LIVE Workshop Wednesday: Strategic Finance in Today's Market with IVP

questions that hopefully, hopefully result in a lot of learning. This week, uh, we will hear from Michael Miao, partner at IVP. We will be discussing Strategic Finance in Today's Market: A Tactical Guide to Building and Scaling Your Team with IVP. Welcome, Michael.

Hey guys, uh, really excited to be here. Thanks for having me.

Yeah, of course. So just a few reminders up top before we ask Michael a few questions to warm things up. As you guys know, these sessions are super interactive, so please make sure you get your questions in early. We always try to make sure we get to as many questions as possible. The earlier you get them in, the more likely they are to get answered. When you put a question in the chat, I will be privately message you asking if you want to ask the question out loud. We highly encourage you ask your questions. It always results in the best answers and the best conversations. And with that, Michael, we're going to start with a few questions directed at you.

Awesome. Ready?

Okay. So what is one of your favorite investments you or the firm made in the past year?

Yeah, so I guess I'm going to go with an investment I made about a year or so ago. It's a company called Seon. It's a fraud prevention software platform. It's a company based in Europe with offices in the US as well. But, you know, it's an incredible team. It's a huge market. Online fraud continues to be a massive problem. And it's just the classic definition of a really scrappy team that, you know, just gets things done and going after a huge market opportunity. So it's one that I'm particularly excited about.

Great. That does sound exciting. And a good team is always something to look forward to. All right. What has most surprised you about venture capital this year?

Yeah, that's a great question. I think what surprised me the most is I thought this year would actually be a lot more active from a deal perspective than it actually ended up being. As I think about why, I think a lot of— The CEOs out there, I think, took the advice of, hey, like, we need to extend runway, you know, preserve cash, get more efficient. And I think the result of that is, you know, a lot of companies just don't need to go out to raise right now. So, you know, I had thought this year would be a lot more busy, as last year was a little bit slow. But, you know, I'm anticipating hopefully things pick up towards the end of this year and next year. But I would say that's probably one of the things that surprised me most. I thought there would be more fundraisers, especially in the growth stage this year.

Yeah, so you're basically on vacation this year is what I'm hearing. No.

All right.

And with that, I'll hand it over to you for your presentation.

All right. I will go ahead and kick off here. So, hi everyone. My name is Michael. I'm really excited to be here with you all today. I'll be talking about a topic that I'm personally really passionate about, which is How to Build Strategic Finance Teams at Startups. And before I dive in, I wanted to just give a quick background on myself. So I'm a partner at IVP. I joined the firm about 7.5 years ago. I primarily focus on software and healthcare investing. And you can see some of the companies that I've had the privilege of backing in my bio below. Before I joined IVP, I actually worked on the strategic finance team at Dropbox from 2014 to 2016— or, excuse me, 2015. And as far as I know, you know, we were the first strategic finance team in Silicon Valley. I won't go as far as to say that we invented strategic finance, but I like to think that we at least, you know, coined and popularized the term. So, you know, in this presentation, I'm just going to give a quick overview of what the finance team does. I'll explain what strategic finance is. And if you're interested, I plan on getting into the tactics of how to build a strategic finance team at your startup. So that'll be what we go with here. All right, so why am I showing this picture? So one of the biggest questions actually I get from startup founders and employees is, you know, what the heck does the finance team actually do? And I'm willing to bet, you know, if you ask the average startup employee this question, they usually picture a combination of Kevin, Oscar, or Angela from the accounting team from The Office TV show. And I think this perception is really understandable. Finance has historically been associated with closing the books, handling payroll, paying the bills. And as a result, you know, I think this like bean counter stereotype has emerged for finance professionals at startups. That being said, like I think things are changing really, really quickly and the reality candidly couldn't be further from that. The role and the scope of the modern finance team has changed dramatically. In the last decade. I think what we're seeing in all of our portfolio companies in tech at large is, you know, finance is increasingly seen as strategic, and they now have a seat at the table when it comes to making major decisions at the company. And I think a lot of this is being driven by the fact that, you know, you're seeing a new type of finance talent that is now entering the tech industry from both junior and senior levels. At the junior level, You know, what we're seeing is, you know, there's been a massive exodus of junior talent from Wall Street over the last decade. I think young people today, they care a lot more about impact and mission, and they're flocking to startups in droves. At the more senior levels, I think you're starting to see a new breed of CFOs begin to emerge. You know, these folks tend to have more investing and strategy backgrounds versus the traditional Big Four accounting backgrounds. And this, I think, has really up-leveled the profile and impact of the finance team. I think all of this has also coincided with, you know, the rise and growing popularity of the strategic finance function, which is something I'll spend some time talking about today. And, you know, before I go into strategic finance specifically, I thought it would be helpful to maybe just give a quick primer to explain how finance teams are typically structured. So at the foundation, you have the accounting team. This is usually the first function to be built, and it's the most important function to get right. Because it is the foundation upon which everything else is being built. You know, the accounting team makes sure that every financial transaction is properly recorded, categorized, and they're responsible for making sure that the company has clean financial statements and clean financial data to work off of. This team also handles really important functions like accounts payable, accounts receivable, tax compliance. And at the right time, you know, they are in charge of making sure that a company passes an audit. This function usually and can be outsourced in the early days, but what we typically see is, you know, this is brought in-house post-Series B. And then as you move up the stack, after accounting, you have the FP&A team. So the FP&A— FP&A stands for financial planning and analysis. You know, this team typically owns the company model. They're responsible for putting together a financial plan for the company and budgeting. You know, they're the ones who are basically building a financial roadmap. For the business and just making sure that the company doesn't run out of cash. And then at the very top of this pyramid, you have strategic finance. And this team typically works on special projects that either increase revenue or decrease costs. I think a way to think about it is almost like it's a product management function for your company's underlying business model. Or you can actually think of it almost as like a biz ops team that operates with more of a financial lens. I think either works. And I'll spend the next couple of slides maybe going a little bit deeper in that and making it come to life a little bit. So I think as I mentioned on the last slide, at the core, the strategic finance team aims to optimize the company's business model. And they do this by either increasing revenue growth or decreasing costs. The team typically is very cross-functional. It partners with product, engineering, sales, marketing, and other teams. And the goal really is to help other teams make better decisions through data and financial modeling. And if you were to boil down just the core responsibilities of what this team does, you know, it's help the company grow faster, save money through cost optimization, form economically sound partnerships with other companies, make better data-driven decisions, aligning the team, and also managing, you know, existing and also prospective investors. I'd say like are the core responsibilities of what this team does. And to maybe bring this to life a little bit more, I wanted to give a quick example of a project that I led at Dropbox when I was part of the strategic finance team there. So I think for context, this project would probably be categorized under the cost optimization bucket from the prior slide. And to even set the context even further, as a cloud storage company, cloud infrastructure has always been Dropbox's biggest cost item. I think that probably makes sense to everyone. Even in 2014, when we were earlier, you know, we were spending hundreds of millions of dollars on infrastructure per year. I think at the time, we were like AWS's second largest customer during then. And the company was growing really fast. And our leadership had a point of view that, you know, we weren't going to be able to control our destiny if we were so reliant on AWS. So as a management team, you know, they made the decision that, hey, like, we need to build out our own private cloud. And we did, and we called it Magic Pocket. You know, for all the infrastructure folks out there, you know, this is no easy feat. It's really capital intensive, very time intensive. And, you know, as you know, you can't just switch over, right? There's a period of time where you basically have to mirror your infrastructure from AWS onto your own data centers, and actually bear the cost of that mirroring expense, which means, you know, 2x the expense that you normally would have on a per unit basis. You know, also, like most, you know, startups in the early days, I think we made a lot of product decisions that drove a lot of user growth. And, you know, candidly, we didn't really think much about the cost, cost implications of those decisions. So I think we're in this weird situation where, you know, we had the increased cost of infrastructure mirroring. And also the fact that, you know, we had made, I think, a few suboptimal product decisions. And that caused the Stratfin team being tasked with a cost optimization exercise of, How do we increase our gross margins? How do we preserve our cash a little bit better? How do we get more efficient? So, you know, our strat fin team, we partnered with the product team to just find ways that we could reduce our total storage intake through different product changes. And this was stuff like, you know, seems pretty basic now, but it took a lot of work to prioritize and find this. But, you know, deleting data for inactive users, you know, even little things like optimizing the thumbnails that we were generating every time a picture got uploaded to Dropbox. And, you know, getting rid of a lot of the storage bonuses that we were offering that didn't really drive conversion or engagement. You know, we rigorously had to A/B test all of these changes, we implemented them. And to give you a sense of the impact, you know, these initiatives, I think, cumulatively reduced our total storage intake by about 25% within one year. And that resulted in tens of millions of dollars of savings in the first year alone. So this was just one of the many projects my team worked on. There were many examples of even more impactful projects that our team did, but I think this gives you a sense for the types of engagements that the strategic finance team tends to take on. And if you're looking to hire strategic finance team into your company, this slide has a summary of some of the traits and characteristics of folks who tend to be really good at this job. So I thought it'd be helpful to quickly talk about it. In terms of skill sets, I think you need people that are really analytical and also enjoy ambiguous problem solving. These folks need to love being in spreadsheets. They need to be Excel wizards. They need to be very data literate. If they can write SQL queries, great. If they are willing to learn, even better. I think that ends up being a really powerful combination. Just the ability to mine your own, query your own data, and then also build a financial model from those results, I think, makes a person really impactful in a strategic finance role. But, you know, strategic finance, as I mentioned earlier, it's very cross-functional. So, you know, you need people that are really good at simplifying complex financial concepts in a way that, you know, an engineer, a marketer, or a salesperson will all understand sitting in the same room, right? I think that's kind of the way you need to think about it. You know, in terms of the mindset of the folks that, you know, you hire, you know, I mentioned it in sort of the skill set portion too, but, you know, these folks need to be really comfortable in an ambiguous setting. They need to be very intellectually curious. Curious. They need to have a bias for action. And you also need folks that are comfortable speaking up and challenging the opinions of senior leadership, but also doing it in a very, call it, you know, respectful and high EQ way. So I think if you get folks that can, you know, check the box on, you know, a lot of these things, I think they end up actually being very set up for success in a strategic finance role. So, you know, if you're thinking about building a strategic finance team, you're probably asking the question, like, when should I do it? Typically, what we see is a company exploring building out a strategy team post-Series B, it only makes sense if you have product-market fit. So if you're a seed-stage company, it's probably premature to do it. It's better when you have revenue. I think that probably intuitively makes sense. So usually at the $5 to $10 million ARR mark is when you start seeing some of these teams being built. And the first step is to hire a leader. right? This is usually someone with, call it, 8 years of work experience that comes from either a finance background or an investing background. In terms of, you know, title, it's usually head of strategic finance or VP of strategic finance, depending on the seniority of the person. It could also be head of finance or VP finance. You can take the strategic part out. Um, you know, I think that part is less important. More important is whether or not this person checks all the boxes on the characteristics and traits that I mentioned in the slide before. Once that leader is recruited, you know, he or she, they're gonna need to build up their team. So usually what we see is junior folks on strategic finance teams, they tend to come from an investment banking background, so you can recruit directly from there. That being said, you know, if you are a little bit earlier on in your startup journey and you're trying to get the team to just hit the ground running, you may want someone with a little bit more experience that has done operating before, that maybe has done banking and then a couple of years in a finance or investing role to make sure that they're able to get up and running more quickly. But if you have the resources and the patience to train someone straight out of banking, that can work really, really well too. That was how I interned with Strategic Finance. But my biggest advice is just to make sure that you keep these teams really lean. My general rule of thumb is you add one teammate every, call it, 40 or 50 employees until you get to about like 10 to 15, just so you can get max leverage on the team. But, you know, that being said, you know, I think the right size of the team is a function of the complexity and the size of the underlying business model. To give you a sense for, you know, Dropbox, I think like the right size for us was about 15 or so people. But, you know, you juxtapose that with a really complex organization like an Uber, right? And they had a much, much larger strategic finance team. That made sense, just given their product and their scale, it was very, very different. So there's no right answer. It's very, I think, dependent on your company. But I think, you know, 10 to 15 probably ends up being where you get the most leverage out of an organization like this. So, you know, the last thing I'll leave you with, before, you know, we get into Q&A is maybe just some best practices for setting up and scaling your strategic finance team and your finance team in general, I think it applies there. So starting at the top, you know, I think strategic finance is only successful if there is a culture of holding teams accountable. So what this means is like, I think the CEO, CFO, you know, they need to instill that discipline from the top down. And the reason why is that, you know, if people aren't held accountable to hitting plan, this function doesn't really work very well. And I think, you know, my second piece of advice is more for strategic finance leaders, and also, you know, the CEO, CFO that empower them is, you know, these people need to be very proactive, not reactive. I think there needs to be just like a bias for, you know, asking for forgiveness, not permission. And, you know, this function, I think, works really well when, you know, they're the ones, you know, pulling the CEO or CFO along versus the other way around. So I think there just needs to be a lot a lot of proactiveness to make this function successful. And as I mentioned a couple of times too, you know, strategic finance, it tends to be a very cross-functional organization. So what that means is that, you know, this function can be a really great conduit for, you know, the senior leadership to diffuse strategy or the company's North Star to the broader team. And the implication of that is I think it's really important for management to keep the strategic finance team informed and use them as a tool to disseminate information across, you know, marketing, sales, product engineering, I think it can be a really good way to do that. Stratman, you know, again, it's a very analytical team that does a lot of modeling, does a lot of data. So it works best when the company has a really strong culture of data and analytics. What this means is making sure from the early days that you have the right BI infrastructure in place and making sure that, you know, the team has access to clean data because As most finance people know, it's garbage in, garbage out. So it's important to make sure that what you're working on is something that you can actually stand by. And the last thing I'll say is, and this is something that I think not a lot of people think enough about, which is I think it's important to keep investing in next-gen financial tooling, right? I think as finance professionals, we all love Excel. It's a great software tool, but it can only do so much, right? It's very manual. It's single-player by definition. And what we're seeing is, you know, there are, uh, incredible software tools out there that, um, automate and give a lot of leverage to the repetitive financial tasks that anyone in finance needs to do. So anyways, um, I know that was really quick. Um, I wrote a, a blog post that I'm sure the SaaSr team can link to after this, um, that has a little bit more detail. But, um, if this is something that is interesting to you, um, you know, please feel free to reach out. And always always enjoy jamming with us. So that, that is it.

Great. Thanks, Michael. Feel free to stop sharing your screen so we can see everyone's lovely faces for Q&A. All right. Our first question comes from Michael. If you want to unmute yourself. We got a little Michael squared action. Or I'm sorry, Ryan. Our first question comes from Ryan. Here we go.

Hi, Michael.

Thanks for the comments. I worked for Stanley Black Decker for 12 years, and every single sales meeting we had had a finance person and an HR person. Yeah, but they were more in that bean counter range. Um, everything you said today was great. Uh, it's a struggle that I have with Jason as well. You're talking that $10 to $15 million ARR. His his daily post about hire the best VPs is all very valid, but we're still in that $1 million ARR range. There's only 5 people on the team, but what we're building potentially has, has a massive data potential that we could build what we describe as the ChatGPT for mechanical design from Tesla to Apple. I need to fill that gap. Finance and financial intelligence, however you want to describe it, is a struggle. We're closing our seed round probably by the end of August. So I was able to, to bring in investors without much help there. But in my mentor groups, that's the one person I'm missing. I don't have that startup-level, VP of Finance-level expertise, experience to lean on. What do you suggest to kind of fill that gap as we're growing? Because we went straight to enterprise. So we're a team of 5. That's trying to close half million, million dollar deals and grow with the seed money we got. So finance for me is the last role. I know that's bad to say that I have on my list VP of sales per Jason M. Lemkin, VP of program management, shit like that is, excuse my French, is where we need to put somebody now. But I still need to fill the gap because I'm worried I'm going to screw stuff up. Thanks.

Yeah, yeah. Well, you're not the only founder to hire finance last. What we typically find is, you know, after you get your product leader, engineering leader, sales leader, marketing leader, everyone looks around like, wow, we have a lot of people. Hey, like, wouldn't it be great if we could, you know, take our finance team to the next level? And oh crap, we don't have anyone. So it's not just you. I think the good thing is you're post-product market fit. You're starting to see some pretty strong early revenue. Traction. And, you know, usually I think what we see is like people bring in a VP Finance kind of around the Series B is typically what we'll see. As I mentioned earlier, like you can outsource a lot of the accounting stuff in the early days. But I think what you're saying is, hey, you want to get that like strategic finance leadership role kind of filled in the early days. You know, I think you can reach out to headhunters, reach out to your VCs for introductions. I think this is a really great hiring market for that. Um, but you know, for you, it might not be a bad idea to maybe take a swing on it. Maybe someone who's a little bit more junior, right? Someone who has a lot of horsepower that maybe is coming out of an investment banking program that doesn't really want to stay in finance, or like tap your investors. I mean, there's a lot of really talented VC associates that find that, hey, after 2 years of doing this, This isn't really for me, but in that 2 years, they got tremendous context working with companies, sitting in company pitches, being in boardrooms. And I find that like, you know, that profile at your stage could work because the reason why I say that is like, if you're gonna target the, hey, I've been working for a decade in finance or investing or investment banking or whatever, and you wanna hire like a true VP finance. Harder. Like, those people are probably more excited by, like, you know, later-stage companies that have a little bit more scale, that are a little bit more de-risked. But, you know, at your stage, you might actually be well suited with just like a really strong, high-horsepower sort of finance athlete, where, you know, it's gonna— it's a little bit— it is riskier, right? But I think you'll have higher likelihood of finding someone really good, potentially.

Awesome. Thank you. Yeah, I'll try to implement all that. We need more of that strategic plan for the next 5 to 10 years versus is the investor support. We're a weird animal. The founders and I have a separate effort that we invested in that may sell in under 2 years, so we're not as worried about A, B, C, D, and F. We're more worried about how do we take the money we have today and use it wisely. But I appreciate it. I may reach out offline and say hello, pick your brain one day. Thanks.

Thanks, Ryan. Okay, our next question: How can the strategic finance team help better track complex expenses like marketing ROI?

Yeah, I think that's a great question. And this is what your strategic finance team will do. I think a lot of it comes down to making sure that you have also like a very strong accounting function. In addition to that, I think you need the right financial infrastructure in place such that you can segment your marketing spend into, you know, it could be paid social, email marketing, events, and making sure that at the accounting side that you're able to accurately, I guess, segment those expenses. But then absolutely, like, this is the type of stuff that I think strategic finance teams are really, really good at looking at, you know, payback by marketing channel, right? Like, all that stuff is stuff that the strat fin team tends to do, but making sure that I think they partner with the marketing team so they have contacts making sure that, you know, the proper infrastructure from a data perspective is set up. You know, these are great things to do. And once you do have set up, you can do a lot of really interesting things like calculate LTV by segment, right? And figure out like, hey, like, what are the most profitable and lucrative marketing channels for us to do? I think a lot of companies in the early days, they're kind of flying blind and just kind of doing it by intuition. But like when you do the actual work and you realize like, hey, this marketing channel tends to bring in customers that retain at a much higher rate and also have a higher proclivity to spend, that may actually cause you to change your marketing mix in a pretty substantial way. So I think these insights are really, really helpful. And it's just another great example of something that Subbest does.

Great. Thank you. Our next question comes from Liv.

Hi, can you hear me?

Yes.

Yeah, so my question is around the recommendation of the next-gen finance tool that you could recommend to use for a company, a SaaS company that is doing $100 million in revenue. Because I'm a strong believer if you're growing, like, to list a company or to exit through an IPO, and a good IPO in that case, like grow it to hopefully $200 million and list with a multiple of 5, say, to $1 billion, you really need to get to track your revenues and to track your financials well. So which one do you recommend?

All right, so the SaaS team said I couldn't plug any of my portfolio companies, but since you asked, I'm gonna bring up—

You can plug a little bit.

I'll plug a little bit. All right, thanks, Jason.

In this, in this context, it's okay.

Yeah, so, um, So we invested in a company called Pigment at the beginning of this— I should say, sorry, not the beginning of this year, last year. Yeah. And it is a next-gen financial planning tool. Think of it as like a next-gen Anaplan or Adaptive Insights. It's catching on like wildfire. All of the major big technology companies that are even publicly traded are using it to manage their financial plans. It's an extremely powerful tool. That makes it really easy for the finance team to collaborate with different stakeholders in the company and more accurately and efficiently, you know, manage their financial plans. So that's one that I really love. I think it's an incredible team. The product innovation is exceptional. They're adding AI features daily. So, you know, if you're a finance professional, like, I would definitely take a look at that one. And it's, it's taken off.

And Michael, since you know, I know it's a portfolio company, since you'll know it in some ways more than others, you'll have inside information. Just as a case study, when, when is it, how long does the deployment take and when is too early? Like when, when do you not have the, the physical human capacity to deploy something like Pigment? How long does it take?

Yeah, I mean, I think it's different for every type of customer. And it's, it's dependent on, it's very company specific. And I'd say like as a whole, if you think about like an Anaplan or Adaptive, like these are potential—

take a year. Yeah, Anaplan or Adaptive takes a year, right?

A year, sometimes a year and a half. Like we've had, when I was at Dropbox, you know, this was something that, you know, we spent a lot of time doing. We had, you know, many failed implementations. I won't name which one. Um, so it can be really, really tricky. Um, for Pigment, it's much faster. I think it's a couple months, right? Which I think sounds like a lot of time when you compare it to like the typical SaaS solution. But just given, you know, the, the amount of integrations that you need to do to make sure that it's up and running, and relative to the incumbents in the space, it's actually very, very quick. So usually a couple months, I'd say, but they were getting that implementation time down very quickly. Got it.

And then do you— so my learning, and I think there's something that should be changing, but in the old days when we were getting going in SaaS, a lot of this stuff just took a year. Right? And it took— and you needed a real team to do it that would then take 6 months to make a decision and then a year to deploy it. Maybe that's coming sooner. Are there— if you don't have the full team yet, is there— do you have a recommendation of a tool that's for folks one stage earlier, right? That's pre-Adaptive Insights, Pigment, and a plan. Do you have a suggestion? Because I think it's a huge gap there too, right?

Yeah. I say this a little bit tongue in cheek, but Excel.

No, I know, but everyone is using Excel or a rando combination, and Excel is a powerful piece of software. Let's not mock it, right? But I've met with a lot of startups that are, that are trying to do that for startups, but usually they don't do enough is what I find is the problem. They're not rich enough, right?

Yeah, yeah. I think there's some, I think, tools that earlier stage companies will use that maybe aren't quite enterprise ready. Like, I think Mosaic is an example of one that a lot of earlier stage SaaS companies will use. I typically think though, you know, if you are a Series A company, you're probably, it's probably premature to use something like a Pigment at that time, just because, you know, your business model is changing so quickly, right? So from a financial modeling perspective, like even the modeling logic, as you add in different business lines, you add in different features, I think, can sometimes change. So, you know, I think usually sort of like Series B, Series C is probably the right time and maturity for some of these tools. But yeah, at the lower end, I think you have— well, I don't want to say lower end in terms of product. I mean, I mean, just customer focus, you know, you have like the Mosaics of the world, you know, I think Abacom is another one. But, you know, as you get a little bit later stage, you need something more enterprise ready, that's a little bit more robust. Yeah, you know, Pigment tends to be a really good choice for that.

Well, I'm waiting for this tool. It's funny, I'll do some other questions, but I was catching up with the Monday co-founders and they're going to come back to SaaStr Annual this year. And one of their key differentiators, I think, is that they did this all by employee number 8.

Wow.

Because they had so little money and the ACV is so low, it was $2K at Monday. It still is. And they needed an 8-month, a true 8-month cash. Back, not a pretend 8 months, not 8 months to make the board happy or to make IVP happy, but it had to be real because it's still— their NRR is high today, but it wasn't then. They had like 80% NRR, so they had to make that money back. So they instrumented everything. They had cohort analysis, multichannel, multi-everything, and they built it all in-house. And I was just like, if someone builds this Monday-like tool for every startup, it could take off. It's a hard problem to solve, but it would take off like wildfire, I think, because there's this gap. But it was a reminder from them how power— if you can do this earlier, it's super powerful, isn't it?

Absolutely.

You can, right? Yeah.

Yeah. The more sophisticated you are, the earlier you can get it implemented, the value of this just compounds because it just allows you to make better decisions. You can allocate capital better, more efficiently, and these businesses grow faster, they burn less, and they're more attractive to investors, which is why the earlier you can get it up and running, depending on whether or not you can find the right talent to to run it for you, I think the better. Yeah, so I couldn't agree more, Jason. Yeah.

All right, sorry to interrupt. Keep going with any other questions.

Yeah, not a problem. And then Michael, while we're plugging for Pigment, is it gopigment.com? We have a couple questions in the chat.

I believe it is.

Okay, great. Gotta make it a well-rounded plug.

Yeah, and the founder, she was at SaaStr event in Singapore. She presented. So you can go on YouTube and find a pretty good presentation if you search Pigment and SaaStr. Ask SaaS or APAC.

Yeah, Eleanor and Romaine are amazing. Yeah.

Awesome. Okay. Our next question comes from Alina.

Hi, Michael. Hey, team. Thank you so much. My question is about fractional CFOs or VP of Finance. I know it's a very popular thing right now. A lot of talent in the market and they're taking the fractional leadership position. My question is around when do you think is the right time and how to optimize the workflow with such role Thank you. Yeah, I think that's a great question. I think, I think it's a great option for certain companies. I think what, you know, we'll see is in the early days, they'll do a, you know, you can outsource a lot of like the AR, AP, bookkeeping in the early days. And I think around like the maybe Series A, Series B, like you can have like a fractional CFO come in. I think though, like, the earlier you can bring that in-house, I think the better. And the reason why is because if you're a fractional CFO, by definition, you're not a full-time employee at a company, which means that, you know, you're probably not, you know, in the meetings with the CMO, VP sales, product team. And because of that, I think you just have a little bit less context. But what I find is, you know, these folks tend to be very good at setting up the right financial infrastructure, maybe managing your model, maybe closing your books in the early days. But I think that's table stakes for finance. I think where finance gets really, really interesting is when you can start doing some of the strategic finance stuff. So that means having someone in-house that has all the context in the world, that understands how this business works, that is plugged in, has built relationships with with all the key stakeholders within a company, and then you can proactively come up with, identify problems, also come up with solutions. And I think that's usually a little bit out of scope when it comes to the fractional CFO, VP finance. But, you know, in the early days, like, I think if you're just trying to get your financial infrastructure and bookkeeping processes like up and running, I think it'd be, I think it's a great option. But that's That's just my perspective.

Great. On the topic of hiring, I see a lot of founders hire a VP of Ops or head of ops. Now, let's say they have a McKinsey background and skip a traditional VP finance. They get in a lot of trouble. Have you seen this? What type of advice do you have?

I've certainly seen it. I wouldn't say they get into— I will— I think what ends up happening is they all eventually realize they need to hire a VP finance versus like a very talented ops person that is, you know, more of a generalist that understands finance. And I think companies can kind of get away with it in the early days, and it kind of works because I think if you're— if you look at what's happening to like the finance organization, like You know, most good CFOs behave like COOs, right? And if you just bring that down one layer, that means good VP Finances, they tend to be very good VP Ops, I don't know what you want to call it. So the functions are kind of, I think, melding to a certain degree. But like, you know, if we're talking about finance specifically, like, yes, I think where people get in trouble is if you bring in a really talented good ops person, but you don't hire like the right accounting team or controller around that person, what ends up happening is I think a lot of like the financial systems don't get built right in the early days, which just causes a lot of headache and problems for the person who eventually has to fix it. So I think it's a good Band-Aid solution in the early days for like a scrappy company. But I think by the Series B, you should probably have a finance leader in place that can, you know, build it for you in-house.

Great, thank you for the insight, Michael. Our next question comes from Jason M. Lemkin.

Hey, hi Michael, thanks for presenting today. Yeah, I just had a question. If you have, um, I'm more involved from the technical side, technical co-founder, but I end up in like monthly financial planning meetings and generally involved with companies where not really Series A prior to that, but there's revenue, they're profitable, they're growing, they have market fit, and we just need to, from revenue, grow as fast as we can without putting ourselves at risk, you know. And we have proper accounting, but generally we're working out of Excel and as a management team and trying to look at the right metrics for cash flow. So a lot of it, there's a lot of accrual accounting, you know, deferred revenue, but we, from a cash flow operations perspective, like, what would be the top 3 kind of metrics you would think would be great to keep an eye on?

Yeah. Um, so the question is, from a cash efficiency perspective, like, what are the— if you had a dashboard, what are the things that—

in Excel?

Yeah, yeah, I think it's a great one. Um, the metric, I mean, the most obvious one is probably like like just your cash balance and as a result, your cash runway. So taking how much cash you have divided by your monthly burn rate will yield how much cash you have left, assuming that burn rate continues. So I think that's always one good sanity check metric to have in mind. I think the burn ratio, I think, is a really good one. I think it's a, it's a metric that gives— puts into perspective how much capital are you consuming versus how much ARR you're adding? I find that that tends to be a really good proxy of whether or not a company is efficiently deploying resources. And outside of that, yeah, yeah, I'd say like, just cash, cash runway, and then burn ratio, probably the three that I focus on. Okay, great. Thank you.

All right. And then speaking of burn rates, what are the top learnings and tips for helping founders truly manage their burn rates proactively? What things do founders get wrong here?

I think the number one thing founders get wrong when, and you know, in our portfolio, we, we've been working through this over the last year, year and a half. Um, you know, everyone wants to manage to a, good, you know, 1x burn ratio or a certain burn level. But I think where founders get things wrong is they can be overconfident in their forward projections and assume that growth continues to be really, really strong. If that happens, the implication in your financial model is that the company is going to be generating more revenue, more gross profit that covers the increased spend end. I think that's where founders get things wrong. They're overly optimistic on the top line. Um, and they sometimes, if they miss, like, they get hit with kind of the double whammy, right? They didn't cut enough, um, in OpEx, um, and they missed on the top line, and then their burn rates can actually, um, kind of, uh, get a little bit out of control because of that. So I would say, like, that's probably the most important thing to keep in mind. Like, look at, like, the next not like to assess like your burn rate, look at this month, not what you're projecting in 12 months, because what you're doing this month is more grounded in reality versus all of the implicit assumptions you're making in your forecast for 12 months down the road.

Great. So not too optimistic. We are full pessimists here. No, just kidding. But our next question comes from Millen, if you do want to unmute yourself, we saw some good engagement in the chat on this question.

Hey, Michael, thank you for spending the time today. Speaking of spending time, what's your recommendation on how much time or capacity members of the strategic finance team should spend on benchmarking with external datasets like OPEX Engine or RevOps Squared or, or public company comps?

How much time? I mean, I think there's a lot of amazing resources that, you know, you can find online that have really good benchmarks, like our friends at Iconiq. They produce like an amazing report every year that gets very granular in terms of, you know, what the right growth rate, burn rates, like spend by category are. And I think that's a very quick exercise. I don't know if I have like a percentage that I can give you, but it's certainly something like a good VP finance or CFO will just kind of know intuitively, like, what is the right burn rate? Are we spending too much on G&A? And you can get a lot of these benchmarks actually from your investors. So I don't know if it's like a time allocation question. I think it's something that the strategic finance team just needs to be doing. Constantly.

Thank you.

But they should be taking time to like create their own benchmarks and like survey data, like get leverage from your investors. Like they will do that for you, I guess, is maybe the way I think about it.

Actually, as it happens, I'm filling out a request from one of our investors, so we're contributing some benchmarking data to their dataset last night. So that's why it was on my mind. Thanks.

Yeah.

Great. Okay. What are 3 things a strategic finance hire should do in the first 90 days? I believe we're thinking head VP level for this.

Yeah. Yeah. I think the mistake you would make is jumping in like first week trying to solve like a bunch of different problems and like, you know, trying to make impact before you really understand like how the company works. So I would say like in the first like 2 to 3 weeks, like your goal should be getting meetings with all of the key decision makers, the head of product, head of engineering, head of sales, head of marketing, co-founders, head of ops, and understanding just how the, company works, what the culture is, right? I think that's number one, just taking the time to like really truly understand like what the problems the company is facing is. I think, you know, once you do that, and through those conversations, like I think you can start identifying like what's working, what's not working, and, you know, create a plan of attack and a list of projects from that. And then like, I would look at, you know, the, like, the second thing that, you know, you'd probably have to do is take a look at the financial model. There's usually a financial model in place. I think a lot of the things that a head of strategic finance will do in the early days is making sure like, hey, are we modeling this business properly with the right granularity? And, you know, doing a lot of groundwork to make sure that is working. And then also make partnering with the accounting team to make sure that, you know, we have the right granularity in terms of the metrics that we are tracking. Like, do we have OpEx broken out into R&D, sales and marketing, G&A? If not, like, let's, you know, go into the GL and, you know, chart of accounts and like, let's figure that out and fix that. So I think there's a lot of that. And then last is I think I would start focusing on reporting, right? Like, you can't fix what you can't measure. And I think a lot of companies probably don't track and focus on the right metrics. So I think companies are ultimately really, really successful when there is a culture of metrics and managing to it. So, you know, making sure that, you know, the company is focused on the right sort of metrics from a finance perspective would be great. And these don't have to be like financial metrics too, right? Like they can be like engagement metrics, signup metrics, like So I'd say probably those things. Understand the org. Make sure that you have the right systems and models in place. And then making sure that the metrics that you're tracking are the right ones.

Great. Okay. And then I know you mentioned you had recently interviewed someone for a CFO position. What is one question you always ask on an interview? Besides like their name?

You know, I think this is a really great question. Um, I don't know if it's a specific question, but it's just like, I always like to ask like, why are you interested in this company?

Right?

Like, what are you— like, what about this company excites you? Because the truth is, like, for most finance roles, you know, like, I know, you know, in today's talk, like, you can sometimes make it sound like, you know, really, like, exciting, very strategic, all that. But, like, truth is, like, in finance, there's, like, a lot of, like, non-sexy things that you got to do, right? You got to go through a lot of data. There's a lot of, like, systems you got to build. And there'll be really, really good days where, you know, you're interfacing with the board, you're fundraising, you're, you know, having like these great cross-functional strategic projects that you're working on. And there'll be other days where you're paying bills and, you know, setting up a new accounting system. And, you know, I think what makes people successful in any role is whether or not they enjoy the bad days. And I think you can only enjoy the bad days if you're really, really excited about the company that you're joining, which means Are you excited about the mission? Are you excited about the team? I think those are the things that I tend to ask. Yeah.

And I think—

And I think about all the other stuff through their experience and how they think about team building, all that. I think that's important for sure, but I always like to get a sense for how excited is this person about the mission of the company.

Yeah, I think that's great advice for any hire as well. Are there any last questions before we wrap up? All right.

I still don't see the blog post.

Did we put that in the comments?

Do you have a link handy, Michael?

Let me, let me find it. I will send it to you all. Let me know.

One second.

Hey, Michael, if we've got nothing else, just two quick ones I have. If you have two more seconds, more of just what you're seeing overall at the IVP level and thinking about some of these issues. Do you think, folks, that we have overcut in many cases and that folks will get— they've gotten so fit and so lean that we will get a little less efficient going into next year? Are you seeing any of that? So many folks, if you look at like HubSpot Monday, Salesforce, they've gotten radically more efficient in the year, as have many startups, right? They went from radically inefficient in 2021 in many cases to like like radically efficient today. Are you think it will— are you seeing it swing back at all in terms of some sort of balance of, of, of these efficiency metrics, or is it too early to know?

I think it's too early to know. Yeah, I think like when a company does a RIF, like it takes a lot of time for you to actually see the financial impact of it. Um, so I think it's a little bit too early. Too early.

Yeah. Do you guys have— does IVB have any— like, I, I'm probably maybe more bullish on, on some of these things than a of late-stage folks are. Do you have any thesis on like 2024 IPOs and where the markets are going? Because cloud stocks are actually— if you just measure from January 1st, it's been a good year. If you measure from 2021, it's atrocious. But if you entered the market in 2021, you'd be like, I'm all about SaaS and cloud. Like, we're up 30% this year. Salesforce is up 80%. Do you guys have a theory on what this will do for the public markets next year?

Yeah, I mean, I don't know. I don't have a crystal ball. It's hard to say. I would say the inflation print that we we had last month was really, really encouraging, which— yeah, a lot of the stocks up. Um, I think, I think there is a chance that the IPO window opens next year. Like, we're certainly, you know, hopeful of that, but, um, everything's so volatile, it feels very month to month. Um, so it is, it is really hard to say. But no, I think as an investor, like, the important thing to keep in mind is like the SaaS business model is such a beautiful business model. And I think a lot of public market investors love it, right?

Um, they do love it. They've— and they've re-loved it this year, I think, right? They've fallen back in love again this year, right?

Yeah.

It's like, if you think about what this— what this business model is, is you're basically acquiring these like annuity of recurring revenue streams that not only recur but then compound due to positive NDR. Um, so, you know, and they're structurally high gross margin businesses too. So like They're great businesses. Yes, like, we kind of got ahead of our skis as an industry in 2021. I think there's a lot of, you know, pain that, you know, is being felt in 2022 and, you know, year to date. But I think a lot of the best companies are growing through it, working through it. And as the economy recovers, and as the cost of capital potentially, you know, changes next year, depending on what our government does, like, I think that could potentially crack open the IPO window, because there's certainly a lot of amazing companies that are at scale well, got more efficient, and, you know, ready for a public offering at the right time.

Yeah, I got one more question. I'll give you my— I don't have the data that an IVP has, so I really want to get yours, but, uh, shooting from the hip, I think there may be a flood of IPOs in the back half of 2024 because I think, from my limited— I've made 4 seed investments that are at $200 million in ARR or above that now are super fit. Now, none of these are dogs, none of these were faux unicorns. They're at $200 million, but they got so lean the last year in terms of their metrics. I can think of one that is cash flow positive now. If you're $200 million in ARR growing 30% and you're basically cash flow neutral, that's a good IPO today, isn't it?

Yeah, totally.

And so I don't have the visibility. I think if you get 2 or 3 of these that go out, there could be 20 or 30 that go, and we could be, even if multiples are never going to recover, We'll never have 2021 multiples, but we could have a fascinating back half of '24. That's my optimistic bet, because I just think there's more of these approaching or past $200 million that the last year kicked them in the ass to get efficient, and they are. But that leads me to my last question, then we can go, Kaitlyn. I don't mean to hold this over. Do you think— So what I've learned from my own portfolio, and then again, I look at some of these companies like Monday that go from from like -20% operating margins to almost +20% in one year. When I look at HubSpot's efficiency and Salesforce's, and even folks like Mongo and Datadog that have gotten, Mongo finally, I mean, Mongo, it's as good as it gets, but it wasn't all that efficient 12 months ago. Now it is. Do you think they will stay fit and efficient? Because I think this means we all have to go about 30% further on each dollar, each sales and marketing dollar, each engineering dollar, or do you think we won't have to stay this efficient? Because I think for all this stuff, we have to figure out how efficient does the business have to be? How many employees can I have? How much can I spend? And are we going to stay in this sort of world forever?

[Speaker:JASON M. LEMKIN] My sense is probably longer than you would think. I think the reason why companies were burning so much capital in 2021, early 2022, was a function of the cost of right? Like, if you rewind back, like, interest rates were effectively like 0% almost. And in that world, when capital is that cheap, like, companies are just spending and spending and spending to grow. You know, I think we're in a world now, um, because of the inflation that we saw over the last, uh, year and a half— and yeah, granted, it is coming down— where, you know, I think rates are going to probably stay elevated, right? I think that's like the iron law of finance, interest rates. So I don't think we're going back to 0% interest rates. Um, I think this is probably— I think we probably have like, you know, maybe one or two more rate hikes a pause and then potentially cut next year. But I just don't see us in a world where the cost of capital is that low in the near future ever again. So I think what you're seeing right now in terms of efficient levels probably persists, my guess.

Yeah, it's a good— I don't— we can break— I see with founders that I work with that maybe have only been in tech for 4 or 5 years. Yeah, I find all— almost all of them have adjusted at this point, right? Either they, they ran— they don't have enough money, or they've gotten But I find most of them, the 4 or 5-minute, think this is a transitory period and they still think that they're gonna— they don't know. And I see it with founders and the worst of all, I see it with sales reps, sales reps who got used to, in many ways, frankly, getting paid on a net basis, taking home maybe half of what they book in 2021 because everyone hired so many reps in these traditional 4 to 5X metrics, which which you know well, which make the SaaS model work, right? You've got to close 4 to 5 times or more what you take home. Capital distorted that so much that sales reps think they should make that much. And I actually don't talk, I fear, I interview a lot of sales folks, including CROs and VP sales, they still don't get it. They don't get why, they think it's a moment in time that the market, they were in some massive 1929-like depression and next year they'll be able to spend in sales like they did. And I don't think enough people have adjusted. Invested, right? And I think your point is we may stay in this efficient world for longer than we thought. That's what I think too. I think we'll be forced to stay. I don't think valuations will get so high we can ever go back to cheap money, right?

Yeah, yeah, yeah. I think most people— well, I think a lot of founders, especially if you started a company in 2019 or 2020, like, you know, this was like the only cycle that you saw, right? So like your entire startup journey has been in a really distorted point in time. But if you actually zoom out and look at history from a longer perspective, you start to realize that was actually the irregular time. The time that we're in right now is actually much more reflective of how things have been the last couple of decades. So I think there's a little bit of that where, yes, you're seeing, I think, the more seasoned, experienced entrepreneurs, I think, react more quickly, especially the ones that have seen it before. Right. Like if you were around during the dot-com crash, you're like, holy crap, I kind of know how this ends. But if you're a younger founder where your first company was maybe founded in 2020, you had a very different experience, and as a result, you're probably reacting a little bit slower.

Yeah, I think maybe we could break with that, but I think for those of us in doing it for a while, like you and me, I actually think if you're doing decently, if you're still growing in today's macro, this is like it always was, 2023. This is like it was in 2016, '17, '18, '19, maybe not late '19. Look, if you went from 100% growth to zero because you were a weird vitamin, then yeah, I can't help you. But if you just feel like everything's harder today, but you're still growing, like, get used to it.

Yeah.

This is the real world today.

Agreed.

Listen, one quick question just to wrap it up.

Can you set up a session with the Monday Founders on how they did the whole internal setup?

That'll be pretty— Yeah, we'll do a little bit. Well, I'm not— We just did one together that'll come out soon where we dig in a little bit to it, and we'll do more in September. But probably 2 sessions with some, a bunch of guys running an $800 million ARR company is all I can get out of them. But we do have one coming out in a couple of weeks that we just did last week, and then we'll do it again in September. So we'll, but I will dig in more on how their systems work because it's super interesting, right? And we do, we already did dig in a lot of it. And in fact, one interesting lesson for this one, and then we should pray with Michael, is actually their systems were so detailed that it actually confused their early stage investors. And they had to like de-segment, they over-segmented and their cohort analysis was too good that it confused everybody and they had to decode, they actually had to de-cohort their customer base because it made them look less effective than they were. They kept saying, look, we're growing really quickly, we're not burning much cash, but these cohort analysis made it look like all their customers were churning actually. So it was interesting what happens if you get too good at data. They were over-presenting churn in the wrong way and so they had to ratchet it back. They were too sophisticated. Right?

Yeah.

All right. Thank you, Michael, for the time. We all really appreciate it. Thank you, Caitlin.

Of course. Thank you, Michael. Thank you, everyone. And we will see you back next week for Hypergrowth Partners. Bye, everyone.