Kategorie: Investment Know How

  • eCFO Tips continued….

    September & October 2012

    eCFO Tips: Always do a beauty contest when it comes to selecting advisors/service providers. No matter how small you are, always have at least 3 potential advisors compete for business. You will learn a lot through these interviews and it will be time well spent. Make sure you also invite people from various background e.g. individuals, small, medium and large firms.

    eCFO Tips: Remember your consultants/advisors will only be as good as the information you share with them. You should regularly update your advisors and MOST IMPORTANTLY the people who do the actual work on a daily basis (junior staff) at least once every quarter. Invite them over to your company and give them a general update on how things are going. This will ensure that they will provide you with sufficient advice. It will also save you money since advice will generally be better and you will not need as long to bring them up to speed if an urgent matter arises. Throw in some nice food and drinks and I am sure your work will always end up on the top of the pile 😉

    eCFO Tips: Pricing – often it is going to sound like the hourly rates of your advisors are set in stone. This is not true – make sure that you negotiate not only the hourly rates but also yearly accumulated fees e.g. if you go above EUR50k you get an overall discount on all accumulates fees for next year. In addition, ALWAYS ask your advisors if they are willing to take some risks and enter into a performance agreement. Even if they do not end up doing it, you will find out how convinced they are with regards to actually being successful.

  • (a) Bankers, accountants, lawyers, consultants, fund raisers – how to deal with eCFO service providers

    As an eCFO you will have to deal with a range of different service providers. While making good decisions in this area help you to substantially improve your operations and allow you to run the business effectively, making bad decisions can be very costly to you and your new venture.

    I would recommend that you first understand your business well and then look for advisors. You should strategically pick advisors who understand your business and can help you develop it further. As a start-up you should have a good combination of old, reputable wisdom and young, start-upish advisors who will help you to rapidly grow the business. I have selected a few categories of advisors and provided my personal opinion of each. It would be interesting to get some feedback regarding your experience and “best practice for working with start-up advisers!”

    eCFO Tips: Always do a beauty contest when it comes to selecting advisors/service providers. No matter how small you are, always have at least 3 potential advisors compete for business. You will learn a lot through these interviews and it will be time well spent. Make sure you also invite people from various background e.g. individuals, small, medium and large firms

    Bankers

    Find a bank that clearly shows you a road towards obtaining a rating that will allow you to take small steps towards bank financed leverage. Initially, that might mean a conversion of your rent deposit, credit card limit extension and eventually working capital lines. In the beginning you will have a lot of interaction with your banker so make sure you have a personal contact and a strong backup team for daily requests. Secondly, make sure that they understand what you do and offer sufficient support through customized banking software or (in my opinion much more preferable) solid internet banking functionality.

    Fees and costs associated with your account should be minimal and waived for at least the first year. Remember you are giving them money and they will not extend any credit to you initially. You should not be paying for giving money to someone.

    Accountants

    Find an accountant who knows your industry, is extremely reliable and detail-oriented. There should be absolutely no excitement. In addition, it is great if they are looking for new business and are willing to deal with all the additional work of a start-up. An additional great attribute would be a close connection to the regional tax authorities to handle any problems on a personal level. We checked out accountants ranging from one-man shops to the Big Five and eventually settled with a firm that is rapidly growing and has close ties with several start-ups.

    From my personal experience I would strongly advice against one-man/woman shows or very small companies. You always need back-up in terms of systems and most importantly in regards to having multiple people who can work with your accounts.  I have seen a case where an accountant got sick and suddenly nothing got done anymore.  In addition, there is also nobody double-checking the work – as it turns out most of the work done by the sick accountant was either incomplete or wrong but this was only discovered after several months by the new accountancy firm and at additional cost. So overall I would recommend that you stay away from small firms and pay a little extra for some peace of mind.

  • Preemptive obedience … or focusing on the right thing at the right time…

    I just had a very interesting discussion with one of our CEOs. In essence it involved a heated debate on what to do with substantial accumulated funds of one of our portfolio businesses. Invest, save or distribute to shareholders – for me it was clear that a start-up needs to heavily invest if it sees an opportunity. Screw security, savings or distribution of returns! This often means taking on a substantial amount of risk and not focusing on those things that would be dear to a prudent eCFO. The CEO was totally surprised to hear that from me and said “that goes against everything you told us before. You made us focus on liquidity, told us we needed 3 month working capital in the bank and were not allowed to spend any money on stuff you considered not absolutely essential.”

    This clearly showed me the danger of over emphasizing certain points.

    Just because I firmly believe that liquidity is the one and only important measure for a start-up does not mean that once the business is generating cash it should not be re-invested. It also does not mean that I would suggest that savings and reserves should always be the right way to go. Each measure ALWAYS needs to be adopted to the environment it is applied to! Risks need to be taken once it has been sufficiently analyzed and understood – start-ups depend on the risk taking ability of its management.

    For me this is an important lesson that as an eCFO you have to continuously further the education and situational awareness of your team and the people you work with. Never assume that people will understand that each measure is only applied for a certain period of a business lifecycle. It also means that I need to improve my communication in regards to a healthy balance between risky and risk adverse behavior.

  • Strategy – why do we even bother with all of this? (b)

    Balance sheet

    Your balance sheet – yes, you have seen it when the yearly accounts were prepared but it really did not matter to your start-up. For you the one and only key was liquidity in the beginning, followed by profitability but what now? Yes, those accounts become important eventually. What do I mean by that – well, once you have established your strategic goals you will need to optimize your balance sheet accordingly. If you are preparing for a sale, potential investors (and their highly-skilled forensic accountants) will look at your accounts. Are you planning to change your debt to equity ratio and work with more capital? Will a bank lend you money? Are you going to build / buy your next office or remain a humble tenant?

    There are a lot more questions to ask and you are now playing with the big boys. A Fortune 500 CFO will be very concerned with her balance sheet and watch movements in these accounts closely. As an eCFO of a start-up this is a new area for you and you should slowly get into it as your business develops.

    In summary a balance sheet can also teach you lots of interesting things about your business and serve as an important stepping stone to your business’s next growth / development stage.

    eCFO Tips: Do not be afraid to think about new things. If you are working in an innovative start-up there might be lots of balance sheet optimization questions that nobody has really thought about. Are facebook fans in generic groups that are rented out for advertising assets? Should the initial investment into these groups be on your balance sheet and depreciated over time? How do you value your investments in other start-ups? What happens with your old, cancelled projects? Make sure you have good advisors and get lots of support when tackling these questions.

    Strategy can mean a lot of different things depending on your situation but as a general rule of thumb I would suggest that you consider anything that is not based around daily operational tasks as “strategic”.  Given your unique position in the business and access to information, you have the opportunity to support the other management team members in occasionally taking a look around and consider the bigger picture, away from the grind of daily demands. This is were you can add a lot of value and a sound strategy will help the business to develop faster and to reach goals that you did not think possible only a short while ago.

  • Strategy – why do we even bother with all of this? (a)

    So, why do we even bother with all of this? Initially, you need to make sure that your business performs well, does not run out of money and that financials analysis and data points support operational decisions. All of that you can do but if you are a serious eCFO this is probably not the stuff that makes you get out of bed every morning.

    What really should get you excited is building a healthy, growing and extremely successful venture.  Your operational measures will support that but more importantly you should be influencing the strategic development of your company – if you are not doing that you chances are you will never be more than a glorified accountant.

    Strategic decisions

    In order to make a strategic decision you will need a strategy. This may sound a little too simple, but ask some start-ups about their strategy and often you will find that they either do not have one or are unclear in what it is they are trying to achieve. How much time do you think an operationally involved management team has for strategic discussion, decisions and evaluations? From my personal experience: very, very little. Daily business and the demands of a growing venture will eat up all available time.

    This in turn means that your role becomes more important. As an eCFO you can provide plenty of data and input for creating a strategy. Often you will also be more shielded from client demands and product needs than the other members of the management team. Make sure you  that you add a discussion about strategy every now and then to the weekly/monthly meeting agenda.

    Formulating a strategy will require a highly customized approach as your business will have individual needs, goals and problems. Nevertheless, I can assure you that if you have implemented the measures discussed on this blog, than you have all the necessary tools, processes and data to support and drive a successful strategy formulation and implementation process. This in turn will help the entire management team to make better business decisions. I have chosen a couple of strategic measures that can be undertaken to provide examples of what I consider to be strategic decision for an eCFO. As I said these are just examples and you should think long and hard about strategic elements for your specific business situation.

    Profit distribution

    So let’s assume that business is going well and money is flowing in. Operationally, you have fixed most major issues and business is good. With the money comes a totally new perspective for a start-up. You have to decide what to do with a refilling pool of cash – should you distribute to hardworking employees, enrich your shareholders, reduce prices for your valuable clients or invest like crazy? Again there is no perfect answer to this but a sound financial analysis will help you to make a better decision. You should start to think about concept such as ROI calculations to evaluate which return perspective each of your investment/payment decisions has. Furthermore, you need to open a dialogue with all of potential stakeholders to find out what exactly there demand and needs are. Often you will be surprised by stakeholder expectations. Note: it might be dangerous to communicate too much to each stakeholder on, as this may raise unrealistic expectations which then lead to disappointment.

    eCFO Tips: Communication, communication, communication… when it comes to strategic decisions never assume that you know what each stakeholder wants. You will most likely approach a decision from a financial analysis perspective – most other (normal) people will not think that way – so make sure you talk to everyone and do not assume anything. Often you will be surprised – sometimes pleasantly and sometimes not so J.

  • eCFO Tips continued …

    August 2012

    eCFO Tips: Communication, communication, communication… when it comes to strategic decisions never assume that you know what each stakeholder wants. You will most likely approach a decision from a financial analysis perspective – most other (normal) people will not think that way – so make sure you talk to everyone and do not assume anything. Often you will be surprised – sometimes pleasantly and sometimes not so :).

    eCFO Tips: Do not be afraid to think about new things. If you are working in an innovative start-up there might be lots of balance sheet optimization questions that nobody has really thought about. Are facebook fans in generic groups that are rented out for advertising assets? Should the initial investment into these groups be on your balance sheet and depreciated over time? How do you value your investments in other start-ups? What happens with your old, cancelled projects? Make sure you have good advisors and get lots of support when tackling these questions.

    July 2012

    eCFO Tips: Especially in a start-up environment do not get bogged down in the details. If you are looking to establish financial goals do not say EUR9,287 because your business plan spits out that number – instead just define easy to remember goals e.g. we need EUR10,000 revenue per month with at least 30% EBIT. Do that for 3 months in a row and this business starts to be viable. This is an easy rule for not only you to remember, but it also sets a financial target the management team can work towards.

    eCFO Tips: Make sure that management teams can differentiate between expenses and investments. In our company everybody gets a VOIP phone installed on their computer and uses a headset for calls. We do not have actual phones anymore. Nevertheless, the FolienKnecht team requested to spend EUR40 for an actual phone – it took a long discussion for them to convince me that this was a necessary expense and approval took a while. At the same time I suggested that they should get together with the city of Hamburg and sponsor a networking event. Sponsoring fees here were a small 4 digit amount and they asked why I did not have a problem with such a comparatively large amount, versus all the hassle for the EUR40 phone. The answer is easy – for a start-up it is essential to spend money on the RIGHT things not on those that are nice to have. As an eCFO it is your responsibility to ensure that this principal is actually enforced and that every expenditure is measured.

  • Interesting article „Managing the legal process in an early stage startup“ …

    Here an interesting article from London based Seedcamp partner Carlos – great read!

    Managing the Legal Process in an Early Stage Startup

     

  • FolienKnecht – a case study (b)

    Business model testing (Is it profitable? Is it scalable?)

    Regular checks are important for a start-up. Have your previously set goals been reached and if so, can the business be scaled further? We usually measure the scalability by starting with relatively small trial cases that cover a broad range of marketing measures. Can we generate sales through Google Adwords, mailings, e-mail marketing, tele-marketing, direct marketing events or any other method? If there are a couple of measures that allow us to generate sales with a positive return e.g. if we spend 50 cents we can generate 51 cents in revenue we know that this potentially could allow the business to scale. Once we have found a method that seems to work, we scale the test case – if we can generate EUR10,000 in revenue by spending EUR500 through adwords, could we also generate revenue of EUR100,000? As an eCFO you need to push this test case as quickly as possible to make sure that the business model actually is sustainable and has significant revenue potential. If not – kill it quickly.

    eCFO Tips: Make sure that management teams can differentiate between expenses and investments. In our company everybody gets a VOIP phone installed on their computer and uses a headset for calls. We do not have actual phones anymore. Nevertheless, the FolienKnecht team requested to spend EUR40 for an actual phone – it took a long discussion for them to convince me that this was a necessary expense and approval took a while. At the same time I suggested that they should get together with the city of Hamburg and sponsor a networking event. Sponsoring fees here were a small 4 digit amount and they asked why I did not have a problem with such a comparatively large amount, versus all the hassle for the EUR40 phone. The answer is easy – for a start-up it is essential to spend money on the RIGHT things not on those that are nice to have. As an eCFO it is your responsibility to ensure that this principal is actually enforced and that every expenditure is measured.

    Event overview!

    Investments and financing

    I admit – this is a special case since FolienKnecht is a services business, a powerpoint designer, which can grow through its own cash flow generation ability. Therefore, I just needed to make sure that I fully understood the cost structure and what was needed to bring the business to break even cash flow generation without raising significant capital. As with most agencies it is possible to grow with this easy formula: “one employee needs to generate enough cash to pay the salary of two, two for four, four for eight and soon growth is possible”. In addition, your cost structure will mostly consist of salaries and some marketing investment but both cost items should quickly generate revenue. What is more important is that you create structures that are highly efficient and streamlined for cash generation.

    For any other type of venture that require significant start-up capital I would suggest that you calculate your financial needs, then add 30% of that total to your numbers and you are good to go. Once you have determined your financial needs, raise a little bit of capital yourself and build a prototype. Investors are much more likely to give you money (even for a higher valuation) if you can show them a working prototype vs. a slide presentation with nice ideas on it.

    Overall, I hope that these posts provided some operational examples of how to implement the measures I described in previous posts. As always I am looking forward to receive your feedback and comments!

  • FolienKnecht – a case study (a)

    Enough of all the theoretical posts! Here is a more interesting, operationally focused case study. I think that my previous posts have theoretically highlighted various aspects of being an eCFO but what does it mean for operational reality? In order to further highlight this I was able to get permission from one of our venture teams to write about them in this post.

    Here a quick description of the business model:

    FolienKnecht (German for “PowerPoint slide servant”) is focused on providing high quality outsourcing services. Its first line of business is creating, designing, and improving PowerPoint presentations. (www.folienknecht.de; Spanish: www.ppt-express.com)

    Its second business line has recently gone online with a video creation/design offering (www.videoknecht.com) and it also provides a range of other outsourcing services through www.165euro.de. The business was initially tested through an intern and eventually bringing it into fully operational mode through incubating it within our company (www.etribes.de).

    Timeline of development

    FolienKnecht was incubated in the beginning of January 2012. We found a very capable management team consisting of two guys. One is the intern who developed the project and the other is an experienced entrepreneur. Both were willing to take this project forward with the eventual goal of founding a company and creating a business outsourcing company with multiple revenue lines from various business services.

    Operationally, they received support from our incubation structure but this case study will focus specifically on the financial aspects. If you are interested to read a case study from another perspective you can find additional insights (sorry, in German only) here: http://www.kassenzone.de/2012/05/30/powerpoint-malerei-outsourcen/

    eCFO tasks for a new venture

    As the eCFO in our holding company it was my responsibility to take care of the financial aspects. In this role I helped the management team to develop a strong financial understanding to ensure that the company eventually developed into a financially strong independent entity.

    Team

    Within the team responsibility was shared between the two founders. In start-ups everybody does a little bit of everything to make sure that things get done quickly. This is necessary and a good starting point but fairly quickly set roles should be developed. I asked the founding team to provide only one contact point for all financial questions, analysis, and data points.

    Basics

    Our incubation services take care of all central basic services. This ranges from office space, to laptops, water/lots and lots of coffee and other basic things you need to run a business. In addition, we take care of central services such as accounting, HR, recruitment, and legal consultation. These services are initially provided free of charge to speed up the incubation process. However, it is important to make sure that the entrepreneurs are aware of the actual (expensive) services the venture incurs. The company therefore needs to track these expenses and needs to start to implement liquidity controls, budgets and financial planning. This is best done through an Excel spreadsheet that mirrors an actual P&L statement.

    Controls

    Initially, we determined the basic costs incurred by running FolienKnecht and set clearly defined goals we needed to reach in order to move all activities from our incubator into the new entity. Spreadsheets and preparation of financials are also important controlling functions. Here it was important that once a clear goal had been defined, the necessary measures were put into place to ensure that it could be tested on a monthly basis whether or not the venture was successful. We came up with a simple P&L statement that showed expenses, income, and sales funnel in an excel spreadsheet. This is a quick, slightly dirty, way of preparing the necessary financial information. In addition, we provided access to our billing software so that every bill can be generated by the management team but, more importantly, so that they can understand payment cycles and all connected liquidity concerns. If you are incubating a business within an already existing structure, you need to make sure that from the get-go the management team feels the same constrictions and problems it would feel as an independent business.

    eCFO Tips: Especially in a start-up environment do not get bogged down in the details. If you are looking to establish financial goals do not say EUR9,287 because your business plan spits out that number – instead just define easy to remember goals e.g. we need EUR10,000 revenue per month with at least 30% EBIT. Do that for 3 months in a row and this business starts to be viable. This is an easy rule for not only you to remember, but it also sets a financial target the management team can work towards.

    To be continued in the next post …

     

    Here you can find an example of their work:

    Die
    FolienKnechte    [slideshare id=13542261&w=427&h=356&sc=no]

    View more presentations from FolienKnecht

  • German tax privileges for entrepreneurs under fire…

    Very interesting article for German entrepreneurs on Gründerszene.de. Watch out what the tax treatment for your equity shares will change in the coming month!

    http://www.gruenderszene.de/recht/gesetzesaenderung-exit-holdings