Kirsty Nathoo - Managing Startup Finances | Summary and Q&A

TL;DR

CFO Kirsty Nathu shares common cash-related pitfalls for startups, including not knowing key financial metrics, underestimating expenses, and raising money too late.

Key Insights

• 📊 Cash is the lifeblood of a business and running out of cash can lead to the death of a business, so it's important to know and understand your company's numbers, including bank balance, money coming in, and money going out.
• 🔍 By using these three numbers, you can calculate important metrics like burn rate (money in - money out), runway (how long until you run out of money), growth rate, and whether your company is default alive or default dead.
• 💰 It's important to be honest with yourself about your numbers and not try to make them look better than they actually are. This includes not lying about your burn rate, growth rate, or expenses, as it can lead to a false sense of security.
• 📈 Scaling before achieving product-market fit can be detrimental to a company, as it can lead to increased expenses without a corresponding increase in revenue. It's important to focus on getting to profitability and understanding the return on investment for each hire. ⏰ Regularly monitoring and knowing your numbers is crucial for the health of your company. Look at your numbers at least every week, and if your runway is getting low or things are looking inconsistent, check them even more frequently.
• 💼 Outsourcing responsibility for financial matters to a bookkeeper is common, but it's important for founders and the CEO to still be involved and knowledgeable about the numbers. External bookkeepers may not always have a complete understanding of the business.
• ⚡️ Hiring too quickly can lead to increased expenses without a corresponding increase in revenue. It's important to hire strategically and consider the return on investment for each hire. Hiring should be an investment into the business, not just a way to increase headcount.
• 💸 Underestimating expenses can lead to financial trouble down the line. Make sure to accurately account for expenses like salaries, equipment, and other costs in addition to the base salary. Also, be aware that paid acquisition costs may increase over time.
• ♀️ Running out of runway before raising money can be detrimental to a company. Always assume you won't be able to raise more money and aim to get to profitability with the money you have. Don't leave fundraising too late, as it reduces leverage and makes it harder to raise funds.

Transcript

morning everybody thank you for coming in at 9 o'clock it's an early start so as Kevin mentioned my name is Kirsty Nathu and I'm the CFO here at Y Combinator so I've actually helped now 2,000 companies almost as they've come through Y Combinator so seen a lot seen a lot of successes and seen a lot of failures so I'm going to help you just understan... Read More

Questions & Answers

Q: What are the three key financial metrics that startups should know?

Startups should know their bank balance, money coming in, and money going out in order to understand the health of their company and avoid running out of cash.

Q: How can startups calculate their burn rate and runway?

Burn rate can be calculated by subtracting expenses from revenue, and runway can be calculated by dividing the existing bank balance by the average burn rate.

Q: Why is it important for startups to understand their expenses and not underestimate them?

Underestimating expenses can lead to running out of cash faster than anticipated, causing financial instability and potentially the failure of the business. It is crucial to accurately project and plan for expenses to ensure sustainable growth.

Q: Why is it essential for founders to maintain a good grasp of their financial numbers rather than outsourcing financial responsibility entirely?

While outsourcing financial tasks like bookkeeping is common, founders should still understand and regularly review the financial reports to ensure accuracy and to catch any irregularities or mistakes made by third parties. It is important for all team members to have a clear understanding of the financial health of the company.

Q: When should startups consider hiring a full-time CFO?

Generally, startups can hire a full-time CFO post-Series A funding. Until then, consulting CFOs or external services can provide assistance with financial strategy and planning. Founders should focus on building their financial understanding and overseeing financial reports themselves.

Summary & Key Takeaways

• Startups often neglect knowing key financial metrics, including bank balance, money coming in, and money going out, which can ultimately lead to running out of cash.

• Understanding burn (money in - money out) and runway (how long until you run out of money) is crucial for maintaining financial health.

• Other mistakes include underestimating expenses, outsourcing financial responsibility, hiring too quickly, and delaying fundraise, all of which can lead to financial instability.