Year-End Planning for Startup Success | Startup Finance Basics w/ Kruze's Scott Orn

Kruze COO, Scott Orn, joins Jason 0s

• The basic things that startups have to get right are critically important, and if they don't get them right, everything can blow up, similar to not maintaining a car properly 13s.
• The top three areas that can throw a startup into a tailspin are legal, accounting, and Human Resources or human capital 50s.
• Scott Orn from Kruze Consulting, a CPA firm dedicated to VC-backed startups, helps startups with these critical areas 1m1s.
• Kruze Consulting focuses on early-stage startups and has worked with clients like Superhuman and Comm, who eventually graduate to other services as they grow 1m17s.
• The end of the year is a critical time for startups, with many trying to get things done, but it's often too late to close deals between December 15th and January 1st 1m48s.
• Founders should aim to close deals in October or early November, or else they may not happen until January 15th 1m56s.
• Year-end planning is essential for startups to set up for success in the following year, and it's crucial to focus on the right things 2m6s.
• Startups run on cash, usually VC cash, and proper financial planning is vital for their success 2m15s.

Evaluate Your Fundraising Needs for Next Year 2m17s

• At the end of the year, it's essential to ask if you'll be raising money in the upcoming year and if you're fundable, as this determines how you operate 2m23s.
• The best place to start is by asking your existing Venture Syndicate if they would invest in you if you were new to them, and what needs to change to be fundable 2m42s.
• What makes a company fundable changes every year, and in a down market, survival becomes paramount, while in a thriving market, growth becomes key 2m56s.
• If the answer to raising money is no or maybe (which means no), you should focus on what needs to change in the company, such as increasing revenue, signing more logos, or cost-cutting 3m49s.
• A good way to phrase the second-order question is to ask if, after making necessary changes, your investors would feel comfortable introducing you to their favorite series A investors 4m10s.
• If revenue is flat or down, it's essential to discuss whether you want to prove to investors that you're unfundable or figure out a way to get to growth and break even 4m37s.
• To be ready for fundraising, you need to have your story correct, a timeline, and a clear idea of when you're raising money, with at least nine months of runway 5m0s.
• Having a lot of cash in the bank is ideal, but you don't want to let venture capitalists run the clock out on you, especially when you're getting down to three months of cash 5m18s.
• Startups should begin fundraising with 12 months of cash, as the process typically takes 3-4 months to complete, and having enough cash provides leverage in negotiations with investors 5m49s.
• The fundraising climate is challenging, but certain sectors, such as AI companies, are doing well and may be able to raise money in as little as 6 weeks, while traditional SaaS companies, biotech, or consumer companies may take 3-6 months 6m2s.
• It's essential to set a timeline for fundraising, treating it as a sales process with targets, and having at least 6 months of runway 6m31s.
• If a startup only has 3 months of runway, it's recommended to stop taking a salary, cut costs, raise prices, and show 6 months of runway to improve the chances of successful fundraising 6m34s.
• Having 6 months of runway provides a much better position for fundraising, allowing founders to negotiate better terms with investors 6m58s.

Financial Statement Review and Clean-up 7m5s

• To ensure startup success, it is essential to review and clean up financial statements, making sure all expenses are submitted, and invoices to customers are reviewed to collect as much as possible 7m18s.
• This process involves nitty-gritty accounting, including going over all invoices to customers and collecting as much as possible, to prepare for the new year 7m23s.
• Raising prices can be beneficial for companies that are struggling, as seen in cases where companies increased their prices 2-3 times and customers were happy to pay, resulting in a new lease on life and improved long-term value 7m37s.
• The end-of-year cleaning period is an opportunity to review and clean up financial statements, understand key metrics, and prepare for the new year 8m1s.
• Founders who understand their metrics tightly, including customer acquisition cost, lifetime value, cash in the bank, burn rate, cost of goods, and gross margin, are better equipped to make informed decisions 8m14s.
• An accounting team can walk founders through this process and provide guidance on cleaning up financials and understanding key metrics 8m23s.
• Having clean and organized financials is crucial for startup success, and founders should prioritize this task to prepare for the new year 8m29s.

Set High-Level Goals and Strategy 8m34s

• Setting high-level goals and strategy is crucial for startup success, and having a plan is essential, as "hope is not a plan" 8m34s.
• A good goal for an early-stage startup might be to triple revenue, but it's essential to have a process for achieving that goal, including understanding how to acquire new customers 8m53s.
• To create a plan, startups should consider how they got their first 10 customers, how to get the next 20, and how many customers they can acquire per month, as well as churn rates 9m1s.
• Having good books and being thoughtful about the plan is vital, and it may involve resourcing the plan with new hires, such as sales executives and customer success personnel 9m14s.
• The plan should include milestones, such as product milestones, hiring milestones, and financial milestones, which can help build confidence within the organization 9m41s.
• The financial plan should be presented to the board for approval, which brings accountability to both the startup and the board, and helps to answer key questions about the business 9m56s.
• A financial plan is essential for scaling the business, as the founders' initial relationships and sales efforts may not be sustainable in the long term 10m18s.
• Having a financial plan can lower anxiety within the organization, make the leader seem more effective, and help define reality for the team 10m40s.
• Great leaders define reality, whether it's a harsh reality or a growth opportunity, and communicate it clearly to their team 10m50s.

Cost Optimization Review 11m27s

• Conducting a cost optimization review is crucial, especially for companies with large expenditures, such as AI companies that spend 20% more on infrastructure costs than typical SaaS companies, which can significantly impact their financial model 11m27s.
• Big cloud companies often have issues with invoicing, including double invoicing and forgetting to invoice for several months, which can lead to messy and large expenditures 11m41s.
• It is essential to negotiate with cloud providers, as everything is negotiable, and companies can get startup credits or aggressively negotiate with their primary provider using quotes from other providers 12m19s.
• Turning off credit cards and reviewing subscriptions can help identify unused services and cancel them, which can lead to significant cost savings 12m34s.
• Being frugal and setting a tone of discipline within the organization can increase confidence and encourage employees to have great discipline, especially when it comes to expenses such as office space, infrastructure, and remote work 13m15s.
• Setting a good example as a CEO or founder is crucial, as employees will follow their lead, and having great discipline in expenses can lead to a more confident and disciplined organization 13m34s.

Create Next Year's Operating Plan 13m39s

• Creating next year's operating plan involves building a financial model that outlines key metrics such as customer acquisition, average selling price, infrastructure costs, and headcount, which is crucial as startups spend 70-80% of their total spend on people 13m39s.
• The financial model should include timing against key metrics, such as the time it takes to onboard a sales executive, which can take six weeks, and the performance of new hires, with only one out of three salespeople typically performing well 14m39s.
• It's essential to plan for the possibility that not all new hires will perform well, and to have a plan in place to address this, such as hiring more people than needed to account for underperformance 15m2s.
• The financial model should also take into account the timing of hiring new employees, as hiring too many people at once can disrupt the company culture and lead to mercenary hires who don't care about the company's vision and mission 16m11s.
• Staggering hiring can provide optionality and allow the company to adjust to changing circumstances, such as slower sales, and can help extend the company's runway and months of cash 16m38s.
• Understanding these levers can make a founder CEO great and reduce stress while inspiring the team 17m11s.

Tax and Compliance Planning 17m19s

• Tax planning and compliance planning are essential for startups, including knowing when tax payments are due and understanding how extensions work 17m22s.
• A tax calendar can be a useful tool for keeping track of deadlines, and Kruze offers custom tax calendars for major startup metros on their website 17m41s.
• It is recommended to always file an annual federal and state tax extension, take care of 1099s, and pay the Delaware Franchise Tax to avoid losing corporate status and incurring fines 17m58s.
• Filing a tax extension can provide more time to complete taxes and allows for the option to claim an R&D tax credit later in the year 18m11s.
• R&D tax credits are available for startups with revenue of less than $5 million for less than five years, and can be a significant benefit, with up to one out of five developers eligible 18m40s.
• It is recommended to work with a qualified partner to understand and claim R&D tax credits, as the process can be complex and varies by location 18m47s.

Team and Equity Management 19m2s

• Team and equity management is a crucial aspect of startup success, particularly when it comes to bonuses, promotions, grants, and 409a valuations 19m2s.
• While bonuses are not common in most startups, they may become more prevalent as the company grows, and promotions are also a consideration 19m5s.
• Grants, specifically option grants, are a significant part of an early-stage employee's compensation package, often vesting over four to five years 19m12s.
• Companies typically re-evaluate and provide smaller, yet meaningful, option grants to key employees every few years 19m37s.
• Founders must strategically think about their key employees' compensation and risk of losing them, considering factors such as repricing options if they are no longer competitive 19m49s.
• Resources like cap table software companies can provide benchmarks for cash and option compensation to help inform these decisions 20m2s.
• The end of the year is an ideal time to address these issues, as the board will expect it, and it can be discussed during the same meeting as financial approvals 20m14s.

Cash Management Strategy 20m22s

• Startups that raise money are not expected to be investment experts, but with interest rates ranging from 3-7% available, they can earn significant returns on their cash reserves, potentially covering the base pay of two additional sales executives, for example, a $3 million raise could earn $180,000 in interest at 6% 20m35s.
• A study found that Kruze's clients are managing around $4 billion, with $2 billion sitting idle in operating accounts earning almost no interest, presenting an opportunity to shift some of that money into cash management accounts to earn a higher yield 21m1s.
• Typically, startups have an operating account for paying bills and collecting revenue, and a separate cash management account, which can be with the same institution, to actively earn interest on excess funds 21m12s.
• It's essential to set up automatic transfers to a cash management account to earn interest while maintaining a sufficient cash reserve to avoid missing payroll, which can hurt morale and make the company appear unprofessional 21m32s.
• At least $1 billion from Kruze's client base could be sitting in cash management accounts earning interest, making it a good opportunity for startups to take advantage of current interest rates 21m47s.
• This strategy may change over time, but for now, it's a straightforward way for startups to earn additional income from their cash reserves 21m54s.