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A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

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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