Kirsty Nathoo - Managing Startup Finances

Summary

Kirsty Nathoo, CFO at Y Combinator, discusses common financial pitfalls for startups. She emphasizes the importance of monitoring cash flow, understanding burn rate, and calculating runway to avoid running out of funds. Nathoo also advises founders to be realistic about expenses, avoid hiring too quickly, and aim for profitability to gain investor confidence. Her insights aim to guide early-stage companies towards financial stability and sustainable growth.

Takeaways

• 💼 The CFO's role is pivotal in guiding startups through Y Combinator, emphasizing the importance of financial health and avoiding common cash-related pitfalls.
• 🏦 Cash is the lifeblood of any business; running out of it can be fatal, and it's surprisingly easy for startups to overlook their cash situation until it's too late.
• 🔢 Companies must monitor three key financial metrics: bank balance, money in, and money out, which can be obtained from simple bank statements without the need for complex financial software.
• 💸 Understanding 'burn rate' is crucial; it's the rate at which a company is spending its capital, and it directly impacts the company's 'runway'—the time until the company runs out of money.
• 📉 The 'default alive' concept suggests that if a company's revenue growth continues at a constant rate and expenses remain constant, it should be able to reach profitability without additional funding.
• 📈 Growth rate is a measure of the increase in revenue over time, and a constant growth rate can lead to an exponential increase in revenue, known as the J-curve of growth.
• 👀 Founders should frequently check their financials, ideally on a weekly basis, and be aware of any changes that could affect their runway or burn rate.
• 📊 Underestimating expenses is a common mistake; startups should anticipate increased costs over time, including the full cost of hiring new employees, which can be 25-50% more than just the salary.
• 🤔 The responsibility for financial oversight should not be outsourced entirely; founders must stay informed and question any discrepancies in financial reports prepared by bookkeepers.
• 🛑 Scaling a company too quickly, especially before achieving product-market fit, can be detrimental; it's important to spend cautiously and maintain a path to profitability.
• 🚫 Raising funds should not be delayed until the last minute; startups should aim for a 12-month runway before considering fundraising to maintain leverage and avoid desperation.

Q & A

What is the primary role of Kirsty Nathoo at Y Combinator?

Kirsty Nathoo is the CFO at Y Combinator, and she has helped nearly 2,000 companies as they've come through Y Combinator, witnessing their successes and failures.

Why is cash considered the lifeblood of a business?

Cash is the lifeblood of a business because if a business runs out of cash, it can lead to the business's death, and there is often no way to recover from that point.

What are the three key financial metrics Kirsty suggests startups should monitor?

The three key financial metrics are the bank balance, the money coming in (revenue), and the money going out (expenses).

How can a startup calculate its burn rate?

A startup can calculate its burn rate by subtracting the money coming in (revenue) from the money going out (expenses), effectively measuring the change in the bank balance between two dates.

What does 'runway' mean in the context of a startup's finances?

Runway refers to the number of months a startup has until it runs out of money, calculated by dividing the existing bank balance by the average burn rate.

Why is it important for a startup to know its growth rate?

Knowing the growth rate helps a startup understand the rate at which its revenue is increasing, which is crucial for planning and assessing the health of the business.

What is the 'default alive' concept, and how can a startup calculate it?

The 'default alive' concept refers to whether a company can reach profitability with its current revenue growth rate and constant expenses. It can be calculated using a tool created by Trevor Blackwell, one of the founders of Y Combinator.

How often should a startup review its financial metrics?

A startup should review its financial metrics at least every week, and more frequently if the runway is getting low or if there are inconsistencies in the financial situation.

What is a common mistake startups make regarding their expenses?

A common mistake is underestimating or undervaluing expenses, such as not accounting for the full cost of hiring new employees or the increasing costs of customer acquisition.

Why is it a bad idea to outsource financial responsibility without staying informed?

Outsourcing financial responsibility without staying informed can lead to misunderstandings and errors in financial reporting, causing founders to be unprepared for financial challenges and potentially leading to the failure of the business.

What is the significance of the ratio of revenue to employees?

The ratio of revenue to employees is a better metric than just the number of employees because it indicates how efficiently a company is generating revenue with its workforce, aligning with the goal of doing more with less.

At what stage should a startup consider hiring a CFO?

A startup should consider hiring a full-time CFO relatively late in its development, possibly post Series A funding, as the role involves more strategic financial planning and oversight.

Why is it important for a startup to have a plan to achieve profitability?

Having a plan to achieve profitability is important because it ensures that the startup is working towards financial sustainability and independence from external funding, which is crucial for long-term success.

What is the recommended approach for a startup when raising funds?

A startup should always assume that it will not raise any more money and plan to become profitable with the current funds. It's also advised to start thinking about raising funds when there is at least a 12-month runway left.

What is the significance of not raising funds too late in the startup's lifecycle?

Not raising funds too late is crucial because as the runway gets shorter, the leverage in negotiations decreases, making it harder to secure investment on favorable terms.