Expert advice on how young startups can optimize their financial stack

Cash flow management is a key part of setting any early stage tech company up for growth and future success. While good financial hygiene may not be as exciting as revolutionary new technology or pitching investors, it’s the foundation on which everything else rests. Without it, your startup may have an innovative product or visionary idea, but you won’t have a viable business.

We spoke with two experts on how to optimize your financial stack–– aka the tools, services, and team members tasked with managing a startup’s accounting and working towards its financial goals.

The panel featured Growth Partners managing director Jordan Hill and Mydoh COO Angelique de Montbrun.

1. Track your financial metrics

If you don’t know the state of your early stage startup’s finances, you can’t possibly begin to improve your cash flow management. Optimizing your financial stack starts with knowing what you’re working with and identifying areas for improvement.

“Often, a lot of founders are too busy to track metrics. They have a million and one things happening at once,” says Hill. “But there’s the old adage that what gets measured gets managed, and what gets managed improves.”

“What gets measured gets managed, and what gets managed improves.”

Hill says creating a core set of metrics to track is worth the time and effort because it lets you know if your business is on track for growth and also creates a level of accountability for founders to identify other leaders to which they can delegate the task of improving those metrics.

To keep from being overwhelmed, de Montbrun suggests starting off with targeting between five and eight core metrics that will help you “build a sandbox and boundaries” to work within. Key metrics to track include cash flow, or simply how much money is coming in and going out, as well as fixed costs, variable costs, and some form of growth metric.

Financial metrics are also important when it’s time to raise funds, and can help prepare you for common questions VCs ask before investing in a startup. “From a VC perspective, if they see founders have a set of core metrics they’re tracking, it de-risks their investment, which is important when, with early stage companies, there’s already a lot of risk and unknowns,” says Hill.

2. Be transparent with your employees

Whether they have an actual financial stake in your company or not, it’s good practice for early stage startup founders to treat their employees as part-owners. This means being as transparent as possible with them about the state of your finances, which can create a culture of trust and boost morale.

“You don’t necessarily need to get carried away with sharing every detail, but sharing how you’re doing in terms of your revenue targets and other key milestones can show that, even when there are natural tensions, you as a founder are running a good business,” says Hill.

De Montbrun agrees financial transparency can help improve employee satisfaction and talent retention. “Every person working on a company wants to be part of something material and wants ambitious targets. They want to solve a big problem and they want to have a large market, “ she says. “Making sure your employees are connected with your metrics is an important component of the business.”

3. Don’t wait to build your finance team

Many early stage founders make the mistake of thinking only rapidly scaling or established companies need financial teams. According to our experts, it’s almost never too early to start thinking about your startup’s financial leadership.

“There’s a misconception that the need for finance is correlated with a company’s size.”

“The one quote I always hear from second-time founders is that they wish they’d brought in finance earlier,” says Hill. “There’s a misconception that the need for finance is correlated with a company’s size… I’ve personally spent more time with a $2 million company than with an $8 million company in the past.”

He says early-stage startups might begin with a fractional chief financial officer (CFO), perhaps even an investor who can serve as an advisor, who can build out a cash flow and financial model to help figure out projections. Once a startup gets to their funding round, they will likely need to bring on more full-time financial leadership.

“Then, obviously, once you get customers, you’ll need people to invoice, collect payments, and keep records of those transactions,” says Hill. “And then runway starts to become a factor.”

The main takeaway is that thinking about finances should start almost immediately and constantly evolve as your startup scales and hits new milestones. Even early stage founders should receive monthly financials, even if they’re just a basic set of core metrics.

4. Pay special attention to retention and churn

In an industry hyper-focused on growth, it can be easy to overlook the importance of customer retention and churn. De Montbrun cites this as a common pitfall early stage founders succumb to.

“We can grow the business and acquire as many customers as we want, but if people aren’t staying and paying, then that isn’t an efficient use of our investment.”

“I always say to my teams, we can grow the business and acquire as many customers as we want, but if people aren’t staying and paying, then that isn’t an efficient use of our investment or our capital,” she says.

If you’re seeing low retention, de Montbrun says that should raise alarms and be something you prioritize fixing asap because it represents a large inefficiency in your business.

“If you’re not paying attention, it can easily run away from you and you get into trouble as a founder or operator,” she says.

When an early stage founder notices issues with retention and churn, their first stop should be getting their product team to dig into the problem. They should also involve their marketing team or, if there isn’t a marketing team yet, whoever is in charge of customer acquisition to throttle growth a little until metrics improve.

5. Key metrics only become more important as you scale

As your business progresses through the startup stages, Hill and de Montbrun say data only becomes more important, although the type of data you focus on will likely change.

De Montbrun points to conversion rates as a key metric companies entering the growth stage of their startup journey should pay attention to. “Conversion rates are an important component because you can have a leaky bucket and that’s going to cause a lot of inefficiency.”

She says startups in the later early stages or growth stage should have multiple funnels through which they source leads, and begin to laser-focus on nurturing those leads and tracking onboarding.

“Pipeline is important,” agrees Hill. “It’s not enough to just get leads, they actually need to be moving through the pipeline and, especially with enterprise sales, how long does that take? Because if it takes 180 days and you meet someone in March you might not make a sale until September.”

Understanding the length of your pipeline is key to setting and meeting revenue targets.

Founders should also begin to track users’ longer-term behaviours and engagement. “If you can start to say if a user does X or Y in the first 30 days, then they’ll do Z, you can predict and reinforce behaviours,” says de Montbrun.

Remember, it’s always crucial to revisit and validate your data and assumptions in this phase as things can change quickly. How your earliest customers behave may, for example, differ from that of later users.

Setting early stage startups up for financial success

Thank you to Ross for hosting this webinar and to de Montbrun and Hil for sharing their valuable insights on how early-stage founders can optimize their financial stack.

RBCx clients can attend our next webinar by reaching out to your RBCx Relationship Manager for an invite to upcoming sessions.

RBCx backs some of Canada’s most daring tech companies and idea generators. We turn our experience, networks, and capital into your competitive advantage to help drive lasting change. Speak with a RBCx Technology Advisor to learn more about how we can help your business grow.

This article offers general information only and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or its affiliates.


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