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July 22, 2019, Mountain View, CA., USA
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Kirsty Nathoo - Managing Startup Finances
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About speaker

Kirsty Nathoo
Partner, CFO at Y Combinator

Kirsty Nathoo was previously an audit manager at PwC based in Cambridge UK, where she audited tech and biotech companies ranging from startups to public companies. She has an MEng in electrical and information sciences from Cambridge, and qualified as a Chartered Accountant with the Institute of Chartered Accountants in England and Wales.

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About the talk

Topic: Business

YC Partner and CFO Kirsty Nathoo shares the most common mistakes startups make with their finances and how they can prevent them.


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Morning, everybody. Thank you for coming in at 9 it says I know these thoughts so I just haven't mentioned. My name is Christina Wu and I'm the CFO here at my company. So I'm so I've actually helped now mm companies almost as they come through y combinator. So Cena lost Cena lost his successes sin Seno's to fail is so I'm going to help you just understand some of the big mistakes that we see some of these companies doing based on that cash advance on the money. And so every business whether it's a salsa or Mom and Pop Shop cash has its lifeblood

and if you run out of cash then the business dies, this is really no going back about points and it's actually surprisingly easy to run out of cash. We see many sauce up not realize that they they have done that until it's too late so I can be able to turn it around and do something about it. So we got to talk about these three early-stage pitbulls. So this is probably most relevant to you right now, and then we'll talk through another three that I just thought to raise money in Assassin's think about hiring some of the other mistakes that companies make I'm so we got

to look at what the numbers you should be looking ass. How often you should be looking at them whether your expense is really sick, and I'm thinking a little bit more about hiring and looking at responsibilities. All right. So let's move on to the first one. I'm supposed to say he's really not knowing what numbers to look at to make sure that the health of your company is is good and really threw three things that you should know your bank balance the money coming in on the money going act. At least I'm not difficult. You don't need anything fancy to be able to do this. This is all

information. You can get from your online banking or your bank statements. You don't need bookkeepers. He don't need financial software. This is super straightforward, but you would be amazed at how many companies don't look at this. And then using these three numbers you can then calculate some of the things you can look at but you can look at your Runway. You can look at growth rates and you can figure out whether the company is default alive. Okay, let's go through these in order. You been is purely money in minus money out again. You can get this from your bank statements is

effectively just the change in bank balance between two dates. Is example super easy you have 25k expenses. You have 10K Revenue. So you been is 15 k? If you are expenses are a little bit lumpy some companies, you know, you might have a one-off month where where you are. No pay the legal bills or something with super high. You can do this. You can look the average expenses as well to figure out your butt and that's often referred to as average button. So you might look stupid over 3 months to kind of guess it get more of an idea. So then once you know your

burn then you can start to look at what your Runway is and what this means is. How long do you have until you run out of money? And the way that you talk to you like that says you look at your existing bank balance / your average Ben and that gives you a number of months. So here we have a hundred fifty K in the bank. We just calculated all been right to be 15K. And so we have 10 months of Runway again super straightforward, but you'd be amazed at how many companies or how many found this don't know these numbers for that company. I just

appoint hear that again the band might change over time. But this is a number for you. This is not the number to try to make things look good. This is for you to not lie to yourself. So looking at the bed and going well this month it was 15K, but let's pretend it was 10K. So then that makes it look like the we have 15 months of Runway left. All you doing is lying to yourself. You still going to run out of money on the same day. It's just making you feel better right now. So it's super important to to really be honest with yourself on these.

You can also look at your brakes. Right and so this is just looking at two periods of time. So your money in a month to my nephew money in in month 1 / your money in a month. So this is looking at the the right that you are revenues increasing. So in our example here, we have 10k of Revenue in July 12th K in August. And so I broke the race is 20% I just a note for that for the people that went the the mathways was is it at school a constant growth rate is what's going to give you the Jake of and growth of Revenue?

Because if you have 20% growing each month as your numbers increase each month that 20% is a is a larger number. Okay, and then the final one is whether the company is default alive all the other the other side of it is is it default dead? So the way you calculate this is if your expenses a constant and your Revenue growth that you just calculated continues have you got enough cash to reach profitability? And because I'm the little calculator that Trevor Blackwell, he's one of the founders of Y combinator created for you to do they sell basically there are three things

that you can you can play with so you can look at you all monthly expenses, which is the redline you can look at you all monthly Revenue starting point, which is the green points over at the South and then you can change the gradient of that Lines video growth rate and it will calculate Weight become profitable and how much capital is needed. Now this example isn't the same numbers as the ones that would just be working through. So in this example, this is assuming that you will need 250 K of money to get to profitability and it will take you two years. And so those are really key things

to know because if you only have a hundred K of money in your bank account, you know that you got a problem and you know that you have a need to find a way to increase your Revenue growth or you need to find a way to cut expenses because the whole goal here is to be at the point where you can find a path to profitability. because It gives you free them being profitable gives you free them because you aren't in a position to need to raise money. I kind of like dating if you don't need to raise money, you will pay less desperate. So you the investors want to give you money more. So it's easier

to raise money. So it's actually really important to have that option. It can sometimes you know, it can be it can be a switch as well. You don't have to necessarily be profitable right now, but if you know that you could turn off one specific expend. So do one specific thing and be profitable then that's also a great day. This was a really great essay that talks about this in more detail. This was written by pool Graham and you can see the the link it suits you wear that buy that gives you more information on this and again is kind of things when we doing office hours

with round does it's one of the first questions we ask and you'd be amazed how many people don't know the answer? These numbers super easy calculate super straightforward the next problem. Is it people go long in this is okay. I looked at my room way. I've looked at my Revenue. I know all my numbers and I kind of forget to Bassett. But Ashley this needs to happen pretty often. You shouldn't be looking at every quarter or every month. You should be looking at these at least every week. And if your Runway is getting low things are looking not very constant consistent. You should be

looking at it very often lie sometimes daily whenever anyone asks, you should know your numbers have a sink. Now how many of you know how much money is in the company bank account if you already have one. Great, how much have you know, you'll run away? Slightly less numbers 5 minutes Huntsville, that's that's pretty good. I like it. I'm impressed. Okay, the next one is under representing your expenses. So if you think back to that default alive calculator that assumes that your expenses again to remain constant and actually in reality,

that's probably unlikely most Allsup's our expenses will ramp up over time. And you should you should understand how that's going to happen. You know, what what kind of expenses are going to increase in both again to increase to sew some examples of expenses that may change over time is the first one is undervaluing your own time, but they clean the early days where you're doing everything and you're either paying yourself minimum wage or some very small amount which by the way in California or everybody can painting sells minimum wage. And you're also doing things that don't scale in order to

acquire uses enough totally fine. And that's what we recommend that people do but it can make your customer acquisition costs look below and then really they are and so you should be aware that I have a time as he sought to hire people to to look into these that those expenses are going to go up. Hiring people is not just the salary. But every person that you hire you need to provide them with equipment, you need probably desk space you need health insurance probably depending on where you're based. And so all of these things cost extra money on top of the

salary. I so depending on location A good rule of thumb is this an employee will cost about 25 to 50% more than just the salary. So if they being paid a hundred k ya, then you'll fully loaded cost to the company is going to be somewhere between 125 K 250k super easy to forget about you think I'm going to pay 200k. That means you though. So it's going to cost but it's it's amazing how those numbers do I doubt so just be aware of those. Finally assuming paid acquisition costs remain constant is another another

mistake that we see people make a lot seemed like this often times in the early days is actually easiest to find your early uses because the other ones this is hopefully motivation to use the product and actually over time it gets harder to find than convert uses. And so the cost of doing that goes off and so again, you know, you should be thinking about that. You should be looking at what your costs are right now and seeing thinking of a reasonable. What do we think? They might go up to because if you can look at things in the worst case scenario and you have you

know in the west case scenario you calculate that you have 8 months of Revenue 8 months the runway left, but actually then things a best of mess and you end up with 10 months of Revenue than that bonus, right? You got you got a bit longer to figure things out. Runway is no Savannah symmetric is not one of these things is supposed to make you feel good is not one of the things that supposed to be used to to compare yourself against companies is for you to know the health of your company and so don't ignore all this stuff don't lie to yourself don't you know try to massage these numbers to

feel like it's making yourselves back to because all this going to happen is you're funny and it will become a shock. All right. So these ones now it's starting to get a little bit more if you raise money is he stalking to hire people? So it's good to be reminded right now, but these are probably less relevant to a lot of you feel now is outsourcing responsibility and I'm to prepare the finances for me as I stopped to get those with more complex. And that's a totally normal thing to do. We recommend that people do that.

It's usually wants people racing money is no such a good time is no such a good use of the CEOs time to be doing. Books on the Sierra can be doing much more high-leverage things in mind. Is that even though the bookkeeper is doing the books and preparing those numbers. The responsibility is still everybody's in the company of the CEO. But all the found us. Everybody should know what these numbers on an external keypad isn't going to know the business let you know the business. So often times they will the way that they they work is that they will get hold of bank statements and they'll

see money coming in and they'll see money coming out and they'll do that best gas about what these things are and they won't always be right honey, really expect them to always be a hundred percent right? Because they looking at it from a very removed position. I'm so it's up to the founders and it's up to the team to look at those reports of the bookkeeper send every month and to make sure that you understand them and to make sure that if anything that comes through that looks strange you question is not necessarily I think I think a lot of places that people are concerned that I think

questions will make it look like they don't understand the numbers but usually what happens is if you don't understand what these numbers are looking like it's usually because this has been some misunderstanding in the reporting of the numbers and so if you like well, I thought my Revenue was going to be the high this month what's going on? Why is why is this guy? Why is this this number then you can actually go in and look in query what was going into that and you know, you might find that the house being a mistake made. And this is this is probably one of the number one in the things

that I get found this coming to me complaining about they'll come up to me and this total panic keep him messed up and they told us all this wrong stuff for now. I don't know. I have no Runway and I don't know what's going on. And actually what happened is the bookkeeper sent them the monthly reports. They would like to take done my work. If I'm just didn't look at the reports didn't figure out what was going on. And now there isn't enough time left for them to turn the business around either to get profitable or to raise money to figure things out and the company dies because it runs

out of cash. So super super important to be on this all the time. Hiring too quickly and scaling the company to quickly. Is it really easy to do to hire a to quickly? Because you're under a lot of pressure to go to hire people. It feels like it's a it's a really easy really miserable piece of information, you know, you talked to Founders. I'm one of the first questions that that that they will often ask is so how many employees are you at right now? How do you say alright,

it's 25 and you think you don't know. I've only got 10 employees. That means that you know way more successful than I am and Ashley that's totally not true. So we already mentioned that hiring employees cost more than just a salary that every higher is actually an investment into the business. I need to be making sure that you're getting a return on my investments and now for some types of employees at super easy to measure so, you know, you think about the sales person if I don't bring any more sales than it's costing

the business to hire them then clearly, you're not getting a good return on investment, but then think about a community manager or a you know, a support manager is is much harder to to measure that and that's kind of one of the things that as a CEO you need to be looking ass and you need to be figuring out to make sure that that all the people in your company are actually working to make the company more valuable. Possibly. This is the point where you know, if people aren't working out you should be prepared to fire fast, you know, if people aren't pulling their weight then they need

to the need to leave the company. Like I say it's easy to fall into this trap that the mole people you have the best of you doing but actually the best companies do more with less as so actually the real way that you should measure yourself is what my ratio of Revenue two employees because the higher that says the best of you doing you doing more with less And that's the past to being profitable from an early stage, which then takes the pressure off to the the worry about whether the company is going to continue. How do you spell so easy to feel like you have to

kind of compete with with all the flashy sauce UPS that's raised Bunches of money and their old hiring day to scientists right now. And you know all that means I must needed a two scientists. So I better hire date signs. I actually don't you know that again the best companies do more with less and if you can if you can build a really great company with less employees, then that's amazing for everybody involved. I bet I remind you know, you should be treating this money half away is not the case of just how I need to hire this person. I need to hire that person because what the

investors who would giving you this money. Ross can you to do something basically a miracle they're asking you to take that money and send it into ten or a hundred times that amount of money to give back to them. And the way you going to do that since we're being careful with your expenses and making sure that your Revenue gross. As I hold on to that scaling before you get product Market fast is also another dangerous thing that people fall into quite easily by the point where you still figuring out what your product is me trying to find product-market fit. You should be spending as

little as possible. And then that will give you the runway to have time to figure out what it is that you you should be building and then, you know, people will be beating down the door to buy your products more employees will not help you get to product Market fit. It will not help you get the faster. It will not help you get them more efficiently and What is the conversations I have with Founders is something along the lines of my sails? Hello? Because I don't really have enough sales people. So if I hire another couple of salespeople, that muscles will obviously increase

That doesn't sound like product Market fit to me. You know, if it's if you have not been customers of beating a path to your door and you know, it it it feels like the wheels are trying to Wheels falling off. Is he trying to look after all those customers? So just hiring will sales people isn't necessarily going to be the thing that sets that going. Also, sing yourself that you need more developers or you need more people to to get the thing that gives you the the product-market fit another conversation along. This is something like I need full moon developers

because then I can build feature X y&z and then obviously everybody go buy it. But again, if you have product-market fit than even your junk evzero that doesn't have all these fancy things is solving a big enough problem for everybody that they willing to pay for it and they love you for it anyway, and then you can stop building up on the most peaches and then you can start hiring to do that. This is this is the one that there's no coming back from the other ones. If you make these mistakes you can you can probably sell fake Sneakin, you know, if you hi to quickly, you can figure

that the house if you don't know you respect that don't know you all numbers you can let him numbers. This is the one that is yuno no going back. So if you let your Runway get to low before raising you going to have problems raising your money. So the first thing is you should always assume that you will never raised any more money always assume the previous money that you raise will be your last. And that you should be aiming to get to profitability on that money. So again the conversations I have with Founders why they always fine. My invest is going to put in another million

dollars. It'll be totally fine. What kind of scary if you're relying on your messages to do that? Because they don't always sometimes they might but they don't always. Dusty Sage money is the money that you'll raise off and on just an idea, you know that you'll be able to talk to investors about a an idea for a product. You've got a hypothesis that you you won't be able to check and I will give you some money once you get to series. I am beyond that becomes much Machado, you know, you need sustained growth. You need to have more of an idea. You need to have product Market fit. This is why

it's a lot harder to raise money as he goes through the life of the company. Any particular don't leave it too late because if you're running out of Runway, you leverage goes down as you're trying to raise money. So if you have 6 months of Runway, let's say anything about to go and start raising money. That's pretty scary. It could take 3 months more to Ashley guessing invested to agree to put money in and ask your cash balances of decreasing over those three months. You're losing leverage. She can see from here that probably 6 months. Maybe you can just

about police off. The really wants me thinking I told most Runway. That's the point where you thinking. Okay. Maybe I need to think about whether I raise money or whether I'm thinking about getting to profitability. I also if you get to six months and you unsuccessfully raising money, you really don't have a lot of time to turn this around to get to profitability for the company to succeed. And is it a really great essay on our block that goes into this in more detail link down here so you can we can read that you're at your Elijah and hopefully

hey that's on board. Okay, so in conclusion most companies died because they run out of money is super easy not to run out of money just by looking at a says number of things any cash balance in your Runway understanding how your expenses going to increase understanding that the ratio of Revenue to employees to the best metric than just the number of employees and having a plan to get to profitability because you should assume you not going to raise any more money. All right. Thank you very much.

Okay, so few minutes for questions. Quotes about the way that you're saying it audit, you should try to get continuity on sheets for the possible articles which claimed that bad somehow enough Silicon Valley and you should try to raise money and not be profitable and get here and go along those lines. And what do you think of plans and how do you balance the two sides of you should do things on a shoestring be profitable as early as possible that says you should just throw money and get market share as fast as possible. I think it depends on

the stage of the company as well. You know it in the early days then probably being careful with your money and making sure that you are you have a plan to get to profitability is a good thing. Just having a plan doesn't mean that you necessarily have to actually be doing it, you know, so it's 7 example might be maybe you're plowing all of your revenues back into marketing and some description of Arava and knowing that you could actually slow. Do you know the way to the way to reduce your expenses is to reduce your marketing which might slow your Revenue

a little bit but it would come save that cashed it to preserve the runway. It is just that it is a balancing act and you know, the other thing you have to bear in mind is that obviously the investors want you to spend money super fast. They want you to come back to them cap in hand with you. Please. Please give us more money. So, you know about just being responsible and giving yourself enough time and enough Runway to be able to to figure ring size. Michigan State Florida and I'm just curious of what stage do you

bring a Seer for on for an unfit. Company South Apartments mobile time to bring in the CFO is surprisingly latest me even probably post-series a you probably don't need a full-time CFO at that point and is also says that do you know Consulting cfo's will do will do so the strategy, you know, he'll Pizza to figure out your numbers to raise to create a day or whatever for raising money a full-time. See if I was actually pretty lights on. Just a reminder that the

difference between a CFI. When a bookkeeper at least for the for the u.s. Is the general of the way that this works is the bookkeeper you will you would have earlier and that the other people who were just going in to get your your numbers is coming through your bank statements into a balance sheet into an income statement into the accounting system. So that providing the reports for that and then separately so that you would hire a CPA and accountant who would prepare the tax returns and file those for you each. Yes. It is actually two different sets of people. So it will keep you

would need to Aaliyah a CPA you need any leads to your tax returns and then a CFO who's going to oversee that I knew more of the building a full casts building out budget something like that are probably others but lights are on as well before that is really the founders we doing it. My question is regarding the relationship of the deal with any financial obligation to how can you help me calculate sit there all tools online personally. I think it's actually better to build it yourself because I I think it it makes you think about it in your mind. And so

usually just doing good all spreadsheets for me. What's well, but suddenly that there are other ways that you can you can do it in this this a loss of services to make it easier to see full cast some things. Okay, maybe one more question and then we'll move on. Yeah, I'm from product Market fit. Ofra best is so are you raising seed-stage money? Okay. So the seed stage. So the question is should you provide forecast in your deck? If you don't reach product-market fit in the answer is probably no show me the seed stage. If you talkin to professional investors or experienced investors, they

probably aren't really going to look or ask you for that number will ask you for things like so how could how big could this cats and What's the total Market size and you know questions like that for the not going to be looking for his a monthly gross predictions. Probably if you being asked those kind of questions from investors and you're raising money of the Seas stage, it probably means that those investors in North Ashley that's experienced investing in early-stage companies. So that's a datum point for you to decide whether it's it's a good person to to work with. I'm

Suddenly by the time you get to Siri say, however, you should have you should have some plans but you know the point of a series a is that you've got product-market fit. I know, you know, you know you have more of an idea for Castaways forecast. You don't know for sure. But yeah. Okay, I think we up. So thank you very much. I'm doing and I am a on Friday. I'm so this questions. I didn't get to then feel free to drop them in there and I will answer as many as possible.

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