This Week in Startups - How to send effective investor updates | Startup Finance Basics w/ Kruze's Scott Orn | E1632

Episode Date: December 9, 2022

Kruze COO Scott Orn is back with Jason to explain how founders can nail their investor updates! (0:00) Kruze's Scott Orn joins Jason to discuss the MOST important metrics and information that founders should include in their investor updates to make them concise and effective (11:49) Other non-financial items to include (14:50) How to break bad news to investors Check out Kruze: https://www.kruzeconsulting.com FOLLOW Scott: https://twitter.com/scottorn FOLLOW Jason: https://linktr.ee/calacanis FOLLOW Molly: https://twitter.com/mollywood Subscribe to our YouTube to watch all full episodes: https://www.youtube.com/channel/UCkkhmBWfS7pILYIk0izkc3A?sub_confirmation=1

All right, everybody, welcome back to startup basics. This week in startups.com slash basics, if you want to see the complete collection of legal, financial and customer-based basics we do with our top partners. We're an investment firm. We invest in 100 companies a year. We rely on service providers to help our startups. Keep things tight because tight is right.

And one of the people who helps us do that is Scott Warren, who is the CEO of Cruise Consulting. They're an accounting firm that is special. specialized to work with startups. In other words, you like the pain and suffering in the exhilaration like I do, watching companies attempt to get product market fit and turn on revenue. You're addicted to it like me. I always tell people everyone at Cruise is like that. The people at Cruise could work at any accounting firm and they choose to work at Cruise or work with startups because they love founders. And yes, there are challenges, but we love it.

And we love the educational aspect. And there's nothing, I mean, you know this. There's nothing more rewarding than seeing a company just learn to fly and take off. And when they outgrow us, we call it going off the college. You know, it's a great feeling. Yeah, that's true, right? Yeah, if they go become a public company or whatever, they're going to go with some big fancy for accounting firm and you got them there. And that is really about specialization, right?

You really need this group of individuals who are starting companies need specific help. And one of the things we or I personally have been on a, a. bit of a mission for the last decade is to tell founders to get into the cadence of writing a monthly update. Why? Why do you want to do a monthly update? Well, it's a lot of reasons. I think the discipline of the founder themselves being able to look at a blank piece of paper, looking at that blank document on a Sunday saying, what the hell did I accomplish in October? I need to tell the people who gave me their money to join me on this journey, the investors, I need to give them an update.

And for my team, I need to collect the information from them of what we actually did. And when these don't get sent, it's typically for one of two reasons. One, the founder is scared because it's not good news, which is a mistake. When you have bad news, that's the time to send it. And number two, you know, some founders have not set up a great reporting structure or maybe they're lost in the woods. They don't actually know what they should include in an update because they're, they have plans. They're just playing the role of CEO founder. They're not actually developing a plan.

They have not given clear goals. So then how do you report on them? So let's talk on from your perspective. The basic things that should be in there. And then whatever else you want to add to my little preamble. I totally agree. And I think the most important thing is it doesn't have to be perfect and just get in the habit. It's like waking up and working out every day. And I think you're right about the discipline, but there's another thing, which is the goals, the goals for the company.

I know, because we're a startup too, and our founder, Vanessa Cruz is a super goal-oriented person. And I know how well that has served us over the years. And so communicating those goals at the beginning of the year, communicating the goals or the milestones for the next fundraise, and reiterating that every month to the venture capitalists,

the investors who are reading this, is probably the single biggest thing. And like you said, being able to evaluate yourself and seeing, am I on track? Am I in trouble? Do I need to ask for help early? Do I need to cut expenses? Whatever it is.

That's the single biggest, most important thing. And then you get down into the metrics. And first of all, there are tons of good templates out there. So you don't have to like make this up on your own. I think we even have a template on our website that you can just Google Cruise investor update. But the first thing to start by far is cash, cash balance, just to give everyone a sense of where you are.

And then the very next thing should be your burn rate. And the thing after that should be how many months of cash you have. Because I don't know about you, Jason, but when I read investor updates, because I do an angel investing too, my pulse quickens until I can see how much cash this company has. Sometimes they don't include it and you just hit reply. I didn't see cash and burn in here and runway. So if you don't include it, people's minds, maybe not yours or mine, but I'm going to just say people in general, people's minds go to dark places. Yeah.

There is a glaring omission. And the place you don't want your investors going is, oh, the startup is dying. Very simple. How much cash you have in the bank? Pick a number, a million bucks. How much did you burn last month? 25K. How much did you burn the month before?

50K. How much did you burn the month before? Zero. You had a great month. You had some cash come in. Okay. I like to take the last three months average burn, which in this case would be zero plus 50 plus 25, which is 25K a month.

We have a million dollars in the bank. We burn 25K on average or 75K for the quarter, 25K in a month. That means you have 40 months of runway. Great. Or if you want to base it on the peak month, we have half that amount. We have 20 months. And so I like to have based on the last month's burn, we have this much, based on the three month average we have this month.

So I even have a little bit of a, you know, kind of like when you're looking at your average gas mileage, is it over the last mile or over the last 10 miles, right? You might see two different numbers if you're climbing uphill or whatever it happens to be. What this does, though, is it ultimately builds credibility for you with your investors. So when you need more money down the road or something goes well, doesn't go well or does go well. They might, if things are going well, send you an unsolicited offer to give you more money at a higher valuation. If things are going poorly, they might be able to intervene and have.

help, they might proactively offer you a bridge round. And so all of these things are possible. And short is better than nothing. A short update. We didn't hear our goal in terms of revenue. The product is pushed back a month. The team is working 12 hour days. We burn 75K a month. Again, we have 12 months of runway. We're going to get this product out by December 1st. Worst case scenario December 15th. But we are six weeks behind good. we lost our iOS developer, expect another update December 15. You know, boom, perfect. I just wrote that update in 10 seconds.

That's better than nothing. Yes, totally. And you're right about your mind going to dark places because everyone who's been in the Star Community System for a long time has this pattern recognition. And when people go silent or are leaving things out, you know, your brain knows that something's wrong. So you're totally right. A couple other things I'd add to like the metric stuff would be just reviving.

If you have revenue, celebrate that, especially the stage company and show the progress. Because I don't know if everyone realizes this, but especially like you have a speed dial to the Series A investors. So like if you see a company tracking, you're probably going to pick up the phone and be like, hey, you guys might want to get in front of this one. It's not the absolute amount of revenue have. It's the trend. Series A investors, Series V investors, they are paid to find companies that have a really good trend that could be huge and get into those companies. That is their entire job. So if you are showing, hey, we're growing 20% a month. And yes, it's only $20,000 of revenue this month, but next month

it's going to be, you know, what is that, 24,000 and then 30,000. That's catnip for the series A investors. 100% cat. And if it's, it's, you know, 200,000 up to 250 to 300, that's what the series B investors want to see. So you're doing, there's all this like little bit of communication. almost like branding or marketing to your investors. Now, it has to be true. You do not want to mislead anyone ever. And that will hurt you way worse if you're misleading. But like show those trends and then celebrate the customer wins.

You know, if you sign a couple, you know, Fortune 1,000 companies for your SaaS product. The old lighthouse customers. Yeah. Get a high five. Even if they're just trialing it. Hey, we got a trial with Disney. It's, you know, it's 500 bucks a month. But man, if this thing were to take off, it could be 500.

thousand a year. So we're lightning focused on that, gets people excited. And often, if you send a tight update, you might have a seed investor, an angel say, hey, would it be okay for me to introduce you to this All Star Series A investor who I had lunch with last week or I was telling them about you? So what happens is you're giving ammunition to your early investors to talk to the next stage of investors. No updates, no ammunition. They can't talk about you. So when they have a lunch and we do network with each other. And so to service people. You know,

you want to talk about how great a company's doing. You've had some of our breakout companies as early accounting, correct? Oh, absolutely. Like, calm, super cool. Com, perfect, example. Calm the meditation app. Alex would send updates.

You know, I'd say every other month. And, you know, we'd see the number, and you would secede on some of these. Be like, we have, there was seven angel investors in it. And he'd be like, what? We hit a million in revenue in a month. And we have 17 people like, whoa, this is going really well. And then people started throwing money at them.

And they said, no, we don't need it. But it really did create the excitement and the buzz around the company and around its growth. Well, I don't know if this happens to you, Jason, a lot, but it's the holiday party season coming up. And there's like this is, you know, my boss would always tell me these stories when I was at Adventure Capital Fund. but Doug Leone was at Sequoia was famous for walking up to people and, you know, saying hi and everything and saying, who are your two best companies, right? Like that is this unwritten, you know, venture capitalists referring the two best companies in their entire portfolio.

And if like the calm example is perfect, like I don't know how involved you were with Insight, but Insight came in and did a couple big ones there. And I'm sure they checked with you, you know. Yes, they did. Yeah. Yeah, they checked. Maybe they wrote a check. Yeah, exactly.

Yeah. That's all public, by the way. Yeah. I mean, they did do a secondary. We were able to, you know, be able to sell a small portion of our shares and return to our LPs. And so that is public. And there's a vibrant secondary market for Com shares to this day.

I keep getting people saying, hey, want to buy at this price or would you like to sell at this price? We have people who are buyers and sellers in it. And I think regular communication is a big part of that. Cadence, I like monthly for Seed Stage, because it's a good. creates discipline. When you get to Series A, you might move to quarterly. You don't have to include everything in here. You don't have to, if you're worried about things leaking. If it does leak and people write a Wall Street Journal story, you're probably going to be pretty stoked

about it if things are going well. So let's be honest. Like somebody was like, what if this leaks? And I was like, you get a tech crunch story or a Wall Street Journal story? They're like, can you leak it? And I'm like, yeah, yeah. Can you send it to your favorite reporter? Yeah. I'm like, no, I'm not in the leak business, but I guess you could create a fake Yahoo account and say, you know, send it to somebody. And founders have done that, by the way, leak their own updates because they're so good because they want to get coverage. But you don't have to include, hey, here's the seven things we're doing on a growth basis

that are our secret sauce to get new customers. If you figured out some customer acquisition, don't put that in there. If you have some new product coming, you don't need to put it in there. You could put it in after you launch it. Hey, we launched our new product. Here it is. You can show that to select investors on a Zoom privately, tell them, don't tell anybody. So just, you know, if there's any concerns, you don't need to include everything, top level,

but runway, cash flow, revenue, customers, all of that's super important. If you have hires, people might be able to help you with hires. You put a couple links in. You could have retweets in there with a click-to-tweet link, which is a cool little service where it pre-populates a tweet, gives people the ability to edit it. So I tell people, hey, put a little click-to-weet in there. Hey, you know, a new version of Calm Sleep Stories is out, you know, and check it out, you know, with the link. But it's just a great way to help. You can put requests in it. So if you want it to

work for you, you put requests at the bottom. We're looking to fill these positions. We're looking for customer introductions. And we've got an open note with 500K left on. And if anybody's interesting and double down on their investment. So many great things can come from these. But really the discipline is the key, I think. If you can't, if you can go for a coffee, every day. You go to Starbucks. You go to Blue Bottle. You take a walk.

You wait in line. This is what I say to Founders. This is my little trick. You know, you learn some tricks to trade. Where's a monthly update? I don't got it. I said, okay. Hey, have you been to Blue Bottle?

Or what's your favorite coffee? Oh, I look Phil's. I'm like, oh, which one should go to? Oh, you go to the one on Market Street? Oh, that's nice, Phil. It's a big line there, right? Oh, yeah. It took 15, 20 minutes.

I'm like, great. Next time, send your assistant. Send somebody else to get you goddamn coffee. Get your pour over for seven bucks. sit at your desk and write a 20 minute goddamn update. And I'm not telling you this for my. I already own my shares. I'm already made my money.

I've already got a portfolio. I'm saying this for you. Skip the freaking, no offense to Phil. It's delicious. Get that mojito. But just take the 20 minutes and write it. I know it's hard.

Or write it in line for God's sakes. You know, you could just dictate it. Yeah. There's a couple other things that I would recommend too, by the way, which is, there's a nice little hack, which is recognize your investors who do. something nice for you the month before.

Like because a lot of these are like BCCs right. So you don't actually know you could look at a cap table but and there's nothing probably that gets me more motivated. I'm like a praise hound or something like that but like I like that makes me feel good and you actually know you're appreciated. Yeah. And that's in I also think just like you know those requests you nailed that like especially if you're like a SaaS company that's that's enterprise sales.

Yep. You would be shocked at how many. warm leads your investors can make. I was on the phone with Disney two weeks ago. Somebody asked for an intro to Disney. I looked at my LinkedIn. I got too many Disney people on my LinkedIn. It seems like everybody I know from the dot-com era has done a stint at Disney.

It's almost like it's a, you know, it's like a tour of duty in our industry. And so I was like, my lord, I know some important people. I got on the phone with somebody who's incredibly important. I told them how jazzed I am about this particular startup. And, you know, next thing I know, the startup's in three different meetings with three different units. This is how it goes. Now, if they put a little praise to me, that would be quite nice.

I'd like to get a little shout out in the newsletter. Really nice punch up there. I like that. Shout out your investors for helping. And then it might activate others. It's human nature, you know. The other thing you talked about, which I think we should cover for a second if you're okay with it, is how to break bad news.

And you were, so first of all, the monthly newsletter or, update is a good place to break bad news, but I would actually recommend like the phone call Zoom, especially if with your, you know, your big investors. Major investors. If launch owns 10% of the company, then they should be reaching out to you and your team to do, because there's going to be follow up questions and things like that. But getting in front of that bad news is such a credibility builder. And there's nothing work.

Because I also think people don't always understand that like, you're probably friends with, you know, the syndicate members you know across all these seed stage companies is huge. So if you're at Phil's in line, you bump into one of your investor friends, you guys might start just swapping stories. And to hear about it that way instead of directly from the entrepreneur is not a good thing. And it makes you shut down your checkbook, you know? Yeah, I mean, these investors have options. And they're not obligated to continue to invest in your company. In fact, quite the opposite.

They're going to reserve second and third investments in your company to the highest performers and the highest communicators. Those two things tend to be correlated. I love bad news if it's followed by how we plan on turning it around. So nobody here hasn't been to the rodeo before. I mean, we're rodeo. We're like the clowns in the middle of the arena getting chased by the bulls laughing about it. If there's not something going wrong, you're wondering why.

We understand this. We're literally. You know, though, they have the three clowns playing cards, and they, like, are taunting the bull, and we're just sitting there playing cards. We get charged by the bull all the time. We know. It's like a joke to us. Like, okay, yeah, you lost your CTO. Oh, you're getting sued. Oh, you're running out of money. Like, of course, we're in the middle of the rodeo. It's a startup. Totally. Circus. We understand. Just tell us what the plan is. We lost our CTO. He went to a competitor. We are stealing this other competitor, CTO. We got four people. We're doing interviews all weekend. Like, just tell us what the plan of attack to recover is. And once again, the word credibility is. comes up. You took a bad beat. How are you going to, you know, rebound from it? How are you going to come back even stronger? Get knocked down twice? What is it? Knockdown twice? Stand up. Yeah, stand up three times. Like, whatever. You just get stand up. Yeah. In this and climate, when there

are companies doing layoffs, like, odds are, you know a great CTO candidate who just either their company is going down or got laid off or whatever. It can insert them right in there. So don't underestimate the synergies of your venture capitalists and how they can help you plug holes. That's just one example. Yep. You know, but like that happens all the time. It is the way for you to have your own discipline to separate yourself from the other options of investment, a new company or funding another one of your portfolio companies.

And listen, nobody's expecting perfection here. They understand startups are going to be messy. And listen, even the big one. You know, Facebook laying off at 11,000 people, their stock went from $350 down to $90. I made a J-trade. Pretty proud of that. Did you buy it 90, 95? Well, I put the water in at 90 and with a 5% variability on it.

I think I got in at 94 and change. Amazing. It was 110 again. I had gotten shares from like some venture firm that invested in a company that Facebook acquired. I rode those puppies up to 115 and sold them. And, you know, because I just didn't want to be an investor in Facebook at time. But then I was just watching this and I'm like, I think Zuckerberg's going to take the

medicine at some point. Yeah. Yeah, yeah, yeah. Because this is so much negativity from investors, right? So this is the mighty Zuck. He's worth $50 billion, $100 billion. Even he had to bend the knee and say, okay, fine, Brad Gersner, fine, whoever's going to, you know, all these people started selling the stock. We don't, we don't buy your story. And he said, okay, fine, I'll make a riff. I'll cut 10,000 people. I'm going to, austerity measures are going to happen. And he communicated that. And his stock went up from $90 a share to 110.

Boom. Massive rebound, 20% rebound. And now people who work at the company are like, okay, great. We're taking the medicine. We're facing reality. And that's what a little monthly missive does. It makes you take ownership, face the music, and that'll just make you a great leader. We have so many delinquent people on this that,

we have a system in our firm. Email, hey, we missed August. Hey, we missed September. Hey, we missed August, September, and it's October now. Are we going to get an October update? Or maybe we could bundle these three into a quarterly update, maybe, or something. And then if there's a fourth email, hey, CCing Jason, here's this calendarly link. Can we jump on the phone?

And if I don't get a meeting from that, then it's, hey, Casing you on your phone. Jason is Cicied here. And then I hit the dial button. And I'm increasingly just hitting the dial button and calling my founders when I don't get one. So for all the investors out there, just call your founders. Then we had three or four people who were so delinquent. I popped up a notion page with the headings in it. I had them talk to one of our operations people who did like a little interview with them.

How many employees do you have? What's the cash position? You don't have the cash. Okay, who's your accounting from? Oh, it's Cruz. Can we have permission to talk to Cruz? And we literally started building the bones of this based on what they said. and they had a board meeting.

So we're just like, okay, we have the board doc. Let's adapt some of that. We literally started writing for them. And then this founder was like, okay, you proved to me, I should write these. I'm just so busy.

So busy. Now we're back to the Phil's line. Yeah, yeah. How long you went? Did you go, did you see the new Black Panther? What is that runtime? Two hours, 45 minutes?

Come on. Write it in the popcorn line. You watch it House of the Dragon. Yeah, yeah. Come on. Ten episodes. They always go like 105, 110. Just give up.

one house of the dragons. You know? If I can extend that Zuckerberg analogy to, that was so good because you're showing people that like if if they're, because Zuckerberg has to communicate with Wall Street. You know, and so he's forced to do it. And you're like everyone can see that Facebook's fundamentals are pretty good still from like, you know, cash generation. And so you jumped in there and bought more.

Like that can happen for Seed Stage or Series A companies. Like if there's some bad news around the periphery, but the fundamentals are good for these companies. Like you, this is when like venture capitalists are not, they're not charities. You are in it to make money. Yeah, but that's the moment where you want to write a check when things look good besides the peripheral stuff. And so we're, we're okay with risk. Yeah. We are in a risk business. You tell me, listen, we had 30 people. We're making a million dollars a year. We cut it down to 12 people. And we doubled our prices. We lost 20% of our customers. But now we're at 1.8 million. We just hit break even. I'm like, okay. You got.

my ear. Boom. Boom. Okay, let's go. Yeah. After you, after House of the Dragon, let's go get a fells. Let's go. Anyway, listen, I think we beat this horse.

Yes, yes. And I, they're already dead. We don't need to beat this anymore. Your updates are for you. They benefit you. You need to stop whatever you're doing if you hear our voices and just write the update. Even if it's been a year. Even if it's been a year.

Just write, just take the medicine. Apologies. This should have. more frequently. I'm going to hit a quarterly cadence next year. I watch Cruise and I watched launch, talk about this on a startup basics. Shout out to Scott and JCal. But yeah, just take, I mean, just do it. It's not that much work. Short is better than nothing. Make sure you got those numbers in there, like Scott's saying, just tell us your runway, tell us your burn, divide the numbers, tell us how many what the outcome of that division is. And we can help you, right? And lean on your

investors, how can we be helpful is what we always say? It can't be helpful if you don't communicate. Very well said. Couldn't say any better. All right, listen, everybody, cruzconsulting.com. Scott at cruzconsulting.com. He's a true mensch. Helps a lot of startups. No, I mean it. I mean, I think you. Especially in times like this, this is where the reputations are made. Reputations and fortunes made in the down market, collected in the up market. Now's the time when the great service providers do the hard work to save these companies to help these founders, you know, thread the needle. This is when the great investors make the riskiest bets that have the biggest alpha in the

market. And so I'm working, I don't know about you, but man, I'm working 16 hours a day right now. It is brutal. I worked every weekend at least half days on the weekend. And by half days, I mean half of 16, eight hour days, you know, four hours in the morning, hang out with the kids at night, no house of the dragon. Thank God that's over. I can put another four hours into work.

Hard work pays off. This is the time when the great companies were built. This week in Startups.com slash basics to see the whole collection. Got some Wilson Sincini goodness in there. Just join us to understand these basics. Really appreciate you, Scott. Thank you, Jason. Appreciate it.

All right. We'll see you all next time. Bye-bye.