Thursday, October 03, 2013

Finance Should Be a First-Class Discipline for Startups

Tim O'Reilly, the founder of the O'Reilly media empire, published a great longform essay recently titled, "How I Failed".
http://oreil.ly/19ouE72

It's a phenomenal read which covers a wide variety of topics, including how O'Reilly sold GNN to AOL for $15 million in stock, sold that stock as soon as the lockup expired for $30 million, and could have netted *$1 billion* had they held on to that stock until the peak.

But the part of the essay I want to focus on today is something that a lot of young entrepreneurs tend to ignore.
"Treat your financial team as co-founders.
They aren’t just bean counters. They can make the difference between success and failure. Don’t just look for rockstar developers or designers, look for a rockstar CFO.  Even if you’re a good entrepreneur with a nose for where money intersects your vision, a first-class financial team focused on building effective controls, managing expenses, and optimizing the system will be well worth it.

Hold teams accountable for their numbers.

Every manager — in fact, every employee — needs to understand the financial side of the business. One of my big mistakes was to let people build products, or do marketing, without forcing them to understand the financial impact of their decisions. This is flying blind — like turning them loose in an automobile without a speedometer or a fuel gauge. Anyone running a group with major financial impact should have their P&L tattooed on their brain, able to answer questions on demand, or within a few moments. It isn’t someone else’s job to pay attention."
I met with one of my investments recently, and the thing I was most thrilled about was hearing one of the founders describes a number of steps they had taken that allowed them to be more efficient about spending and reduce the burn rate by about $5,000 per month.  And this is a company that just finished closing its seed round, and has plenty in the tank.

Far too many entrepreneurs see millions in their company's bank account, and can't imagine how it's possible to spend it all.  Believe me, it goes faster than you think.

Money matters.  And while it may seem easy to come by, that can change in an instant.  One of the core values I love to see on a founding team is a focus on frugality.  Even better if the company builds a lasting culture of fiscal responsibility.

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