Something
Ventured:
March 4th, 2006
By Brent
Holliday
Greenstone
Venture Partners
It’s So Basic
“Hey, don't write yourself off yet.
It's only in your head
You feel left out or looked down on.
Just do your best, do everything you can.” – Jimmy Eat World, The
Middle
After nine years of early stage investing
in and around BC I have seen a ton of things done wrong
and a few things done very, very right when it comes to
managing the beginning few years of technology
companies. It is easy to write about the mistakes when
you see and do so many of them. As the Sinatra song
goes, “And mistakes, I’ve made a few...” After all of
this learning, it seems to me that there are some simple
things that a company can do to set it up better for
success. Simple things that help avoid big mistakes.
Not the hard, strategic decisions on marketing, product
development or capital raising. Easy, simple things
that so many companies fail to do well and it ends up
costing them down the road.
At this point, the writer pauses and
thinks, “Hmmmm… Steven Covey made a fortune packaging
common sense things your mother would tell you under a
“business-speak” title.” Maybe I should leave you
hanging and tell you to read the book when it comes
out. All I need is a catchy title…
Forget it. I’ll leave the book business
to Brody and Raffa.
I’ll save you the $24.50:
In sports, when a professional team gets
in a slump, you here the athletes talk about getting
back to fundamentals or keeping it simple
when discussing how to break out of the slump. Nothing
fancy, just good old hard work on some basic premises.
In a start-up, a slump is never a good thing when you
are chronically short of cash and your last 10 minutes
of success or failure could determine whether you get
any more cash.
So why is it that so many start-up slack
the simple fundamentals for running a business? What
are they, you may be asking? Oh, just the boring old
processes and procedures… the back office. Accounting
and human resources. Sticking with the sports analogy,
this would be skating and shooting or catching and
throwing, you know, the basics. Without the basics, you
can’t do the more sophisticated strategies in a sport.
Same in business.
I’m referring here to being very, very
good at the basics. It is not enough to have a
chequebook as your accounting department and a paycheque,
complete with payroll deductions, as your HR
procedures. If you are going to be a big business, a
world class technology performer, you need to have a
very good back office.
Let’s paint a typical scenario that I see
in a technology start-up. Entrepreneurs and engineers
are the employees (sometimes they are one in the same).
They do the very rudimentary company formation steps:
hire a lawyer, incorporate, get a bank account, rent
some space, grab some computers and make a web site.
The CEO signs all of the cheques. Every once in a
while, employees ask to be reimbursed for expenses. One
guy runs off to Staples, puts $500 on his credit card,
buys mostly for the company, but adds a nice desk lamp
for his apartment, which he rationalizes will help the
business and submits the total bill for re-imbursement.
Crunch time for the first alpha release means employees
are working nights and weekends, not documenting
anything they are doing or how much time they are
working. Often at night, the “work” devolves into a
frag fest on the new HALO video game release. Contract
workers are hired to help with the deadline. They work
at home and keep chunks of the source code on their
computers, even after submitting their work. The CEO
hires his wife as the “accountant” and doesn’t tell
anyone, which is OK because no one ever sees her or
knows she is getting a paycheque. The CTO pays for the
development tools on his credit card, is reimbursed
fully (eventually) and takes the dev tools home to
install illegal copies on his computer so he doesn’t
have to pay for them. In fact, the entire office is
running off of one copy of XP and one copy of Office.
Eventually, the bucket behind the desk of the CEO
becomes so full of invoices and receipts, it is
indistinguishable from the trash can and is accidentally
recycled, leaving no paper records of the past year and
no electronic record because even the simplest
accounting software was not used. No one knows what a
payable is or which ones are beyond 90 days until the
guy from the computer leasing place shows up to re-claim
the PCs.
All of the foregoing examples are real.
Identities have been hidden to keep the embarrassment at
a low level. I have enough stories like this, about the
back office functions in a start-up, to fill ten
columns. I have done diligence on companies that
existed for 5 years and the accounting system in place
was a chequebook and a bank account. Cash in, cash
out. It was seat-of-the-pants financial management of a
company with nearly a million dollars in service
revenue. No formal record keeping at all. Fraud?
Embezzlement? Improper expenses? Who knew? Only the
CEO.
From the very beginning of any business,
hire an accountant. Get a financial system in place,
even if it is a $300 Quickbooks software package. You
need a bookkeeper to enter all of the payables and
receivables and an accountant to create a real time
system to allow you, the CEO, to know what is happening
with cash. It also must be “accountable”. You need
signing authorities and review of major expenses. You
need to set up procedures for expense reporting and
policies about who purchases and what expenses are
allowed {Purchasing policies are critical to managing
cash and are the most often overlooked aspect}. You need
someone to go through expense reports in gory detail and
match the reports to the policies. If you are in a big
company, all of this sounds like kindergarten basics
because you have these in place. Exactly. You are a
big successful company because you executed on your plan
and execution does not happen without best practices in
your back office.
In the beginning you don’t need a full
time controller or even a bookkeeper. These functions
can be outsourced as well. But be sure you set the
policies and understand the procedures across your
company before you just hand off the responsibility.
I’ve seen companies with contracted accounting and
outsourced payroll processing have problems getting an
audit done because they failed to let every employee
know the policies and the rationale behind them. It’s
not enough to create a back office, you need to have
everyone in the company understand who is accountable
and what they need to do to make the company
accountable.
Human resources is often mistaken for
hiring and firing only. So a start-up CEO has that
covered under their role with a small number of
employees. Documentation in HR is as important as in
technology development and accounting. How are people
hired? How are they evaluated? How are bonuses
handled? How is firing handled? What is the difference
between “for cause” firing and layoffs? How is the
payroll handled and who looks after the payroll tax
adjustments? What are the job descriptions and who
handles the updating of these? What about
confidentiality, non-compete and disclosure of know-how
and intellectual property? Can the employee moonlight?
Can they work at home? What is the policy about playing
games, surfing for personal things on company computers
and network, pornography or hate mail, instant
messaging? Who enforces these policies? Does anyone at
the office know even the most basic tenets of the
Employee Standards Act that governs, and in some cases
supercedes, the policies you are making up? Who does
the benefits for your employees? What’s the procedure
if your lead programmer is checking into a substance
abuse program and he wants to take a month off in the
middle of your crunch time? What happens if the dev
team gets in a fist fight on your company premise and
your QA lead has a broken nose?
Yikes. You had better be scared about
HR. It is the absolute last senior hire of any
start-up. You need someone to look after these issues
and deal with the all-too-human aspects of running a
technology company in which people are your greatest
asset. Outsourcing the “hard” HR aspects (benefits and
payroll) are easy. The hard part is trying to go
part-time or not at all when it comes to all of those
“soft” HR issues that can lead to complete destruction
of your company if not managed. A very good,
experienced operations person with HR experience but a
broader knowledge of development and/or accounting is
the perfect hire early on in a start-up. It helps you
focus on the product and the tough strategic parts of
your business. If such a person exists, grab them
because it saves on the hiring of two or three
specialists in the various aspects of the company back
office. Part-timers are usually a cash-saving choice in
the beginning as well.
Get the basics in place right from the
beginning. Investors will be hesitant to invest if the
company lacks the basics. Investors should do enough
diligence to find this out. Especially VCs, who turn
your company upside down and shake it before investing.
You can’t execute on the growth strategies if your back
office is an anchor.
Letters From Last Time –
{Ed.} This is a letter from the
founder of Creo, who happened across my column about the
sale of Creo (Learning Latin With Creo) a little less
than two years after it was posted…
Erratum: a Latin word meaning a small error in otherwise
excellent article. I did not choose Vancouver by
throwing a dart at the map- far too dangerous a
procedure considering the vast empty spaces north of
here. I chose it the way I do all major decisions in
life: consulting a palm reader. Now, if you believed
the dart story there is no reason you would not believe
this. Seriously, and for sake of accuracy: I chose
Vancouver by following the isotherms on the world map
and looking for an English speaking place located on a
warm isotherm that has no mandatory army service (I was
serving in the Israeli army at the time), as well as
nice scenery. Canada has a wonderful reputation anywhere
in the world and that was a factor as well. Being the
decisive type I told all my friends that I'm moving to
Vancouver and will spend the rest of my life there. So
far so good.
Cheers, Dan
What Do You Think? Talk
Back To Brent Holliday
Something Ventured is a bi-weekly column designed
to supplement the T-Net British Columbia web site with
some timely, relevant and possibly irreverent insight
into the industry. I hope to share some of the
perspective and trends that I see in my role as a VC.
The column is always followed by feedback (if its
positive or constructive. I'll keep the flames to
myself, thanks).
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