Blitzscaling 05: Session Notes[John Lilly on Leveraging Community to Scale Mozilla]

This is my fourth blog on the notes and my interpretations on the Blitzscaling sessions. In the fall of 2015, Reid Hoffman began taking session called Technology-Enabled Blitzscaling at Stanford University.Blitzscaling is what you do when you need to grow really, really quickly. It’s the science and art of rapidly building out a company to serve a large and usually global market, with the goal of becoming the first mover at scale. And its also about why organization culture is important for Blitzscaling Because when you’re growing an organization very fast, you have to make people accountable to each other on a horizontal or peer-to-peer basis, and not just vertically and top-down through the hierarchy.

Session 2 notes can be found here. Session 3 notes can be found here. Session 4 notes can be found here.

Here are notes on session 5:-

  1. Following are the points shared & highlighted in the previous sessions by Reid Hoffman, Sam Altman and Ann Miura :-
    1. Faster decision making
    2. Avoid being solopenures
    3. If you are asking about product/market fit, you haven’t got it.
  2. While session 2,3 and 4 were focused on sharing learnings & best practices on how to validate the idea, how to build team and what should be the priorities when you are starting up, session 5 onwards it’s about how you can start creating team for execution & start executing.
  3. If you have to pick between product and growth, pick product
  4. If you are building something where you already have market leader, you have to play asymmetrically.For example:- When Mozilla team thought of building browser, IE had 95% market share. Mozilla team cannot compete directly with Microsoft, so they have to compete asymmetrically by leveraging open source community to build the browser and spread the word about it.
  5. Hiring right talent is critical for your start-up success. Hire the best who believe in your story & passion and can put in those extended hours and year’s to make your idea a success.Avoid those guys who come’s up and say company ABC is giving me $X and if you can give me $X=Y, I will work for you.
  6. Fire non-performers ASAP.You will make those mistakes in hiring, but correcting those mistakes is in your hand.
  7. Setting goals/OKR’s will help you realize what kind of goals will be correct and working for teams and individuals and what kind of goals you should have in future.
  8. To get better in goal setting, review them regularly(at least quarterly) and talk about the progress every week. Build transparency in the team about who is executing what and focus on lead indicators rather than lag indicators
  9. Once your product has proved that it is solving a problem for which customer is willing to pay or user can’t live without, get to know which services and products lead’s to the usage of your product. Google came with their own browser because they realized that it’s the browser that connects users with their product(search), so it’s crucial to control that part also.
  10. Even if you got an awesome product, nothing scales on its own.
  11. Network effect(where people refer your product to others) will only happen if they see a TRUE VALUE in your product. Linkedin was able to leverage the network effect because people saw value in networking with other professionals, thus they invited others on the Linkedin platform.  Firefox browser gave the value of better security, Chrome gave better speed, that’s why users referred those products to other users.
  12. Avoid building a nice to have product and focus on building must have product. Because for nice to have products, your users and customers will NOT contribute in your growth. And you will be spending hell lot of money in acquiring users & customers.
  13. Once you have found the product/market fit, to accelerate the growth:
    1. Improve product/market fit for the customers for which your product is still nice to have.
    2. Take advantage of users/customers for which your product is must have.
  14. To get B2B growth:
    1. Grow in your decision makers.
    2. Focus on your beta customers. Successful beta customers will become your lead generators
    3. Build awareness by:
      1. Trade marketing in Gartner and Forrester
      2. Pitch reports, insights and case studies to your audience.

How Long Can Your Startup Survive Without a Full-Time CFO?

The value of a CFO for a young company is a hotly contested topic. Many argue that they are unnecessary add-ons and that a small, savvy, well-trained financial team can satisfy the business’s needs. On the other hand, CFO’s bring a deeper and more strategic financial perspective that can help companies prepare for the future and optimize their current operations.

The crux of the predicament is that whilst CFOs add significantly greater value than a more “junior” financial team, they are expensive resources.

For a business to successfully navigate this dilemma, it first requires understanding which roles, needs, and paths the business is likely to encounter. Eventually, most successful businesses will outgrow their initial accounting staff and need greater depth in the ranks as the number of dimensions in the financial function increase. If they understand what their eventual needs will be in advance, there are many ways that businesses can hedge their risks and get what they need, when they need it, without financially overcommitting.

The real question might not be how long can you survive, but how soon will you start benefitting from the contributions of an experienced financial leader. In my 15+ years of experience as a finance director and financial consultant, I have found that the best way to judge whether or not a company needs to hire a CFO is by assessing where they stand on “the hierarchy of needs,” which I explain below. The following analysis will help businesses identify where they are in the hierarchy and be a guide to hiring options that best address their current needs and how to move to the next level.

The Hierarchy of Needs

Much like Maslow’s Hierarchy of Needs, a business has a hierarchy of financial management needs. These are displayed in the chart below.

The more basic the needs, the more basic the skills needed to perform them. As the needs progress so do the skills, as well as the insight required to satisfy those needs. The basic needs are clerical and can be met with technical training, but the more advanced needs add a strategic component that is best met by someone with extensive business experience. Different businesses’ needs grow at different rates based on industry, market opportunity, ambitions, and resources. One need cannot be met if a preceding need is left unmet.

Level 1: Transacting

The most basic need of a business is the ability to conduct transactions. By conduct transactions I mean buying and selling goods and services and entering into contracts.

Basic transactions require basic record keeping – what I refer to as checkbook accounting. This can be done by anyone in the business and requires no accounting or financial knowledge. It usually involves a business only recording transactions in the checkbook and then using the change in the opening and ending balance(s) to judge its success and financial health.

The advantages of checkbook accounting are clear. It’s cheap, and it requires little effort. It can be done quickly, and it doesn’t require a specialized resource to do so. Businesses that are just getting started are therefore likely to resort to this type of activity, which makes sense. Nevertheless, even with only basic transactions, many businesses find themselves in serious trouble because they have conducted such transactions without graduating from using checkbook accounting to using “real” accounting.

A fledgling business may find that it can get by operating this way for a short period of time, but it is not sustainable and will not work for any business that intends to survive, much less thrive.

Level 2: Record Keeping

Real accounting is built around the need to record transactions correctly and can be performed by either a bookkeeper or, as the transaction complexity increases, an accountant. An owner can certainly fill this need as time and skill allow, but should be aware of the opportunity cost of doing so.

The role of a bookkeeper is to record activity from transaction sources, such as bank balances and inventory. Usually, a bookkeeper requires management and is overseen by an external accountant or the business owner. Using an outsourced bookkeeping service gives the business better flexibility but requires more detailed communications and review.

While both a bookkeeper and an accountant are focused on recording historical transactions and activity with varying degrees of accuracy and compliance, an accountant differs from a bookkeeper in that they are trained to higher professional standards. This training and education gives them the skills to better guarantee that the completeness and timing of financial activity has been properly recorded. Accounts prepared by an accountant should be prepared in compliance with GAAP and should meet the more stringent reporting requirements of a company that will one day seek external financing.

I recently worked with a client who not only had very good, GAAP compliant record keeping for an early stage business but also surprised me by having a complete catalog of all of their contractual obligations. While there weren’t many, their founder was a former CFO and knew that when the time came, lenders and investors would require full disclosure of all contractual obligations. By recording their contractual transactions from the start they are in much better shape for an eventual capital raise.

For businesses that want greater oversight without significantly greater costs, it often makes sense to use an external resource to periodically review the bookkeeper’s work, especially if, unlike my client, the leadership doesn’t have accounting experience. This can be bundled with tax preparation work or by a retained fractional CFO.

Fortunately for cost-conscious firms, the ability to capture transactions has changed significantly in the past decade. No longer is it a manual data entry world. Much of this has now been replaced by software applications and other IT resources. This of course has implications on a business’s cost structure (the point being that software replacing labor helps to save costs).

Generally speaking, businesses that are at this level in the Hierarchy of Needs can get away with not having a CFO. After all, the principal requirement is just a correct recording of the transaction(s) that the business is performing. Since this task is still fairly basic and can be done either with in-house trained labor, or by hiring part-time external labor, it will likely not require the services of a more expensive, dedicated CFO.

The Illusion of Fintech

As financial and operational data is drawn from many sources into hosted accounting systems, the focus has shifted from manual data entry to ensuring and assessing the quality of the data and how it is captured.

However, when not properly implemented, these software applications can mislead businesses into believing that just because the data is in the system, it is correct, when in fact it isn’t.

In many ways the adoption of Fintech has become the new Checkbook Accounting for some businesses – the accounting data being the shoebox of receipts, in the system but not adding value.

As a result of this, the accounting systems and the operational interfaces need to be set up by someone with a strong understanding of the accounting principles. Quickbooks, one of the most popular accounting software solutions around, says so itself: “As your business — and revenue — grow, managing your financials may become a task you don’t have the time or knowledge to manage. Specifically, when it comes to avoiding legal and compliance issues, accountants can be worth their weight in gold.”

This is a time where it would make sense to a company to pull in an external financial consultant to ensure that the applications are integrated properly and that there are policies setup to ensure that the usage of the applications supports the financial reporting function.

Another company that I recently consulted with needed to fix a faulty inventory tracking software implementation. The company had experienced significant growth in its first four years of operation but had failed to properly set up sales tax schedules and taxable items. This resulted in incorrectly reporting a rapidly increasing amount sales tax over a period of years.

I worked with the business to fix the implementation, and file the corrected returns. Unfortunately, for many months, the cost of the penalties and interest exceeded the actual sales tax due. While fixing the implementation, other opportunities for improvement were identified and implemented. The client is now able to better report real-time profitability by product line through their accounting system. It has also used this to make adjustments to its product mix at a significant savings to the business.

Nevertheless, the project served as a great example of the potential problems related to Fintech. Even an adequately connected IT-based financial system will require a regular review of the data and account reconciliations. These activities require not only a good understanding of accounting but also an ability to assimilate operational data into the financial records.

Level 3: Trusted Reporting

With transactions being properly accounted for, a business can start reporting on the activity of the business. The key difference here being that the reports start to take the shape of business lines (e.g. the sales department’s revenue and costs) or specific business tasks (e.g. customer service), as opposed to simply just reporting the transactions of the business (e.g. revenue).

Again, FinTech has made it so that comprehensive reporting is more affordable and robust than ever before. Business schools have been evolving in recent years to ensure graduates have a strong understanding of Fintech and its myriad applications. Dedicated courses have even been popping up.

That being said, it is important to know how the reports are going to be used prior to putting in place a reporting system. Although accuracy is always a requirement, reporting for internal purposes doesn’t need the same approach and level of review as reporting used for external purposes. Depending on how the activity was captured, the reports can be presented in a number of ways but always with the caveat: “Garbage in = Garbage out.”

The main purpose is to communicate transactional information in the appropriate level for the audience in question. If this can be accomplished by the bookkeeper and/or accountant, their job is done. If not, the business will need to have someone who can properly convert the accounting information into meaningful communications.

A common problem I see with earlier stage businesses is that they use disparate systems as sources for their reporting, and as a result, they are never really sure if they have captured the data properly in their reports.

Not having a single source of data leads to either capturing less than 100 percent of what was intended, or in some cases, duplication and more than 100 percent of activity gets reported. Successful reporting needs to be thorough, accurate, and complete, especially as these early stage businesses are preparing to raise Series A funding.

It is usually at this stage in the Hierarchy of Needs that a CFO starts to become more relevant. After all, taking the records of transactions and slicing and dicing them to start to satisfy and guide the business’s day-to-day involves deeper knowledge and judgement. Nevertheless, one common option here is to seek part-time help from an external CFO. In my experience, this is usually when I get involved with the business. It is also where I find I can start adding the most value.

Financial Reports, Ends or Means?

Every business owner who has been handed a stack of financial reports by their accountant will tell you that financial reports on their own are frustrating and of little value. In most instances, they actually create greater ambiguity for the owner, and make their job more difficult.

Reports on their own are not the end goal. They are supposed to be a means with which to understand business activity. For example, it’s not enough to know that the ending cash position for the period changed by a certain amount if you can’t identify which activities drove the change.

Earlier on in my career, I worked with a client who didn’t understand that being a seasonal business caused sizeable fluctuations in the working capital needs as accounts receivables and inventory positions grew during peak periods. Their bookkeeper provided them with cash balance reports but with no explanation. I worked with them to identify metrics, such as inventory turnover and days sales outstanding that they could track to give a better reflection of how the business was doing and to also help forecast future cash positions.

As mentioned, reports created for external use serve a different purpose than management reports, which are created for internal use. If they were created for internal use, they are the means by which the business learns about its activities and uncovers opportunities that can be acted upon.

A business is more likely to thrive when reports are generated by a person who is skilled at analyzing and interpreting the financial data contained in the reports. This person can identify when standard reports need more details and can create ad hoc analyses when it makes sense. Knowing when to take this next step and how to go about it only comes with experience.

In particular, businesses experiencing rapid change cannot afford to skip interpreting the information contained in the financial reports. In fact, they should be strongly relying on these (and on things such as dashboards of KPIs) to help them navigate their way. But creating meaningful dashboards is not as simple as it sounds. It requires understanding what factors drive the business and what signals they send off. Some KPIs may be purely financial whereas others might be a mixture of operational and financial data. An experienced finance leader will know how to pull together this critical information or direct others in doing so.

Level 4: Financial Planning

With an accurate record of historical activity and analysis of the factors that influenced successes and shortcomings, a business can use the information gathered to develop financial forecasts. As the cliché goes, “You can’t know where you are going until you know where you have been.”

The process of creating a forecast is nothing like the steps for recording accounting activities and requires a different set of tools and skills.

Companies with rapidly changing business models benefit the most from regular forecasting and again, should not be skipping this step. The faster the business is changing, the greater the risk associated with not planning, and the greater the need for frequent updates on progress toward the plan.

A forecast ideally would be a rolling forecast and should always be projecting 12 months out at any given time. This is especially true for seasonal businesses. The forecast should include three financial statements: profit and loss, capital expenditures, and cash flows. Leadership can then work with the rest of the business to ensure that the business has sufficient resources to meet its goal-based needs. The finance team seeks to scale business resources to meet the plan with no more and no less than what is needed, so that opportunities and/or resources are not wasted.

Companies that are at this level of the Hierarchy of Needs will almost certainly require a CFO. As mentioned above, a part-time CFO may be enough, but there would need to be a close working relationship and collaboration with management in order to achieve meaningful, and hopefully accurate, financial forecasts.

Level 5: Strategic Partnering

Businesses that aspire to continually grow and improve will seek the most from their financial management team. The ultimate deliverable of the financial management team is strategic partnering, where the financial function partners with other areas of the business and is an integral part of the strategic planning process. This can only be achieved once the business understands where it has been and where it is heading.

Strategic vision includes long-term pricing decisions, scenario analysis, international expansion, acquisition decisions, as well as many other higher level decisions. Strategic partnering results in the assimilation of new frontiers into the long-term financial goals of the business.

A seasoned finance leader who can partner with the business to create a financially viable strategy is a must at this level.

Choose Lean Finance

In today’s business environment, lean organizations are proving that with the right financial discipline, companies can achieve significant results with far fewer resources than what was once possible.

As noted by Christian Gheorghe, the CEO of Tidemark, “Even a mid-level finance pro can move an organization’s planning, budgeting and forecasting processes beyond Excel spreadsheets so managers have the data and analytics needed to understand those ‘what-if’ scenarios and utilize predictive analytics and forecasting.”

By increasing the yield from labor and financial resources, high growth businesses are more agile and better able to respond to changing business conditions. While FinTech does have limitations, it is becoming a tremendous enabler. It for instance gives the business the ability to embrace remote working which allows for it to retain higher quality talent at a lower cost of compensation. Software that manages accounting and finance better supports the use of outsourced shared service centers.

Collaborative technology has made it easier for businesses to hold off on hiring full-time finance resources while still having access to a worldwide pool of highly talented individuals. Businesses can now engage fractional CFO’s and advisory boards and get around to hiring a full-time CFO later, while still meeting their needs for more sophisticated financial leadership.

That being said, as concrete milestones approach, a seasoned finance leader, who can create a financially viable strategy, is a must. This is especially true when a business is trying to rapidly grow through a series of external financing rounds. While advisors, VCs, and consultants can get a company through early stage investments, waiting too long can result in the CFO not having sufficient time to learn the business before pre-IPO activity begins.

Finding the right CFO, who is willing to join the venture, can take some time. Paul Holland of Foundation Capital said that “It’s not uncommon, for it to take several months to execute on a high-quality CFO hire. The ideal time frame in which to make that hire is 12 to 18 months before the IPO.”

Another challenge for companies without a CFO in this environment is to keep track of regulation. As an example, ASC 606, when it goes into effect, will require businesses with external investors to report revenue differently from how they may have traditionally done.

In conclusion, whilst hiring a CFO need not be a top priority at the earlier stages of a company’s lifecycle, if the business continues to grow and its ambitions also increase, a CFO is required to effectively manage the business’s growing needs.

Five Questions to Ask When Building a Finance Function

Here are some key questions that a business should consider when staffing their accounting and finance function:

  • Will you be seeking outside investment? If so it is important to put the proper accounting process and policies in place as early as possible.
  • Is your business rapidly changing? A historically focused transactional mindset will be limited in its ability to help identify opportunities and threats. Additionally, as the business changes, the accounting processes too may need to change.
  • How much financial management skill do you have and how much time can you afford to spend on this? Even if you are proficient with accounting and finance, every hour you spend on the finances is at least an hour you can’t spend doing what you do best.
  • How much financial buffer can you afford to keep ready in case of surprises? With less visibility and planning, surprises are more frequent and larger. You will need a larger cash reserve.
  • How complex are your operations? Like machines and most everything else, the more complex your operations and finance the more skill and experience your business will need to adequately record, report, and plan.

 

Originally posted at :- https://www.toptal.com/finance/cfos/cfo

Blitzscaling 04: Session Notes[Ann Miura-Ko on Thunder Lizard Theory and Achieving Product Market Fit]

This is my third blog on the notes and my interpretations on the Blitzscaling session. In the fall of 2015, Reid Hoffman began taking session called Technology-Enabled Blitzscaling at Stanford University.Blitzscaling is what you do when you need to grow really, really quickly. It’s the science and art of rapidly building out a company to serve a large and usually global market, with the goal of becoming the first mover at scale. And its also about why organization culture is important for blitzscaling. Because when you’re growing an organization very fast, you have to make people accountable to each other on a horizontal or peer-to-peer basis, and not just vertically and top-down through the hierarchy.

  1. In session 04, Ann Miura talks about Thunderlizards companies who are able to scale massively & avoid competitions to dominate the market.
  2. A start-up is able to become a thunderlizard if they can attain following powers. Details about all these powers are given below:-
    • Category Power:- means changing rules of the market and game
    • Company Power:- means creating high-performance culture
    • Product Power:- means achieving product/market fit
    • Proprietary power:- means attaining IP’s or access to scare resources
  3. Propriety Power :  – Your start-up will achieve proprietary power by
    • Obtaining Intellectual Property, example pharam companies discover drug and get IP for that
    • Access to scare supply, example DE BEERS
    • Creating on high switching cost, example Oracle DB
    •  Network effect, example Linkedin
    • Authentic teams, example qilo 🙂
  4. Every great start-up has one fundamental assumption which if turns out true they become really big. Veeva Systems(a cloud computing company focused on pharmaceutical and life sciences) had the assumption that they will be able to scale up well if they build their system on top of force.com. What’s your basic assumption?
  5. Product Power :- You will achieve product power if you have:-
    • Achieved the product market fit. If you are asking about product market fit, than probably you have not found that.A great article on this is here
    • Define a new market category, example SalesForce for cloud base CRM
  6. It’s sometimes seen that some entrepreneurs have proprietary power, but they fail to convert that into product power and concept just end up being a college project.
  7. Company Power : – You will achieve company power if  you have:-
    • Discovered scalable business model
    • Understood and able to create an organization culture that is unique to you.
    • Lowered your company debt and technical debt by defining proper
      • Processes for people operations/HR
      • Tech & operations processes
      • Compensation and Benefits processes
      • Career development path for your employees
      • Communication channels within the organization. Here is a great article to understand company and technical debt
  8. Most of the successful founders are able to think about how to attain company power early in their start-up stage. As an example, Google was able to attain company power very early when they have a small team.
  9.  Founder(s) who become successful CEO understands company power. And those who don’t understand this are replaced by VC’s or have to get a CEO from outside(off course if start-ups survives)
  10.  You achieve Category Power by:-
    1. Defining new space by changing rules of the market and game, example AWS, Netflix, Apple
    2. Change the buying criteria of customers
  11. Catgeory power is achieved by looking externally whereas company power is achieved by looking internally
  12. Speed of decision making matters alot
  13. Founders who are on the path of creating a  thunderlizard company knows clearly why they are the best founding team for the idea they are executing.
  14. Even if you have created a technology solution, the biggest challenge is to find market for that solution. So if you have raised the seed capital or bootstrapping, always remain capital efficient so that you can survive longer.
  15. For marketplace start-up, most important is supply side of the platform and how much loyal will supply side remain with the marketplace. Demand side will not come back if supply side is not there.
  16. For solofounders, journey of start-up will be very tough as it become very lonely
  17. Steve Blank process of customer discovery is both a science and art. Most founders get the science, but fail to get the art.
  18. Start-up with multiple founders should leverage their diversity. VC’s want to see the balance of Yin/Yang in founding team.
  19. Founders should agree to largers vision where they want to go to avoid break-ups down the line
  20. In initial years, avoid recruiting agencies to hire people. Best talent is found internally
  21. Pivoting doesn’t mean changing your product button color, it’s about throwing what you are doing for something else. For example:- Slack was a gaming company pivoted towards enterprise collaboration software .