Cash Flow Secrets for Startups | Expert Advice from Alex Pryor | Peter Sorgenfrei | EP. 9

Welcome to another episode of the Whole Human Podcast. I am Peter Sorgenfrei, your host, and with me today I have Alex Prior. Alex, welcome on the show.

Thank you so much for having me, Peter.

So Alex and I met on LinkedIn, where a lot of my connections are meeting up, and And Alex is based in South Africa and more specifically in Cape Town. And when we talked about doing this, Alex, we spoke a lot about financial metrics and the financial side of startups. So that's going to be the focus of the episode today. But before we jump into that, would you mind introducing yourself to the people who may not know you?

Yes, of course. So despite the fact we're talking finance today, I'm not actually a finance person. So I do hope the accountants out there will forgive me. I have over 20 years of experience in the technology sector. Sector. And I specifically specialize in emerging technology and the effect that's going to have on corporate. And I suppose more than that, it's really looking at how do you translate technology speak? Because tech types, us tech types, we love our jargon. How do you translate that into something that the man on the street can understand, that someone in the boardroom can understand so they can make the right decisions about what they're doing? And as part of that, what grew out of that is startup mentoring. So, we have a very strong entrepreneurial culture here in South Africa, specifically in the tech sector. And what's very interesting is that I would get asked to mentor all these startups. It's been a great journey. I've met amazing people, but they all think I'm there to advise them on the technology side, and I'm not. I head up innovation and ventures for one of Africa's largest tech companies, and I'm not there to advise on the tech because they've usually got the tech sorted. The conversations we have, as we're gonna have today, is actually, have you thought about your finance? Have you thought about your cash flow? Do you have a tax person? Do you know how taxes work? How are your costs going to change over time? And they get these huge eyes whenever I ask them this because it's not the conversation they were expecting. But it's a really important one, especially in tech where the costs, even if you're just in software, can massively escalate without you realizing it. And unfortunately, when you're a small business, you don't realize that companies don't actually pay you immediately. And often, it's a very delayed payment. And the best companies in the world have been, I think, taken down because they didn't know how to manage their cash flow, or they just were unprepared for the realities of the financial aspect of their company.

So, it's one of those things where, you know, everybody, as you said, we get blinded by the solution, the app, the product, the service that we're building. But we're forgetting the rails, or we're forgetting the environment that we're in that allows it to become a business. So, that's the difference between developing a product and a service and actually develop a business or developing a company, which is what I found fascinating when we spoke the first time. I'm like, oh my God, you're right. We're always having these conversations where people get surprised that they're running out of money.

Yeah. So, all the tech hits them with a massive bill or actually, no, we didn't have that legal contract in place. I have no recourse.

Right. So, all that stuff, why do you think founders and entrepreneurs don't deal with that? Why do you think they don't handle that early on in developing their companies?

I think it's one of those ones that has multiple reasons behind it. The first reason really is that someone else has always managed that for them. So, if they were an employee, finance manage that. If they are straight out of school, they're a first-time founder, they've never even had to think about this. When they see a startup, and specifically successful startups, they see the money coming in. They see the guys who have bought their big fancy cars, probably on credit. They see the success of it, but they haven't thought about what goes into it. So, even if they thought about the financial aspect, they haven't thought about all the parameters that go around it. So, In many cases, it's ignorance, not willful ignorance. There's nothing wrong with it. It's just that they've never had to think about it and they don't know what they don't know. One of the other sides of it is that they're often scared of it. So, because I deal with tech founders a lot, they know the tech. They are techies. They've built the tech themselves. They may be good at sales. They may be good at talking to people, but they're scared about things like legal contracts or tax or finance or numbers. And they haven't thought beyond, this is gonna be the best product ever, and I'm gonna make all the money, and I'm gonna buy the giant mansion and the supercar, and everyone's going to love me, and I'm going to exit, and someone's gonna pay me a billion dollars. And unfortunately, that's the biggest stumbling block for them. So, I think it's a combination of ignorance. They don't know what they don't know. No one's ever told them. It's a combination of fear because they don't know that— they might know they don't know, but ooh crap, that's scary. If I just ignore it, maybe it'll go away and it'll just sort itself out. And then, there are the guys who know just enough. So, maybe they know they've got a handle on a cash flow forecast. So, they now know what costs they need to pay out. So, they know what they need to charge. And software pricing is a completely different story that even the top corporates get wrong. But they might have a handle on that, but they don't have a handle on everything because that's something that comes with time and experience. Which is why, especially when you're starting out, you need advisors because no one, even at the top tier of corporate, you don't know everything about legal. That's why you have a corporate legal team. You don't know everything about finance. That's why you have a CFO. But when you're a startup, there are 1, 2, 3 of you, maybe 5 if you're lucky, but you're not going to have all of those skills. You've got to learn them, which means someone has to tell you what it is you need to know.

And I think so, in my experience, both building my own companies and also now working with others that do, it's one of those things where you're like, we'll get to that. Right?

Exactly.

It's, yeah, it's not that complicated right now. We're spending some money on some development. Maybe we have a few salaries. Maybe we don't have salaries actually. Right. We're—

Yep. Working out of the garage.

So right now we're worrying about getting our first revenue through the door and then we'll worry about managing our money Or our cash flow later, and so I think that's one thing. And I also really resonates with your point about not wanting to do it or fear of touching it because we don't understand it necessarily. So it feels like one of those things where you know you need to understand it, but you need to get deep on it. But you don't have the mental capacity or honestly the desire to fully understand it because you don't see it as. Exciting. You don't see it as interesting, right? It's interesting to solve this problem that you're trying to solve, but it's not that interesting to manage your cash flow.

It's so much more important. And yeah, as with everything, if I take a house analogy, house looks great, looks beautiful, got the nice new walls, the brand new furniture. If the plumbing breaks, doesn't matter how pretty it is, your house is still going to stink. You're not going to be able to use the toilet. You're not going to be able to use the bathroom. And that's really in many ways, and finance people hate me for this, but finance is the plumbing. Contracts are the plumbing. The operational stuff is the plumbing. It's all fine until it goes wrong. And then you're in big trouble.

So how do we make it easier on people listening here, right? We can tell them you should get an advisor. You should have people around you who know this. But that's probably not going to cut it, right? They're probably not going to do it. So, are there some simple things that you can do as a startup founder to get started on understanding these topics and having proper processes in place?

Absolutely. So, one of the first things that I give advice to guys for is actually right at the beginning when they're looking for their partners. Don't find the person who's the same as you. You need to find people who have complementary skills to work with you, whether this is an employee, whether this is a partner. And that's really— I have a small consulting business that looks at neurodiversity in the workplace, which is obviously nothing to do with tech, but also very interesting that I love. But my partner is amazing. She's great with people. She builds the relationships. She can sell like a demon. Invoicing terrifies her. Absolutely terrifies her. Now, invoicing is something that's pretty critical for a business. But on the other hand, invoicing, like, I can handle invoicing. I know when it needs to happen. I can make sure that it's happening. So, it's complementary. By the same token, I am fine on a video call, but it takes me a bit of time to, on the social aspect. I'm a little bit scared of people. So, I've got to psych myself up for it, but she's energized by it. So, Pick the people you work with so you've got those complementary skills to try and fill as many gaps as possible. The second thing is just acknowledge your strengths and your weaknesses. If you know you don't know finance, you're going to have to start doing— either you're going to have to figure it out yourself or you're going to have to figure out someone who is. Don't ignore the problem because it's scary. But in terms of simple tips people can do, I'm not going to say go and look at this website because that gets intimidating. I think it's more some simple things you need to think about. So, thing number 1, when you think of the future, is your revenue going up and up, and are your costs staying the same? If that's how it is in your head, there's something wrong. Costs will always increase, and if they're not increasing in line with your revenue, what are you doing that's making that gap? What are you doing that makes that exponential? Everyone wants that exponential curve, but unless you're actively doing something, there's a logic problem in your head. So, it's a little bit of critical thinking skills. So, Is your revenue in your mind going up but your cost staying the same? There is something wrong. Second thing to really think about is when is the money coming in? So, you've invoiced $100 million. You're amazing. Fantastic. That $100 million is not real until it hits your bank account. What if your people don't pay? So, these are all scenarios you've actually got to think about. So, I suppose scenario planning then is my next piece of advice is think about Best-case scenario. Think about worst-case scenario. The truth is somewhere in the middle, but you have to be prepared for the fact that giant invoice on that amazing project that you just did and it's going to get set the company to the moon. What happens when the big company, other company you sold it to, says, "Oh, I can't pay now. Sorry, economic crisis. What do we do? We'll pay you a little bit this month. We'll pay you a little bit next month." For a big company, generally they can absorb that sort of thing. For a small company, it's death. So, you need to have a look at what your worst-case scenario is, and you need to make sure that you are saving a certain number of months' worth of your costs, and you have that emergency fund you don't touch. Now, I've yet to meet a startup who does this and actually has succeeded with it, but I still give it as the advice because that's really the dream, because that means you can survive famine. If you are living literally down to your last cent, your company won't survive.

But I think that—

please.

Yeah, no, just to build on that, Alex, you're absolutely right. I don't think a lot of startups will be in a situation where they can do this emergency fund, but having the mentality and thinking about it that way means that they understand actually what their costs are, right? So, and it doesn't have to be complicated, right? You may have some rent, you may have some people, you may have some Subscriptions for different software platforms. Now we're just talking developing software companies. You don't necessarily have a lot of inventory. You don't have a warehouse if you're not doing a physical product. But you have some things and you know how they develop over the next 6, 12, 18, 24 months.

Hopefully.

Your first point about people, and we see this all the time. Yes, our revenue line is increasing, but our cost line is increasing much less. Explaining how that happens. And you can start by explaining it to yourself, dear listener, right? You can explain to yourself logically, how am I going to make even more money on the same amount of input or a little more input? How is that actually happening? And does that hold water? Explain it to your— explain it to your parents. Explain it to your partner. Do they understand it? Explain it to them.

Explain it to your kids. They see through things that you wouldn't even believe. So, if your kid can understand and say, yeah, that makes sense, you're onto a good start. Yeah.

And I think that just having that conversation with yourself or your kids or somebody else will help you understand that actually, maybe my costs should go up a little bit more. And then subsequently, how am I going to cover that with the revenue I have? And to your second point about payment, another thing I see a lot is people are very reliant on 1 or 2 customers.

Oh yeah.

And so, if those 1 or 2 customers, to your point, don't pay or delay payment, then you get into trouble really quick. So, maybe there's also a point here to make about diversification.

Absolutely.

So, even if you have a giant customer that you're really happy with and you're really trying to execute to deliver perfectly against those guys, And girls, you need to build additional customer relationships at the same time, not only because it's just good business, but also because it safeguards you against potential pitfalls in terms of your cash flow.

Yeah. The other thing I see all the time, just in terms of people's customers, is they undercut themselves to get that first customer. We're gonna go in low because customers want to save money. They'll buy our product if we're cheap. And it's actually a logical fallacy. So, unless you can deliver that service at scale for very minimal cost and input, you're actually going to spend— you're going to end up losing money on that. And I get these weird looks like, no, we're just going to charge low for the first customer. But then you've set a precedent. You've said, this is how much our service costs. You've also gone in with that mentality, I'm cheap. And unfortunately, when this happens, they spend all their time on that first customer that they're making a loss on. Even if they went in with wide eyes going, I know I'm making a loss. But that means when the next deal comes in, even if they can have it at a higher price, they're still focusing on that small customer. Because one of the scary things about business, regardless of what business you are in, whether it's big business, small business, regardless of industry, is that the guys who pay you $1,000 a month, take as much or more effort as the guys who pay you $100,000 a month.

Right. Good. Again, 2 massive points there, right? And thank you for that. In many businesses, you're absolutely right. The $100,000 deal takes as much effort as the $1,000 deal in a lot of businesses, maybe not most businesses, but in a lot of businesses and certainly a lot of sort of software technical businesses. And the other thing is about pricing. It is so tempting to reduce your price because you think that's what's going to get you the deal. And it might. But now you're competing on price, not on value.

Yes.

So how do we give people the confidence in their belly when— name a big brand in your industry that will buy your product or service if you reduce your price. How do we give them the confidence to say, Nope. Our price is this.

So, my advice here is actually it's an ounce of audacity. So, an ounce of audacity will get you remarkably far in life. I'm not gonna mention names, but some of the biggest names in the world, so I'm specifically thinking of a very popular motivational speaker, top motivational speaker in the world. Now, do you know when he became the top motivational speaker in the world? when he started telling people he was the top motivational speaker in the world. So, endowments of audacity. Even if you have to psych yourself up in the bathroom before you have that sales meeting, you go in and you believe for that 15-minute, half-an-hour-long meeting that your product is the best thing ever and that it deserves that price. The fact that you're having a panic attack in the car before and after doesn't matter because your client doesn't see it. So, my advice is try. If they slam the door in your face, the odds are good that they weren't that interested anyway. But very seldom do they slam the door. An opening price or having a conversation about how much does something cost, it's a conversation. And too many people, I think, go in with, if I give this price, they're going to say no, and that's the end of it. But it's not.

Mm-hmm.

And as you said, it's really, it's talking about the value. It's not about how much does this cost. It's about thinking for the company I'm talking to, for the people I'm talking to, and especially when you're talking to companies, am I going to help them make money or am I going to help them save money? Because at the end of the day, if it has to go via finance, finance again, that's one of the ones that— those are the 2 questions they need to answer. It can be the greatest singing and dancing bear that's going to make everybody happy. But if it doesn't, if the finance people look at it and say, okay, how is this going to bring us revenue? How is this going to reduce our cost? And you have to show that value. And there are all sorts of ways that you get to that value. But if you're just talking price, you're not giving them what they want. You're not giving them something that they're going to be able to take to their committees. You're not going to give them something that they're going to build a long-term relationship because it's transactional. It needs to move away from financial transactions into solving their problems. Not what you can do for them, not even what you can do. It's what do they need solved. And this is something I see as well. There's just too many conversations. Let me tell you about my company. I don't want to hear about your company. I want to hear about my company.

And that's another good point, right? So whether it's your company solving it or another company, it's about what they need solving, not your solution. Touch on another thing as it relates to this, which is another mistake I think many founders make is they hinge their future on winning that one deal. And they do that because they have a shot at that deal because they're in that room or they're in that process with that company. And so they tend to lower the price because they need that deal desperately. And to me, that also comes back to business development. It comes back to saying, We should be in a situation that we can say no to somebody, or they can say no to us without us freaking out because we've lined up eight, nine, twenty other conversations like it. So the effort that goes into actually get yourself in those rooms is something that is underestimated, right? So you start out; you're like, okay, our ideal customer is. I'm gonna say Walmart as an example. And you put all your effort into getting the meeting with Walmart and then they start squeezing you and you take it because you're so desperate to get the business. Because actually, if you don't get Walmart, you're gonna have an issue because you're running outta money or because you don't have a proof point or whatever it is. But instead of doing that, you should be saying, there's Walmart, there's Carrefour, there's Auchan, there's all these other large grocery chains in the world. Let me map all those. Let me figure out whether or not my solution might help them save money or make money to your point. And then, let me try and go shoot at all of them quickly so that I have 4, 5, 6 meetings lined up so that when Walmart says no to my price, I can still go to number 2, number 3, number 4, number 5 without losing my integrity of the business by going to a price point that I can't sustain.

Precisely. And I think that comes down to a side point to that is people bank in their head, not in the bank. So, they get that meeting and in their head, they've already won the deal. So, that meeting for them means that they're going to get the money in. But it's just a meeting. And one of the best pieces of advice that was given to me was whenever you meet with a prospect, with a new client, ask them, or with a new potential client, Ask them, why did you agree to meet with me today? Or what made— why questions can be scary. What made you sit down with me here today? What made you decide that we should have this meeting today? Because too many people jump into, this is our product and the value proposition, and it's going to solve all your problems, without necessarily even knowing what they are. But maybe they sat down with you for a different reason. Maybe it wasn't your core offering. Maybe it was just that, hey, my secretary scheduled it. And the conversation goes very differently when you know upfront why they are sitting there. And even if it is just, I'm going to have to work a lot harder because Peter agreed to meet with me today because his secretary put it in his diary and he felt bad about canceling it. So, ask the question upfront. They can just say, I don't know.

Yeah, no, sorry. I love that, right? We walk into these and the same thing when people meet investors. We walk in, we think we know what this meeting is about. But unless we ask, we have no idea.

Exactly.

And I've seen so many people come in and pitch something. And if they'd just taken 5 seconds to say, hey, why are we here? And I could have said, you know what, I'm not able to invest. But I think what you're doing is interesting. I really want to help you meet some people in the industry. Then, that would be a different meeting than them just going ahead with their 5 slides. And the same thing when you're selling your product or service, right? But that also, Alex, I think that requires a little bit again of self-confidence, right? You're sitting there in front of the VP of Purchasing at some big company. And instead of starting to sell your solution, you say, okay, buddy, Why are we here today? Or what made you meet with us today? Having that sort of calm confidence, while super helpful, I think is difficult for many, certainly first-time founders.

Absolutely. And certainly, it's something I resonate with because I, as I said earlier, I'm a little bit scared of people. I do a lot of stage speaking. I do a lot of training because I can talk At people instead of talking to people. But I can also tell you it's a skill that can be learned. If you'd asked me a decade ago, I would say I can't network. Can't be done. Just it's not a skill I have. And you actually have to. It's I say to my kids, they say I can't do this. First I go yet. And the second thing is how do we get better? They look at me and they roll their eyes go practice. But It's actually true. And unfortunately, you just have to take yourself through that process. You just need to say, I can't do it yet, but I need to practice. So, it's that ounce of audacity. It's that— what was that? There was a movie with Matt Damon that talked about 20 seconds of courage. It's just about getting over that hurdle, about saying that first sentence. And some of them are going to be disasters. I think we expect that we should always be perfect. We should always be confident. We should always be this. We should always be that. And should is such a dangerous word. We should have sold out for $1 billion yet. We should have gotten all our money in yet. We should have been a success by now. Take the shoulds away. Really, just take them away and take everything not as a make or break, to your point about if we don't make this, we're dead. Take it as a learning opportunity. Even if it is a make-or-break conversation, even if you have that conversation, it goes badly, and you have to shut your business down, how are you going to take that lesson to the next business? And unfortunately, unless you're one of the lucky few who either can fake or genuinely has that confidence, you're going to have to learn how to do it. You're going to have to learn some uncomfortable things about yourself and just practice.

Right. And I think to your point, it's not, it's never the last business, right? Most of the people that you and I meet have done one or more businesses. Most people that we see, even the big ones, maybe, I don't know if Mark Zuckerberg had a business before Facebook, right? But maybe he's the outlier. Most entrepreneurs have had multiple business ventures that haven't succeeded for a variety of reasons. So to people listening to this who are in the process of building their first company, I hope it will be your last, but chances are it won't. Chances are this thing that you're doing right now may not succeed, and then hopefully you can go on and do something else. And at some point, you'll find the right fit for you and the right fit for for the market to to build a company. So Alex, I want to finish this episode by returning to to a little bit about the financial metrics. So if you were a first-time founder CEO today. What are some of the numbers, 3 or 5 numbers that you think I would absolutely need to know intimately? What are the metrics that I should be aware of?

So, for me, obviously, your costs are number one. How much is it going to cost you every month to run this business? And that's not just your fixed costs like your rent or your salary bill, but it's things like Do my costs go up to get a customer on board? Do they go up, have a spike after I get the customers on board? Because especially in services businesses or in software businesses, there often is a cost, what we call a cost of acquisition or a cost of onboarding. So, know your costs beyond just your fixed monthly costs. How are they going to change over time? The second one obviously is your revenue number. How much money is coming in? But you've got to be honest about your forecast. You can't say, I'm going to have a target of $100 million this year, and you're just going to put, say, we're going to get this, we're going to get this, we're going to get this. It's about being honest about what that number looks like. But ultimately, I think the most important number that underpins all of that is cash. It's your cash is king. Now, obviously, we're not necessarily talking about physical cash in hand, but how much money do you have in the bank? When is that money going to hit the bank? If that money doesn't hit the bank, what do you do about it? So, really, it's with any business, and I don't care how big or small you are, it's about managing your cash flow. So, managing your liquidity. So, do you actually have enough money in the bank? Do you have enough money coming in on time that you can keep running your business? So, for me, that is absolutely critical, is knowing what's coming in when. And then, I suppose, from just a software perspective, if you are a tech founder—

Got it. Yeah.

I was gonna say, if you're a tech founder, beware of your consumption charges. So, these are the ones that go up and up every time you use a service, whether it's a hosting service, whether it's an API. Be very careful because this has killed a lot of tech startups because they underestimate how much it costs them to run something and they charge less than it is costing them to run. So, that's just the side tech tip for tech startup founders. Watch your consumption charges.

So, knowing your revenue, knowing your cost, most important thing is cash is king, not necessarily physical cash, but your cash flow. And last but not least, consumption charges. What does it actually cost you to run your business as it scales? Certainly, if you're a software company or SaaS company. I want to thank you, Alex, for coming on the Whole Human Podcast. It was a delight to speak with you today. For the listeners, if there are topics like these, whether it be financials or sales or marketing or hiring or working with investors that you would like me to cover with any guest or a guest in particular, as always, I'd be happy to hear from you. Alex, thanks again. Thanks for coming on the show.

Peter, thank you for having me. It's been wonderful chatting to you.