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Startup School Winter 2020
January 20, 2020, Online, USA
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Kirsty Nathoo - Managing Startup Finances
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About the talk

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

You can find the lecture slides and transcript here: https://www.startupschool.org/videos/70

Find more Startup School and YC content at https://www.startupschool.org/library.

00:57 Three early-stage pitfalls

01:30 Not knowing what numbers to look at

01:39 Know your bank balance

04:21 Your growth rate

08:28 Representing your expenses

14:32 Hiring too quickly and scaling the company too quickly

15:13 Hiring employees

17:40 Scaling before you get product market fit

22:05 Conclusion

23:10 Q&A

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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Morning, everybody. Thank you for coming in at 9. It says, I know he stopped so I can even mentioned. My name is Christina. Who and I'm the CFO here at why companies to be helped? Now, 2000's companies almost as they come through y combinator. So Cena lost Cena lost his successes since it 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 and my son at money. And so every business, whether it's a salsa or a mom-and-pop shop, cash has its lifeblood and if you run out of

cash then the business ties, this is really no going back about points. Actually surprisingly easy to run out of cash. We see many stars do not realize that they they have done that since it was too late. So I can be able to turn it around and do something about it. They're going 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. It 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. Alright, 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, there are three things that you should know. If I can borrow 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 statement. 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 rate 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 - money out. Again. You can get this from your bank. Statements is

effectively just the change in bank balance between to date. 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 bill or something is super high. You can do this. You can look the average expenses as well to figure out your butt and that's a threat to his average button. So you might look sick over the three 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, cuz you look at your existing bank balance /, your average been, and that gives you a number of months. So here we have 150k 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 appointed. But again, the band might change over time. But this is the number for you. This is not a number to try to make things look good. This is for you to not lie to yourself. So looking at the bed and getting well, this month, it was 15K, but let's pretend it was 10 K. 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 grades, 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-long / your money in a month. So this is looking at the the right that you already knew was increasing. So in our example, here, we have 10k of Revenue and July 12th, K in August. I still operates rate is 20%. I just a note for that, for the people that went the, the most ways, which is it at school, a constant growth rates

is what's going to give you the Jacob and growth of Revenue. Because if you have 20% growing each month, as your numbers increase each month, that 20% Susana 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 it detailed dead. So the way you talk to me like this is if your expenses a constant on your Revenue growth that you just calculated continues. Have you got enough cash to reach profitability? And the Humvee 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 red line. 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 rates and it will calculate why you 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 150k of money to get to profitability and it

will take you 2 years. And so those are really cute things to know. Because if you only have a hundred K of money in your bank account, you know, 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 Freedom being profitable gives you freedom because he wants 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 could 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 expense will do one specific thing and be profitable than that's also a great. Those are really great essay that talks about this in more detail. This was written by Paul Graham and you can see that the link it suits, you wear that, like that gives you more information on this

again, is kind of thing about me during office hours with friends as 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'd love to my Revenue. I know all my numbers and I kind of forget the Bassett. But Ashley this needs to happen. Pretty often. You shouldn't be looking at it 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 very constant consistent. You should be looking at it very often, like sometimes a 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 and 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 calculation, that assumes that your expenses

again to remain constant, and actually in reality, that's probably unlikely, most Allsup's, their 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 against increasing both again, to increase to do some examples of expenses that may change over time as this one is undervalued in your own time, but everything and you're either paying yourself minimum wage or some very small amount which, by the way in California or everybody can pay myself minimum wage. Are

you up to doing things that don't scale in order to acquire uses? I'm not totally fine. And that's what we recommend that people do but it can make your customer acquisition costs low 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 again 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 on so

many things cost, extra money on top of the salary. I so depending on the location. I'm A good rule of thumb. Is this an employee will cost about twenty-five to fifty percent more than just the salary. So if they being paid 100K, yeah, then you'll fully loaded cost of the company is going to be somewhere between 125k 250k. I need a super easy to forget about. You think I'm going to pay the hundred K. That means you do. So it's going to cost but it is amazing how those numbers do I do. So just be aware of those. Finally, assuming paid activation

costs remain constant is another another mistake that we see people make a lot is actually easiest to find your early uses because the other ones, this is, hopefully most of Asa 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 other 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 in the west case scenario, you calculate that you have Eight months of Revenue, eight months of Runway left, but actually, then things a best of messing you end up with 10 months of Revenue. That enough bonus, right? You've got a bit longer to figure things out. Runway is no Savannah. Symmetric is not one of these things that supposed to make you feel good is not. One of the things that supposed to be used to to compare yourself against the company's is for you to know the health of your

company and so don't ignore 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 as you raise money, as he's talking to hire people. So it's good to bear in mind right now, but these are probably less relevant to a lot of you. And I'm the first one is outsourcing responsibility and prepare the finances for me, as I

stopped to get those with more complex and I told him no more thing to do. We recommend that people do that is 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 this year, during my 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 a CEO but also found us. Everybody should know what these numbers on an external. Put 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 me coming out and I'll do that. Best guess about what these things are there. Any respect them to always be a hundred percent, right? Because they're 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 spend every month and to make sure that you understand them and to make sure if anything that comes through that looks strange, question is not

necessarily I think I think a lot of it is that people are concerned that asking 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 at the numbers. And so if you like, well, I thought my Revenue was going to be a higher this month. What's going on? Why is why is this guy? Why is this number? Then? You can actually go in and look in crary was supposed to bring into this 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 still, come up to me and this total panic. I'd like to poke poku messed up and they told us all this wrong stuff. But 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 like take time, does didn't look at them. The report didn't figure out what was going on. And now there isn't enough time left for them to tend to 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 high-a to quickly because you're under a lot of pressure to to hire people. It feels like it's a, it's a really easy, really miserable piece of information. You know, you took one of the first questions that they, they will often. Ask is, so

how many employees are you at right now? How do you say it right now? I'm at 25 and you think you don't know, I'm going to go 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 hires out to be an investment into the business. I need to be making sure that you're getting a return message meant for some types of employees at super easy to measure. So, you know, you think about the salesperson if that don't bring any more sales than it's

costing the business, getting a good return on investments, but then think about a community manager, you know, I support manager is is much harder to measure that person 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 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 they need to leave the company. I 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. And 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 path 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. I hope they're easy to feel like you

have to kind of compete with, with all the fly. She saw sucks. This is Ray's Bunches of money and they're all hiring they scientists right now. And you know, about me is, I must needed a two scientists. So I bet they hired a scientist 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 Castle is not the case of just do. I need to buy this place and I need to hire that person

because what the investors, who would giving you this money. Rocking you to do something. Basically a miracle. They're asking you to take that money and send it into 10 or 100 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 you're repping, you 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 One of the conversations I have with Founders is something along the lines of my sales. Hello, because I don't really have any sales people there. The hiring of a couple of sales people that muscles

will obviously increase. That doesn't sound like what it might be fit to me. You know, if it's, if you have not been customers a beating a path to your door and you know, it it, it feels like the wheels are trying Wheels, falling off, if you trying to look after all those customers, so, just hiring will salespeople isn't necessarily going to be the thing that sets at going. Also missing yourself that you need more developers. Do you need more people to, to get the thing that gives you the the product Market face? Another conversation along is something like I need

full motive elipas because then I can build feature x y and said. And then obviously everybody go buy it. But again, if you have product-market fit than even your junky evzero, that doesn't have all of 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 start building up on the more 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 solve a sneak. And, 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 lend you numbers. This is the one that is, you know, 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 ask you that you will never raise any more money. The previous money to erase 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 investors looking to put

in another million dollars. It'll be totally fine. That's the kind of scary if you were lying on your messages to do that because they don't always sometimes they might but that I'm always so stay Sage money is the money that you'll raise off and on just an idea. You know what you'll be able to talk to investors about a an idea for product. You got a hypothesis that you you won't be able to check and they will give you some money once you get to series. I am beyond that becomes much much harder. He do. 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, and in particular don't leave it too late because if you're running out of Runway, your 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 actually get an investor to agree, to put money in and ask your cash balances of decreasing over. There's three months, you losing leverage, she can see from here

that probably 6 months. Maybe you can just about police off the really want to be thinking by 12 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 she get to 6 months and you unsuccessfully raising money. You really don't have a lot of times tennis 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 leisure

and hopefully pay 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 set number of things, bring you cash balance in your Runway understanding, how your expenses are going to increase understanding that the ratio of Revenue to employees, is best metric than just the number of employees. I having a plan to get to profitability, because he should assume you don't want to raise any more money. Alright. Thank you very much.

Okay, so few minutes for questions. I've always thought you're saying it. You should try to get continuity on a shoestring. But I bring articles, which claims that Apple was acting bad somehow in the Silicon Valley, and you should try to hurry, and go along those lines. And what do you think of this plan to balance? The two sides of you should do things on a shoestring to be profitable as early as possible? That says you should just throw money and get market share as fast as possible. The company

as well, you know, in the early days. I'm 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, start at 7 example, might be maybe you're plowing all of your revenues back into marketing and some description. 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 slowly rubbing you a little bit, but it would

come. So if I cashed it to preserve the runway, it is just that it is about a thing. I asked, you know, you have to bear in mind is that obviously the investors want you to spend money super fast money to come back to them, kept it 100 with you. Please. Please give us more money. So it's all about just being responsible with it and giving yourself enough time and enough Runway to be able to to figure SAS. Mission to see if Maria and I'm just curious at what stage do you bring us here for on, for an unpaid that company? Do you

start with Apartment C and bubble time to bring in the CFO is surprisingly light up to me, even probably post-series a. You probably don't need a full-time CFO at that point and of the loss of services that do, you know, Consulting cfo's will do will do to the strategy, you know, how P2 to figure out your numbers to raise to create a deco or whatever. For raising money, a full-time. See if I was actually pretty lights on. Just a reminder, the difference between a cat-5 and a bookkeeper at least for

the for the u.s. Is that generally the way that this works is the bookkeeper you would you would have earlier and that the other people who were just going 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 their reports for that and then separately, so that you would hire a CPA accountant who would prepare the tax returns and file those for you each year. As soon as I pick two different sets of people. So bookkeeping you would need to Elia a CPA, you need any leads to your tax returns

and then a CFO who's going to oversee that and do more of the building, a full cast building out budget. I probably have to stay later on as well before. That is really the found this to be doing it. My question is Rebecca is at least a possibility of any financial obligation to do. So, how can you help me calculate it? I mean, they're all tools online personally. I think it's actually better to build it yourself because I I think it it makes you think about this new mind. And so, usually just doing good. All spreadsheets for me works. Well, but certainly, there are other ways that

you can, you can do it in this. There's a loss of services to make it easier to see forecasts and things. Okay, maybe one more question and then we'll move on this site. Oh, friend bestest. So are you raising seats? Okay. So the seed stage. So question is, should you provide forecast in your deck? If you don't reach product-market fit in the answer is probably no certainty of the 16th stage. If you talkin to professional investors or experienced investors, they probably aren't really going to look or ask you for that number. They will ask you for things like so how could how big could this

gas? And What's the total Market size? And, you know, questions like that for the note has been looking for his, our monthly gross predictions. Probably. If you being asked those kind of questions from investors and you're raising money at the seed stage of problem is that those investors in nose after that, experience it investing in early-stage companies. So that's add a 2.8 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 Marketfest, I'll let 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 say thank you very much. I'm doing and I am a on Friday. I'm so if it's questions I didn't get to then, feel free to drop them in there and I will answer as many as supposed to.

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