Summary: There’s more to start-up finance than raising money, here are the “5Ps” you need to know. E-mail. Tweet.
While I try to keep topics on this blog related to innovation strategy, and product development (rather than being a pure “startup” blog) sometimes I need to weigh in on topics that get me a little annoyed. That is, in nearly every meet-up of young startups (the best places to find the seeds of innovation sprouting) the discussion is centered around raising money. All too often venture capital financing is lauded as the holy grail for a startup, over running your business. However, if you’re supposedly operating as a “lean startup”, these are the financials you should be focused on…not raising money.
Financial Management vs. Raising Finance
There is much more that goes into the financials of a start-up (I almost called this post “Why Startup CFOs Matter”). Consider that if the core objective of a business is to make money, and likewise its death is to run out of money, it’s worth examining how the areas of day-to-day financial operations of a startup.
Here I propose “5Ps” of start-up financial management:
- Process & Policies
Let’s explore each of these in more detail.
The first ‘P’, addresses all of the modeling and forecasting (both macro & micro) that help determine you you will manage the financial health of your business, en route to achieving your goals. Some of the relevant data points you’ll need to know to do this effectively are:
- Understanding sales activity average deal sizes, # of deals, segments, sales cycles
- Tracking profits…and since you’re a startup it’ll mostly be losses
- Managing cash flow vs. growth (e.g. bookings and recognized revenue)
- Diagnosing your “full” costs, including those to acquire and serve customers (and projected lifetime value)
2) Process & Policies
To accomplish #1, it is essential to institute the right procedures that will help keep things in check, and give you the visibility into key metrics so you can effectively monitor your progress.
- Setting up reporting systems, including workforce and salesforce management tools
- Instituting proper contract, billing, and collections policies
- Managing key metrics, and keeping expenses in check
With personnel often clocking in as the largest business expense, it’s critical to get this right. To do so, you’ll need to think of things like:
- Compensation plans and overall incentive structures
- Employee benefits
- Utilization model for customer, or professional, service organizations
While many factors go into determining optimal pricing models (we won’t tackle that in this post). Optimizing your revenue mix, increasing average deal sizes, lowering costs to serve all factor in. Clearly this is all conditional on what model you choose, freemium models have different dynamics than inbound models, which are different than enterprise models. Nonetheless, this is decision that has the biggest impact on your ability to drive revenue.
Finally, if you’re trying to avoid crafting Barney Deals, and create a real partnerships that drive financial returns, there are a number of things to think about. While your lawyers can handle the details of the contract, you’ll need to drive the key economics and rights issues…essentially the core mechanics of who writes the check to whom, and for what.
There are many resources out there to dive into more detail of the CFO role. The point is that there is more to managing the financial health of your emerging, or established, business than raising money and selling out. The day-to-day financials matter, as they impact every other area of your business. The 5 P’s framework is an easy shortcut to help you keep track of the thing you need to be on top of…and staying on top of those will help anyway for when you actually do need to raise money.
Caveat Emptor: As always, you’ll probably need to take anything I say with a grain of salt. In his case, I’m one of those few people I know that graduated from business school without taking any of the core finance classes…and I’m proud of it. But more on that another time.
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