Financial Indicators for Startups at Different Stages | Hacker News Reader

Financial Indicators for Startups at Different Stages

mattermark.com

191 pointsdmor29 comments

This doubles as a good lesson for somebody considering joining a startup, and kudos to them for being fully transparent about it. You should always ask to see the graph they've presented here, a graph with historical burn, revenue and months of runway left. Otherwise it is very difficult to figure out how much risk you are taking by joining. Because if the runway starts getting short and the startup need to "control expenses", that means laying you off.

> Generally, I think controlling expenses is a lot easier than figuring out how to make more money.

A key point. If your salary is coming out of future predicted revenue growth, and that growth doesn't happen, your expense is going to be controlled.

I'm not suggesting startups shouldn't be aggressive with spending, nor suggesting employees shouldn't take risks when joining startups. But you should ensure that, as an employee, you are compensated for the risk you are taking. And this graph is a great way to see exactly how aggressive the startup is being with their spending.

  > But you should ensure that, as an employee, you are 
  > compensated for the risk you are taking.

"Oh no I lost my job" risk is already priced into current market-rate salaries. A startup may have a greater chance of laying off an employee, but the risk to the employee must also consider how quickly they're able to get another job at market rates. If the job market is tight, the risk is much lower.

What is unwise is to accept less than a market rate salary plus deferred compensation without thinking like an investor. At the very least one should consider how much their time is worth relative to the cost of investing, i.e. "H hours of my time at market rates is worth $D, therefore if I were investing $D of my time into this startup I'd receive C common shares."

> "Oh no I lost my job" risk is already priced into current market-rate salaries.

Well that's up to me, as the risk-taker. Isn't it? Why should I let 7S-ymVNwEwE- decide that?

Challenging read from a software guy like me. But really thankful for you publishing it. Where can I read more about these things? We're starting our own company and as money starts to flow in, we're worried about not being prepared enough to draw all this numbers. I'd prefer to know all of this instead of hiring someone and blindly trusting her/him on these things.

Thank you, I am afraid there isn't enough published on this, which is part of what motivated me to write it. I know the content is a bit dense, I hope it was at least palatable enough to get to the end.

For further reading I highly recommend SaaStr.com which is a blog on SaaS and helpful for most recurring revenue type businesses. I also think it is wonderful to work with an accountant, and once you start getting revenue it is worth it. We waited a long time to do this (which is part of why I know as much as I do about this stuff) and that was probably a mistake, as it made a lot of cleanup work for us later on. Hope that helps, good luck with starting your company!

Thanks!

For understanding and calculating MRR, CAC, LTV, and cohort analysis, "SaaS Metrics 2.0" by David Skok (of Matrix Partners) [0] is highly referenced. Skok discusses viability of SaaS businesses (such as that LTV should be at least 3x CAC). A list of definitions is provided [1].

[0] http://www.forentrepreneurs.com/saas-metrics-2/ [1] http://www.forentrepreneurs.com/saas-metrics-2-definitions/

this class was very informative http://startupclass.samaltman.com/

Thanks to MM for clearing up the subtleties between revenue and run rate in so rigorous a fashion. Will be pointing people to this link for some time to come I imagine. If we really want to get sophisticated, I guess we'll have to start modeling startup run rates using differential equations akin to rocket fuel in a spaceship approaching orbital velocity ;)

Which brings me to an interesting point. What happens if your SaaS offering explodes and it appears you should be charging much more for your product? Perhaps even 2-3x with no appreciable loss of customers. For the example of MM, the $500/mo recurring may start to seem low in the coming year as the amount of data and ai features increase. Furthermore, the market is somewhat finite (dealmakers). Can they get away with increasing fees by a large multiple year over year? And if not where will additional revenue come from as its concievable they will need to add more (expensive) data science talent to grow.

Love this question, I think most SaaS companies underprice (including us!). We have raised our prices once since we started, and probably will continue to do this yearly. We make most of our money on expansion revenue (additional seats or services like our API), so the per seat pricing isn't that limiting. But why collect $600 when you could collect $1000? We try to price at the highest point where people will complain but still buy.

"try to price at the highest point where people will complain but still buy" --Probably the most elegant pricing advice I've yet to come across.

Would one say that these metrics should be reported on by founders to employees throughout a startup's lifecycle?

As an employee, should you know your own company's burn rate each month for example?

Absolutely. This should also be on the list of questions you should ask before you go to work at a startup. You probably wouldn't ask these on a first interview, but as you get close to the offer stage asking questions about money in the bank, burn rate, cash out date and such are fair game.

If the company will not answer those questions, that in itself is useful data for guiding your decision making. :)

I get that one should ask before they interview to determine their risk.

But what about if you're already working at the company? Should you periodically ask this information or should founders be sharing it?

Management should be sharing it with you at least quarterly if not monthly. Typically, I've seen it done the day after or the Friday after the most recent Board meeting.

I think it varies in terms of what companies do, but I loved having this visibility at Twilio from our CEO while I was there so I brought the practice with me at Mattermark. It always made me feel like I had a better understanding of the trade-offs we were making and level of risk, and I hope it brings the same feelings and thoughts to my team.

Can you give any indication of how this info was shared? Was it a presentation every quarter? A quick email every month?

Part of the company all-hands on a monthly basis

This is really only relevant to Startups that are trying to raise VC money.

I disagree. This is really only relevant to Startups who are seeking to not die.

Cash on hand, burn rate / break even point, revenue growth, and I believe even Valuation metrics are relevant to all companies all the time - even if you're two guys in a truck building fences and wondering what one comma on your ATM slip might feel like.

On the question of when to recognise revenue, I'd hope that serious investors know the difference between accrual and cash accounting.

In particular, that bookings come before sales come before cash, and that the three are reported independently.

Could you expand on that? How are you differentiating between a 'booking' and a 'sale'?

My interpretation of this was that bookings == 'contractually agreed upon commitments to buy' (basically, sales), and then revenue flows thereafter, so if I sold a million dollars, and had $200k of churn in june, my June bookings would be $800k.

Are you referring to a 'sale' as some sort of 'customer has stayed past a probation period and the salesman is eligible for a commission' point? I'd love to have this cleared up.

Sale and cash are well understood in accounting circles. "Forward booking" is, I understand, much fuzzier. What may count as a sale (eg, I receive a purchase order) may differ from the forward booking (someone scribbles on an MoU).

Depending on the organisation, sales staff can be paid at different times in that pipeline. And unsurprisingly there's dropoff at each stage.

I guess I should end by pointing out that I am not an accountant and this isn't accounting advice.

> I'd hope that serious investors know the difference between accrual and cash accounting.

This comment surprises me a little. Have you ever met a serious investor that doesn't know the difference?

I would expect not to. That said, I might sail into No True Scotsman territory, so I should stop here.

Extremely bad title. This is about one startup, not startups.

If they do want to do some properly backtested analysis of the predictive value of various financial indicators versus expected value across many startups though, that would be great.

I'm genuinely not sure if you're trolling, or just unaware that sourcing and analysing various financial indicators against valuations across multiple startups is what Mattermark does?

That's exactly why I'm surprised that the title of this post suggests that they would be doing this, but they didn't.

The title isn't misleading at all. It's about the different financial indicators that people use to talk about saas businesses, and he just used his own business as an example to help explain the terms. The numbers or company need not even be real, they are just there to help explain each term.

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