This Week in Startups - Low-Burn | Scaling Your Startup S2 E8 with Neyborly’s Ben Seidl & Xendoo’s Lil Roberts | E1224

Episode Date: June 3, 2021

A low-burn rate gives startups the agility they need to succeed and weather unforeseen challenges. Two CEOs join Jason to discuss how founders can make the most of their limited capital. Ben Seidl of Neyborly covers managing burn rate (2:58), Lil Roberts of Xendoo shares the steps needed to maintain financial health, then Jason joins for a Q&A on how to create a slingshot business(48:48), the appropriate level of runway (55:02) & more.

Okay, everybody, welcome to another edition of this week in startups. Today, we continue Season 2 of Scaling Your Startup. It's a 10 episode series. This is episode eight, and we've got an amazing, amazing episode for you. This is a must listen for founding teams. So you're probably going to want to get the team together and listen to this as a group and take some notes because we're going to have two founders on the program, one, Ben Seidel, who is from a company called neighborly, which we're investors in. And he is going to talk about managing. burn rate. Now, why should you listen to Ben? Well, Ben went through a near-death experience with this startup because he was operating co-sharing spaces in the real world. Basically,

there are storefronts where you can rent them by the hour for a company offside or a book club or rehearsal dinner, whatever you wanted to use these spaces for. Well, guess what happened in a pandemic? Revenue goes to zero and investors are not interested in investing your company. He figured out how to save the company and he became what I call a slingshot startup. up. The setback has made him stronger. You're going to want to listen to this talk twice. And Lil Robbins is with us. She's a founder and CEO of Zendu, which we are also investors of they do accounting services. She's going to talk about financial health of your company and how to manage it. There's a lot of tactical stuff in her talk that's really important. And at the end, we do a little roundtable

talking about how involved should a founder be in their finances? And I beg of you as a founder to if you do not have the skill set of watching the books and going through those bank statements every month, you need to add this to your skill set because I've had many founders come to me and say, the accountant screwed us, they got it wrong, and we went out of business. I thought we had three months of runway. We actually had three weeks. I thought we had six months of runway. We actually had two. All of this nonsense, it's your responsibility. Just like you have to manage technical debt, you've got to manage your sales team, you've got to manage marketing, you got managed recruiting. It all lands on the founder and CEO's desks. Therefore, you have to know how to

control your burn. Stick with us. Scaling your startup season two is brought to you by Netsweet. Don't let old software and spreadsheetsheet slow you down anymore. Upgrade to Netsuite, the world's number one cloud business system. Head to Netsuite.com slash twist for the special financing program. Our crowd helps you invest early in IPO companies alongside professional VCs. If you're interested in investing, you can join our crowd for free at OUR, CROWD.com slash twist and brainbase. Protecting your ideas should be simple. Built by founders, for founders, BrainBase File is a clean and automated trademark filing platform that gives anyone the ability to protect their idea. File now for

just $199 at BrainBase.com slash file. All right. It's been an amazing scaling your startup season two. You can go see all the episodes at this week in startups.com slash scale. We've talked about growth, copyrighting, social marketing, sales, fundraising, product, SEO, conversion funnels, culture. And today we're talking about how to operate efficiently, low burn rate, and just have really solid financial hygiene. super important. And we'll start out with Ben from Neighborly, who's going to talk about managing your burn rate.

Go ahead, Ben. Thanks, Jason. All right, well, I'm excited to jump in here and talk a little bit about burn rate and how to effectively manage your burn as you're growing your startup. So as a quick introduction to myself and the company I work for, I am the CEO and co-founder of Neighborly, and we are an early stage startup. That is creating a flexible real estate platform for people to rent. space for their business for exactly how long they need. So similar to Sonder for commercial real

estate and we've been growing very rapidly in California. The first thing I want to start off on this, I think, super important topic of Burn Raid. This is something that I believe isn't talked about enough in startup culture. It's what I found to be a bit of a taboo. Something founders, you know, are really, really curious about and concern about and are eager to learn about. but something I think that's a sensitive topic when you're discussing money with your investors. So hopefully today I can shed some light on my thoughts and experiences with burn rate. And hopefully some of this stuff is helpful to you. The first kind of topic within burn I want to discuss is how to think about the burn rate.

This is part of the difficulty of understanding this topic. There isn't a correct burn rate. It depends on so many varying factors, especially these factors are changing. as your company is growing and as you're reaching different stages of funding. So because there isn't a easy or solvable solution for this question, I think it becomes a pain point for a lot of funders, especially has been for myself over the last five years of building neighborly. So the first reason the answer is it depends, is because it depends on your company's growth needs, your growth rate, what your opportunities are. And also on the investor side, it depends on how many firms and

investors are interested in funding your company. So if your company is very hot, there's a lot of interest in funding your next round, then you can be a bit more aggressive and perhaps your burn rate can be a little bit higher. But when you're trying to grow and get your revenue scalable, I think you need to be a little bit more conservative. So the two quick decisions, I think you need to look at are your growth needs and, you know, how attractive of an investment opportunity are you for the investor community. The second major question to think about as you're trying to determine what the right burn rate is for your company, it depends on the type of company you're building, of course. So if you're doing a physical business or if you're doing a software

business, you have very different expenditure profiles. So Adams versus Bits, when you're building an Adams-based company like we are, there are very different costs involved and very different expenditure profiles involved. We have to buy inventory and we have physical operations that take place in these locations versus a software business that can scale with very little cost when done right. So I think you really need to kind of understand what the cost profile is for the business that you're building to understand what the right burn rate needs to be. The other thing that I've noticed as we've grown our company is it also depends on what you're investing your funding into. So are these things durable?

Are they going to provide you with stable, predictable, forecastable revenue? Are the assets that you're purchasing or the money that you're spending? Is that going into something that you can count on and that will retain value over the years after you've spent this money? So in our case, again, we're oftentimes building out new space. creating new access systems for our spaces, creating technology to further improve the unit economics for our spaces. A lot of these things are mostly one-off expenses, so more like R&D. So I think that's another thing to consider is if you're spending all your money on Facebook

ads and Google ads, there's not a lot of durability to that expenditure. In general, you want to plan for about 24 months. I think that's on the conservative side. It could be as aggressive as 18, but I would say 24 months is a nice target to hit for the amount of time you have to spend your money once you've received the wire transfer. And then you want to make sure you have about a four to six month buffer while you go into fundraising for your next round. So all of those variables, I think you need to take into consideration as you're deciding what is the quote unquote right burn rate for your company. What I just discussed was a bit subjective, right? And the answer I kept saying was it depends. That is a frustrating answer to hear when you're looking for.

for some advice. I think one thing I read last year that I really appreciated and resonated with was a quantitative framework that David Sacks put together called the Burn Multiple. David Sacks, Rain Man, Bestie, all-around good guy, and actually an investor in our company as well. But he put this blog post out last year to put some quantitative framework around what you can expect specifically for software-based startups. But I would suggest if you're interested in this concept reading his full blog post because it was wonderfully done. But in essence, what it said is he has the thesis that he looks at burn multiples for a growing company. Basically what that equals is your net burn divided by your net new ARR as an approximation of your

capital efficiency and how you are investing money to grow your business. So if you're anything under 1x on that burn multiple, you're doing amazing. If you're over 3x, there's something going wrong and you're going to need to make immediate adjustments to your burn rate. That's a really, I think, fantastic framework, especially if you're a software as a service startup to look at to kind of further gauge what is the quote unquote right burn rate for your company. Are you still running your business on outdated software? You know the ones I'm talking about. Sometimes legacy software can be like quicksand for your business. The bigger your company grows, the faster you sink with all that software that just can't

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Head to net suite.com slash twist for the special financing program right now. Once again, that's N-E-S-U-I-T-E dot com slash twist. The second topic I wanted to jump into was now that we kind of understand what burn rate, you know, should be or how to think about it. The second point is how to manage that. What are some proactive tasks and types of management philosophies that I think are important to follow as you are spending your round of funding. The first thing I would say, and this is all from experience, I've got seven quick tips here,

but they all can be summarized to say that you need to be engaged and you need to be proactive as founder, CEO, or a member of the executive team of a startup. It's tempting when you raise a round of funding to outsource some of this financial work, bookkeeping, accounting. maybe your entire finance platform to an outsource CFO. And while that can be very helpful, of course, and get you some higher level skill sets into the company, it tends to distract you from the minute details of your finances.

And I think that can get very dangerous. So my advice is to be as engaged as possible in your finances and your burn and be very proactive. One of the first things I think you need to think about is set your growth goals for the next round, of course, determine how much free cash you have at the moment to invest to hit those growth goals. Try to get a good handle on how much to the dollar those growth goals will cost you to achieve. Of course, think about when it is you aim to raise that next round, whether it's 18 or 24 months,

perhaps longer or perhaps quicker if you're growing really fast, but if you have that goalposts kind of in the sand of we're going to raise a Series A in 18 months and the growth goals are aligned with that and the growth goals to achieve that are going to cost $2 million. and we currently have $1.5 million in the bank, well, then you need to adjust your burn rate or adjust your growth goals, of course. So answering those first four questions quickly and then continuing to review those questions and answers as the company is growing and changing is very, very important. That's the kind of engaged and proactive part. I like to keep a 20% rainy day fund kind of set aside. We've got a savings account for the business where I'll put some amount of

money into it generally around 10 to 20 percent. And that just helps me look at the cash balances in a different way. So we have kind of an operating account and kind of a savings account like you would have for your personal life. At the end of the day, of course, that's still all of your cash, but at least for me, it helps, it helps me manage our cash a little bit better. Another thing I really, really think is important, and I think this is controversial, is I believe that the CEO founders should be involved in the bookkeeping and monthly reconciliation. I think it's absolutely critical that the founder and CEO is reviewing bank statements, credit card statements, perhaps even doing the bookkeeping themselves,

or at least doing it with the assistance of a bookkeeper at the end of the month. Totally outsourcing that those tasks, I think, can wind up leading to your company, spending all kinds of money that you're not aware of, or you not seeing where the leaks are in your bucket. The last thing I would say, which is pretty widely known, is use some of these fintech companies that are out there that can help you control your team spending and have higher fidelity visibility into your company spending. So Brex, Ramp, what have you, using those types of credit card and spend management systems can really help give you more engagement and invisibility into

what's happening. All of that to be said, my main piece of advice from this whole talk would be adjusting quickly is the most critical aspect of managing and understanding your burn. If you are an early stage startup that's growing fast, you know that every week, perhaps sometimes every day, your business is changing to the point that you need to reconsider certain expenditure patterns, certain growth initiatives, certain revenue targets. and because your company is changing and growing at such a fervent clip, you need to make sure that you are thinking about your burn rate, almost like gears on a bike.

So when things are going super well for you and you have a lot of cash in the bank, perhaps you have the ability to go faster and, you know, kind of shift the bike to be able to coast because things are going well. Maybe all of a sudden things are going poorly and you find yourself going straight up, uphill and you need to shift into a different gear. So really understanding where you are growth-wise and traction-wise and having that, what I think is unfortunately kind of an innate understanding of how to drive your business, just like a bike. I'm not sure there's really some quantitative or steadfast rules that I could give to how to do that. But if you really know your business well

enough, you'll know it just like your own bicycle and you know how to ride that thing and how to adjust when you face different circumstances, which invariably will. So just remember that making quick adjustments to your burn is really, in my opinion, all that matters because sometimes it's great to have a more aggressive burn. Sometimes it's imperative to reduce your burn immensely. But only you are going to have that kind of insight and ability to make those changes. So be engaged and be proactive and know that you need to adjust quickly. So what to do when things are going wrong financially? I think that's probably a more apt quick discussion to have rather than what to do when things

are going swimmingly. It's easier to spend more money. It's easier to grow faster and invest more cash to get more top line growth. But what's harder to do is to adjust your burn when things aren't going as anticipated. So here's six quick tips that I took, particularly last year during the pandemic, when our physical business of renting space for meetings, off-sights, production events, that business, of course, was ground to a halt during the pandemic. And so we had to immediately take swift and precise action on how to change our burn rate

and basically save the business. And so these are the six things that I did consistently throughout 2020 to keep our business afloat and we're now thriving and growing really fast. And it was these six things that I did from a finance perspective that kept us alive. Point one kind of ties back to what I said about monthly reconciliation and bookkeeping. Reconcile your bank statements and payroll. Make sure, as founder and CEO, you know where every one of your dollars is going on the outward side. You should understand that so that you know what levers to adjust. just when needed.

Number two is triage immediately. So eliminating nice to have is something that you should be able to do and understand how to do immediately. If you looked at your bank statements and your payroll, you should as founder, CEO, be able to cross off half of those things if you had to just by knowing what's a nice to have and a must have. Next step, of course, would be then to review those must have and agree with your executive team and your overall team on what the survival plan needs to be, there has to be adjustments

to those must-haves. Maybe it's decreasing salaries, maybe it's pausing certain services, what have you, but you really need to agree upon those must-have decreases with your team. And that goes into point number four, which we did a lot of last year, which is negotiate with your creditors. So adjust terms, maybe pause payments, but get out in front of that with your creditors and talk to them about your business situation and explain where it's headed and why you need, you know, a bit of a helping hand at a moment in time because I think if you can communicate effectively and proactively, you're way more likely to receive relief from creditors. And so that's a pretty nuanced ability. But I do think as long as you're a forthright and really transparent,

you can oftentimes find that banks will pause their payments for a period of time. Software service providers will oftentimes give you breaks. So just be, you know, be transparent and be really proactive. Scrutinize every single dollar spent. Kind of goes to my point number one, but just make sure you're looking at every single dollar and you know, even if it's $29 a month for a SaaS provider that you're hardly using, think about if those $29 are best spent with that provider or saved. The last thing that comes from doing this, my point number six is I think you should compare and contrast your new leaner business versus your prior business after those first five steps are taken care of.

You might end up finding out like we did that your business is actually much better off in this leaner version and that perhaps you're more profitable. You can grow faster. You've made smarter decisions on investing your money. And as you all know, creativity is best fostered with constraints. And when you don't have constraints, aka you're spending money willy-nilly and you think that the money pot is always going to be there for you to reach into to buy something new or invest in a new concept or get that growth from your funding, that becomes a very lazy and oftentimes a very lazy strategy. And oftentimes I believe hinders your creativity as a team.

So when you have constraints around your business financially, that can create much better business outcomes, new ideas, new products, new services, new ways of doing things that will end up increasing your valuation and your profitability. But comparing and contrasting those outcomes, I think, is a really strong learning opportunity for the executive team. Last thing I'll go over real quickly is just kind of my trials and tribulations with burn rate over the last five years of building this business. I've had five key learnings over five years.

Not paying close attention to your burn is deadly. I think that is the, if you were to look at the root cause of companies who go under because of outsized spending, it's because they weren't paying close enough attention. It's that simple. Number two, your funding is always going to disappear faster than you expect. And this was something that investors told me when we raised our seed round in 2019, that even though to me it seemed like an unlimited amount of money at the time, investors said, trust me, it will disappear faster than you ever imagine. And that ended up being

words of wisdom because it was true. It just does. It's some type of inertia, I think, with your ambition as a founder and the investor's ambition and your business, you end up perhaps getting overly aggressive when things are going very well for you. So just remember that it's probably going to disappear faster than you expect. Speaking, living, and building a frugal culture in your company is also something that I've really learned. And that ebbs and flows. Sometimes I'm able to implement that frugal culture and other times our growth or our opportunities are incredibly compelling and maybe we get a little bit more aggressive. But for the most part, I've really, over the last year and a half, focused on not only speaking the frugal culture into existence

in our company, but living it myself, showing how I'm making decisions and actions that validate those commitments and then making sure that the team members who join are also reflecting and building in a similar way. Frugality can really, really turn your business around and create incredible opportunities for you if everyone is on board. But that means from the top down, you have to start being the example of that. Otherwise, it's hypocrisy. Never count on any future investment or investor to be there for you. I think it's nice to know that you have support of your investor. and the firms that have backed you, but to convince yourself that there will always be money there

no matter what happens and that you're kind of being cradled by these people is really dangerous. It's not true. And I think it's easy to convince yourself of that when you're just getting started as an early stage startup that, hey, these people invested money in us. They're going to be there with us for the long haul. And while that may be true, as your funding rounds increase in size, those initial investors will not be able to keep pace with those funding rounds. And so you have to understand that

what my last point is, is the funds that you have today are your last. For us, I've really tried to instill that in our team, that there is no superhero that's going to fly down with a bag of money and bail us out when things get tough. We need to make sure that the money we have in the bank today, at least philosophically and mentally, is the money that we will always have. So how do we build the best business of what we have today. And I think if you're acting that way and building your business that way, then good things will come and you'll absolutely be able to raise another round as you grow your business because those are types of management practices and growth tactics that investors like to see. So having that philosophy of money in your bank account today is the

last money you'll ever have is a very strong mentality to fostering the company. And that's pretty much it. I really appreciate the chance to share some of what I've learned with Burn Rate over the last five years with y'all. And so thanks a lot to launch and Jason and Jackie, everybody here. And I'm looking forward to talking more about this. Okay, it's time for another Our Crowd deal of the week. Right now, you can join Our Crowd's investment in Citro Reason. Siderreason has partnered with five of the 10 largest pharma companies to deliver life-saving drugs at a fraction of the time and cost. According to the deal memo, CITO Reason's AI models, the human body at the molecular level, and completely changes what's possible in the trillion-dollar drug development landscape.

You can get in early on CITO Reason and other unique opportunities by signing up for free at R Crowd.com slash twist. And by the way, did you know R Crowd investors were able to get in on some of the best IPOs? Of 2019 and 2020, they benefited from companies IPOing like Beyond Meat and Lemonade, and some of Our Crowd companies have been acquired by buyers like Inta, Nike, Microsoft, Oracle, and Uber. With Our Crowd, accredited investors can invest directly and easily in startups early before they IPO or get bought. Accredited investors can participate in single company deals for as little as $10,000 or one of Our Crowd's funds for as little as $50,000.

The investment professionals at Our Crowd have already, invested hundreds of millions of dollars in over 200 companies with dozens of exits. Again, the R-C-R-C-R-O-R-O-W-D.com slash twist. Thank you so much, Ben. Great talk. Next up is Lil Roberts of Zendu. Lil, you have the floor. Hi, everybody. Super happy to be here with you today. My name is Lil Roberts, and I'm CEO and founder of Zendu, a fintech company doing online bookkeeping and accounting, early mover in the space through technology. Happy to be here. here, today we're going to talk about your financial health as you're scaling your startup. And as we all know, that it is tough and that we are all building the plane as we're flying,

right? You know, we're out there. And that applies also to just regular businesses, but especially with startups, we're building the plane as we're flying. And so today we're going to talk about six steps to healthy financials. And we're going to kind of debunk all the different pieces of it so that you can determine what you need when. So first one is we're going to get started with the right structure.

So the right structure has two pieces to it. It has an entity type, which is really your legal protection. So when you think about whether you're going to be an LLC or a C corp, a lot of startups will start out as an LLC. They'll start out as a multi-member LLC because your triple Fs, right, family friends and fools want to write off all the expenses in the early days, right? So they're almost getting back through tax savings. their investment.

But as you go out for the institutional investors and you start to go west or wherever you find the money in the U.S., they're going to want you to be a C corporation. And the reason being is there's a lot of legal protection for the company and for the investors when you're a C corporation, because you're bound by Delaware law or Wyoming or Nevada, and it gives the investors a lot of rights. So entity type, legal protection is what that's for. The second piece to it is the tax type of your entity. And that's where the money comes in, right? So you can be an LLC and you can be taxed as a C-Corp.

And what that means is that you still have the legal liability side of the LLC and some of the flexibility, but your tax structure is a C-Corp, which means that you're going to be taxed on the exit of the business versus being an LLC tax type like a 1065 or an 1120s or a Schedule C, where you're going to just pass those tax savings and take advantage of them right then and there that year. Key takeaway here is that the wrong tax type and you're burning money, right? If you have the wrong tax type, you could be losing out on tax savings that you can't recover from at a later date. Also, on the legal side of it, the key takeaway is you don't want to go through if you know that you're going to go out for institutional investors. And there is some great benefits to have an institutional investors for your scaling startup.

And they're going to want you to be in the C corp. And if you do it later on, it usually costs a lot more money than if you would have left the shoreline as a C corp when you started out. So as we get into the second one, the revenue business model. So there's so many different business models out there. But when we think about scaling startups, they really fall into mostly four categories. There's the SaaS category, whether it's pure tech or tech enabled like Zendu. There's the product category, marketplace, and e-com. And we're going to break it down into each one some of the accounting tips for them.

So revenue business model SaaS, right? Software as a service or service as a software. The big takeaway here is deferred revenue, right? If you look at companies like JumpCloud, Calm, Slack, and Zendu as a service as a software, when we have subscription plans for our customers, typically there's monthly plans, and then there may be quarterly plans and annual plans. And if you are booking revenue that's coming in where the customer's paying, you say, 12 grand for the year, and they're paying it in the month of March,

March, as deferred revenue, you should be recognizing that as one 12th each month. Now, what happens is it's a timing situation for deferred revenue model. You don't want to necessarily start out day one because it adds a lot of complexity to accounting. We'll get into that in the next couple of slides. Physical product business model. The complexity here is going to be your inventory, right? Because you're going to have raw materials, companies like Peloton and Nests, Sonos and Eight Sleep.

Eight Sleep's amazing. I have one based on Jason's recommendation, and it's absolutely incredible. So there they have raw materials, and then they have finished product. So they're going to have work and process that they need to account for on the accounting side of it, and you should be accounting for it because that is an asset that should go on your balance sheet. And then you have the complexity also of how much inventory you have, and at a certain size, you're going to be taxed on your inventory.

And that is when your businesses get much larger, that that will happen, that you're accounting for that on your balance sheet. Marketplace businesses, Airbnb, Uber, Etsy, Amazon Cellar Central is a marketplace, Rocky Tan. So this business is a little bit unique, right, because there's a commission. It's what's your take or what's your rake. So as an example, say your book in a million dollars a month on gross revenue, right? So you are, your software is a platform that is sitting in the middle. So it has customers on one side and it has the people providing the product or service on the other side. And you're acting as a technology middleman in between.

So you may be collecting and booking a million dollars a month. But if your take is 20%, then really your revenue is $200,000 a month and your expenses are going against your revenue. And this is really important because if you're looking at your profit and loss and you're booking that million dollars as that's your company revenue, then your expenses are going to be a much smaller percentage. And it's not really accurate to what your true business model is. So marketplace typically cash businesses because you're going to get the revenue at the time that the product or services is being exchanged. Econ businesses' fastest growing business model right now, and the pandemic certainly helped it for the conversion to more people being going through purchasing product through a digital mechanism. The challenge is here on the accounting side is going to be cash flow, right? You have to go ahead and put 50% debt deposit on your goods before they go across the ocean, if you're buying them in Europe, if you're buying them in China.

and then you have to put the other 50% down before you ever get the product and before you ever sell it. So you need to account for that through your accounting. So you have an idea of what's happening, how much money is in process, what kind of cash flow challenges you may have. And then the other piece with the e-com side is sales tax. A lot of controversy over at Amazon has made it a lot easier for their resellers in recent times where they're collecting the sales tax on Shopify stores. There, they'll collect it for you, but they're not paying it or recording it. So you're going to be responsible for that.

Zappos, watchbox, pod.com, all types of e-com businesses. So again, sales tax cash flow challenges. Another responsibility or an add-on expense for you with e-com businesses, if you're an e-com startup, is the tech stack. So to have additional detailed visibility, you're going to need additional tech stack that are other costs for you. And those are things like A2X that will track refunds

to the detail level for you through your Amazon or through your Shopify store, Tax Jar or Avalera to capture sales tax and file sales tax. So to give you an idea of expenses in this, so sales tax, if you're selling in 20 locations of Amazon and you have Nexus in 40 states because of the volume of sales,

that you have, each state has a different number that once you reach that for sales tax, they want you to report on, you would have to do 40 filings a month. And that could be $30 per filing. So just the mechanism to file could be $1,200 besides the sales tax that you owe. So imagine if you're a startup only doing, you know, a million dollars and you're selling across a lot of states and your product is not that expensive, you're going to be collecting sales tax and filing sales tax, and it could cost you more a month than what you may owe in the sales tax. Trade Gecko, another great add-on app for capturing inventory, and then Zapier, which we all know,

right, for middleware to sync up. So now that you have your business model, you know, what business model category you fall into, and you've dealt with your legal entity and your tax type, now we move into number three, which is cash, V accrual v modified accrual, right? Which is just somewhere in the middle of it too. So how do you know which one's right for you? So it comes down to a couple of questions that will inform you on what may be right for you. So business model, we just covered, complexity.

We covered some of the areas that your business could have some complexity in the accounting side of it for you. Timing. Timing is all about, you know, what's your revenue? And if your revenue is early day and you want to do accrual accounting, you're going to be paying a lot of money and spending a lot of time. And I love what Ben said earlier about founders need to be involved on the accounting side of the business. Crucial, crucial. You know, we do online bookkeeping and accounting and tax returns.

But for the startups that we work with and we work with small businesses all over America and 12 other countries, it's important that the founders stay involved with their finances. Super important because that's where you're going to save the money. Those founders that did that are the ones that made it through the pandemic by being able to conserve and keep their cash in the bank so they can deploy it now as the world's opening up. So cash versus accrual. Cash is all about the time that the expense happened, right?

When the money came in or when the expense happened, that's cash basis, right? when it leaves the bank is when is on a cash basis. Accrual, on the other hand, a true full accrual is about accounting for the period that the expense or income actually occurred, not when it was received. So if somebody paid you $12,000 for an annual subscription and you got that in March, you are going to take one 12th of that and that is accrual. That is what part of accrual accounting is, along with prepaid and, along with inventory.

Modified accrual is when you're keeping track a sum of it, but not all of it. Maybe you're booking your inventory number every month. Maybe you're booking your prepays, but maybe you're not taking the revenue that's coming in and putting it across a deferred revenue model and doing journal entries. So it comes down to when the right time for you is when it makes sense for your business model and for the additional time and effort because accrual accounting costs a lot more than cash accounting does, right? And then there's also tax benefits. Lots of times people like to stay in a cash basis as long as they can because they're going to get the right-offs right then and there instead of in the future.

So the key takeaway here is that the size of your business, right, is going to determine it. That's going to help you with the timing and the effort that you want to put forth for that to do accrual. And one of the key things here is that when your business reaches, you may be cash for a long time. When your business reaches 20, 25, 30 million, you need to be talking to your advisors and you need to find out is your business, is it mandatory that you have to be in accrual? And if so, to convert from cash to accrual is about changing a lot of the systems and processes that you're doing inside your business to capture it and that you'll have to make that convert. because otherwise, if your business is a mandatory accrual-based business, the IRS can come knocking. And none of us want that, right? Every startup needs to ensure they own their intellectual property.

And that all starts with filing your trademarks. The trademark is the trade name that you're going to use and that you don't want other people infringing on. And this has been my life for decades building different media properties in gadgets. Somebody tried to rip that off and do it in another country. If you don't know where to start, I have a great solution for you that I've started using. It is the easiest way for you to protect your IP. It's called BrainBase File. BrainBase File, a clean, simple, and automated trademark filing platform that gives

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We cover the first couple of areas about just really foundational and structure. Now let's talk about monthly financials. And look, I know it's not exciting to talk about math and accounting. And although I'm the CEO and founder of Zendu, I'm not a CPA. or an accountant. I've been in small business my whole life. And I think it's crucial, just like Ben was talking about earlier, that you have to know your numbers and you have to have visibility to your numbers, right?

Everybody wants to know how they performed and how they're doing. And so the purpose of your monthly financials is just that. It is 12 months a year. So there are 12 opportunities that you're going to lock in the, you know, how your expenses, your month, you know, we pay rent on a monthly, basis, right? We pay payroll two times a month for a monthly amount of payroll. So you need to track your revenue and track your other expenses. If you have SaaS subscriptions, they're on a monthly basis. So you want to track that to see is their profitability or the path of profitability.

So the benefit of your monthly financials, which are your profit and loss statement, your balance sheet And the cash flow is just that. It's going to give you the results. So profit and loss is capturing all of your expenses for the month and all your different revenue streams for the month into one or two pages that you can look at and that will tell you, are you profitable or are you not profitable? And you should look at that both in dollars and in percentages

to see what you need to do to adjust for your business. balance sheet is more of a of a long-term look your balance sheet doesn't change that much monthly and it may not change at all monthly if you're a cash-based business your balance sheet though is where you're going to capture your fixed assets you're going to capture inventory numbers you're going to capture other things that are more of a long-time asset liability and then cash flow is that's all about knowing your burn right are you positive are you negative cash flow how much money do you need to keep in the bank that's going to allow you to sleep comfortably at night and allow you to get where you're headed with the business.

So purpose of your monthly financials, it's your scorecard, it's your monthly checkup, it's a temperature check, it is the heartbeat of your business. Absolutely, you need to have monthly financials. We believe that you should do your monthly financials from day one. Some businesses, you know, we'll just kind of do it ad hoc and then try to catch up later on. it's really important to get into a great habit and routine of doing your financials monthly. It gives you the opportunity to adjust a flight plan and also when it's time to go out for investing, it gives you credibility and investability because the investors are going to see that you're crossing the T's dot in the eyes

and that you're just staying current and that you have great system process and structure in your business. So number five, budget and forecasting. So budget's crucial to know in your runway. How much money do you have? Are you going to be able to get that plane in the air and keep it in the air, right? So you need to know, do you have to have enough money to do that? And it's really, it's forward thinking. So monthly financials are reporting backwards.

It's a look back, rear view mirror. And then budget forecasting is educated assumptions on future performance. You're taking the past and saying we're going to get better. And in getting better, this is what we believe, we're going to do, and this is how much money we believe that we need to do that. And then number six, the last piece here is the financial team, right? So the encompassing umbrella is accounting. And so if you think about what goes under accounting for your business, what do you need

and what's the timing of that? There are four key pieces. So there's bookkeeping, payroll, CPA, and CFO, and we're going to break each one down. So on the bookkeeping side, we highly recommend that you outsource it. It is something that you don't need to have on your plate. It is economical enough to have an expert do it that's going to maximize your tax savings and that understands that tool. The tool would be either zero or quickbooks that is your profit or loss and your general ledger.

So outsource it, cloud base, weekly bookkeeping, right? We do weekly bookkeeping. And then monthly reconciliations. that's what you want from whoever is doing your bookkeeping. So payroll. So we recommend that you use a cloud-based company because cloud-based, the world is digital, so we all should be using cloud-based partners. And we recommend that you pay twice a month and that you look for a company that also has

HR benefits that you can grow into. Because as businesses scale, typically around 20, 25 employees, that's the time that you're going to need some help on the HR side. So always look for somebody that could give you a hand with that. CPA. So CPA is crucial to your financial team, right? It is somebody that's going to give you strategy on tax savings. They're going to talk to you about tax planning and compliance.

And compliance is a very key area, not only for you in your business, but also for your investors, because they want to know that who they're trusting their money with is making sure that they're keeping the business compliant and that everything is as it should be with the IRS. So you have to file taxes annually. And a lot of people, this is an area that when we talk to a lot of startup founders, that this is the area that's confusing for them. They're like, well, you know, how do I know which tax return to file? When do I file it? And the government makes it a little confusing, right? Because typically for most businesses, your tax period is the calendar year, January to December 31st.

But then depending on what tax type you are, C-Corp, L. LLC will determine do you file by March 15th or by April 15th or if you're a C-Corp that you choose a different fiscal period, then it could be June 15th or it could be April. It could be September. So that gets a little cloudy. And then along with the federal for your tax returns, most states, all but seven states, require you to file a state return. and a lot of companies and CPAs will charge you extra for those. So if you are operating and you have team members in three states, your tax return will cover federal in one state,

and then you need to make sure that you communicate to them that you have team members in other states so that they can file those other state returns. So CPA is somebody that you want to talk to throughout the year, and they're very much different than the CFO. CFO, the last person on your team, is somebody who is looking forward, right? CPA is working with your financials that are the look back, rearview mirror and doing the reporting and filing taxes. CFO, their job, forward looking, budget and forecasting, board reporting.

And the timing of when you need a CFO, you know, there's a lot of great articles out there. and the timing used to be series B, series C, have a full-time CFO on. There's a lot of fractional CFOs now, and a lot of people are saying that when you raise a big series A round, you know, $7 million, $10 million, $12 million, time to bring in a CFO because they're going to help you on the forward side of how you can tighten up expenses, where they're savings. Their job is to look for all of the patterns of what's happening and help you adjust for that before you get to reporting and say, wow, we burn too much money. And that's the job of the CFO.

So in summary, if you have a really strong accounting structure, it's blue skies. You're going to sleep well at night. You're going to understand your financials. And it's really your understanding your financials is the oxygen to scaling your business. Thank you. Thank you, launch. Jackie, Jason. Super honored to be on with everyone today and have an opportunity to talk about financials

and your financial health. Lil Robertszendu.com. My email is here in case you'd like to reach out with any questions. So thanks so much. I'm honored to be with you today. All right. Great job, Lil. Great job.

Ben. Ben, let me ask you up front. What were there moments during this pandemic when you thought this is just too much trouble and it's worth, maybe I just have to wrap things up and shut the company down? And then I guess on a personal basis, what kept you going? And I suppose getting control of the numbers and knowing you could land the plane safely was part of that.

Yeah, the truthful answer is every single day. I thought about how viable this business was, how long it would take for the pandemic to subside, what the world would be like when it was finally over, if we were a business that would survive that process and thrive. afterwards. So it was a lot of soul searching in the sense of my team and myself thinking about, is this something we really want to devote ourselves to? And to the second point of your question, what got us through it, I think, was the commitment that I had for myself, but also most of our executive team had as well, which is this business, if we can make these, course corrections to it and a few business model adjustments and keep cash in the bank,

stay solvent. On the other side of this, this is going to be a fantastic business and very necessary for the new economy. And I think we all agreed upon that. So we found the strength to keep going through that shared vision. And then personally, I talked about it with my family and my friends and, you know, was always thinking about, is this worth it? Because it's going to be another 18 months of pure pain every single day punched in the face to try to get through this. I mean, you saw Breeder go under. Brewer raised $122 million. They went under.

You know, you're seeing across the landscape tons of companies. Notel raised, no tell raised 350 million. They went under. So, like, these companies went to zero with that much money. And so I guess to finish the question, though, I kept. doing it because here's at the end of the day what I believed is that even if this business closed, I would just keep doing this similar to kind of some other founders who do it for the passion. And I would be in commercial real estate, whether it was with neighborly or something else.

So that was what kept me through it is that I'm committed to this as a career and I love to do it. So even if it folds, I'm going to do something almost the same tomorrow. So that kept me in it. And it's very interesting. I put you in the category of a slingshot business, which is to say the pandemic set you back massively because people couldn't interact. But it set you back and then all this energy was created and now the slingshot has been released. People are looking for event space for small events and a lot of retail space has become suddenly available as the weakest restaurants, retail outlets, closed,

tragically during the pandemic or maybe even inevitably they were going to close anyway and they just closed quicker. So now there's more supply for you in terms of storefronts and people want the service more because they're working from home and they want to do more off-sites and they want to do more events. So in a way, all the suffering and pain has now resulted in massive gain post-pendemic. Am I correct in that slingshot analogy? That's absolutely right. And that's what kept us committed, uh, not throwing in the white flag at any point during that process is just knowing that commercial real estate in the next five, 10 years is going towards flexibility, adaptive reuse, multi-use. It's going

through all types of patterns that aim to create more frictionless experiences and more tech-enabled experiences. And that's exactly what we do at neighborly. So, you know, we're, we are one of those companies that's going to set commercial real estate forward. Yeah. It's amazing. Just going into cockroach mode, as we call it in the industry, and surviving is such a difficult task. It's so painful. But if you can emerge from the other side, you can then grow into this mighty juggernaut. Lil, you heard Ben say, it is the responsibility of the founder to be in the details and to understand their accounting. You run an outsourced accounting service. So where is the balance here? I've seen many founders run out of money, blame their accountants, they weren't on top of it.

What do you advise founders in terms of how involved and how in the weeds they should get with their finances and with their accounting? Great question. Jason, exactly what Ben said. They should monthly look through the credit card statement and look through the bank statement. I do that. I'm not doing the books by any means, but I am looking at that and I think to a certain level in the business they should pay the bills. There's not that many bills in a startup

and you really need to be intimate with the details because you see it start to walk everywhere. And I think I love the frugal mindset because to me, you're using other people's money when you have investors and it is your responsibility to make sure that your company is going to get to where it's supposed to go. Right?

And I resonate with during the pandemic day two, the market crashed. The next day, you have to be willing to get divorced to make a marriage work. We looked at it and said, worst case, do we return all the money to the investors? And then how do we survive through? So when you say the absolute worst case would be we return the money to investors, what would they get? And then you go into second step. And that is, how do you survive through this? And what do you need to do?

our customers are with small business owners, we had a competitor go out. You saw it. $90 million. Boom. Yeah. And there is something about pacing yourself and having a decent amount of runway. When the companies you work with,

what do you see on average as the runway venture back startups have? And what do you think is ideal? So what I see on average that they have is 12. to 16 months. And I think ideal is you want to have 24 months. I think at 18 months, you should be really thinking about when are you going to go out for your raise. Don't wait and all of a sudden say, oh, I have to go out for my raise.

And when you get down to where you are at a million dollars or a little bit above a million, you need to make sure you have a line in place. If you're going to go for a series A, we just went out and secured a line, a line of credit. So when we go to raise, we're in a stronger position that if something happens timing-wise, right? And the line of credit is generally available to businesses with reoccurring predictable revenue. If you're in some of those other categories, you might not be so lucky. Absolutely. Absolutely.

Do you have any thoughts on these new services that are providing loans against reoccurring revenue? Have you tried them? Do your customers, are they trying them? they seem like they could be expensive at times. Some of them charging upwards of 6% for, you know, like a two-month loan against, you know, receivables. Yes, run as fast as you can, as far as you can.

You're not going to survive it. It's the old model of factoring for regular businesses. And there is so much money out there, and I'd love to hear your thought on it. But for me, you're not going to overcome that. If you're paying 36%, you know, 6% for two months, you're paying 36% interest for the year, you can find cheaper money. Yeah. And some of that, I wonder if that would even include compounding.

I guess you're paying it off so it wouldn't. But yeah, 36% is like a very expensive credit card. Well, this has been amazing. Thank you so much for both of you doing it. Very comprehensive talks. And we will see you all next time on this week in startups.