You would think that a venture fund CFO would be the last person to provide relationship advice. However, I am often asked, “How would you structure the finance function for an early stage venture?” And my answer is in the context of nurturing a long-term relationship.
A long-term relationship may introduce you to new experiences and products (in my case colorful socks) but it will also force you to evaluate how best to manage your joint finances. Creating a strong financial foundation early mitigates stress in your ‘relationship’ and enables you to establish the right path to grow together. The same applies to managing your company’s finances.
A long-term relationship may extend your ‘friends’ network, but choose wisely – in the case of your company, establish the right partnerships early including your bank and service/technology providers:
- Optimize your banking relationship beyond a deposit account. Find a bank with technology start-up experience, ideally one who has provided short-term financing (line of credit, term loans). The right banks also support the technology ecosystem through events that bring together venture capital firms and entrepreneurs. A strong banking relationship at inception will support your growth needs while saving you the administrative challenge of either moving banks or managing multiple bank accounts.
- Outsource to an accounting service provider and a human resource technology solution. Outsourcing will cost significantly less than hiring a full-time resource and will provide an independent perspective. When selecting an outsourced solution, your provider should go beyond administrative benefits and demonstrate the ability to provide quality reporting that will help drive both business and fundraising decisions. A strong outsourcing partnership will scale with the growth of your business.
A long-term relationship does not rely on luck; it requires focus, planning, and investment – don’t take these for granted:
- Don’t spend money, instead invest it in your business. Base your spending on the value or competitive advantage it creates for your company. Consider an independent advisor who can help guide strategic financial decisions that support your long-term growth. Your demonstrated ability to invest in growing your business will pay dividends when you raise future rounds of capital.
- Manage cash through a quarterly cash flow projection which reasonably projects when you will receive payment on your receivables. Use this projection to maintain cash for payroll and rent, to plan additions to your team, and to negotiate payment terms with your vendors that are consistent with your receivable cycle. An effective cash flow projection will provide the roadmap if you need to raise additional capital.
- Create a simple chart of accounts (15-20 account categories) for your financial statements. Things will only get more complicated with time. Review financial statements monthly and update your cap table when you grant options (and when you raise a new round). Updated financial information and an updated cap table are essential when raising capital and responding to investor diligence requests.
A long-term relationship can benefit from third-party interventions. I’m not suggesting therapy, but an independent review will prepare you for the future:
- Consider a financial statement review by an independent accountant. A review can provide external parties with a basic level of assurance on the accuracy of financial statements and is appropriate as your business grows and seeks larger and more complex levels of financing and credit. A review will also help in transitioning to a financial statement audit which institutional investors will likely require.
A long-term relationship generally requires co-habitation, so plan your ‘home’ wisely:
- Evaluate your space needs strategically as rent will likely be your largest expense after payroll. A lease agreement creates an obligation for the total payments; therefore, if you want flexibility consider a shorter-term lease agreement and retain a tenant option to extend. If considering a new space remember to account for both the cost to move and the cost to return your existing space to its former state.
While these steps require time and energy and may not seem immediately important when launching your business, the right investment in your financial foundation will provide the agility to scale as well as save you from downstream challenges (aka ‘an ugly break up’).
Have questions or interested in (financial) relationship advice? Send me a note at email@example.com