CFO Survey – Would you add Bitcoin to your balance sheet?

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Bitcoin as a store of value and payment mechanism has been growing in acceptance as evidenced by some publicly traded companies putting a portion of their cash reserves into the cryptocurrency.

Tesla invested more than $1.5 billion in Bitcoin to its corporate balance sheet, noting that the purchase was made with cash not needed for operations.  Time Magazine, owned by salesforce.com inc.,  said it would also add Bitcoin to its balance sheet.  MicroStrategy has aggressively urged companies to shift corporate cash into cryptocurrencies like Bitcoin, and also announced it would be paying Board Members in Bitcoin.

TechCXO wanted to know where its CFO partners stood on the issue, so we surveyed 25 CFOs.  Many TechCXO clients are privately-held technology startups, and we asked them:

Resistance to Risk, Preserving Limited Cash

By a wide margin, TechCXO CFOs said they would not put cryptocurrencies onto client companies balance sheets. There were 21 “No”; 3 “Yes” and 1 “Maybe”.

When looking at the comments, the resistance was not necessarily due to not seeing crypto or Bitcoin as a legitimate asset, but more in response to their clients’ current cash and risk profiles. Some of the  comments added are below.

Currently I would not. Bitcoins are accounted for as intangible assets in the U.S. You cannot recognize gains until you sell but do have to write-down impairment if the price drops. Most of my current companies have limited cash resources. As such, they are risk averse.

Cash requirements precluded consideration:

Crypto is volatile. Our clients’ main goal with their funds is principal protection. Not until they have significant excess cash would I consider this as an investment thesis.

And:

The volatility of cryptocurrency erodes the ability to preserve capital. Most of my companies do not have enough capital to put it at risk.

However, some with more significant cash reserves would consider higher risk investments, even amending policies to do so:

One of my current clients, publicly traded, has raised a significant amount of equity that we have difficulty investing for any type of return. We have discussed amending our Investment Policy to allow up to 10% of investable cash for higher risk/higher reward investments, like Bitcoin.

Still others are ready to go:

One client I have has indicated he wants 5% – 10% of fundraising proceeds to be deposited in Bitcoin.

Social Enterprises

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Paul Sansone, TechCXO partner and former CFO of the Boys and Girls Clubs of America and Better World Books, is an expert in social enterprises, social entrepreneurship and B Corps. Paul also serves as a member of the CASE (Center for Advanced Social Entrepreneurship) Advisory Council at Duke University.

Social entrepreneurship is the process of recognizing and resourcefully pursuing opportunities to create social value. With decades of experience in financials for social ventures, Paul knows what it takes for social ventures to raise capital. Learn what impact investors are looking for in their investments, raising capital as a B Corp, and trends he sees in social entrepreneurship. View Paul Sansone’s full bio.

Update: Issues for Non Profits in 2021

Recently, Paul also conducted a radio interview that included a discussion of issues Non Profits are facing in 2021. Starting at the 5:50 mark and through 9:00, he details some of the resource development and fundraising issues Non Profits faced in 2020 and the innovative strategy pivots they need to pursue in 2021 to carry out their mission. This may including some M&A activity among Non Profits. He goes on to talk about the entrepreneurship tactics of organizations like Goodwill and Habitat for Humanity.

The Power of Compound Decision Making – Part 2

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CEOs of private, mostly venture-backed growth companies know all too well the burden of high expectations, both in the milestones and scale they are trying to achieve.  Quality decision making is at a premium. In, Part 2 of “The Power of Compound Decision-Making” (PDF) we examine how to push high-velocity decision making deeper into your organization.

You can download Part 1 here (PDF).

Thoughts and Takeaways from SaaStr 2018

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Last week I attended the annual SaaStr conference, where thousands of people in the SaaS community – Founder CEOs, VC & PE investors, operators and service providers of all stripes – descend upon San Francisco’s Hilton Union Square to learn, hear from and network with some of the most exciting upstart software companies in the world. This year, juxtaposed against the conference was the backdrop of a major stock market correction, where the DJIA dropped over 2,000 points in a single week amid concerns over rising interest rates. Having professionally invested through the 1999-2001 tech wreck and now as a CFO operator to my SaaS clients, the question running through my mind was what were the implications for an industry that has seen non-stop growth over the past decade?

Original article appeared February 2018. See notes from 2019 SaaStr conference, too.

Of course, a well-built business will survive, and oftentimes thrive – no matter the macro volatility. After attending about 20 sessions over 3 days, and hearing from many inspirational and battle-hardened entrepreneurs, there were several common themes that emerged from the conference. Below are my 3 big
takeaways:

Viraj Parikh TechCXO

Viraj Parikh is TechCXO’s Managing Partner in Nashville

  1. Software penetration is still very low – it is still early innings: Don’t let stock market volatility distract from this fundamental revolution. Tomasz Tunguz, a well-followed VC blogger, believes SaaS M&A will be very strong in 2018, after a weak 2017. Big cap tech companies flush with cash need to continue fueling their growth engines, and they are competing with PE funds that raised over $343 billion in 2017. That money will be put to work to continuously penetrate every corner of the global economy with cloud-based software. The median multiple is 7x forward ARR…growth is alive and well.
  1. A SaaS company’s journey to relevance is an exercise in de-risking the company To acquire a VC investment or become an attractive acquisition target, your company must begin with relevance. There are 3 stages in every start-up’s journey to a relevant state: a) product-market fit, b) search for a repeatable, scalable and profitable growth model, and c) scaling the model.

A. How does a CEO know whether they have achieved a Product-Market fit? They must meet two criteria:

    1. The company has a number of referenceable customer who have purchased the product
    2. Customers are happy, as evidenced by:
      • Product usage
      • A reluctance to give it up
      • Expanded usage
      • Low churn

B. After product-market fit is established, the startup must quickly transition to the search for a repeatable, scalable and profitable growth model:

    • Don’t try to boil the ocean – pick one target market with a single use case and benefit
    • Quickly close your early access sales
    • Invest in customer success to ensure your customers are accomplishing their goals
    • Build a buyer personae – what do they buy and what do they care about? – find a predictable and repeatable motion, and then begin scaling that process. For example, predictable sales bookings can be simplified to the number of sales reps times sales productivity
    • Understand your unit economics, and make it profitable.

C. Scaling the model through proper management of the sales and marketing function to achieve maximum sales bookings velocity, including:

    • Hire enough sales people, and pay up for great ones. Too many companies make the mistake of underspending here to conserve cash…that can be a big mistake
      • Set ambitious but achievable sales quotas that inform and roll up to the company’s revenue
      objectives
      • Regularly track the productivity of each sales rep, e.g. what % is achieving > 70% of their quota,
      and > 100% of their quota
      Accomplishing a, b & c will undoubtedly result in a terrific story, but in the eyes of an investor, it is
      fundamentally about risk mitigation. The lower the risk, the more likely you will attract capital.
    1. Run your company around Annual Recurring Revenue (ARR) This may seem like an obvious point to longtime observers of SaaS companies, but plenty of entrepreneurs still fail this basic test when pitching to venture capitalists. The first slide of every investor deck should include ending ARR (and its trajectory over time), which is the single most important valuation metric.
      • Break down ARR into its component parts:
        • Starting ARR
        • New ARR bookings
        • Expansion ARR
        • Churn ARR
        • Ending ARR – if this does not continually grow, it is a red flag that sales have stalled
      • Growing Bookings is the key sign that you are making it as a company. For SaaS companies, bookings are defined as Net New ARR (New + Expansion – Churned). Never count bookings if it does not convert to cash within 90 days

Conclusion

If last week’s stock market bungee jump made you want to vomit, the SaaStr conference was the perfect antidote. The industry’s abundance of capital, intelligence, creativity, discipline (through trackable metrics), and unwavering confidence that software will rule the world, is the envy of every other sector of the economy. Entrepreneurs who are armed with the right toolkit, as outlined above, can and will be building great SaaS businesses for many years to come, irrespective of the business cycle and stock market gyrations.

Term Sheets

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Congratulations.  You’ve made a compelling case for your company to receive funding, investors are interested, they’ve done a couple of rounds of due diligence and probably visited you and your team at your site – if there is one.

Next step is a Term Sheet.  Here are the pressure points within the term sheet that you and your lead (such as TechCXO) need to be prepared for:

Leverage

The simple truth is that your early-stage investors typically have more leverage than you.  They look at hundreds of deals and fund a handful.  However, you’re not necessarily weak.  Having interest from multiple suitors greatly strengthens your hand.  Just remember not to dig into your position too hard.  Investors are used to walking away from deals and you want that capital.  Word travels fast in this small community, too and you don’t want to be cast as a hard case.

Ownership

Our guidelines remain: no more than a 25% equity for investors in the Angel/Seed Round and no more than 30% equity in the Early VC or Series A stage.

Valuation

Using traditional industry comparables as you would for M&A transactions is tricky for start-ups.  Generally, the more mature your company and its metrics, the better the valuation.  Some metrics such as cash flow and revenue may apply.  Some metrics may not be available and you will need your Structure and Performance hurdles to aid valuation.  The assumptions made and agreed to within those hurdles such as customer acquisition, revenue, retention, profitability, etc. will help set your valuation.

Board Composition

One to two Board seats to investors is the norm. There is an increasing trend of an equal number of board seats going to independent members, with the founder/CEO as the “odd” member of the new Board.

The Option Pool

The purpose of the option pool is to provide incentive for management, key employees, and advisors. This range can vary based on how many of the management members are also founders and have founders stock.

Many firms provide options for all early employees – typically under the assumption that they are being paid below market cash compensation and are in a volatile employment environment. With each new raise, the option pool is refreshed to ensure that there are adequate incentives for key new hires.

For stock option plan composition, a good rule of thumb is for 15-20% of the capital structure reserved for the option pool at this stage.  Even better is if you can get this post-closing, so the new investors and founders share in the dilution.  With further rounds of financing, this pool may get down to 10%.    Target half of the pool for the leadership team (CEO, Board Members and direct reports to the CEO).

Key Rights and Preferences

Rights and preferences can get you down into the weeds. You’ll certainly need advisors to help you sift through this. Here are some quick highlights:

  • Liquidate preference – usually 1X original investment
  • Participation – conversion to common after the payment of the liquidation preference in order to “participate in the remainder of liquidation proceeds”
  • Anti-dilution rights – to protect against future issuance of equity securities at a price below the price the current investors are paying
  • Board of Directors participation – either board seat or observation right depending on the size of the investment and % of the company owned post investment
  • Veto rights on certain corporate transactions – preferreds vote as a separate class on things like senior debt, issuing additional securities, liquidation
  • Information rights – monthly/quarterly/annual reporting of financial results to investors
  • Registration rights – ability to register shares in the event of a public offering

Structure and Performance Hurdles

The primary questions to be answered are: how big is your market and how much of it can you capture…and in what time frame.  This is why we stress defining market niches so much during your preparation for funding. Other considerations such as the development of new applications and adding key team members can be factored in but there’s no getting around competing and winning in your defined market.

The Power of Compound Decision Making

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CEOs of private, mostly venture-backed growth companies know all too well the burden of high expectations, both in the milestones and scale they are trying to achieve. Attached is Part 1 of “The Power of Compound Decision-Making” – a management piece that I hope will stimulate productive thoughts among aspirational business builders and leaders.

Power of Compound Decision Making (Part 1)_Viraj Parikh_TechCXO

Before the (Banker) Bake-Off, Cultivate a Great Chef or Two

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They were immortalized in literature by Tom Wolfe as “Masters of the Universe” in Bonfire of the Vanities.

Michael Lewis described them as “…a breed apart, a member of a master race of dealmakers” with “vast, almost unimaginable talent and ambition” in his book, Liars Poker.

At one time, 44% of Harvard’s MBAs went into finance and more than 1 in 10 became investment bankers.

But, following the financial collapse in 2007, and the dissolution of famous firms like Salomon Brothers and Bear Stearns, a lot of talent left moved to hedge funds and private equity. Venture capitalists replaced investment bankers as the media’s celebrated dealmakers.

The Economist even wrote stores like “Banks? No, thanks!” detailing how graduates from leading business schools were more drawn to consulting and tech firms than investment banking.

While they may not be seen as the other-worldly beings that they were in times past, I continually promote investment bankers as a wonderful resource for entrepreneurs, executives, board members and investors. Moreover, having worked a variety of bulge bracket and boutique firms, I find investment bankers to be among the most generous in sharing their knowledge and insights to develop long-term relationships with prospective clients.

I find investment bankers to be among the most generous in sharing their knowledge and insights…

If you want to know what’s really going on in your industry, talk to an investment banker. And, while most business people think about investment bankers demonstrating value in the context of transaction execution, you should cultivate these really smart people before the bake-off… that is, a capital event like an IPO or a sale.

Here are six reasons why.

1. Information about industry trends. Investment banking firms tend to organize their marketing efforts around an industry focus, they have likely competed for engagements or potentially represented similar firms in your sector. The preparation for these projects is intense and requires significant research and background information. Meetings with bankers can provide an opportunity to learn about important industry trends and recent events and these discussions provide you with a low-pressure opportunity to learn more about their qualifications.

2. Insight about your competitors. Investment banking firms frequently attend industry events and may meet with management teams of businesses that compete with your business (whether they win the mandate or not) and often have insight into the business of your competitors.

3. Advice on your business strategy. Investment bankers see lots of businesses and exits. This experience provides them with a knowledge base to render sage advice on strategy, positioning, pricing, and distribution, etc. Coupled with their knowledge on the values of the businesses upon exit, investment bankers can be an excellent source for advice on strategy.

4. Introduction to executives. Investment bankers active in your industry sector are networked with executives or aware of executive changes. As your business grows and evolves, you may be looking to add an executive to your team. Investment bankers can be an excellent source for introductions to potential hires.

5. Referrals to sources of capital. Venture capital and private equity firms frequently engage investment bankers to work with their portfolio companies. As a result, they have a significant number of contacts with these capital sources. As a growing business, you may find that you require additional capital that does not warrant an engagement of an investment banker. Bankers are happy to provide referral to potential sources of capital as it endears them to you as a prospective client and equity sources for providing a potential opportunity.

6. Feedback on your pitch. Since Investment bankers have the opportunity to review plenty of company pitches, they can provide great feedback on the company presentations. Sharing your pitch while developing a relationship with an investment banker is an excellent opportunity to learn about their qualifications in potentially representing your business in the future.

Take note of tombstones for recent transactions in your sector as to which firms are active and target developing relationships with these firms. In addition, BankerAdvisor is a resource for discovering and learning about investment banking and M&A advisory firms that may help you identify firms with a track record focused on your industry sector.

Mike Casey

Mike Casey

Mike Casey is TechCXO’s co-founder and a partner in the Finance/Operations practice. See his full bio.

Catabasis Pharmaceuticals

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Catabasis Pharmaceuticals

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THE CHALLENGE

Building and financing a drug discovery platform company.

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THE SITUATION

Within two months of creating Catabasis Pharmaceuticals, the company’s two founders had developed an innovative approach to drug discovery and development.

Catabasis wanted to build a portfolio of new medicines for their focus area.

Catabasis had initially funded the company through a round of convertible debt but needed a financing plan, an infrastructure and systems to move forward.

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TECHCXO INTERVENTION

TechCXO provided overall strategic direction as well as finance and operations systems — everything from cash management to budgeting and forecasting to advising on organizational and employee needs.

TechCXO helped to hire the company’s full-time in 2013 and has continued to provide financial leadership through the recent IPO.

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THE OUTCOME

Catabasis raised several rounds of equity financing to fund its development and expansion. TechCXO helped to develop the company’s financial and operational capabilities. Catabasis had its initial public offering in June 2015 (CATB) and now has two Ph2 assets in the clinic as well as a robust portfolio of investigational new medicines for the treatment of various disease indications.

[/fusion_text][/fusion_builder_column][/fusion_builder_row][/fusion_builder_container][fusion_builder_container hundred_percent=”no” hundred_percent_height=”no” hundred_percent_height_scroll=”no” hundred_percent_height_center_content=”yes” equal_height_columns=”no” menu_anchor=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” status=”published” publish_date=”” class=”” id=”” link_color=”” link_hover_color=”” border_color=”” border_style=”solid” margin_top=”” margin_bottom=”” padding_top=”5%” padding_right=”” padding_bottom=”5%” padding_left=”” gradient_start_color=”” gradient_end_color=”” gradient_start_position=”0″ gradient_end_position=”100″ gradient_type=”linear” radial_direction=”center center” linear_angle=”180″ background_color=”#e5ded4″ background_image=”” background_position=”center center” background_repeat=”no-repeat” fade=”no” background_parallax=”none” enable_mobile=”no” parallax_speed=”0.3″ background_blend_mode=”none” video_mp4=”” video_webm=”” video_ogv=”” video_url=”” video_aspect_ratio=”16:9″ video_loop=”yes” video_mute=”yes” video_preview_image=”” filter_hue=”0″ filter_saturation=”100″ filter_brightness=”100″ filter_contrast=”100″ filter_invert=”0″ filter_sepia=”0″ filter_opacity=”100″ filter_blur=”0″ filter_hue_hover=”0″ filter_saturation_hover=”100″ filter_brightness_hover=”100″ filter_contrast_hover=”100″ filter_invert_hover=”0″ filter_sepia_hover=”0″ filter_opacity_hover=”100″ filter_blur_hover=”0″ type=”legacy”][fusion_builder_row][fusion_builder_column type=”1_1″ layout=”1_1″ spacing=”” center_content=”no” link=”” target=”_self” min_height=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” class=”” id=”” hover_type=”none” border_color=”” border_style=”solid” border_position=”all” border_radius=”” box_shadow=”no” dimension_box_shadow=”” box_shadow_blur=”0″ box_shadow_spread=”0″ box_shadow_color=”” box_shadow_style=”” padding_top=”” padding_right=”” padding_bottom=”” padding_left=”” margin_top=”” margin_bottom=”” background_type=”single” gradient_start_color=”” gradient_end_color=”” gradient_start_position=”0″ gradient_end_position=”100″ gradient_type=”linear” radial_direction=”center center” linear_angle=”180″ background_color=”” background_image=”” background_image_id=”” background_position=”left top” background_repeat=”no-repeat” background_blend_mode=”none” animation_type=”” animation_direction=”left” animation_speed=”0.3″ animation_offset=”” filter_type=”regular” filter_hue=”0″ filter_saturation=”100″ filter_brightness=”100″ filter_contrast=”100″ filter_invert=”0″ filter_sepia=”0″ filter_opacity=”100″ filter_blur=”0″ filter_hue_hover=”0″ filter_saturation_hover=”100″ filter_brightness_hover=”100″ filter_contrast_hover=”100″ filter_invert_hover=”0″ filter_sepia_hover=”0″ filter_opacity_hover=”100″ filter_blur_hover=”0″ last=”true” border_sizes_top=”0″ border_sizes_bottom=”0″ border_sizes_left=”0″ border_sizes_right=”0″ first=”true”][fusion_text columns=”” column_min_width=”” column_spacing=”” rule_style=”default” rule_size=”” rule_color=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” class=”” id=”” animation_type=”” animation_direction=”left” animation_speed=”0.3″ animation_offset=””]

“TechCXO has led finance and key operational functions from our founding, through early capital raises, to our IPO.”

Jill Milne, Founder & CEO

Catabasis Pharmaceuticals

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All we need is a million dollars, and we will be unstoppable

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All we need is a million dollars, and we will be unstoppable! (A cautionary tale)

Keith Heffron is a TechCXO Partner and an innovative financial leader, business owner and transformative CFO who scales emerging companies. See his full bio

At TechCXO, we’re fond of saying that part of the CFO’s job is not to save money but to spend it. Spend it, that is, to fund the scaling and acceleration of a company in ways that increase enterprise value.

As business owners, we all fall in love with the idea of our business growing into a huge success. Thinking big is a good thing.

You also have every right to ask your CFO to model an aggressive growth plan and to help secure the capital to help that plan take flight. That’s what we’re here for.

However, the same amount of energy and forethought you put into the concept of “How fast could we grow if we had an additional $1M investment?” should be applied to asking “How fast can we grow without sacrificing quality, our reputation, or our values?” And, “What, if any, additional investment is required to achieve this level of growth?”

The best approach is to build a Marketing, Sales, and Operational plan to support the financial plan growth you are targeting. Then, consolidate these individual department plans into an integrated financial model. The resulting cash flow projection will tell you how much of an investment you might need and the timing of that need. It will also allow you to modify your plans based on constraints. The result should be an integrated financial and operational plan that the entire organization understands and is confident of achieving.

Remember when you got your first 10 customers? Everyone was all over them! Everyone knew what was going on, hand-offs were well communicated, and you had your arms around all of it. Things didn’t go perfectly but you were able to react quickly and course-correct well. But then 10 became 20 and you experienced your first growing pains. Everyone was in everything, ownership and hand-offs weren’t clear, and the cost of breakage wasn’t something you had planned for.

Time to assign positions, ownership, metrics, and invest in hiring and systems. While these are all good and necessary things, each requires its own plan and considerations. I further suggest to you that this process of re-evaluating as you grow should be a non-stop process that you should dedicate time to every month with your team.

If you are making plans to solve your many current problems, you are already behind. Are you considering the impact of growth on all areas and are you prepared to pull the necessary levers when that growth comes? Does every person in your organization know how their job will be impacted if customer volume doubles? Let’s work through an illustration to clarify.

Bob is in customer service. He has amazing rapport on the phones and customers love him! He can handle any problem and knows how to make customers feel appreciated. Sure, he has to work a bit of overtime on heavy days but he always keeps customers happy. He’s the kind of employee you can build a company around.

Now imagine that customer volume doubles. Bob can’t keep up and each call is taking longer. He is spending too much time apologizing for delays, he is tired and his quality is slipping. Complaints are getting back to you from others in the organization and you need to get Bob some help. You can quickly hire someone and count on Bob to get them up to speed but it will be another month before the new person is proficient. You hope you can survive until then and not lose any more customers…

Fast forward three months. The new guy is OK but he and Bob aren’t getting along well. Bob is a perfectionist that doesn’t want to let go of control and the new guy is frustrated. You think he may quit. You are still getting customer complaints. Wasn’t this hire going to solve the problem? And why is this happening in other departments as well? Will this cycle never end?

What if……three months before this became a problem, you sat down with Bob and a couple of other key employees for just an hour and asked the question, “What would break down if we doubled in volume?”

Questions you might ask include:

1. What should the customer service organization look like with the increased volume?
2. Do we need a Supervisor for this group?
3. Is Bob capable of being the Supervisor and does he even want that role?
4. How can we identify candidates now?
5. At what point will we need to make the hires?
6. What key skills does the hire need to have?
7. What does the training and on-boarding process need to be?
8. How do we make sure this is not felt by our customers?
9. Can our paper tracking system handle the volume or should we look into a CRM?

This kind of planning for growth is critical to the near-term success of the company and the process is also key to building a long-term successful, evolving enterprise. Further, it suggests a different order to your growth decisions.

There are few things as exciting as growing your business, but you must take some time and understand the cost of that growth. I’m not just talking about dollars, although all roads ultimately lead back to that. There are massive impacts to your people, your ability to execute the additional volume, and an opportunity cost to everything you choose. To start down this road without a clear plan risks all that you have built so far.

Using that $1 million investment to fuel manageable growth is far better than throwing money at problems caused by inadequate planning. Now you have a plan for success.

Outgrown Your Accounting System?

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New cloud-based accounting systems, such as NetSuite, offer much more functionality, flexibility, and interactivity than traditional accounting systems.

Based on their extensive experience as CFOs, TechCXO’s Finance partners can review your current accounting system, assess your company’s needs, and advise what you should be doing to take advantage of the new systems and their capabilities.

We help clients design new systems (chart of accounts, accounting and revenue recognition policies, dashboard reporting of key metrics, etc.). We also provide hands-on migration and implementation assistance so you get the most out of your platform implementation rather than just migrating a suboptimal legacy accounting system.

Our CFO partners focus on small- to mid-size growth companies in software, professional services, and other verticals to provide accounting systems design and implementation support.

QuikOrder Acquired by Pizza Hut

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Congratulations to our client, QuikOrder, for being acquired by Pizza Hut. TechCXO supported QuikOrder with finance and accounting services for close to two years, including M&A support by assisting in due diligence pre-sale and interim CFO services from TechCXO’s Bob Brogan.

QuikOrder, is Chicago-based and a leading online ordering software and service provider for the restaurant industry. Terms of the deal were not disclosed, but it marks one of Pizza Hut’s largest acquisitions to date.

By acquiring QuikOrder’s online ordering capabilities, Pizza Hut U.S. will improve its ability to deliver an easy and personalized online ordering experience and accelerate digital innovation across its base of more than 6,000 restaurants in the U.S. In 2018, approximately half of Pizza Hut U.S. sales were processed through QuikOrder’s platform. Founded in 1997, QuikOrder specializes in developing and maintaining internet-ordering systems used across the QSR industry. It has served Pizza Hut U.S. for nearly two decades. Over that time, it has built an expert team that fully understands and meets Pizza Hut’s specific needs. The acquisition will include: Pizza Hut’s current digital ordering platforms, systems and services and QuikOrder’s in-restaurant technology and ancillary services, as well as its future generation products and programming.

Read more:

Chicago Sun Times
Chicago Business
PRNewswire

 

techcxo-10-time-fastest-growing
Bob Brogan is a senior Strategy, Operations & Finance executive recognized for identifying and delivering profit-improvement objectives for software as a service, professional services and technology companies.
bob.brogan@techcxo.com
(708) 243-7004
See Bob’s full bio

 

SaaS Company’s Journey to Relevance

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Recently, I attended the annual SaaStr conference where thousands of people in the SaaS community – Founder CEOs, VC & PE investors, operators and service providers of all stripes – descended upon San Francisco’s Hilton Union Square to learn, hear from, and network with some of the most exciting upstart software companies in the world.

This year, juxtaposed against the conference was the backdrop of a major stock market correction, where the Dow Jones Industrial Average (DJIA) dropped over 2,000 points in a single week amid concerns over rising interest rates. Having professionally invested through the 1999-2002 tech wreck and now as a CFO operator to my SaaS clients, the question running through my mind was “What are the implications for an industry that has seen non-stop growth over the past decade?”

Of course, a well-built business will survive, and oftentimes thrive – no matter the macro volatility. After attending about 20 sessions over 3 days and hearing from many inspirational and battle-hardened entrepreneurs, there were several common themes that emerged from the conference.

Below are my three (3) big takeaways:

1. Software penetration is still very low — it is in the early innings

Don’t let stock market volatility distract from this fundamental revolution. Tomasz Tunguz, a well-followed VC blogger, believes SaaS M&A will be very strong in 2018, after a weak 2017. Big cap tech companies flush with cash need to continue fueling their growth engines, and they are competing with PE funds that raised over $343 billion in 2017. That money will be put to work to continuously penetrate every corner of the global economy with cloud-based software. The median multiple is 7x forward ARR…growth is alive and well.

2. A SaaS company’s journey to relevance is an exercise in de-risking the company

To acquire a VC investment or become an attractive acquisition target, your company must begin with relevance. There are three stages in every start-up’s journey to a relevant state: a) product-market fit, b) search for a repeatable, scalable and profitable growth model, and c) scaling the model. Consider:

a) How does a CEO know whether they have achieved Product-Market fit?

The company must meet two criteria:
◦ The company has a number of referenceable customers who have purchased the product
◦ Customers are happy as evidenced by:
▪ Product usage
▪ A reluctance to give it up
▪ Expanded usage
▪ Low churn

b) After Product-Market fit is established, the startup must quickly transition to the search for a repeatable, scalable and profitable growth model:

◦ Don’t try to boil the ocean – pick one target market with a single use case and benefit
◦ Quickly close your early access sales
◦ Invest in customer success to ensure your customers are accomplishing their goals
◦ Build a buyer persona — what do they buy and what do they care about? — find a predictable and repeatable motion, and then begin scaling that process.  For example, predictable sales bookings can be simplified to the number of sales reps times sales productivity
◦ Understand your unit economics and make it profitable

c) Scaling the model through proper management of the sales and marketing function to achieve maximum sales bookings velocity, including:

◦ Hire enough sales people and pay up for the great ones.  Too many companies make the mistake of underspending here to conserve cash… that can be a big mistake
◦ Set ambitious but achievable sales quotas that inform and roll up to the company’s revenue objectives
◦ Regularly track the productivity of each sales rep, e.g. what % is achieving >70% of their quota, and >100% of their quota.
Accomplishing a, b & c will undoubtedly result in a terrific story, but in the eyes of an investor, it is fundamentally about risk mitigation. The lower the risk, the more likely you will attract capital.

3. Run your company around Annual Recurring Revenue (ARR)

This may seem like an obvious point to longtime observers of SaaS companies, but plenty of entrepreneurs still fail this basic test when pitching to venture capitalists. The first slide of every investor deck should include ending ARR (and its trajectory over time), which is the single most important valuation metric.
◦ Break down ARR into its component parts:
▪ Starting ARR
▪ New ARR bookings
▪ Expansion ARR
▪ Churn ARR
▪ Ending ARR – if this does not continually grow, it is a red flag that sales have stalled.
◦ Growing bookings is the key sign that you are making it as a company. For SaaS companies, bookings are defined as Net New ARR (New + Expansion – Churned). Never count bookings if it does not convert to cash within 90 days.

Conclusion

The SaaStr conference affirmed the industry’s abundance of capital, intelligence, creativity, discipline (through trackable metrics), and unwavering confidence that software will rule the world. Software remains the envy of every other sector of the economy. Entrepreneurs who are armed with the right toolkit, as outlined above, can and will be building great SaaS businesses for many years to come, irrespective of the business cycle and stock market gyrations.

Viraj Parikh TechCXOViraj Parikh
TechCXO, Managing Partner 
Nashville
TN
viraj.parikh@techcxo.com
(917) 523-6940

See Viraj’s full bio

Peter Biro – Why choose TechCXO?

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Why would an accomplished entrepreneur, CFO, Stanford MBA with an engineering degree from Duke choose the TechCXO on-demand executive model for his career? We asked him (Peter Biro).

Peter Biro is an experienced operating and financial executive and entrepreneur with deep experience in enterprises from pre-revenue to $100M. Peter is focused on early-stage infrastructure, software and SaaS businesses in need of assistance in fundraising and transaction execution, scaling their finance and sales operations processes functions, and taking their businesses global.

He specializes in financial transactions, from financings to M&A to optimizing economics of different sales channels, for companies up to $50M in revenue.  He also specializes in assisting Israeli-based technology companies.

He has served in a variety of operating roles in technology companies:

  • CFO of ObserveIT – An Israeli security software company backed by Bain Capital Ventures.
  • VP of Business Development of syndicated data provider Restaurant Sciences (merged with GuestMetrics).
  • COO of of Lyris, Inc. (acquired by Aurea) – A publicly-traded digital marketing software, which he helped create through a number of complementary acquisitions.
  • Co-founder of Five Guys Burgers and Fries – The Northeast’s largest franchise group.
  • Entrepreneur in Residence – General Catalyst Partners. Peter vetted transactions and helped launch Icelandicdata center company, Verne Global.
  • Founder of The Cowper Group – A management consultancy focused on buy-side M&A for middle market technology companies

He began his career in IT on Wall Street.  Peter holds a BSEE from Duke University and an MBA from Stanford.

How to Keep the Payroll Toothpaste in the Tube

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One of my colleagues who is a long-time CFO relayed a rule he had in his companies about people who see payroll data.  Which is: you cannot get another job here that doesn’t involve payroll.  Once you see how much everyone makes, you either stay in that role, or you have to leave the company.

This seemed extreme when I first heard it.  But the more I consider it, the more sense it makes.

In truth, many build stage companies trust this extremely confidential information in the hands of office managers who double as the people who “do” HR, which includes running payroll.  Few of these people have bad intentions.  Many are inexperienced.  And not many things blow up culture faster than exposing this information in the wrong way.   Once that toothpaste is out, you cannot put it back in the tube, and it is very difficult to clean up.

Nothing blows up culture faster than exposing payroll information in the wrong way

So, today I plan to have a reminder conversation with everyone who works with me and handles payroll data.  Not because I don’t trust them – mostly because once you’ve seen this information a thousand times, you can lose sight of how sensitive it really is and how important it is to keep it confidential.

On a related note – another build-stage company payroll risk I frequently see is the “single press of a button” problem.  Meaning, one person can both enter payroll and submit it without an approval step.  I understand why this is tempting in the early stages, and yet: it is a really terrible idea.  (The same goes for bill pay and especially wires, by the way).

Systems like TriNet and ADP actually make it hard to do an approval step in their PEO implementations, which I don’t really understand.  That said – always put in a second pair of eyes on this.  That pair of eyes too is probably bound by the same rule that my partner puts in place: once you see payroll, you can never go back.

This article was adapted from a post that originally appeared in Peter Biro‘s Build Stage CFO blog.

Board Financials

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What to include (and leave out) in Board financials

Many a post has been written about rules of thumb for holding effective Board meetings.  People should be present, meaning actually focused on the meeting and not doing other work (this one from Brad Feld at Foundry).   There should be an Executive Session scheduled with plenty of time for it (this one via Fred Wilson of USV).  I’m going to focus in particular how presenting financials can be done in order to maximize value and keep things focused on what is really important.

First of all, whatever you present as the CFO, it needs to be distributed ahead of time, preferably at least 72 hours.  This is one hard and fast rule that I try not to violate whenever possible.  There is nothing worse as the CFO than numbers that go out the night before an 8am meeting.  It’s not just Board members that hate this.  It invites scrutiny and questions, and is a signal – I am big on signaling – that management doesn’t quite have its act together.

[This story was originally posted on Peter Biro’s Build Stage CFO blog]

What should be in the package?  Here are the things I minimally include in businesses that have a meaningful monthly cadence – which most build stage companies do.  For some it’s weekly; an example is an app where week-over-week growth is a meaningful metric.

  • Last month’s P&L vs. original forecast, and YTD vs. forecast
  • Last month’s P&L vs. prior month – dollars view
  • Last month’s P&L vs. prior month – unit economics view (meaning, take your P&L, and divide everything by the unit that’s most important in your business.  Could be square feet, available days for appointments, hours sold, hats – you name it)
  • Meaningful YoY stats by product line, location, or some other way to give investors an idea of where growth is (or is not coming from)
  • Headcount summary – by department, where are we against plan?  For many startups, this is where cash either gets burned (hiring too fast) or revenue growth is thwarted (because you can’t find the right head of marketing and while this saves you money in the short run, it means you are not driving top line in the medium-term)
  • Rolling forecast vs. original projection – meaning, if I re-forecast the business for the rest of the year (which you should be doing on an almost constant basis), where am I going to end up
  • Cash projection

If you have these ready to go 3 days ahead of time in well-formatted slides with pithy color commentary, you’ll serve everyone well.  You might need to add a few more based the particular business that you’re in, but this should get everyone grounded in the results and communicate how things are going.  Investors will have the opportunity to look through the numbers and draw some initial conclusions, which will make the financials review section of the meeting much smoother. Your goal as the CFO is to let the strategic discussion take center stage and let the numbers support that discussion.

Caveat: sometimes you will have Board members/observers who do not read numbers early no matter how early you provide them, and are going to ask nitpick questions about one obscure figure that you know is not vital to anything.  Take a deep breath and go with it.  It’s not constructive behavior, and with any luck, the other Board members will talk to this person offline about expectations.  Your role is to set them high, and keep them there.