Runway in weeks, not months. Most people do it in months. Weekly burn, do like a four-week average that's worked for us. Collections or DSO. DSO just stands for days sales outstanding.

Starting point is 00:18:34 Some growth metric. It could be MRR, GMV, whatever makes the most amount of sense for whatever it is your building. For us, mostly it's MRR. Unit economics proxy. So something like a KAC payback, an LTV to KAC ratio is another popular one. Gross margin, net margin. So what does that actually look like? So you'll have a money stand up. So it's like the week of December 1st. The runway is going to say 47 weeks minus 2. The burn is going to say 74,000, but our budget was 70,000. So what I like to do is I put like a red emoji. That's something, it's not a good thing, right?

Starting point is 00:19:22 The DSO is 35 days, down from 40. Oh, that's green, right? MRR is 284K plus 9K week every week. That's green. CAC payback is 5.2 months and the target was four. Maybe that's a yellow. What is the top action? Oh, we need to chase three invoices worth $45,000. Literally takes five minutes. And everyone sees the same truth. Red, yellow, green, creates the accountability. It's super simple. Anyone could do it.

Starting point is 00:19:52 The numbers don't lie. Sometimes people do. Keeps everyone on the same page and it just creates these way more efficient companies. Rule number seven, and this month. might be one of my favorites. It's the monthly one-pager. If you've got a board of directors, maybe you've raised some venture capital, your board doesn't need 40 slides. They need clarity on one page, and you do too. Here's how I think about it. The top third cash and runway, so current balance, burn, trend, the middle third budget variance. So what have you missed and why? and be honest. Be honest with yourself.

Starting point is 00:20:33 So the side boxes, AR slash AP, aging and top vendors. The bottom third is like exceptions, risk, any decisions that you need to make. And you update it on the same day every month. So, for example, I do it on the fifth. And you send it whether anyone ask or not. The one-pager forces focus. If you do like a bunch of slides, like a 40-page slide deck that you'd give to a board deck, I find that you can hide more there.

Starting point is 00:21:04 But the one page just demands the truth. It's just all there. And it's very clear and it's really easy to share with the rest of your team. Rule number eight, tools and automations. Finances is something you should do manually every month. If your bookkeeper is getting sick, it means you can't close your book. your system is broken. If Sarah in accounting is the only person who knows where the vendor contracts are stored, you don't really have a system, you have a single point of failure. And that's one of the reasons why founders can't fall asleep at night. Deep down, you know that there's a bunch of stuff that you're reliant on people. You don't want to have that. So this rule is simple. Build a machine that runs without heroes. That means automating the recurring stuff. and documenting the exceptions.

Starting point is 00:21:57 I want to walk you through what this actually looks like. First, approvals and requests. You need a dead simple system where everyone knows the rules. So here's what we use across lay checkout companies. If it's under $1,000, your manager approves it via Slack. It takes 30 seconds. Between $1,000 and $10,000, finance teams approves it, and you need to show which budget line it's coming from.

Starting point is 00:22:26 If it's over $10,000, the CEO of that company has to approve it. If there's a board of directors, they might get notified. That's it. Three tiers. No confusion. You can build this with Brex's built-in approval workflows or use a Google form that feeds into Slack. Second, purchase orders for the big stuff. You don't need POs for everything.

Starting point is 00:22:49 I'm not saying that. That's corporate overkill. But any contract over $25,000 a year, like, come on, that, that deserves a P.O. Why? Because it prevents the nightmare scenario where a $50,000 annual software renewal auto-charges your card and nobody remembers signing up for it. The P.O. creates a paper trail. It forces someone to review it before renews. And maybe it's not $50,000 software renewal.

Starting point is 00:23:17 Maybe it's $2,000. The point is the same. This is boring. Doing POs are boring, but it saves you from surprise four or five, sometimes six figure charges. Third, receipt capture that actually works. We already talked about Brex auto generating receipts and locking cards if you don't submit it within 24 hours. But here's the discipline part. Every month, someone on your team needs to review uncategorized expenses. If you got more than $500 sitting in miscellaneous, something is broken. broken. Miscellaneous is where money goes to hide. Clean it up. Fourth, the monthly closed checklist. This is the most underrated tool. First five business days of every month, the same 12 things happen in the

Starting point is 00:24:03 same order. Bankrupts reconciliation. Accounts receivable aging report. Accounts payable aging report. Payroll reconciliation. Vendor payment run. Review uncategorized expenses. Update the 13-week cash flow, create the one pager, send it to the board if you have one. You do this every single month, same order, same owner for each task. And you track completion like a Google Doc, shared Google Doc, or a project manager tool if you use one. When it becomes routine, it takes four hours instead of four days. And then fifth, keep your chart of account simple because a lot of founders screw this up. They let their accountant create 150 expense categories because we might need them later. It's at least happened to me. Wrong. You actually want to create 15 to 20

Starting point is 00:24:56 categories max. Maybe it's payroll, contractors, cloud and software, marketing, office and rent, travel, just like the big stuff. And that's it. If you can't figure out what category and expense belongs in within five seconds, your chart of accounts is probably too complicated. simplicity is speed in my opinion. The meta rule is basically that you want to tag everything. Every expense gets tagged by a team, by a project, by an initiative, engineering expense gets tagged by marketing, that product launch you're running, tag it, tag everything until, you know, maybe it's Q1 product launch.

Starting point is 00:25:39 And then, you know, three months from now when someone asks, how much did that product launch actually cost us, you can answer it in 30 seconds, which is obviously the goal. The bottom line is you just want to automate the recurring, document the exceptions. You build a system once and it runs itself. It's 15 minutes on a Monday, 30 minutes on a Friday, four hours a month end. It's not crazy. That's the rhythm. And if you build it right, you'll never be the founder scrambling to pull financials

Starting point is 00:26:05 together the night before board meeting or when you really want to sell that company. Rule number nine, dilution mindset. Equity is the most expensive currency. This is the lesson almost every founder learns too late, especially first-time founders. Every dollar you raise costs you ownership forever. I'll give you a couple of scenarios. Scenario A, you raise $500,000 at a $5 million post,

Starting point is 00:26:35 so you give up 10%. Let's say you exit that business at $20 million. That 10% cost you $2 million. Scenario B, you cut $40,000 a month in burn and you extend runway by 12 months. Same effect, but 0% dilution. Before every raise, ask how many months of runway does this buy me? Because you can actually extend runway by three ways. Revenue growth, one, two expense cuts, and three, obviously fundraising.

Starting point is 00:27:05 Pick the one that saves the most ownership. Sometimes raising is right. I know I talk a lot about boot trap startups here. but sometimes for whatever it is you're building you might need to raise and if you hit PMF product market fit sometimes yeah speed speed does win but sometimes bootstrapping longer is the move it the more you know especially in the early stage pre-seed seed series A you're giving out the most amount in those early stages so the more leverage you have the more bootstrapped you are you know, would you rather own 30% of a $20 million company or 80% of a $10 million company?

Starting point is 00:27:46 It's obviously the same outcome, but a very, very different life. And I think a lot of founders don't really think about it this way. So this is my system. And I'll tell you how I actually use the nine money rules and this whole system across my holding company late checkout. Every Monday morning takes about 15 minutes. I update the 13-week cash flow. I post five metrics in Slack. I flag anything that's red or yellow.

Starting point is 00:28:23 I sign one action item. Then every Friday takes about 30 minutes. I approve expenses. I chase invoices over 30 days. Or I tag people to do that for me. I update next week's forecast. And then the first week of the month, this takes about four hours. I close the books.

Starting point is 00:28:44 I run the budget variance report. I create the one pager. I send it to any stakeholders if I have them. And I review what got better, what got worse, what changes. A new thing I want to implement is a quarterly half-day offsite. So this is when I would bring my partners together. We'd update the data room. we could run bare and base bowl case scenarios.

Starting point is 00:29:10 We live in all different locations, so I think having us in one place would be awesome. We adjust the budgets, we adjust the milestone gates, we revisit dilution strategies, should we raise money, should we bootstrap, should we get some debt? And that's basically the rhythm. Once it built, you know, this whole financial OS runs itself.

Starting point is 00:29:31 So to summarize, take actions that make it unreasonable to fail. The truth is finance isn't sexy. It's not a growth hack. It's not going to help you get followers, but it will keep you alive and it gets you closer to product market fit in the sense that it will extend your runway. I've seen founders with better products, better teams, and better markets lose to average founders who simply knew their numbers. So why be a brilliant one who dies? I wanted to give you an action plan. Today, calculate your real runway.

Starting point is 00:30:04 cash divided by monthly burn. If it's under 12 months, you're in the red zone. This week, build your 13-week cash flow sheet. I'll include the link in the show notes so you have access to all these notes and all this great stuff. This month, please make your one-pager. Send it to your board if you have one or send it to people on your team. Hey, you can even send it to me. I'll review a few of them.

Starting point is 00:30:32 Once you install this system, it's almost impossible to fail by accident, which is obviously the goal. 15 minutes on a Monday, 30 on a Friday, four hours a month, and I think that's about it. And if you're thinking, I'll do this later when we're bigger, chances are you won't. By then it'll be too late. So build it now, copy this whiteboard, survive long enough to win. I was one of those people in my first few companies that just always push finances to the end. I kind of knew what was going on. I knew I had some vague idea of how much cash was coming in, how much runway we had.

Starting point is 00:31:13 But it really wasn't surgical. I was at 40,000 feet when I should have been ground level. These nine rules help you get to ground level. And I hope this is getting your creative juices flowing at least in at least a little bit. I haven't been able to find any videos or episodes that actually walk you through this for free. So hope it's helpful. If this video help you at all or at least got you thinking, just drop a comment and tell me, you know, what about it? Which rule hit the hardest?

Starting point is 00:31:46 What was interesting to you? Maybe I'll do a follow up. Maybe it's a deep dive on a data room setup I can show you. Maybe it's unit economics for SaaS or agencies or AI startups. Just let me know in the comment section. And if you want to help thinking through your money rules, also comment that below too. I see every single YouTube comment. I respond to a lot of them.

Starting point is 00:32:10 So go build your system. Your future self will thank you. And again, thanks to Brex for making this episode possible. Hope you enjoy this. Happy building. And yeah, go build some financial models.

The Startup Ideas Podcast - Screensharing $90M of Startup Finance Lessons in 32 Minutes

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