AI, Accounting & SaaS Economics: What Founders Need to Know Before IPO | Derek Anderson

I think that you can see a lot of benefit already from people leveraging the large language models to do things like write memos. There are companies out there, there's systems out there. If you're dependent on OpenAI, right? Or if you're dependent on whatever platform you're using, then what happens when they release something that just totally disrupts what you're doing, puts you out of business or or whatever, right? Um, do you trust that they're like, you know, that they're utilizing your data in the way that they should?

All right, welcome to another episode of The Venture Capital Podcast with your host Peter Harris and John Bradshaw. Today we're joined by Derek Anderson, managing partner at Connor Group, an advisory firm comprised of Big Four and leading growth company alumni helping growth stage companies solve complex accounting, financial reporting, and technology problems primarily around the office of the CFO. Derek led finance teams inside high growth companies and now partners with founders navigating critical scale moments. Derek, it's great to have you with us.

Thanks for having me, guys.

I should also note that like Derek and I have known each other for a while. Um, we lived in the same neighborhood for a little bit, so are good friends and I'm excited to have you on the show.

Thanks. Thanks for having me. Um, it's been, um, great to see you guys, uh, kick this podcast off however many years ago. I, I, I remember I, I grabbed a few of the initial episodes you had, listened to them. I would say I'm like an on-again, off-again listener, but it's always interesting to me to see what's going on in the VC scene and local VC scene too, since we both live in the same area.

Well, we appreciate you being a listener. Well, so today we want to talk about accounting because you have a very unique viewpoint we'll say, right? Working with CFOs of major companies. Can you maybe talk a little bit about what Conner Group does and what your role within that organization is to maybe provide some context to our listeners before we dive into the topics for this episode? Sure.

Yeah, absolutely. So Conner Group is, as you mentioned, is an advisory firm focused around accounting and finance issues around that office of the CFO, but it really starts started back about 20 years ago in the Bay Area. And the impetus for it was when audit firms like the Big Four could no longer provide consulting services on their own clients. So you had Big Four firms like Ernst Young and PwC and so forth who suddenly found themselves in this position where they couldn't do this work for their clients, helping them go public, helping them get through major milestones from a technical accounting perspective, as well as a lot of other areas like systems and operations in accounting and finance. And so the firm started out as this independent, you know, kind of Switzerland firm that doesn't do any audit, doesn't do any tax, really just focuses on how do I help a controller or a CFO. And initially was focused around a lot of IPOs, drafting the S-1, helping companies go through that process. And then it expanded into process improvement, internal controls, and operational accounting and finance. So setting up the best practices around how to improve the month-end close process, how to get through, you know, your revenue cycle, order to cash, procure to pay, make those more efficient, and really take companies really all the way starting from, you know, ground up, angel or seed, all the way through to an exit moment, an M&A, an IPO, and, and helping companies turn into a, a more modern, more robust accounting and finance function. We also do a ton of system implementations. So we, we like to say that we are accountants who love systems. Some systems implementers are, come from a background in IT or a background in operations. Our background is finance and accounting. And so when we implement something like a NetSuite or something like a point solution like a Coupa, we're doing it through the lens of someone who's served as either a controller or accounting manager, finance professional, CFO, those sorts of things. So that's who we are and we've done a lot of really exciting IPOs. We took companies like Uber and Spotify, Lyft, We've worked with Palantir, a number of, of pretty marquee companies, and we're in the major IPO markets like the Bay Area and New York, but we also have a pretty strong presence in some of the smaller but hot startup scenes like Utah. Southern California's been a good place for us as well, and we're, we're still growing as a firm.

Awesome. And if I remember correctly, you work with, in particular, like you work with a lot of early and growth stage companies helping get those systems set up. Right at the beginning so that by the time they have an exit event, everything's put in place correctly, right?

Yeah. You know, we'll work with companies. I mean, it's, it's kind of interesting. Every, every company has a different journey that they go through to, you know, whatever they get to, if they get to an M&A or, or an IPO. But we do oftentimes get in these companies that are really hypergrowth and sometimes they're going to move quickly even after they get initial rounds of funding. And so usually if that trajectory's quick, we will find ourselves helping them get through an audit, helping them get through, you know, preparation for M&A or even helping them integrate with companies when they buy a new company to fold up inside their portfolio. And we'll help get those companies modernized and aligned with that parent company. We, on the, I guess to the point of early stage companies, what we like to do is we always like to have a conversation, begin, you know, working with companies early stage and at the very least, you know, be a coach or be a sounding board for the CFO and controller. And oftentimes they may be looking at what's most important in front of them. It may not be having the world's best, you know, revenue recognition policy. but we can still give them the kind of best advice they need for that stage in their growth cycle. And then when they, as they kind of mature up, they can start to add to that. But it's, we found that if you start off on the right foot, you're better, you're going to be in a better position when you go public, when you get acquired than if you go and you build up a ton of bad processes, bad revenue policies, bad systems, because then you have to go and unwind those things and kind of clean them all up and it gets really expensive.

Yeah, absolutely.

How expensive?

We make a lot of money off of how expensive it is. I mean, that's the, the reality.

I'm not asking your fees, how exp— but just how expensive is it when people mess this up?

I mean, you know, we, we will have companies, obviously it depends on what they're trying to do. If you're, if you're gonna get acquired, it's less expensive, right? Because usually the, you're not having to build out SOX and, some of those things that you would do as a public company. But I mean, it could be millions of dollars of avoidable fees. You're probably still going to spend a lot to go through an exit like that, and you're going to spend it more than just on accountants. You're obviously going to be spending money on investment bankers and attorneys, but you'd probably avoid, yeah, in the millions of dollars in accounting fees if you got it figured out earlier. There was in kind of the boom of the kind of end of 2020, 20 to 2022 year of like this crazy, what, 1,000 IPOs or something if you count the SPACs during that period. I had one client, really interesting one, and I'm always careful to not share specifics about what client names, but I had a client that was really interesting because we did a lot of IPOs that were really messy and racked up tons of fees. They weren't prepared, they pushed it out really hard, really fast. But there was one really distinct one that I remember had this awesome team, really impressive chief accounting officer, really impressive controllers. FP&A team was really good too. And it was like this funny thing where they still hired us and we didn't really do that much. We didn't have, we only made, you know, I don't need to say how much we made, but we didn't make that much money because we were basically this just there as a, you know, an extra set of eyes on some things because what they were doing and how well they had prepared was so good that they really didn't need us that much. And it was fine 'cause it was actually kind of fun. It wasn't as, as big of a headache for us.

Yeah. Yeah.

Oh, there's a local, a friend's company that went through an IP, an IPO, and early on they didn't do their 83B elections properly, which I know is, I think is not where you're at, but that, that cost each of the founders high six figures early on.

Yeah. I mean that, that, so the 83B is interesting 'cause that can cost individuals money too. It's not just a, mm-hmm, a company thing. And, but then of course people are pissed off at the company.

It's like, I mean, it goes, well, yeah, but the, the company had to fund it. From them because as founders you often, you don't have that kind of cash sitting around.

Right. Yeah. You know, and what's funny about a few of those things is like what we'll do is we don't necessarily, like we, 83B has part of it's a tax issue, right? And we don't necessarily come in and say we're gonna own that piece of it, but we're gonna say, hey guys, you're, you just started this company. Here are the things you need to be thinking about. You know, SaaS companies start out or really any company starts out. They don't think about sales and use tax. And then what happens is they move on and then it's, you know, a year out from an IPO. Sometimes in fact, just filing an S-1, it flags it and states start to get, you know, really, really, um, they start to salivate when they see that. And so they start to audit you. Um, and now you've got all these back taxes that you didn't know you owed in sales and use taxes because nobody ever thought it through and nobody ever asked the question. And now you have terrible processes. You don't have the systems to support it. And it just kind of spirals from there.

So I want to transition away, you know, yeah, yeah, some of that stuff, not because it's not important, but I want to talk a little bit about AI and as it relates to accounting, because I think that's the topic of the day as it relates to accounting and finance. And since, you know, you're working with so many of these companies at the earliest stages, and the growth stages, like you have this interesting seat where you're advising a lot of these companies on like what tools to use and, and, and so on and so forth. And so I'm curious, like what's actually being implemented right now and, and where's like, where's, where are these tools actually delivering value versus just a lot of hype?

Yeah. Uh, so I guess the, the, the overarching kind of caveat about finance people and accountants is that I think they're really slow adopters. That's one thing that I've noticed. It's been slow for accountants to really embrace this stuff. And I think it's just, it's a function of their risk aversion. Everything, you know, when you go through and if going back to that point of going public, you spend all this time documenting your risks and saying, here's like all the what can go wrong. So I think people, inherently just think like, oh, if I do this, I have this problem, I have this security issue. So I do think that's the case. And I've, it seemed like it's been adopted slower than I would've expected. But people are adopting it. And I think the people who are getting a lot of benefit from it. So I guess the question is, what are they using? What are they using and what are they not using? I think that you can see a lot of benefit already from people leveraging the large language models to do things like write memos. There are companies out there, there's systems out there that are kind of like copilots that help people think through the accounting research. One thing that is interesting is people will use that stuff as a crutch sometimes without understanding the underlying accounting principles behind it. And they sometimes get things pretty wrong. So it is still one of those areas where like, I think anything in AI, it's like if you vibe code or whatever and you don't understand the actual product, what it needs to really look like and what the code needs to look like, you may be in for a rude awakening when you actually get it launched. And so, but that said, people who are like I look at some of our technical accounting team, we have a really, really strong group of technical accountants. So this is the people who are doing the accounting research on how to recognize revenue and equity, things like that. They're really, really fast when they use AI. I mean, they can punch through stuff really impressively that just wasn't as possible before because you spent so much time in the documents. So I think anything that's document related, I think is trending in a good direction. And there's a lot of different ways people will use that, whether they're using like something inside of an existing tool or it's a separate tool that they use. You know, I'd say like if you use a ChatGPT or, you know, whatever kind of your typical models that are out there, those, you just, you have to really, really second guess them. To know that they're hitting on the right thing. In fact, even like if I feel like anytime I draft something that I leverage like our internal tools that we use that are built on top of a ChatGPT, just enterprise version, right? There's a lot that you have to sift through before you get to the right answer.

Do you feel like it's getting better?

I think it's getting better. I think it's also, it also gets better when you can provide more context inside of it. So like as we build You know, like personas or, you know, we call them personas inside of our systems. It makes it more clear what you're actually, the question you're actually asking because you've kind of started to train it better. I think also company data is a cool one. There's some tools out there that will pull in like your NetSuite data or pull in on a private environment. They're not, they're not, and it's not going to anybody, but they'll do that sort of thing. And that's also pretty powerful. But I think that there's still that like limit to the user to interpret what they're seeing. So like in the case of like, there's, there are these systems like Flowcast, which help companies run their month-end close. And there's a bunch of different ones. Blackline's a popular one. Numerix is a new hot one. And when they, when you use them to do a flux analysis, so you're trying to understand like the movement of how did accounts receivable go up over this period or what happened with revenues, they're going to have the data because they're plugged into the system. So that's good. And they're going to try to make a, take a stab at explaining what happened. But the problem is, is if like what actually happened was the wrong thing, they'll still explain it. They'll say, oh, here, this is what happened. That doesn't mean it's the right thing, and that doesn't mean that when you read it, you should just say, okay, well there's the explanation, it's good. Financial statements make sense. They may not actually make any sense at all. Yeah. But still saves you a ton of time.

Yeah. It is interesting though, 'cause I think there's been a lot of pushback from people that say, well, AI's like really helpful, but it gets these things wrong, so you have to second guess it. But I feel like the number of things that's getting wrong is smaller and smaller and smaller. And yet people are still like, oh, it's no, it'll never be like a real thing. And I think that's a little bit of denial because I think it's when we get there.

Yeah, I would agree. Yeah, I would totally agree. Although like I have this belief that I've shared often with people that I think that the, this like insatiable desire for improved financial information will always drive people to to continuously improve, right? So if like, you know, Meta has the best finance team in the world because they're leveraging their own AI they built, Google's doing the same thing. And so Google is going to uplevel and then, you know, every small company that's kind of trying to disrupt them is also going to try to uplevel. And so you're always going to have some role for a finance professional to improve the process to quality, you know, to QA it. And so that's my, like, I'm the glass half full guy on AI. I'm not the, like, the doomsday predictor. So that's kind of—

I was a little surprised last night in preparation for this meeting. I was trying to see how smart AI was with math. So I went to Claude and to ChatGPT and I uploaded a loan document and the last statement for like a revolving line of credit. And I said, tell me what my next what monthly interest payment is at, you know, estimate it. And it was way off by a magnitude of 2x.

Then that's, yeah, I think the math is definitely a weaker spot.

The sales spot is great.

Sorry, go ahead.

Some spot, in some areas it's phenomenal.

Yeah. Yeah. And I think it's like, there's also the question of, do you want automation? Or do you want AI? And sometimes, you know, AI, you can think of it as a component or a part of automation, but like you can automate processes, you can have the math done correctly by the system without it having to use anything like probabilistic about, you know, from the AI models. And sometimes that's like, sometimes when people say, well, I want to use AI in my company, what they actually mean is they just want to automate things better. And there's plenty of things that are like low-hanging fruit that are jobs no one really wants to do anyway that you could automate. In fact, some of the best companies, I think, you know, maybe like, you know, just thinking about clients, we have a lot of clients who are, you know, high-growth companies and I would say actually some of the best ones are the AI companies 'cause they're trying to eat their own dog food. But I have one client where They've automated, I don't know, he, he claims 80 plus percent of his, of his journal entries are automated. Yeah. And I think if you actually look at what those are, it's 'cause it's high volume, low complexity, doesn't require a lot of judgment to do it.

Yeah.

And, and it's, it's great. Yeah.

Well, and I would imagine that over time you, you tap into more data sources, you get better accuracy on that sort of stuff. Right. I mean, like it's, it's just a lot of lack of context at the end of the day. And so as you feed more context into these things, you can solve for those discrepancies.

Yeah, I totally agree. And I think the context question is interesting too, because, and I know maybe we'll, we might, we might get into this a little bit, but if, so you asked the question earlier, what is actually working? What are people actually doing? So some of these systems that were designed kind of post-AI, like, you know, AI native, as they say, that are new ERP systems, for example, there's, there's some of those out there, like a Campfire or a Relit type of a system. They, because you're already building your, and especially if you're like, if you're a brand new company, and this is, I think, great for this audience, for the VC audience, you just started a company. You can go straight onto something like that, or fairly quickly. Maybe you initially started on QuickBooks or something, but you could go onto one of those and you're building into your process from day one. You're building Agentic workflows into it. You're building, um, the way that you run reports is like very, um, it's, you can use just text prompts and say, I want to run a report this, I need, I need this. Oh, I didn't get this department field. Please add the department field. And you can kind of start to train it on what things need to look like from day one. And you don't have to go back and like retrain it after you're already, you know, I don't know, hundreds of millions of revenue. I think that's probably a really interesting place that this goes. It's the newcomers that they can scale up these teams with a leaner team potentially and a team or a team plus system that actually understands their context, what they do for business.

Do you, where do you think like the opportunities are? Is it, you know, an agentic ERP? Is it, you know, agentic auditing? What, like where, where are the opportunities right now that you're seeing?

Yeah, the, so, um, agentic ERPs are, are a big thing. There's a ton of money going into the, I mean, if you looked at the funding rounds, they're, they're, they're big. They're big players that are putting money into these companies.

I mean, they're insane market sizes, right? Oh, so they're, I mean, you look at NetSuite, you look at some of these, these players. I mean, it's, it is the central source of truth for, for an entire company in a lot of ways, right?

So, yeah. So I, I do think that's a big area. But it, all the other players are adding AI or they're leveraging third-party tools. They're using like integration software, like, like Boomi and Workato. To handle one, the automations and integrations, but also they'll use it as a place where they can build agents as well. So, you know, to some extent those will exist in larger platforms as well. I think you were, oh, you asked about auditing too, like where it's, where it's, well, not just auditing.

I'm just curious, like what are you seeing that you're like, that's going to be huge, right? Or that's, adding a ton of value or could potentially add a lot of value in a cow.

I, yeah, I really like the ERP play. I will say this, like the way I viewed this and the way we're viewing it internally as a firm is that we really like what they're doing, but they're all like, we know that they're learning as they go. And so a certain amount of like patience needs to be applied and internalized. And also knowing like who's going to win. I don't know who's going to actually win. There's probably multiple winners, but you, but learning the process of building like agentic workflows into your finance and accounting team is probably more important than knowing like it's this specific system that's going to win. So, but I think in general, those systems are probably going to go a long ways. And they'll actually, what's interesting about them is that they're building inside of them, they're building closed management tools as well. So there's like a lot that they can expand outward from if they make their place like the central source of truth, then they're going to probably be able to do things that some of these other point solution systems are doing as well over time. But you could say that and then you could say going the other direction, you'll have, um, there's companies are so sticky on a tool like a Flowcast or a, um, whatever, you know, whatever product they're already on, um, that they'll, it'll, they'll, they'll already build on top of that, that system as, um, a ton. And they may not like, because of that stickiness of having all their processes built around it, they may be, um, unlikely to leave those systems because they already, if they build agentic workflows inside of those, they, I'll just keep them. Yeah.

So do you think ultimately then that the Flowcasts, the NetSuits, the QuickBooks, are they, I mean, they're clearly vulnerable, but do you think like ultimately, like they'll get disrupted by these new players or do you think they figure out their AI story and products fast enough to fend off these new entrants?

Yeah, I mean, I guess what's, what's interesting if you think about, like, if you think about NetSuite, NetSuite is owned by Oracle, is essentially an Oracle child when it was even started, right? And so my, my guess is there might be some larger strategy those guys will have anyway to, you know, figure out how do they keep themselves relevant. But NetSuite is still a really good system and all of these other, you know, like whether it be like a Boomi or Workato, right? They're, and Flowcast, they're, they're already so embedded inside of NetSuite that they're going to continue to innovate so that they can stay relevant, which then NetSuite will try to hold onto those clients and those, or those customers. I think that There's that, that, that joke, I think they, they say that no one ever gets fired for implementing NetSuite or implementing Oracle or implementing SAP. And I think like that's probably still going to be true for a while because there's still complexities that are in some of these larger businesses that the early stage ERPs can't quite do. Like they still struggle with inventory. They're getting better at that, but they still struggle with that. Anything that's like hard goods, which I mean, interestingly enough, is way more in vogue now with AI. You've got all these chip makers and all these different, I mean, they're, it's way more hard goods than it used to be. So I don't know. I feel like they're going to be okay, but it might just be, it might just take a long time. And if it takes, if there's enough time, then they'll have time to adapt or have another platform that they can roll into it. Yeah. It is tricky though to re— like they can't rewrite the code. I think it's like NetSuite's already been around too long. Yeah. Go ahead. Sorry, Sean.

The ERP space is interesting from a VC side because the switching cost is so high. So like if, if you're looking at deals like Peter, you could see like an absolutely phenomenal product. I bet it's still extremely difficult to get adopted if you have to, if it doesn't integrate with existing ERP.

Yeah, I, I, I agree. I think the other thing that's, I think the sunk cost fallacy also hurts companies when they think about switching ERPs. I had a client that had about $12 million remaining to spend on the completion of their SAP implementation. And they kind of like got certain business units, certain products, aspects of it on on it and then they had another system they were using. And we looked at the business and said, do you really, really need SAP? SAP is a great system, but do you really need SAP for what you guys do? I don't know that they actually do. They could implement other systems for a lot cheaper and the total, they could redo everything for a lot cheaper than that. And, but they don't actually want to do it because they've, already invested however many millions, tens of millions into SAP that then switching and going, say to like NetSuite or say to what, you know, I don't know, a Microsoft Dynamics product that feels like something they just, they just can't swallow. So I think that might also impact what companies actually switch to some of these newer ERPs. I think it, I think the greater potential, it's the next, it's the next generation of companies. Those are the companies that probably use these, these tools more.

When I look at, and Peter and I have talked about this, like what's the future of the CRM and the ERP space? I think one of the challenges is you have in an SAP is I think what, there's so many features that most companies probably use, what, 10% of the actual features, right? And so you're paying for all these other features you don't get. And with vibe coding and how good that's becoming, do you see that as a real threat to the space?

Yeah, well, I think it's happening a lot. I've seen it in a personal family connection business where they just get fed up with what's out there and they just build their own system.

Yeah.

And they do it in 4 months.

Part of the challenge, right, has always been you buy a product that's like, eh, gets you like 80% of the way there, or you overpay and it's bloated and it's complex and hard to use, and you actually have to hire a firm, probably like Conner Group, to come in and like customize it for you so you actually can like get use out of it. Um, and there's like whole industries, we've backed them, some of them, right? Like, uh, Simplice that did a lot of that work for Salesforce implementations and so forth.

Yeah.

And now it's like, do you just whether you vibe code or build it yourself, or there's a company that gets you from like 80% as good to like 95% as good, you know what I mean? And they only have like, they don't need to have a huge market because their cost to, to build and deploy is so low that, you know, you just, they can, they can target a much tighter niche and still have a decent little business operating. I don't know. I feel like that's kind of a big threat to a lot of these large businesses that have tried to be everything to everybody. I don't know. What do you think?

Yeah, I would agree. Though I guess the one area that I would maybe push back a little bit is if you're looking at needing compliance around specific like regulatory standards or whether that's like something that's around data security or, or if it's even like SOX, there's a lot of these bigger systems have put the time in to get them SOX compliant. And there's an infrastructure around knowing how to validate and test them and prove out that they're actually doing what they're supposed to be doing. So that may always draw a certain number of companies there because when you build a homegrown system, then there's that question of like, is it SOX compliant? But for some companies, they don't need that. They don't care. They're private. They're not, you know, maybe they're going to be acquired and it just doesn't matter. And I think that will be very viable for them too.

And then you couple it with something you said earlier, which is that, you know, accountants move slowly on some of these things. And so You know, I, yeah, I can see how like it's going to be a relatively slow transition. You know, it's, it's like they say, the future's here, it's just not equally distributed and may not be quite as equally distributed in the accounting space due to slower adoption and regulatory and so forth. So, um, I want to switch gears a little bit away from AI accounting tools and more just like how AI is impacting accounting. And revenue models and pricing and some of the things that you're seeing on that side because, um, you know, you, you get to look into the books and, and a lot of these companies and, and see how that's changing. And so like one of the things that we've noticed recently is one of the big shifts in traditional SaaS is people aren't signing up. It sounds from what we've heard anecdotally is people are not signing up for like 3 to 5 year contracts anymore. They're pushing to 1 year contracts if they can. They're pushing to usage-based contracts. And part of that is driven by the fact that a lot of these AI-first platforms that have their own agents and so forth are really based on top of the larger model companies. And so they have to pay that tax back to those platforms. And so their cost basis is even more usage. Driven as well. And so they kind of pass it on. Is that what you're seeing? Is kind of the anecdotal experience that we're having measure with what you're doing?

Yeah, no, a ton of companies that we work with are dealing with usage-based contracts and including, we have a number of AI clients. And yeah, that's definitely the trend. And you know, there's like accounting peculiarities you have to work out for that too. Just like from a revenue recognition standpoint, that's like, what's the GAAP rule? But then there's like the business implication of what does that mean to you as a business? What's the value of that revenue? And what's the value of the company? Which I think is what Well, I think a lot of this audience on this podcast is, is really thinking about what do I, what do I need to pay for this? Or what can I sell what I have for?

Right, right. Do you feel like, and how does that impact like quality of revenue in your opinion?

Yeah. Yeah. I mean, I, I think it's like, it's, it's, it, it's obvious that I think that the, the vulnerability, like you have a couple of things, you have you have, you know, kind of classic, like you have a vendor concentration risk if you're using, if you're dependent on ChatGPT or not, you know, OpenAI, right? Or if you're dependent on whatever platform you're using, then what happens when they release something that just totally disrupts what you're doing, puts you out of business or whatever, right? It's like every dime, right? Do you trust? Yeah.

Right.

Yeah, yeah, exactly.

Yeah.

Do you trust that they're like, you know, that they're being, that they're utilizing your data in the way that they should. I think sometimes people will use, will work with different providers to try to address that. And so I think that like that has to impact the quality of the revenue, right? And then I think you made the point earlier about you're paying a lot of money back to them. So it has a potential, downward compression on your margins over time, right? That like maybe with the traditional SaaS, you expect to have upward margin over time as you service it. This could definitely be a risk of the revenue just having lower margin over time.

I think the other part of it is, I mean, the beauty of SaaS is you got to lock in like 3 years of revenue, you know? And have visibility into that.

Yeah. Predictability.

Predictability. And like that, I mean, it was the confluence of like all the things we've talked about, right? It was like high margin, locked in for long periods of time, high switching costs, not beholden to anyone else's platform really, because, uh, what you, you, you probably hosted on AWS, but you had 3 other very strong legitimate options. And so like kind of commoditized cloud is kind of commoditized at this point. And now like, you know, it's almost like you remove all of those advantages and I don't think the revenue is anywhere near as high quality as it used to be. And I think that's part of the reason why, or maybe the biggest reason why SaaS stocks in the public markets are down so much. Is everyone's looking at 'em and saying, you had a beautiful, amazing business model, but the future doesn't look as rosy anymore.

Yeah, no, I think it's fair. And I think some of the companies that I've seen that are doing a good job around that is like they create, they find a way to really create that stickiness. Maybe it's because the way that they've deployed AI inside of what they're doing, that creates that stickiness to the customer because they're getting so much benefit from it being trained or benefit from it being, you know, their, you know, really their co-pilot as they work with that software. I think that's one thing. And I honestly, I do think some of these companies where they've been smart is like figuring out how to build out their team in such a way that they're building into the process, all the, the Agentic workflows, what for, whatever, like for, it doesn't need to be finance. It's like any part of your software development, your operations in general, right? If you can build that in upfront, then that's going to, that's going to help you on the cost side, which then just, yeah, that'll improve your margins. Like I've, I've been shocked actually. There's, there's, there've been some interesting companies that like I would've expected they're gonna spend, you know, like they're gonna be much more generous with their spend. Like there was this period going, I don't know, you know, 5, 10 years back where like you hear these stories and we even saw them where a SaaS company, private unicorn type of company would just spend crazy amounts of money on just crazy stuff, right? You'd see like, you hear like, you see the articles people would write up, but why did, you know, why did this company do this? Crazy, crazy spend. And I think some of these companies are much more, they're much more conservative today.

Yeah. I'm curious, what does this mean for all of the companies that are sitting, wanting to go public in your opinion? 'Cause I mean, you, Conner Group works with a lot of these companies that are kind of in pipeline. Feels like last year there was, everybody was excited that we were going to have a bunch of companies go public and then we got tariffs and we had a government shutdown. All of that's a little bit behind us. We've had a few companies go out, but there's still, you know, a huge backlog of companies that have wanted to go out for a long time. Does that backlog still exist? Are those companies in a tough spot at this point? What are your thoughts on that? What are you seeing?

It seems like there's still a heavy pipeline from what we're seeing. And there's already like the run rate this year is already pretty high. You know, there's traditional IPOs and there's like the SPACs too. But the total year to date is already pretty high. So I think, I feel like it's probably still going to happen maybe because there's just so much, like there's only so long that you can really wait. so many years of, of pent-up, you know, frustration and demand that eventually people are just need to do it.

But the ones that have gone out, I mean, maybe this is too anecdotal, but like, I don't feel like have done particularly well over the last 12 months in the public markets. So like if I'm sitting there as a, as an enterprise SaaS business with, call it probably at least $200 million in ARR to be, you know, have the potential of going out. Um, I don't know, like I'm watching some of my peers that have gone out, you know, you look at like a Figma that's down 80% from its IPO. Uh, and that's like a world-class SaaS business in a lot of ways. Um, I don't know, I'd be thinking like, I, I do, I want to go out, do I, or would I rather find a buyer and If I don't have like an incredible AI-first story, does, is there even any oxygen left in the room? You know, is there any capital left to really buy, you know, invest in my company? Or is it all flowing to OpenAI and Anthropic and Groq?

Yeah, I, I think this is an interesting one 'cause part of it's like, I can, I can react to it if you, if you're talking specifically about like a SaaS company. But then there's all these other companies that we're also seeing that aren't only SaaS or aren't even SaaS at all. They're like heavy defense, there's huge defense tech companies, right? There's huge, I mean, SpaceX, what they're gonna be a, like they're gonna build data centers on, you know, on meteors or something. I don't know, whatever, you know, they're gonna, yeah, we'll see.

We'll see.

But the XAI. Yeah, I mean, so there's like, there's all these new frontiers. There's all the infrastructure, the picks and shovels companies in the AI space. So it's hard for me to say like, would IPOs in general go down? I don't, or not be as big as we expect. I feel like there's still a lot of those companies that are doing it and they have good reasons to, 'cause they are the picks and shovels. But then it's the question of like the non-picks and shovels, the AI companies, the ones that are SaaS that are trying to adapt in that world. How many of those will work out and go and how many of them won't? I don't know. I mean, yeah, I'd love to say, you know, that's why I'm, I don't invest in the stock market. Like I'm not an investment banker. I don't do anything like that 'cause it's, I think it's so hard to figure out what's actually going to work.

Yeah. Feels a little bit like a lottery sometimes in the public markets, right? It's hard to get where sentiment is leading.

But then you've got that other, that other thing that I think plays into is just the, the, the, the cap table has to turn that you have to like, you have to eventually investors aren't just gonna stick it, stick it.

They need some sort of liquidity at some point. And yeah, they'll take haircuts if they have to eventually. They don't, nobody, no venture investor wants to take a haircut, but at some point their LPs put a gun to their head and say, give me my money back.

Right.

So, yeah.

Yeah. And even like PE, like you have a bunch of these, like these companies that went, like they were public and went private, or maybe they, they got purchased by PE, but the PE involved is not going to, like, did you just know they're not going to be holding onto them forever. And they, if they don't have a viable path to selling to another PE because they're already too big, or if they, you know, they're not really a good target for a strategic buyer, then they kind of end up just, if they want to still be a business, if they believe in the mission, if they have a real core business, it's a, that's something that they believe in and they've got customers. I don't know, why not just do it? Yeah.

So in the last few minutes we have, I want to talk a little bit about, like what's your advice? Let's start with, let's start with founders. What's your advice to founders right now? Like how do they navigate everything that's going on, particularly from like a finance and accounting perspective? Yeah.

Well, I think I go back to try to think about modern, like a modern accounting and finance team as early as you can. So try to build the workflows, the, you know, the, a model to train your, what will ultimately be your systems and processes on your context, what types of transactions you do and what do they mean and kind of build that like muscle memory up as early as you can. And hopefully that, that will be leveraged by using good systems to do that, using some of these, these AI forward-thinking systems. I think that's, that's probably one thing. Of course, so yeah, so I'm, I'm going to buy, be biased and say, yeah, from a finance accounting lens, just try to get that figured out as early as you can. I would say at least be aware, like, and this is not something that I would, this is advice that I would give anytime, 10 years ago, whatever, you know, before any of the AI hype, be aware of what issues can pop up as you grow, whether they're like a tax issue, whether it's like a technical accounting issue, what, you know, how revenue is supposed to be recognized, whether you, whether revenue is truly a gross revenue versus net, you know, from a GAAP perspective or understanding what that could look like and where at least the issues are and, if you can't actually do all the analysis and you don't want to figure that out early because you're more focused on cash, cash burn, that sort of thing, that's fine. But at least be aware of them and just put them in a parking lot and say, these are things I'm really going to make sure I keep them on my radar. Because then, you know, then you'll know when it's the time to address those and kind of pivot to them. The companies that just don't even think about those, then they catch them off guard a lot later. And then, and maybe then I think on top of that is think about what issues like the vulnerabilities to any of your, you know, you mentioned quality of revenue, like think about those things early on too, because of AI.

What's the, what's the thing that VCs should be asking when they're evaluating companies today that maybe they're not, especially as it relates to like the finance world? Yeah.

You know, I mean, I, I, this is a tough question because I feel like there's so many smart VCs that will say, no, Derek, we've all thought of this before. So maybe I can't say it's the one thing. But I, what I would, how I would react to that is I'd say, so there's this, like a lot of people talk about investing in founders as opposed to investing specifically in the idea or the business itself. And I think there's truth to that as it relates to How do you, how do you handle this like chess game when it moves? 'Cause it's, it's moving quickly and maybe more quickly than it used to. And so you need to figure out like, how good are you at saying, okay, this is my business model right now. If we change this, then what, like, then, then here's the 3 scenarios that could play out. And if kind of like game theory, if this happens, then what do you do? If this happens, what do you do? And kind of challenge yourself if you're a founder or challenge yourself if you're a VC to like think through those questions with the founders and how that impacts their business, how it impacts their, the financials as well. And so that's probably what I would say, but I think you guys are doing that a lot as it is. I just think that the pace that you have to do it is faster.

I think it's really challenging because most companies can only really do one thing well for most of their life and yet in a world of AI, you kind of need to be super adaptable. And so you have this tension of building out for adaptability while simultaneously trying to stay focused and not get distracted and pivot too often. Right. So it's an interesting challenge that I don't think companies have ever had to really deal with to the extent they do today, given that speed of change.

Yeah. And you know, it's funny, I think that this is like one of those things, it's, it's an advice for companies and it's like an advice for us as individuals. And like when we talk to our people inside of our firm, people and, and those, some of those people are leaving, they're going into roles in, in, in industry and finance and accounting. And it's, it's like, you may think, okay, I'm gonna be the world's best, you know, person on understanding how to do this in NetSuite or understanding how to do this in, Maybe it's one of the new platforms. It's Gapfire. Don't do that thinking that that's like, you're going to know that thing forever. Know what the, it's like the question of, are you a company that like, if the company that was the typewriter business, did they think they were in the business of being a typewriter or were they word processing, you know, getting documents out, whatever you want to call that actual business. So think about what that is. Learn the skill of agents, learn the way to think through these things, but then as it kind of adapts, you have to be adaptable as well. Absolutely.

Well, Derek, thank you for joining us today. It was a really fun conversation. Felt like I learned a lot. So thank you. If, yeah, thanks for having me, guys. If people want to continue to follow kind of your work and Kana Group, where can they find you?

Yeah, they can find me on LinkedIn. I think it's Derek J. L. Anderson. S-O-N. Connor Group, Connor, C-O-N-N-O-R-G-P.com. So feel free to connect, LinkedIn, reach out and yeah, I would love to, I'm a pretty open networker. I like to talk to people of all different walks of life. So you heard it.

If you need free accounting advice, reach out to Derek.

Exactly. Yeah, exactly.

All right. Awesome. Well, thank you.

Exactly.

Please comment, like, subscribe, and review, and we'll catch you at the next one. Mm-hmm. Thanks, Derek. Thanks, Peter.