Five Tenets of Finance for Startup Founders
If you are a startup founder, getting your finances right from the onset is particularly important if you want a successful startup. It doesn’t need to be intimidating though so we prepared this Five Tenets of Finance for Startup Founders to serve as a guide for you and your team.
1. Your Company’s money is not your own money
You initially invested money, sweat, blood and tears for your startup. We get it. But once invested though, those stuff are not yours anymore. All those things become your startup’s properties and you should not treat them as your own anymore.
What not to do: Don’t use your Company’s funds to treat yourself to a weekend getaway with no business purpose whatsoever. Neither buy the latest gadgets (and try to justify that it’s because you need it for image-building purposes since you’re the CEO after all) nor buy a first-class seat on an upcoming business trip. If you have investors, I bet your investors wouldn’t like those idea and you might soon find yourself outside the cap table.
What to do: Be responsible. Spend only on things that matter for your startup. Treat the money in the bank as if it’ll be your last. Install an expense app in your phone and use it to scan your receipts and transmit it to your finance department. If you are based in an emerging country in Southeast Asia where the tax laws typically require physical copies still, buy a water-proof envelope and keep the proof of your spending - official receipts and invoices – and hand it over to your finance team as soon as you get back from your business trip.
Set an example to your team by practicing financial discipline.
2. Traditional accounting won’t work for you alone
In the beginning, you will be having zero revenue and negative profit. As a result, your monthly financials will not definitely be sexy. Your accountant might recommend cutting spending on certain costs and expenses and start growing your bottomline. So, what should you do? Our recommendation is to fire your accountant and hire us instead (LOL). Kidding aside, let’s explain why.
In a startup, the principles of traditional finance and accounting won’t work in the beginning. Depending on the nature of your business, your traditional accountant’s recommendations about cutting your spending and growing your bottomline in the first two to three years of your startup might be more harmful than beneficial to your startup. These are the years when you are still trying to beef-up your team, developing your product, getting that product-market fit and scaling. Cutting spending on these essential phases of your startup might increase your runway but it won’t definitely help your startup lift-off the ground.
Traditional accounting won’t work alone. You must learn and apply the so-called Innovation Accounting. Eric Ries described innovation accounting as “a way of evaluating progress when all metrics typically used in an established company (revenue, customers, ROI, market share) are effectively zero.” It basically measures the value of new business prospects that are ambiguous and uncertain just like a startup and serves as a tool to move up to the next level – get funding and monetize finally.
If you need help in setting-up and managing your innovation accounting for your startup, contact us here.
3. Fundraising is a constant process
“Is now the best time to raise money?” This is one of the common questions we receive and our automatic reply never change, “No. It should have been yesterday, or days, weeks, or months before yesterday.”
As a founder, your responsibility is to bring your idea to life and funding is always a key factor to making it a reality. Your fundraising activities do not start from the time you decide to fundraise but from as early as the inception of the idea. You are the first investor of your startup. Hence, you should be mindful of typical investor questions in many facets of your startup – from idea, target market, technology, team, execution, and business model.
Hence, everyday of your life is a fundraising process and getting meetings with potential investors is actually more of a product of that process than the goal itself. Getting introductions and meetings with potential investors and partners are mere lubricants to the fundraising goal.
4. Share ownership with your employees
Your idea is no good unless and until you recruit the right people to transform that idea into reality. Without a team to support you, you are only a person with an idea (just like the other billions of people in the world) and you have no startup. Most of the time, you cannot afford to hire these key people and you have to compensate them for risking their future by joining your shaky startup. Just like you, they are also entrepreneurs in that regard. Hence, giving them a piece of the ownership pie is the right way to reward them.
As to how much percentage to give them would depend on their role (are they your co-founders? or early employees?) and the overall set-up of the cap table (How many shares you plan in the beginning? Is it a 10% pool? Or a 20% pool?). Typically, you would give them stock options that’ll vest for four years though.
We can help you set-up and manage your cap table. Just drop us a message here.
5. Mind your unit economics
Growing a startup is tough balancing act between investing for growth and generating profits. If you look at the financials of most successful tech companies (e.g., Google, Amazon, Facebook), most were loss-making in the first few years but they were able to grow rapidly afterwards. How did they do that? There’s only one answer – they got their unit economics right. Sure, not all startups have business models in the beginning and they just keep on spending money for growth. Looking at the financial statements alone will not provide you a clear picture of the real profitability. You should look into the unit economics of your startup.
How much is the projected profit for each unit of revenue earned from each customer’s lifetime with your startup? How do the variable costs directly impact the margin of each revenue earned? At how many units the startup will be generating positive bottomline finally?
If your unit economics is negative from the beginning, then your startup is unsustainable and you’ll end up scaling losses, not returns, as you grow. Simply put, your unit economics is your profitability algorithm embedded in your business model.
Clearly, getting your Finances right is key in getting your startup off the ground. We believe that if you’ll be able to follow religiously the five tenets above, it’s more than enough to ensure you have the right financial fundamentals for your startup.
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Olos Consulting Group (OCG) provides topnotch and cost-effective accounting, tax, CFO and HR services to startups and small businesses in the Philippines and Southeast Asia. Visit https://www.olosconsultinggroup.com/.