Year-End Planning for Startup Success | Startup Finance Basics w/ Kruze's Scott Orn

Kruze COO, Scott Orn, joins Jason (0s)

• The basic things that startups have to get right are critically important, and if they don't get them right, everything can blow up, similar to not maintaining a car properly (13s).
• The top three areas that can throw a startup into a tailspin are legal, accounting, and Human Resources or human capital (50s).
• Scott Orn from Kruze Consulting, a CPA firm dedicated to VC-backed startups, helps startups with these critical areas (1m1s).
• Kruze Consulting focuses on early-stage startups and has worked with clients like Superhuman and Comm, who eventually graduate to other services as they grow (1m17s).
• The end of the year is a critical time for startups, with many trying to get things done, but it's often too late to close deals between December 15th and January 1st (1m48s).
• Founders should aim to close deals in October or early November, or else they may not happen until January 15th (1m56s).
• Year-end planning is essential for startups to set up for success in the following year, and it's crucial to focus on the right things (2m6s).
• Startups run on cash, usually VC cash, and proper financial planning is vital for their success (2m15s).

Evaluate Your Fundraising Needs for Next Year (2m17s)

• At the end of the year, it's essential to ask if you'll be raising money in the upcoming year and if you're fundable, as this determines how you operate (2m23s).
• The best place to start is by asking your existing Venture Syndicate if they would invest in you if you were new to them, and what needs to change to be fundable (2m42s).
• What makes a company fundable changes every year, and in a down market, survival becomes paramount, while in a thriving market, growth becomes key (2m56s).
• If the answer to raising money is no or maybe (which means no), you should focus on what needs to change in the company, such as increasing revenue, signing more logos, or cost-cutting (3m49s).
• A good way to phrase the second-order question is to ask if, after making necessary changes, your investors would feel comfortable introducing you to their favorite series A investors (4m10s).
• If revenue is flat or down, it's essential to discuss whether you want to prove to investors that you're unfundable or figure out a way to get to growth and break even (4m37s).
• To be ready for fundraising, you need to have your story correct, a timeline, and a clear idea of when you're raising money, with at least nine months of runway (5m0s).
• Having a lot of cash in the bank is ideal, but you don't want to let venture capitalists run the clock out on you, especially when you're getting down to three months of cash (5m18s).
• Startups should begin fundraising with 12 months of cash, as the process typically takes 3-4 months to complete, and having enough cash provides leverage in negotiations with investors (5m49s).
• The fundraising climate is challenging, but certain sectors, such as AI companies, are doing well and may be able to raise money in as little as 6 weeks, while traditional SaaS companies, biotech, or consumer companies may take 3-6 months (6m2s).
• It's essential to set a timeline for fundraising, treating it as a sales process with targets, and having at least 6 months of runway (6m31s).
• If a startup only has 3 months of runway, it's recommended to stop taking a salary, cut costs, raise prices, and show 6 months of runway to improve the chances of successful fundraising (6m34s).
• Having 6 months of runway provides a much better position for fundraising, allowing founders to negotiate better terms with investors (6m58s).

Financial Statement Review and Clean-up (7m5s)

• To ensure startup success, it is essential to review and clean up financial statements, making sure all expenses are submitted, and invoices to customers are reviewed to collect as much as possible (7m18s).
• This process involves nitty-gritty accounting, including going over all invoices to customers and collecting as much as possible, to prepare for the new year (7m23s).
• Raising prices can be beneficial for companies that are struggling, as seen in cases where companies increased their prices 2-3 times and customers were happy to pay, resulting in a new lease on life and improved long-term value (7m37s).
• The end-of-year cleaning period is an opportunity to review and clean up financial statements, understand key metrics, and prepare for the new year (8m1s).
• Founders who understand their metrics tightly, including customer acquisition cost, lifetime value, cash in the bank, burn rate, cost of goods, and gross margin, are better equipped to make informed decisions (8m14s).
• An accounting team can walk founders through this process and provide guidance on cleaning up financials and understanding key metrics (8m23s).
• Having clean and organized financials is crucial for startup success, and founders should prioritize this task to prepare for the new year (8m29s).

Set High-Level Goals and Strategy (8m34s)

• Setting high-level goals and strategy is crucial for startup success, and having a plan is essential, as "hope is not a plan" (8m34s).
• A good goal for an early-stage startup might be to triple revenue, but it's essential to have a process for achieving that goal, including understanding how to acquire new customers (8m53s).
• To create a plan, startups should consider how they got their first 10 customers, how to get the next 20, and how many customers they can acquire per month, as well as churn rates (9m1s).
• Having good books and being thoughtful about the plan is vital, and it may involve resourcing the plan with new hires, such as sales executives and customer success personnel (9m14s).
• The plan should include milestones, such as product milestones, hiring milestones, and financial milestones, which can help build confidence within the organization (9m41s).
• The financial plan should be presented to the board for approval, which brings accountability to both the startup and the board, and helps to answer key questions about the business (9m56s).
• A financial plan is essential for scaling the business, as the founders' initial relationships and sales efforts may not be sustainable in the long term (10m18s).
• Having a financial plan can lower anxiety within the organization, make the leader seem more effective, and help define reality for the team (10m40s).
• Great leaders define reality, whether it's a harsh reality or a growth opportunity, and communicate it clearly to their team (10m50s).

Cost Optimization Review (11m27s)

• Conducting a cost optimization review is crucial, especially for companies with large expenditures, such as AI companies that spend 20% more on infrastructure costs than typical SaaS companies, which can significantly impact their financial model (11m27s).
• Big cloud companies often have issues with invoicing, including double invoicing and forgetting to invoice for several months, which can lead to messy and large expenditures (11m41s).
• It is essential to negotiate with cloud providers, as everything is negotiable, and companies can get startup credits or aggressively negotiate with their primary provider using quotes from other providers (12m19s).
• Turning off credit cards and reviewing subscriptions can help identify unused services and cancel them, which can lead to significant cost savings (12m34s).
• Being frugal and setting a tone of discipline within the organization can increase confidence and encourage employees to have great discipline, especially when it comes to expenses such as office space, infrastructure, and remote work (13m15s).
• Setting a good example as a CEO or founder is crucial, as employees will follow their lead, and having great discipline in expenses can lead to a more confident and disciplined organization (13m34s).

Create Next Year's Operating Plan (13m39s)

• Creating next year's operating plan involves building a financial model that outlines key metrics such as customer acquisition, average selling price, infrastructure costs, and headcount, which is crucial as startups spend 70-80% of their total spend on people (13m39s).
• The financial model should include timing against key metrics, such as the time it takes to onboard a sales executive, which can take six weeks, and the performance of new hires, with only one out of three salespeople typically performing well (14m39s).
• It's essential to plan for the possibility that not all new hires will perform well, and to have a plan in place to address this, such as hiring more people than needed to account for underperformance (15m2s).
• The financial model should also take into account the timing of hiring new employees, as hiring too many people at once can disrupt the company culture and lead to mercenary hires who don't care about the company's vision and mission (16m11s).
• Staggering hiring can provide optionality and allow the company to adjust to changing circumstances, such as slower sales, and can help extend the company's runway and months of cash (16m38s).
• Understanding these levers can make a founder CEO great and reduce stress while inspiring the team (17m11s).

Tax and Compliance Planning (17m19s)

• Tax planning and compliance planning are essential for startups, including knowing when tax payments are due and understanding how extensions work (17m22s).
• A tax calendar can be a useful tool for keeping track of deadlines, and Kruze offers custom tax calendars for major startup metros on their website (17m41s).
• It is recommended to always file an annual federal and state tax extension, take care of 1099s, and pay the Delaware Franchise Tax to avoid losing corporate status and incurring fines (17m58s).
• Filing a tax extension can provide more time to complete taxes and allows for the option to claim an R&D tax credit later in the year (18m11s).
• R&D tax credits are available for startups with revenue of less than $5 million for less than five years, and can be a significant benefit, with up to one out of five developers eligible (18m40s).
• It is recommended to work with a qualified partner to understand and claim R&D tax credits, as the process can be complex and varies by location (18m47s).

Team and Equity Management (19m2s)

• Team and equity management is a crucial aspect of startup success, particularly when it comes to bonuses, promotions, grants, and 409a valuations (19m2s).
• While bonuses are not common in most startups, they may become more prevalent as the company grows, and promotions are also a consideration (19m5s).
• Grants, specifically option grants, are a significant part of an early-stage employee's compensation package, often vesting over four to five years (19m12s).
• Companies typically re-evaluate and provide smaller, yet meaningful, option grants to key employees every few years (19m37s).
• Founders must strategically think about their key employees' compensation and risk of losing them, considering factors such as repricing options if they are no longer competitive (19m49s).
• Resources like cap table software companies can provide benchmarks for cash and option compensation to help inform these decisions (20m2s).
• The end of the year is an ideal time to address these issues, as the board will expect it, and it can be discussed during the same meeting as financial approvals (20m14s).

Cash Management Strategy (20m22s)

• Startups that raise money are not expected to be investment experts, but with interest rates ranging from 3-7% available, they can earn significant returns on their cash reserves, potentially covering the base pay of two additional sales executives, for example, a $3 million raise could earn $180,000 in interest at 6% (20m35s).
• A study found that Kruze's clients are managing around $4 billion, with $2 billion sitting idle in operating accounts earning almost no interest, presenting an opportunity to shift some of that money into cash management accounts to earn a higher yield (21m1s).
• Typically, startups have an operating account for paying bills and collecting revenue, and a separate cash management account, which can be with the same institution, to actively earn interest on excess funds (21m12s).
• It's essential to set up automatic transfers to a cash management account to earn interest while maintaining a sufficient cash reserve to avoid missing payroll, which can hurt morale and make the company appear unprofessional (21m32s).
• At least $1 billion from Kruze's client base could be sitting in cash management accounts earning interest, making it a good opportunity for startups to take advantage of current interest rates (21m47s).
• This strategy may change over time, but for now, it's a straightforward way for startups to earn additional income from their cash reserves (21m54s).