🤔The Truth of a Startups Financial Forecast

Shawn Flynn 0:01

We have the founder of strategic CFO Ed guidance here today at guys worked with early stage companies. He's been in Silicon Valley for a number of years, helping them get ready to either be acquired, raise financing, or just get to the next step. So you're in for a treat today on Silicon Valley successes.

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Shawn Flynn 0:47

Ed, welcome to Silicon Valley successes. Could you please give an introduction to yourself for everyone at home?

Ed Gines 0:53

Absolutely. I met guys, strategic CEOs have staff here domestically, us as well as in internationally over in the Philippines. Interesting. Yeah, two areas, we concentrate on the CFO component of the business, and then our staff is more of the accounting services that nuts and bolts of the business.

Shawn Flynn 1:11

Wow. So Ed, quick question for you. I just want to go right into it.

When a company comes to you. Yeah. What are their normal problems? An early stage company, they say, Okay, I need help. I'm going to contact Ed, what's going on?

Ed Gines 1:26

Well, I seen this as like the three C's, its compliance, cash flow and clarity, clarity, meaning the financial statements, oftentimes you can you read it, and you go, What is this, an investor needs a little bit more than just saying, What is this? They need the financials to read a story, okay, part two cash flow, right?

What's our burn rate? For goodness sakes? Okay, so I'm sorry? What's a burn rate? Well, how much cash Are you guys going through on a monthly basis? And when are you going to run out of cash, okay, because you better get your next round of funding done sooner rather than later and prep for it. So if your burn rate is hundred thousand dollars, you better have 800,000, if you know, an eight months you're done, right? Yeah, it's that simple.

Shawn Flynn 2:15

So if I have 800,000 left in the bank

once, should I really start thinking about raising more money than in my burn rate is 100,000 a month, two months from now

Ed Gines 2:26

to what's the latest six months Get ready, because it takes a while to to get funding because you're beyond fan of friends and family at that point. Okay, now you've got your, your series A, your angel, it just there's a number of procedures that have to take place. And just kind of going back to those three C's, the compliance part another part of the business that can really knock the business so is compliance, which is government filings,

Shawn Flynn 2:53

okay. We all are a silencer people making their then I mean, everyone knows what, March or may sometime there, you're supposed to file something,

Ed Gines 3:02

got to do a little prep work in order to get the mean, the filings of the corporate returns and the extensions, that's what you're referencing, right. But not only that, I mean, you've got sales tax out there, depending on the type of product. Okay, I know there's SAS companies out there, how we're recognizing the revenue so that if you're even generating revenue, right, in terms of on the SAS companies, are you amortized

a little what, right? Yes,

it's a fancy word for software as a service. Okay. Yeah. And there's a lot of startup companies here that are in to the the SAS world. Yeah, yeah, exactly. Okay. So

Shawn Flynn 3:46

so an early stage company they haven't raised or they haven't they have zero revenue, you're not making any money. Yeah, they don't need to file taxes, right?

Ed Gines 3:55

Wrong. Wrong. Absolutely. We have to stay compliance, that that third see, okay, compliance,

again, I use the words will knock the company silly. Okay.

What it means is that all the sudden if you haven't filed your returns and you're trying to raise investor monies, you're ready in the whole, they're not going to give you the monies because you aren't compliant with government regulatory filings. Why would that affect an investor? Wouldn't the investors say, hey, it's not compliant today? We'll just get it done. He'll talk to Ed tomorrow, he'll be okay. Then I'll write a check. Now, those are those are I'll give it to you and fancy words that I'll break it down. The government always has the first position. So if in fact, there's money's owed, it's not we're going to go to the investor it's going to be paid to the government and the compliance part is the investor worried about his money returned into him. That's why it's so important. Yeah, and as a good CFO, you have to have those three things and in order Okay, third being compliance so cash flow.

Because who wants who wants an investor to run out of money from the company? No one does, right?

Shawn Flynn 5:07

So who hires you, then more often the founder of the startup or an investor wanting to invest in the company

Ed Gines 5:14

generally, founders is what I have as and we're helping raise money. So we just did a two and a half million dollar round. Okay.

Shawn Flynn 5:23

Yeah, we will stage company would that have been for the series a really do it half million series? A, how much equity was given up for that round? Can I ask?

Ed Gines 5:32

Yeah, absolutely. You can. Two and a half over 25. So

Shawn Flynn 5:35

what does that mean?

Ed Gines 5:36

Yeah, sorry, a little fancy. So if the value of the company is 25 million, okay. And they participated in giving two and a half million dollars? That's 10%, right? Two and a half over 25

Shawn Flynn 5:49

to an F over 25? Mm hmm. Interesting. Yeah. So that back to that the investor? What stuff is he looking for? from you to make sure it's

Ed Gines 6:00

Okay, investment. Well, we're looking at the forecast. That's part of part of it and the believability of the forecast too. So we're testing the model to make sure that, hey, if we're going to go out in the street and raise this money, does it make sense? You really have to make sure that in fact, are you projecting to Hi, everyone wants the hockey stick? Okay. The hockey stick that okay, that in reality, financial growth, have has the company gone through proof of concept, okay. Are they at commercialization? The hockey stick commercialization,

Shawn Flynn 6:34

so tell me a little bit about that with the startup wanna raise funding? You said forecast, the forecast would be for the next six months, next year. next five years. There you go. What's the forecast? Yeah, the five year

Ed Gines 6:49

it should be detailed. And the way we structure it, first two years, first year or two, you show it on a monthly basis. It also can show it on a quarterly but years, three, four,

Five that's on an annual basis, but we still forecast it correctly. But you don't want to overwhelm your investor with all of this minutia detail. You have to be able to express those financials to tell a story.

And on years, three, four, and five, the story gets a little bit, you know,

Rosie glasses a little bit, oftentimes, investors are cutting in half and really absolutely for evaluation purposes,

Shawn Flynn 7:26

right out the gate. So on that year one, those that forecast What's it kind of based on what type of information is normally given to prove that it's a possibility that this forecast is real,

Ed Gines 7:39

this is great, good stuff. So we happen to be in December of 2018. Okay. Right, January through November, historical data already for the company. So that's not part of the forecast. But that's the reality in order to build, what does it look like in December, and then building it out forward for the remaining for four years, in one month.

Shawn Flynn 8:02

Okay, so you take the past year, or how ever much time you have use that look at the growth month over month, and then take that information, then do the same math for the next year 234

Ed Gines 8:16

week, we go a little bit deeper in our forecasts where we're building out the dev team, because it seems we're talking

Shawn Flynn 8:23

here. Tell me about the dev teams, just the engineers engineers product, correct. All right. And

Ed Gines 8:27

so we're just talking about headcount, how many more? How much more do you need in terms of building out the next generation, etc.

Shawn Flynn 8:35

So questions like that you would go to the investor and go, I need four or five more engineers. That's why I need this much money. Right?

Ed Gines 8:43

Okay. Because the burn rate is increasing at this point in time.

Shawn Flynn 8:48

And the burn rate is,

Ed Gines 8:50

is again, it's expensive. A lot of these dev guys and ladies, okay, need to get paid. They're not living off of equity. They can't cash in there options, right? You can't put that on the table and eat it. Okay, so So part of the burn is the expenses of paying for your development team

Shawn Flynn 9:09

and burn and there's a term used earlier run way,

Ed Gines 9:13

run run rate

Shawn Flynn 9:14

run rate, how are they related?

Ed Gines 9:18

Right? Well, I'm, I'm thinking of it this way, in terms of growth, if that's where, because I don't recall the word run rate, but that's okay. That's okay. That's okay. Sure. So the run rate is what's your burn rate, as well as, what's your growth rate to? Okay,

Shawn Flynn 9:32

interested? So, Ed, question for you. I know you have a bunch of examples that you talk to people about how you work with them and use cases. There's a few that I remember one of them was cleaning up the paper Blizzard? Yeah. Can you talk about that

Ed Gines 9:50

as well? Yes. Um, ideally, for me, our office is paperless. Okay, which is a, it's a, it's a hybrid. But if oftentimes, you go into the startups, papers everywhere, may be electronic, but you have to start sorting things out the right way. So it's accessible to build the data room necessary for investors, because they're going to be asking for those documents, supporting documents. So

Shawn Flynn 10:15

then the data room is what

Ed Gines 10:17

it's a build out, it'll fill out it may be equity related, debt related, it could be expense real, it's just different areas of the financials that you need to support. Why did we have this transaction? What is this expense? click there, it is

Shawn Flynn 10:32

interested. So with that, does that mean paperless meaning I can just put everything in QuickBooks and then we're done

Ed Gines 10:39

two things. The data room is external QuickBooks well put together audit capability is that there are attachments to the accounting software we just happen to use a software called QuickBooks so yes data room at a higher level transactional over at the I'm in QuickBooks so that it's very easy to find,

Shawn Flynn 11:03

okay? And going back to when a startup comes to you doesn't really know what he's doing shitty hire a bookkeeper or accountant at what stage either or because I mean, I hear that allowed to I hire a bookkeeper, I don't even or should I hire a CFO or controller all those?

Ed Gines 11:23

Well, I think it's a migration. It's a path of evolution. Okay. So a bookkeeper would come in nicely initially just to get a little bit organization and what would that bookkeeper do we'll make sure that the all the buckets are in the right place. A lot of bookkeepers though, aren't looking at it from a strategic from a CFO perspective. So bookkeeper comes in, they go, Oh, here's the expenses and the CFO is going now we really should have cost of goods, direct and indirect, we should have in operating expenses area, the operating expenses being operations, GA sales and marketing, okay? r amp D, right? There you go.

Shawn Flynn 12:03

Okay. So the bookkeeper would more input the data, and then the CFO would look at and go, really, let's put this here. Let's put this there and kind of manipulate it around.

Ed Gines 12:14

Yeah. And, and at that early stage, fractional makes you don't need a full blown horsepower CFO, you just need someone to oversee that the bookkeeping is correct.

Shawn Flynn 12:25

So that CFO could actually be someone that comes in a couple hours a week and just looks or maybe 1020 hours a week and just looks over the work that the bookkeeper did, is that a common thing startups do

Ed Gines 12:39

it is, and I'll go back to the one that I'm thinking about right now. If they called me a for the forecast. And they go, you have no books, and they incorporated in April and like, aha, this is complex. Okay, so it took a little bit of myself and my team to get the financials ready for the two and a half million dollar race

Shawn Flynn 12:59

in Wow, that comes from

Ed Gines 13:02

zero to Yeah, to the raise

Shawn Flynn 13:05

25 million valuation in six months, seven months?

Ed Gines 13:09

Well, they've been building on it, but don't doubt that investors are buying into it. And so they're already in production and bringing in revenue. Good for that. Yeah. Lucky them, Ghana, I'm part of the team.

Shawn Flynn 13:24

So congratulations on that. Next question for you. Then I've heard the term controller, how does the controller work with the CFO bookkeeper? What's the difference? What's the similarities? Or what's the define and finding role?

Ed Gines 13:38

My pleasure. So a controller to me is a high horsepower bookkeeper, because they're making sure all the buckets right expense buckets if there's revenue buckets to so they're, they're more qualified than a bookkeeper, but they're looking at historical information. Whereas on on the CFO side, we're looking more forward and strategizing what's what do we need to do, what's the headcount that we're going to be doing going forward? What kind of a business model are we building, whereas the controller is just making sure, are we representing history correctly?

Shawn Flynn 14:13

At what stage? Would a company have a CFO, a controller and a bookkeeper? Wow,

Ed Gines 14:21

I can, I can feel both roles of CFO and controller, okay,

if there's three of us, that's too much on the management side, in my opinion, interested, you just need a controller that might be able to do some CFO work,

but that controller must also be able to do the road shows to to bring in the what is a road show? Yeah, sorry, road shows when we're going out with the senior management team and raising funds,

Shawn Flynn 14:51

okay, in that raising, fun presentation, how important is the controller or the CFO or the CFO in that presentation?

Ed Gines 15:01

Um, the easy way to say this is adult supervision. Okay, we have to laugh, right? We have to laugh, but they want to know who's managing the funds for that that's just been brought in, we want it done correctly, a controller might be able to see that and again, that's historical data they're working for and working with make sure darn right. It's accurate. Yeah, but are we using the funds that are now in place? So the best use of the investor,

Shawn Flynn 15:32

okay, do any investors go to the startup and say, the funds you use? We think you've used them incorrectly, we would prefer you to use them in this area, or this manner moving forward, and then the controller going yes, no, or the CFO? Yes. No. How does that relationship or conversation?

Ed Gines 15:50

That's a complex question. It really is i and i think is a very fair one, we go through the board to make sure it's cleared if we're making some big moves, right. That's part of the forecast. That's the budget that we're putting into place.

And that's just fiscal due diligence on my part, to make sure that in fact, what we said we would do based on the forecast on the milestones that are required, have we actually done that so that a CFO is in part of the board meetings giving the investors comfort that we are making our milestones and if not, why kind of important

Shawn Flynn 16:35

so then to change a little bit there's two other examples I distinctly remember the first one was the paper Blizzard The second one was preparing for raising funds How would you a company's been around two three years they want to raise their next round their team of four pretty early stage they come to you how would you prepare their documents or their papers for raising funds?

Ed Gines 17:00

Sure, well at some point in time the financials have to be audited okay so we have another audit them or someone else now I'm an audit in itself is someone who was external of the company so there so that they in fact are independent whereas I'm more internal right so I can't audit my own self prepare financials but it'd be nice yeah it'd be wrong but yeah it'd be nice it'd be nice so the fees are starting to go up to right again we're talking budget and forecast well if we need an audit puts more dollars down over and month 12 I was gonna need to pay for that audit

Shawn Flynn 17:38

interested so how can you tell me some of the steps you use to help them prepare for

go into investors

Ed Gines 17:46

again I back to the fundamentals and then we'll go fancy okay it's a data room right building out our we compliant Have we met all the governmental requirements of making sure that we can run the business we are running the business both at this city state federal level I mind you that's that's something that no one thinks about but it's a necessary evil to make sure that the dollars can come in through the door from the investor

that one financial statement presentation tell a story show the story of what what has happened and what is going forward

those you know those are over encompassing but there that's the

foundation

of what the financials need to show

Shawn Flynn 18:43

and this has been amazing information and for more information, please visit us at Silicon Valley successes. com or visit us on Facebook or or LinkedIn but let's go back to ed ed

preparing a company raise money how's it different then preparing a company to be acquired

Ed Gines 19:03

Wow, I'm acquisition mode

it is one in the same because you're starting to look at it from an investor's perspective. Is the corporation bidding being

are we exchange is a stock sale or is this an asset sale? we don't we don't even know right it got a little fancy

Shawn Flynn 19:25

fancy key good definition stock sale acid sale and who would prefer what

Ed Gines 19:31

again yeah i know i know oftentimes what we described as a stock sale right an asset sale often is when they don't really want the history of the company they just want the technology okay so they're just buying the assets and said the rest of it you guys can keep it it's cleaner for the acquiring company at times just to do an asset sale it depends on the what what's important to the investor as well as to the founders to so it's a really I don't think it can be expressed in 30 seconds says to the advantage of one to the other

Shawn Flynn 20:10

Okay, you back on the show that and we'll talk mergers and acquisitions

Ed Gines 20:15

player

Shawn Flynn 20:16

but but let's go into a little bit a little bit more detail. So we've talked about a lot of things today. We've talked about

early stage companies, getting them ready for fundraising to be acquired. We've talked about the three C's compliance, cash flow and financial statement, clarity, clarity, yeah, we've talked about the interactions between investors and the entrepreneurs. Mm hmm. Talked about bookkeeper verse controller for a CFO, when, when you bring them in different stages, how they work together, the pony show, or however you like to call it, the road show road. So when they're going out to raise capital, and that confidence that's needed by the investors to see who's managing the money more or less

Ed Gines 21:07

well, they're not not only they want someone on the back end, which is me conservative, making sure that the, the monies are well protected for the benefit of the investors. But they are also looking at the CEO to make sure how believable is the story? How strong of a of

how, how far can this CEO take the company, it's there, they're often listening for the strength of the management team. It's not always about the financials that comes secondary, but they're looking at the CEO and saying, Okay, how strong is your management team?

Shawn Flynn 21:45

So that management team, how closely are they looking when it's a very, very early stage company verse maybe a little bit later stage

Ed Gines 21:53

sounds like high risk on a very, very early stage. Yes. Therefore,

valuations are lower

risk reward.

Shawn Flynn 22:03

So at the very beginning of a company, whether it has no revenue when it has no money,

what are the investors looking for, at that point,

Ed Gines 22:16

you know, that seed right there, and oftentimes you're still at family and friends, just saying, is this thing real? Is this proof of concept stage or earlier than proof of concept? How far along are you in terms of building a viable commercial grade, revenue driven company that's, that's far out there. That's

once you're there, that it's a good feeling. A lot of companies unfortunately, don't make it there.

Shawn Flynn 22:44

So that early stage when it's just friends, families, and fools, they they sometimes say, what does that look like from the accountant or bookkeeper when they come into picture and they found 20 people have written a $2,000 check each for the company.

Ed Gines 22:59

Yeah, it's it's, I bet you the paperwork just atrocious already right out the gate. So for a true investor to come in, that's got to be cleaned up. What do you mean by cleaned up executed documents? Are there really stock

purchase agreements in place? Or the minutes all put together? minutes? Yes. Yeah. Implying, you know, do you have legal counsel already set up so that it is prepared for the true investor to come in? Because those early stage it's just fly it, they're just flying by the seat of their pants, just trying to a make it and paperwork is secondary. But at some point in time, the paperwork becomes fundamentally important.

Shawn Flynn 23:43

interested now, Ed, I heard you have something called the

Ed Gines 23:49

project tracker.

Shawn Flynn 23:50

tracker. What is the project tracker?

Ed Gines 23:52

It just keeps us because we manage many companies and for me to just go in and Company A on Monday, be on Tuesday company. See on Wednesday. I'm like, Wait a second. I gotta keep the solid track. What projects are we working on? Who's responsible ones? the start date ones? The End date? How much have we completed,

and it just keeps moving forward. So it keeps us on track as to what's what does the company need? It's my report card. Have I done my job for Company A on Monday? Because I got to flip my hat on and go to Company B. What's that project tracker look like? It's it's not just one company because as a fractional CFO, we need these tools in place to make sure that we are keeping track with each different project. One, maybe SAS one may be blockchain. Okay. The third one may be construction.

Shawn Flynn 24:50

So if you're a startup founder Mm hmm. And there was Ed guy sitting across from you. Mm hmm. What information do you wish he would give you? What is the best information that you could give a startup founder,

Ed Gines 25:06

but just make sure that you believe your product and keep moving forward? The compliance absolutely is important.

The success rate we all know the answer to that right. of of all the startups

it's hard because if I over do it for the compliance, and they don't make it, why throw away the money and being blunt? Yeah, there's no reason for it.

As, as we all know, success in startups is challenging already. I don't want to throw in horsepower unnecessarily unless it benefits the founder right away. But the bookkeeper initially, yeah, you need to get that straight because you got to pay your payroll.

Shawn Flynn 25:56

So Ed, can you tell the is how to reach you a summary again, of what you do and who your best client your ideal client is.

Ed Gines 26:09

So I met strategic CEOs, you know, we have two areas CFO consulting, and our accounting staff, both domestically and internationally. That helped me see the project tracker Monday, Tuesday, Wednesday through Friday,

our ideal client, generally for one of our we'd like working with three to 30,000,030 employees or less, keeping it simple. The other one is startups why we're here working with founders that are a proof of concept, if not at commercialization series A right in there,

Shawn Flynn 26:50

and how can people reach you if they want to hire strategic CFO? Sure,

Ed Gines 26:57

our website strategic CFO and there's a little hyphen between the two seas.com and they can always reach me there.

Shawn Flynn 27:05

Okay, so once again, that would be at strategic ctos.com.com. Yeah, Ed, thank you so much for your time today. I learned a ton I know everyone at home, learned a time and next week on Silicon Valley successes we have john Bradley who's the founder of an amazing company that's tokenism real estate around the world. So we look forward to seeing you next week on Silicon Valley successes. Thank you. From all of us at Silicon Valley successes. We hope you found the information presented today useful in your path to success. For further information on accessing the resources in Silicon Valley. You may visit us on the web at Silicon Valley successes. com on Facebook and YouTube. Thank you. And remember,

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