Mastering Early-Stage Board Meetings | Startup Finance Basics w/ Kruze's Scott Orn | E1865

0:00All right, everybody. Welcome back to this week in startups time for startup basics with my good friend Scott from cruise cruise does all the accounting for almost all of my startups and we do this basic series for a very simple reason i get asked the same gosh darn questions over and over again and i would like to make it easier for me to not have to answer the same basic questions over and over again all those basic questions are now listed at thisweekinstartups.com slash basics go there learn the basics i'm going to tell you right now if there's 20 little episodes there for you to watch 20 30 minute segments you out of the 20 might know 14 but those other six men that's going to be gold for you and today is going to be gold as well because scott today we're going to talk about how to run an early stage board meeting and how to present your metrics in a way that your investors will be more confident trusting and delighted and and just understand your business better so welcome back to the program scott thank you for having me jason well let's get into it What are VCs?

0:59Let's say you got a seed round done, you raise 3 million bucks, you got 10 people cruising along, you're making, so to speak, 500 ,000 a year, million a year. You got a functioning business here. You got product market fit, you're growing. And now the VCs say, you know what, let's do quarterly board meetings. What is their goal? Why do VCs want this governance and these board meetings? They've got multiple goals. The first goal is they are fiduciaries, right? So venture capitalist, I mean, launch like this takes money from big institutions and you sign up to be a fiduciary and make sure that money is invested correctly and is controlled correctly and is put to good work.

1:38And so the governance part of this is actually very, very important to VCs. They have to be able to represent to their partners or limited partners that they're doing their job and paying attention to where the money is going. Second of all, venture capitalists is one of the kind of coolest asset classes, I think, because very few, you know, public market investors, for example, they don't really help improve the company per se. They're not out there building alongside the founders or helping them, but that's what's so cool about venture capital. So VCs who invest in your company, they come with a Rolodex.

2:10Oftentimes they have a lot of operating experience, like people like you, right? And so they're in those board meetings, not just to kind of make sure the money's spent well and be a fiduciary, but to actually increase the value of the company through their expertise and through their network. Yeah. And there are some very simple best practices here. You're going to make a deck. You're going to present your financial statements. That's blocking and tackling. You're going to need to have great financial metrics. You're going to need to have a great deck. Okay, let's put that on the side for a second.

2:41There are some tactical best practices in terms of how do you get this information to people and how do you prepare for a board meeting? So let's say we're a week out. Yep. What happens a week out? Yeah. Take us to that moment. You should be absolutely last, should be the final stretch of finalizing your financials. So the way we like to do things is we distribute your financials to a client every month. And we always schedule a call and actually go over those financials, answer all the questions. Oftentimes the client, the startup founder has to answer questions for us. We redo it, send it back out.

3:14That's what you want to be finalizing a week out. you want to have play like i actually really recommend having like kind of a standardized board deck so you're not reinventing the wheel every time and so you're going to have your placeholders for different financial metrics my favorite so after you finalize the financials you also need to be cognizant of getting the board pack out with plenty of time to review the financial review the whole board pack really so do not be the person who sends it out at 11 p.m the night before or 8 a.m. day of the board meeting you want to everybody's going to review it and then you're yeah people reviewing it during the two-hour board meeting zoom call and and that's not efficient it also makes you look not thoughtful yes yes so we want to explain to people is how to be thoughtful so maybe you're two weeks out you get your first look at the financials a week out you polish them up you understand them that's important yes you know you may not have we found that a lot of our founders have never had any kind of financial experience.

4:14They don't know approval versus cash based accounting, they don't know a P &L, they don't know a financial statement, something crews will train you on other accounting firms will train you on how to speak the lingo. A lot of these VCs have been looking at these things, public markets, private markets for decades. So they're more than willing to go through it. But you got to learn how to read a balance sheet, and to read your expenses and understand your cost of goods, all that kind of stuff you'll get there then hey you send that packet out i think three days before it's pretty good number uh you know a week before probably unnecessary you probably have things you want to put in there 24 hours before not enough time i pick three days let's pick 72 hours board meetings on thursday you get it out monday board meetings friday you get it out monday tuesday you're all good people have a couple of days nobody can complain right totally agree and and like you said, they're going to have more thoughtful commentary and probably not have to spend as much time on the financial segment in the board.

5:10I mean, they're going to be able to focus on more strategic stuff. Fantastic. Now, there's always the issue of some clever founders. I just had the call right now. It's board meeting next week. Clever founder schedules the Friday before the next week's board meeting. We just puts catch up call 15 minutes, sends me a link, sends me three times this founder is very savvy just says hey a couple of things i want to get your feedback on jcal before the board meeting now i know this is not to get my feedback my feedback is going to come during the board meeting this is to pre-socialize some issues this is to maybe get ahead of some challenges problems mistakes headwinds pick your pick your term here but this is the ultimate in savviness.

6:00I agree. It's very savvy for two reasons. First of all, they're getting your brain working on it a week ahead of time so that you can actually be thoughtful during the board meeting. And second of all, they're building credibility with you and alerting you. Often those are usually bad news phone calls in my experience. Sure. Because the good news one goes out like an email, like we just signed Microsoft to a million dollar license yeah exactly everything's great we got our new hire woohoo tech crunch wrote an article about us exactly we so they're building credibility and letting you know that they're going to come to you when things are have when there's a problem which is really as an investor that's the kind of people you want to invest in because you're again you're there in this asset class to actually build the company help people guide them through their journey so i actually think that's a real positive and your description of savvy is right on uh okay let's just go really quick through some of the financial packet we call it a packet right and in the packet you got your deck deck's going to tell a story it's going to be the guide typically 20 pages later stage company i've seen like 60 page decks you know pre-public companies uh and then sometimes you have subcommittees that might have a 20 page deck the comp committee the accounting i was thrown on some accounting committee before a company was about to go public and i'm like i don't know anything about this like yeah that's why we want you there just want to backstop and i'm like okay sure and i'm okay i'll go to the accounting committee to to to you know ask the dumb questions which actually was great for me um i was super qualified to ask the the dumb questions in that case um But in a startup, you get the 20 page deck, you're gonna have the minutes from the last meeting to approve minutes.

7:44We have discussions about that with Wilson Cicini this week in startups.com slash basics. That's just what happened at the last meeting tends to be one page, very high level these days, a couple of bullet points. Then you have any actions you have to take, which typically is giving stock grants. But a big part of the package is the financial package. This is where you get to shine, Scott. What should be, let's go with our Steed Stage Company again. They raised 3 million. They're making a million. They got 10 employees. What should be in the financial package? And if I may, I'd like to advocate for early in the presentation, you have like the financial flash page, which basically shows cash, average burn, length of runway, and any kind of like revenue run rate or lighthouse clients you sold, something like that.

8:32because the reason why I like to put it early is maybe first page, second page, something like that is I find a lot of board members like you are used to going to a board meeting and being surprised by bad news. And so you're kind of sitting there sometimes like waiting for the shoe to drop. And if the founder can get that financial flash page in front of you and kind of quell those fears immediately, like your brain isn't negatively processing, your brain's positively processing. Oh, great. Plenty of cash, plenty of runway, or Hey, shoot, this looks like a problem here. Not enough cash, not enough runway.

9:09We're going to have to really focus on dealing with that. Right. So I like to get it upfront. Love the financial snapshot. When somebody does that, I think this person knows they're reading the minds of the board members who are wondering, when are we cash out? When are we cash out? Yes. Are we going to be able to raise this next round? Are we spending too much money? is this plan credible so you're basically saying like listen hey we always i always like to use financial data the dashboard of a plane okay you're the pilot you got a co-pilot and crews got another co-pilot navigator wilson cincini you got your crew up there you may have a co-founder in the cockpit okay what's our altitude what's our speed how much fuels in the in the tanks can we land this plane that you know are we safe here uh you know weather report other things are going to happen but just some basic metrics cash burn cash balance divided by burn by average burn equals months left we as investors we do this in our heads all the time okay you're burning 100 a month you got 18 you got 1.8 million in the bank okay you got 18 months of runway oh wait you have 200 000 in payables okay you got 16 months of runway oh you got a settlement oh you got this you know oh 400 000 of that's a loan from stripe for some you know against receivables okay what do we really got right and then this is again back to bad news back to perception that you're not being candid just be candid yeah if you have investors they've seen this movie before you don't need to tell them that the you know second act is going to be chaos we know that there's actually a name for it the o s h i t board meeting every every vc knows that board that's usually right after you invest in the company is the o s h i t board meeting because you get surprised by something that wasn't disclosed in diligence all right so we got the financial snapshot you like putting that up front to get your cash get your burn runway revenue lighthouse clients yeah a little snapshot and what are the more formal things that the investors like to see and why?

11:14They like to see all three financial statements. And I would put that towards the back of the presentation because you got to remember your board is going to be made up of like a diverse set of people. You're usually going to have like one super financially person, financially oriented person. And you might have one person who's like super strategic or a super salesperson. There's going to be a mix. So put that in the - You might have a product person. You might have a culture person. Yeah, there's different people. So yeah, different archetypes. So you want to kind of, in your general board packet, you want to speak to all those different people at different times really.

11:44But the financially oriented person is going to know, usually that's going to be in the back and they're going to be looking through the details and making sure everything adds up on the balance sheet and the income statement looks good. And then the other thing is variance. This is another way of building credibility with your investors. If you show what your plan said you were going to do and what your actuals, another way of saying this is budget versus actuals, especially for the quarter last year to date, things like that. That's another way of building credibility. Take your medicine. If you're, if you're above what you said, you're going to spend, get in front of that, tell them why, explain it.

12:20Maybe the business actually kicking butt and you decided to hit the accelerator a little bit. Obviously they should probably know that they should have agreed to that, but that's, you really can, they will trust you with their cash and their LPs cash. if they see budget versus actuals every month because it's just, or every quarter, it's so powerful to know how the company's actually doing versus what they told you they were going to do. And this is where making a plan separates founders who are winging it versus founders who are thoughtful. You could wing it. You could be a jazz musician, no sheet music.

12:56You're a savant. You just play the guitar. You're playing the drums, piano. We just all kind of groove. We have a jam session. Okay, that's great. that's groovy but when you're going to put the album down you're going to need the sheet music you're going to need the track list you're going to try to do something more formal so sometimes in year one yeah you're riffing you're trying to find product market fit fine but once you have product market fit to some degree and you got those first 10 customers you're hiring a sales team you're going to say okay we want to add this many customers okay to add that many customers we need to have this many meetings and we have to have this many meetings convert into second meetings converting into a sale and then you build a pipeline and then you have a plan and then you staff the plan and now okay the whole uh credibility and the nature of the startup goes from we're just we're taking this boat out on little runs we're going around the bay we're just trying to see if the boat is good and how the sails work you know get a feel for the boat and it's like okay now we're taking the boat to the new world what's the provisions downstairs and who we need to have on here?

13:58And do we have lemons? Because I don't want to get scurvy out there. How much fresh water do we have? Do we have flares? You want to have a real thoughtful plan to get to the new world. If I may, it also sets the example for you in your analogy, the crew, the rest of the management team is watching how you communicate with the board. Oftentimes they'll come into the board meeting and present their section, maybe the VP of sales or the VP of product or head of engineering, but them knowing that you are accountable to the board on financial matters will help you make them accountable to you and the rest of the company.

14:31There's nothing worse than like a rogue VP who's spending too much money or doing weird stuff. If you set the culture on your journey to the new world and say like, look, we're going to eat a certain number of lemons every day, and we're not going to go above that. That really actually permeates the culture of the startup is very, very healthy. It helps you get to that next spot. Yeah. And, you know, it also keeps somebody from going downstairs, taking all the lemons and making a bucket of lemonade and drinking it on the first day. And you're like, no, no, that's not what the lemons are for. We're supposed to put like a wedge in every day.

15:04There's supposed to be enough wedges for the 20 person crew. All right. There are in-depth metrics. We know this. SaaS has certain metrics. Marketplaces have metrics. Those are the drill down. When you start getting sophisticated, people are going to want to see that and they're going to want to see those over time for sass we know this subscribers churn customer acquisition costs that's cac you got ltv lifetime value in marketplaces very obvious stuff you got your gmv that's the gross merchandise value you got your take rate what percentage of that that you get you got unit volume basically how many cars did uber send to pick people up how many doordashes got completed how many airbnb nights and stays got done all of that is very granular um and you present that to the board they'll have great questions about it um but what are the questions that are going to come up when you present financials and most often what are the most often questions that people start it's always you know well it's there are going to be some scrutiny on hey is revenue growing fast enough is what's what's in here what's in this number is our gross margin accurate hey why is marketing let's go into that gross margin being accurate explain what gross margin is and why so many let's call them salty dogs you know they've been out on a lot of voyages they really care about gross margin why do we care about that you're salty dogs yeah gross margin is your revenue you're minus the cost of delivering the service and the reason why people care about that is if you're in a high margin business aka most software companies are high margin think microsoft google something like that you've got a lot more money in the kitty to play with once you've delivered your service.

16:46You can spend more money on marketing. You can spend more money on research and development. You can have a better operating team, right? So a high gross margin hides a lot of sins. And so investors like that, they also, high gross margin companies tend to trade at higher enterprise value multiples. So as you grow as a company and you start raising money, the vcs know that like hey this company's going to trade at a much higher valuation eventually when it gets public and so everyone's kind of building that into their investing valuation which is why investors want high gross margin businesses and why they don't fund traditional businesses that are low gross margin you you mentioned software obviously marketplaces fintech consumer those can all be high gross margin businesses yeah on the low gross margin what are some of the lower gross margin businesses that vcs they might be great businesses to own but the vcs might not be interested in because they don't have big exits yeah well i mean you know the classic manufacturing businesses things like anything that's like super capital intensive is really hard to do one of the trends we see a lot over the years is a capital intensive business manufacturing business figuring out a way to add a high margin subscription revenue stream on top of whatever they sell, right?

18:08It just kind of makes sense. Like, hey, you're going to buy this giant piece of equipment. You're going to buy my Peloton bike. But guess what? You're going to pay 40 bucks a month to subscribe to Peloton, right? That's the way to get VCs interested in capital intensive businesses to layer on that gross margin subscription and prove that there's a lot of value here and people are willing to pay for it. You just dramatically change the margin profile of the company we can do that when you're selling a one-time object be it a phone or a sweater a toothbrush like quip you know there's plenty of d2c companies out there what we found with d2c companies were most of them uh were a race to the bottom somebody comes out with a really unique product in the world it gets knocked off gets knocked off uh and then all of a sudden you can buy it on these Chinese e-commerce sites, Timu, whatever, Alibaba, Baba, whatever.

19:01And you can buy it at such a low price that, hey, the Dropcam that was once a$4.99 product is now a$4 product or a$14 product. And so then what is Dropcam's business? They eventually became Nest bought by Google. The Nest Cam eventually becomes a subscription business. And you're paying for, you know, how much storage you have, et cetera. So you really got to be careful about those businesses services businesses like the one you're in or you know uh accounting legal these are the professionals in these get compensated quite nicely it's some nice coin uh some of the best gigs you can have and one of the most stable gigs however they don't get sold right generally speaking and if i may there's a there's a cottage industry in people trying the gross margin thing is really important making sure that's fully loaded and accurate because there's a lot of out there who've seen this game where people try to load costs, they kind of move the costs around and they move it down into operating expenses, even though it's actually a cost of delivering the service, a cost of getting sold.

20:02So all the investors out there are nodding their heads because they've seen the services business that comes to them saying, no, no, no, we've got this really high gross margin. We're going to be amazing. And they look one line down and the operating expenses are exploding and chewing up tons of cash and the company can never really be profitable they've just didn't the hide hide the hide the nut hide the the eggshell kind of thing so just be careful of falling into that trap yourself and play it straight and if you're coming up with a low margin business we'll figure out how to make it work besides accounting chicanery so if uh let me ask a very basic question hey i'm building software okay we got a sales team that's selling it uh we have some marketing expense we have some developers and then we have the cost of training how does somebody make the decision that that is the cost of delivering the services or that falls below those costs uh what i guess they call cogs yeah so so how do you make that decision i've seen people make decisions that r d is not in their sales is in there marks this marketing's in there that marketing's not in there take me through it yeah i usually don't put r d in the cost of goods sold except for engineers that are doing you know support or actually keeping the product up and quality uh qa could potentially be in there too so you usually research and development is going to be down below in operating expenses and venture capitalists are used to that they're used to seeing a lot of money because those are not direct costs associated with delivering the product exactly they're building the next version of the product right or whatever the delivering this one so delivering the product might be like your amazon web services you might have some support costs in there one thing that i see people kind of innocently mess up and i this is why i bring this up is sometimes a lot of times at startups there'll be someone who's doing support and HR, and they're also handling lunch every day.

22:08They're handling five jobs, right? And one of those jobs is support in the early days. Do not load that full person's salary into cost of goods sold. Yes, allocate it. Exactly. I see companies - This is the discussion you have to have with the founder. So when you go over their reports every month and they say hey you i see we added this month 50 75 000 in customer support staff who is that and you say oh that you know that's steve and oh steve i thought steve was also doing the lunch and managing the office and this that and the other thing is oh yeah yeah no no but he does customer support too okay well how often does he do oh 10 of his time great so we'll put 7500 in there so you get an accurate picture of what is the cogs the cost of goods yeah you could unintentionally scare venture capitalists away by doing that incorrectly and having like a terrible margin.

22:59And you said the salty dogs, they know, they're like, wait a second, a SaaS business should be like 60 to 80 % gross margin. Like, why is this one so out of whack? I'm just going to pass, right? And so you don't even get a chance to explain yourself if you mess that up. Yeah. So you're hosting fees, obviously that's part of it. Your software licensing fees, Sometimes you build software, you got to buy somebody else's software and put it in there. You got, maybe you have cloud storage. Maybe people are keeping huge data sets up there. You got a big cloud storage belt that goes in there. If you're maintaining the software, the maintenance of the software could go in there.

23:36I've seen that go both ways. Yes. And clearly any customer support, customer success teams go in there because when you sell it, the customer support team has to go in and implement it on the ground. Whether that's happening in person or not, it could be virtually in the ground, but you You get the idea. Yeah. And I'm just talking about SAS right now. If you were doing Uber or DoorDash, if you had insurance for that business. Yeah. Because that's it. I was talking to Dara from Uber. He was lamenting the cost of insuring Uber drivers. Very big part of their expense. Yeah. And that is a classic COGS.

24:12You would put that in COGS. Cost of delivering it. Where would you put insurance? This is what I was wondering. You know, for Uber, it might be in COGS because it is part of delivering the service. Like, that's a really good question. Yeah. That's actually one for Dara's controller. Well, look it up. But if you had general liability or director's insurance, that's not COGS. Yeah, that's operating expenses. That's operating expenses. Obviously, that's for you to operate the business. Yeah, yeah. So, we got that. That's G &A. That's G &A, general and administrative. Yes, exactly. Right. Okay. So now we understand that this is the back and forth that Scott and I are having.

24:47The reason I'm asking these basic questions is because this is what you need to do as a founder. It's your responsibility to understand this stuff. Once you understand this, you understand it for life. You understand it for life. And so just invest a little bit of your time in professional development, everybody. Watch Startup Basic Series. Anything we miss here that you think should be included in these board meetings? We really went deep. I just think your point about socializing and getting ahead of bad news or getting ahead of a big decision is really, really good. And you couple that with having the deck done early, sent out early so people can make informed decisions.

25:21That's how you get the best out of your board. And I don't think there's any entrepreneur who accepts investment from it. They all want feedback. They all want a guide on their journey. And so help your guide be their best. Help them help you. Why take external funding from people you respect and not get their feedback yeah crazy to not get their feedback they're they are waiting to give you feedback and use them and say i wanted to go through this with you i'm a neophyte when it comes to legal issues i'm a neophyte when it comes to balance sheet is there somebody on your team at sequoia at kleiner whatever at craft ventures who would spend an hour with me and they'd be like spend an hour come by the office spend the day we got a curriculum here to go like if you ask sacks hey you know i'm a first time sas founder i got 20 you know customers we're doing cash based account i don't know what i'm doing but i know that people love my product and i understand my customers like that's their perfect situation yeah that's their perfect situation oh we can teach you that that's like you coming in and being like you know what i know how to make the perfect omelet i make a perfect steak i've never baked and they're like you never baked okay well yeah come in we'll show you the baking station it's just camera oh you don't know how you make salads Oh, you don't have place out yet.

26:37We got that come in the kitchen. We'll show you how to plate a salad but if you know how to make the steak well Great you you can make a brisket and cook it for 14 hours and people lose their minds over it That's the hard. That's the heavy lifting. Yeah, that's the product So, you know, don't underestimate yourself it be vulnerable be honest about where you need help and The great thing about silicon valley about what you and I do scott Is we love to help scott loves to help I call scott I say this this startup's a disaster scott's oh great put me to work coach get me in there right it feels good right and we love it we call clean it up you know yeah clean up listen sometimes you got that listen i'm from brooklyn i got a number on my phone it says verizon and it says uh you know joe's flower shop that's the one joe's flower shop i call joe's flower shop i get big joe big joe can take care of things he's got no flower shop but it's joe's flower shop you know i just leave it at them there are fixers out there who'll fix stuff for you you know i'm saying it could be a problem you clean something up uh cruise will help you the accounting attacks for that that's that's just that yeah if you got other issues yeah call big joe yeah you gotta call joe's flower shop he'll take care of the other things uh you gotta fix a speeding ticket that's different yeah all right listen if you want to get everything together uh very simple cruiseconsulting.com slash twist cruiseconsulting.com slash twist that's cruise with a k talk to scott he's my guy he's gonna help you he's one of the good guys we collect him over here at launch and this week in startups and uh thanks again scott thank you jason appreciate it all right i'll see you in person soon let's have a little ramen and uh we'll see you all next time on this week in startups startup basics

28:27Thank you.