About the speaker

Alex Oppenheimer is an investor and advisor to startups. Listen to learn how he views revenue operations from an investor perspective and how to scale startups through better business practices and the right financial metrics.

Building the Finance Skillset in Startup Companies

Barry: Alex, please tell the audience more about yourself. You’re an investor and advisor. Could you tell us how you became passionate about rev ops and helping startup companies in that regard?

Alex: Absolutely. So I start from the beginning because in a nerdy way, it all starts when I was like, I don’t know, 10. I grew up in the San Francisco Bay area in and around technology and finance. My dad’s been a CFO for the last 25 years, and so I grew up with stocks, IPOs, and technology. I went to Stanford and studied mechanical engineering then took a job at Morgan Stanley in technology investment banking, naturally. I actually felt like it was a very clear entree for me. Even though most people are like, “Wait, you didn’t study business?” I’m like, “Well, we did seven weeks of training at Morgan Stanley and I took two finance classes at Stanford.” So I knew plenty.

And I spent my two years at Morgan Stanley in investment banking doing the high-level stuff, valuation, the positioning, really getting to work with some amazing companies and see from the top-down, high level, at the end of the road or somewhere in the middle of the road what makes them so great and how to best communicate that to investors. And I pretty quickly realized that I really like that exciting period for companies and I like companies that are doing cool stuff.

And so I then went and joined NEA on the east coast doing early-stage or mid-stage venture capital investing, series A, B, and C, enterprise software companies. And while I was there, I pretty quickly started spending a lot of my time with the portfolio company. So my first year I did 10 investments and then would go to the board meetings, but then stay and work with them for the next day. And what I recognized was a lot of these companies just didn’t have the finance chops. They have great leadership, great product, great sales, marketing, and recruiting, but they just didn’t have that rigor and that perspective that was going to help them organize and do resource allocation efficiently to grow.

And so I saw an opportunity and a need for myself to say, “I’ve got this raw finance spreadsheet skillset. How can I take that into companies and bring them a skillset and a function that they don’t have at series A or series B, and also learn a massive amount about how companies actually work myself?” And so I really got this amazing front-row seat working with companies and learned a ton.

And so after three years there, I decided to move to Israel, and that was the summer of 2016. And I worked in Israel for a year in corporate VC, and then I left went out on my own. And pretty quickly what started happening was all these companies started reaching out asking me for help doing the same stuff I had been doing at NEA, and it was coming from a few different sources. One was from some of my NEA portfolio companies that I had worked with, which made me like, “Well, there’s a guy who replaced me and he’s very smart. Why do you want me when you can get him for free?” And then friends’ portfolio companies, friends who had their own companies were asking for my help.

And so I really doubled down on that, and that’s really my passion. I view my role as being this information and wisdom sharing layer across a bunch of companies. And so I’ve got this unique perspective now where I’ve been what I call waist-deep in several dozen companies, and whereas I find some people could give you one paragraph about 100 companies and some people could write you a Ph.D. dissertation about one or two, I’m kind of in this middle ground.

And so I spent a couple of years just working with companies and a day a week going pretty deep on the operations and trying to, again, from that valuation, what makes companies great perspective, better understand the core. How do we quantify what’s really going on in this company to map it all the way up to what makes this company great?

Aligning Finance Metrics Across Corporate Functions

Alex: And so I worked with some great companies here in Israel, Europe, and the US, and realized a couple of things. The first was that I was doing really valuable work for them in spreadsheets, going through Salesforce and getting their pipelines and HubSpot and getting their marketing funnel and getting their finance data from QuickBooks and getting their payments data from Stripe, and getting product analytics data from wherever they had it and doing my own ETL and bringing it all together and then getting a really nice, clear picture of what really matters in this company, and being like, “Wow, this is a great way that we can allow investors to come in from the top and double click down in the right way to understand what’s really going on and why that matters,” without needing to get a Ph.D. in this business.

But then I thought to myself, I’m like, ‘Well, the founders also really need this stuff.” Yeah, I can pull it all together manually, and that’s very batch-oriented, once a month, once a quarter, once a fundraising type of thing. But this information is critically and strategically important to how you choose to run the business. And so doing it manually doesn’t really make sense. I always tell founders, “If it’s important enough for investors or board members to see once a quarter or once a year, it’s important enough for you to see every single day.” And if there’s detachment there, then you have a problem. And so I’m very big on aligning business metrics from top to bottom and then across the different functions of the company.

So one thing led to another, and I realized a couple of things. One, we needed a solution that was much more operational for these companies. So I teamed up with my good friend, Brian, who’s a Salesforce guru because Salesforce is the most powerful operating data hub that there is. Connects to everything and you can do everything there. And so, whereas I find myself being like, “Wow, I wish there was a place we could pull marketing, sales, finance, product, data all in one place.” And well, there is. It’s called Salesforce. It’s not the simplest, out-of-the-box thing, but it’s extremely powerful.

And so I realized that if we go top-down with companies, then that can work really, really well if we’re backing it up from the bottom up. And then I also realized that if I can work with founders really early on in their life cycle, I can help them understand the importance of some of these key things without making it overbearing and taking away from the focus of building products, getting customers, and bringing on great employees.

And so I like working with really early-stage companies. The problem is that those companies can’t pay you and they need money. So I was like, “All right, I guess a fund is a good method for that.” So I decided to start investing in early-stage companies and pretty efficiently bring that perspective to the table.

Do Metrics Matter to Series A Investors?

Barry: Oh, that’s awesome. And that’s one of the reasons we wanted you on this podcast so badly was because this is a very different perspective. So let’s talk about early-stage versus late-stage. Spreadsheets are very classic for investment banking, for companies before IPO. I hear that series B investors look at spreadsheets, but series A investors don’t look at spreadsheets. So what’s your perspective on that?

Alex: I was actually just thinking about this. I have some pre-seed investments that are now raising seed, and everyone says now, “Oh, just say you’re doing a seed because in seed, no one cares about metrics. Multiples don’t matter.” Right? There’s some truth to that. I say, “Yes, but they’re going to matter when you want to raise a series A and series B.” So you need to be able to paint a picture and draw lines from where we are now and where we’re going to need to be and what we need to do to grow into our valuation.

In the early stage, I believe in the spreadsheet or any modeling tool. I’m invested in a company called Causal, which is a great non-spreadsheet modeling tool. It’s very efficient and connects to all sorts of data sources. And again, I’m from investment banking, so if I have writer’s block, I just open up a spreadsheet and start playing with it. It’s like a canvas for me. And I feel like you can get your hands around data and really viscerally understand what’s going on in real-time, which is great, except when you have too much data. Then you need other tools.

I actually have a company that helps with that as well, called Row 64. Just plugging the portfolio. But I think that the exercise is more important than the result for early-stage companies. So one of the things that I like to do with founders is I’ve built dozens and dozens of models, and I have all sorts of templates and things that I’ve built and simplified because my goal is it’s got to be simple and ownable by a non-financially savvy founder. Because it doesn’t matter if I can do it and I understand it. That’s not what matters here. What matters is can the person who’s running the business really wrap their hands and mind around the tools that they need to run their business so that now they own it and it’s what they need?

And so I find that the exercise of working through it in a simple way, and bringing the experience that I’ve had working with all these different companies to those conversations and say, “Okay, now this is yours and you own it and you can run with it.” And we can make detailed modifications along the way, but the exercise and concepts I find, especially in an early stage, are significantly more important than anything else.

The Startup Environment in Israel

Barry: That’s really interesting. Maybe we can talk about the financial and business metrics that you see are important. But before we get there, there are some other interesting things I wanted to ask. Israel versus the rest of the world or America. Have you seen that people are thinking differently here? Is there more of a go-fast environment in Israel where they need to step back and do the exercises? Or what are your thoughts on that?

Alex: So I’m not going to try to compare Israel, Europe, and the US because you have just vast differences in diverse groups of people and experience sets. I will say that Israel is a little bit less variable in the background and experience set of a lot of founders just relative to other geographies. And that’s mostly because of the size, network, geography dynamics, and ecosystem here, which is extremely powerful, but I actually think it can create some blind spots. But I’ll answer both of those questions about the metrics and that other dynamic.

And I think that there’s been a trend over the last, I don’t know, five years that just SEO content, clickbait is what runs the market. I’m sure you would understand this better than I do. And it seems like, again, this is one of my theses, but I think that Facebook ads and Google ads are a little bit played out for anyone except Nike and GM because they’re priced to perfection. There’s no more arbitrage, so you have to find other ways. And so people just started blasting out content.

And one of the issues is that there’s a big difference between what people need to hear and what people want to hear. And that’s very hard when there’s a whole bunch of stuff that people want to hear because it sounds nice, simple, easy to digest, and familiar versus what they need to hear, which is customized, nuanced, deeper, and more complicated. And it’s hard to get that stuff through.

It’s like I met a company once and they were like, “Yeah, this is our MRR,” and that was like their north star metric. And I was like, “That doesn’t make any sense. You sign five to six-figure multi-year deals. I don’t care about your MRR. I want to hear your ARR, because that’s a nice, relatively unified metric, even though not even everyone agrees on how that’s defined on a couple of different vectors. But you should be focusing as your north star,” I was like, “bookings TCV. If you’re signing multi-year deals with expansion, that’s what your sales team is doing. That’s what your product is delivering on, that’s what I want to hear, not your MRR.” But they read some blog posts that said MRR, this is how you do it. And it was like, well, no.

Unit Economics Make Venture-Backed Business Work

Alex: In seeing all this stuff again from the top down and then from a little bit from the inside out, I realized that you really have to just boil everything back down to the core fundamentals of what makes a business work, especially a venture-backed business, which is the unit economics. And that’s another term that’s been hijacked and spit back over like marketing content to people in oversimplified ways.

But the core idea is that you have fixed costs. You have variable costs. You have recurring costs, and you have non-recurring costs. And then you have time revenue and recurring revenue. And those are the six components of your unit economics. And those don’t actually map to accounting. They also don’t map to cash. So you have to be clever, creative, and really understand what those dynamics in the business are, how the money moves, what that represents, and what’s earned vs. what’s had vs. what you’re at vs. what you did. These verbs are actually very important, and you’ve got to pick and choose what those right things are for every business.

One of the things I always dig on is when people come to me like, “Oh, the unit economics are working,” whether it’s an investor talking about one of their companies or it’s a founder talking about their own company, say, “Yeah, the unit economics are great.” I say, “Okay. Well, what’s your unit?” Because if you don’t know what your unit is, you can’t talk about unit economics. And everything else is just some quick hack proxy for that. If you can narrow down what your unit is, then great. If you can’t, then you can’t talk about unit economics. 

If you haven’t gone through those things honestly, there are all sorts of mistakes that happen in terms of, for example, one-time vs. recurring costs. For example, if you have service people in your organization who some do implementation but some do ongoing services, and you look at unit economics and say, “All right, what did we do in the first month from a services perspective?” Oh, but that’s just implementation. Okay. But does it continue or not? It makes a massive difference in the unit economics of that business.

CAC for Startups 

Alex: People say, “Our LTV to CAC is this,” and it’s like, “Oh man.” Okay, let’s start with LTV. Your company is six months old. You don’t know what the lifetime value is of your customers. Now, to be fair, there are certain industries where you know the average lifetime based on the behavior. Like SMB, cybersecurity, you typically keep your customers for two years. So okay, you can say like, “That’s our lifetime is two years.” Then you know that you’ve got to recover that in CAC on a gross margin adjusted basis, again, adjusting for those variable and recurring costs.

But in a lot of businesses, they’re doing very simple math. You’re basically doing annuity math from a financial perspective where you’re just taking what the ARR is and dividing it by the churn, which is actually bond math. Again, it’s very finance-y, but it’s like a gross oversimplification of a sum formula, like the Sigma thing. It’s like the sum formula from zero to N of every year. And then you’re doing some sort of actually churn rate and discount rate built into that model, and then you’re taking that from one to infinity. And then that resolves itself to that ARR over churn, like LTV. But in reality, you can’t assume infinity. So I don’t know, lock in a couple of years, but don’t forget to discount it, also, because of the time value of money and the risks associated with it, both of those things.

And then on CAC, again, and I’m sure you understand this, attribution is extremely important. You have to look at the sales cycle, which again, trying to do a really detailed attribution on every single thing is very hard. I actually think that you don’t want to get into that level of detail, because one, it becomes this zero-sum dance, where you have to account for every dollar spent, and it becomes almost impossible. You also need to average it across everything. So again, you’ve got to recognize what’s paid vs. what’s organic, do it both separately and together. Then you have to look at the timing of those things.

A lot of companies look at CAC and they just say, “All right, what did we do last month? What did we spend on sales and marketing last month or last quarter?” It’s like, “All right. Well, if you have a six-month sales cycle, again, the cash needs, almost like the working capital needs of your business are there, because you’re paying sales and marketing upfront and not getting money until later.” But businesses typically grow. If you actually do your attribution properly on, again, I don’t use LTV to CAC as a metric, because it’s just whatever you want it to be.

But if you look at CAC payback, which is a lot more tactical and understandable and measurable objectively, your CAC number becomes lower, because all of a sudden you’re looking at marketing expense from six months ago, and marketing expense from six months ago was probably lower than marketing expense was last month, if you’re a growing company. And that’s where those leads came in. So you have to look in your Salesforce and your HubSpot to figure out the aging of those things on average.

There’s a real exercise to figure out what that CAC is. When I do my financial models, I figure out what my offsets are on CAC, and then I lock in a CAC number and use that for the rest of my calculations. But I’ve found that whether you’re using SaaS magic number, some version of LTV to CAC, CAC payback, SaaS quick ratio, whatever you want to do, if you really just focus on the fundamentals of those six things, the cost side, and the revenue side, then those metrics just fall out. They’re output metrics.

The Role of the VC 

Alex: So I think, again, this is a little, I don’t want to get too ranty, but part of the issue is that when I started studying these metrics when I was at NEA, my partner comes to me and says, “Hey, here’s a bunch of research I found on the internet on SaaS metrics and subscription business models. Learn it and study it. Do your own models. Do your own research. Great.” And then he handed me a stack of board decks this high from NEA’s entire software portfolio and said, “Look at them. What are they talking about? How are they talking about it? Because they are the ones that own it. The operators own it, and they really understand it.”

I was able to look through that. I was able to talk to those people. The problem is that a lot of the content is published by VCs now, and VCs are lifting what they hear in board meetings often and then spitting it back out to founders. But ultimately the job of a VC is to diagnose a company and understand what’s it worth and what’s it going to be worth, which are intrinsically tied together in the business. But that’s not how. That’s just what.

Using diagnostics, I always compare it to like if you imagine going to the doctor and the doctor says, “You have high blood pressure and a fever,” and you go, “Okay. So what can you do for me? What do I do about it? Do I need to take medicine? Do I need to exercise and sleep more? Do I need to eat differently? Tell me what to do about it and how to go about it.” And it’s just hugely different.

Even a more exaggerated version of that. At one of my portfolio companies, I sent them my template, and we were walking through it, and they were like, “Wow, we’ve shown our numbers to a bunch of investors, and a lot of them just say, ‘Well, you’re not growing quite as fast on the top line as some of the other companies that we’ve looked at.'” That’s like why would you even say that? Right? That’s the equivalent of going to the doctor, and I’m not comparing VCs to doctors by any means, but, again, just this diagnosis approach only. But could you imagine even less than a diagnosis, just like, “Hey, the last guy who was in here is healthier than you.” So unhelpful. Now you have psychological issues.

Mapping the Sales Cycle

Alex: So yeah, just digging deeper and then rooting back to those core things I find is the only way to make it work. And then that’s just step one on the philosophical level. Then there’s how do you operationalize that and make it come alive? And that’s why I like having my rev ops team, who’s awesome because we can actually map out processes. And then I always say great models begin in PowerPoint. We map everything out with the company, and we do that on a conceptual level, and then we actually do it on a tactical level, like processing the different phases in the sales cycle and how leads move and the roots back. And then we do both of those.

Then we pass it to the Salesforce team, and they actually make that come alive. They make it come alive in a way that is simple. It’s not overbearing. It’s not going to be a massive amount of work for salespeople to actually use it. But it’s going to throw off the right information and data and metrics and define things in the way that they need to be defined. And then as the company scales, we can unlock all these different features to add the complexity of different layers and different channels and all that stuff that comes later.

Barry: Absolutely. I thought it was very interesting that you said it starts in the PowerPoint and not the spreadsheet, or Causal, one of your portfolio companies, but it starts in the PowerPoint. It’s kind of like that brain dump, if you will, or brainstorming, and then breaking down into the pieces. It’s an exercise that’s really cool.

Alex: There’s one other thing I wanted to say on the unit economics piece. In a lot of SaaS companies, your unit is just your customer. And so people don’t necessarily feel the need to do all this digging into the ins and outs and the concepts and what are all these things, because it’s like, “All right, this is a well-trodden path. We’re doing enterprise sales, right? We’re not reinventing the wheel here. Thousands and thousands of companies run the same thing, and the unit economics work as long as A and B.”

And it’s like, again, because it’s so well studied and run that it just works. But as soon as you start throwing in variability in there from a business model perspective, all of a sudden you have usage-based upside, right? Or you are acquiring customers differently or your prices are low, but there’s some viral component or there’s a marketplace aspect.

You have to go all the way back down to the first principles. You can’t just hack it at that point. Again, if you’re doing five to six-figure enterprise sales, all right, there’s a playbook here. Great. But as soon as you want to add some complexity to that, there’s a real question, and you have to go back down to the basics, which is not a painful exercise. It’s like an hour-long thing to really do that, and you can save yourself a lot of trouble down the road.

Barry: That’s a great caveat, asterisk. That’s only one hour if you have the right direction, by the way. But I think people are scared. First numbers, spreadsheets, and people sometimes I’ve seen from a founder perspective. I forgot what they call it, but the ostrich in the sand. They don’t want to hear what’s going on, and they just know that they got money, so the VCs believe in them, and they can spend that money now. And exactly, SaaS will work it out or the economy will work it out. That’s also some perspective I’ve seen.

The CEO Role in Startups – Driving Strategic Direction

Barry: In these meetings, are you meeting with a rev ops person? Is it the CEO and CFO? Who should be in the meetings? When should people, if they don’t have your Salesforce services or added value services, when should they be doing this themselves and who should be running that?

Alex: All good questions. So I find that obviously most early-stage companies don’t have CFOs and shouldn’t unless it’s one of the founders or something and that’s what they do and it’s part of their product or something like that. But I think it’s a CEO-level thing, because, in my opinion, the job of the CEO is to be as much externally facing as internally facing. So the CEO’s job is to manage all the different stakeholders: customers, employees, investors, the government, and everyone who’s involved in the company. And what great CEOs do is they’re able to understand in detail what’s going on in the business and understand what’s going on in the capital markets and what works and be able to take wisdom from one and apply it to the other in both directions.

The more that the CEO, the founders, again, sometimes it’s the office of the CEO and there’s a couple people in that group, that they’re well versed in that and they have those tools and those skills to think through that stuff, the better off they are. Now, it shouldn’t become a focus. Again, the CEO’s job is to drive great products, build an amazing organization, and hire great people, get great customers, raise money when necessary, not get lost in the nitty-gritty. But if you can create connective tissue and tools that make all of those things easier, then that’s great.

Barry: Office of the CEO. What positions are usually in that?

Alex: That’s often the founding team. Sometimes it’s the CTO. Like in Israel, obviously, your average company has a CEO and a CTO, maybe like a product officer in the founding team. That’s just what we have here, which is great. Sometimes it’s really CEO-driven, and the CTO is more executing on the R&D side. Sometimes it’s really like they’re a team and one of them is a little bit more business-minded and a little bit more technical. But then if it’s like a Dev Ops platform, then the CEO would be the CTO at any other company.

So you see a lot of different things, but it’s really, again, who’s driving the strategic direction of the business? And I find that, again, if that person who’s driving and hiring and product and pricing and sales and is bringing all that stuff together, whether that’s one, two, or three people, they all need to have that mindset around, “All right. As we build products, let’s look for ways to create radical alignment with our customers so they’ll pay us more. Let’s make sure that we’re not graduating our best customers. Let’s do feature prioritization based on what’s going to make us the most money in the long term.”

I mean, it’s not about living five years from now, because the fuse on any startup is very short. I heard the definition of a startup once is a company that’s always almost going out of business. So the fuse is short, but that doesn’t mean that you can’t also look ahead and then come back. And again, I think that’s what great founders do. They’re able to attach the vision where they want to be and what really macro thing they’re trying to solve and then bring it down into today and prioritize properly and manage that. To me, it’s a key trait of a great CEO.

The Revenue Operations Perspective in Startups

Alex: And so then the other thing was the rev ops perspective. And so there are a lot of different definitions also on what is rev op? I think we can all agree it’s revenue operations, but what is involved in that? Some people think it’s just finance, invoicing, billing, and deal desk. Right? Some people think it’s just sales and just getting deals done and accelerating revenue or something like that. Some people think it’s just the go-to-market flow. There are so many. My view is that it’s putting everything together. Revenue involves product. It involves the go-to-market flow, and it involves the quantification of that, which happens in finance. And it doesn’t just quantify there. Also, the rubber meets the road and the bank account.

So really being able to have the perspective around all of those at the same time, I think, is the key. And again, early on, it’s typically going to be the CEO, CTO, chief product officer, who really has their fingers in all of those different pieces.

One of the mistakes that I see a company make early is that they will hire a sales, sales ops, sales manager type of person early who came from a business that they feel is similar to what they’re doing. And then they say, “All right, so just do it.” And my point is that that person might be able to do it, but it’s highly strategic how you define your processes because that will ultimately define the quantitative success of your business. It’s like if you’re incentivizing salespeople to do X, but your investors care about the Y, and I’m saying your investors care about it. I mean the broader capital markets care about Y, then that’s a problem. You have misaligned incentives, and that can happen along the chain.

The mistake is just like kicking it down to someone and being like, “Oh, this is not that important.” No, I actually think we all know that data is the lifeblood of companies and of the world now. And so to ignore workflows, that doesn’t align with the idea that data is … What is it? The new oil, whatever. We really need to understand it from a strategic level down and implement it this way. And then, again, it’s a conversation, “All right. Well, you want to do it this way, individual contributor on whatever team. Well, let’s talk about why and how that fits into the broader picture of what we’re trying to accomplish as a company.”

Obviously, in any company, you need buy-in from all of the people around the table. You can’t just force things down on people. That’s not a great way of doing it. It needs to be collaborative, but some of these conversations are uncomfortable because there are certain people that for generations have gotten away with not having what they’re doing quantified. Now that we have data on everything, you can quantify everything. And dollars are the unit that we use to compare the efficacy of anything that we’re doing, which is then how we do resource allocation, which is what finance is.

Some people don’t like having to quantify what they’re doing, but I’d say, “Okay, well, look, it’s a business, right? It needs to be quantified.” By the way, even social goods and non-profits, they still quantify their impact. You have to be able to quantify what you’re doing. Now, you might have to get creative with exactly how you do that, but it needs to be with the macro in mind of aligning.

Okay, what is the end effect of this? Where will we see it come out? Great, you’re doing brand marketing. Awesome. Where do we see that come out? Do we have leads that come in or is there a way that you can test, how it helped the paid acquisition that we got by hitting people more times? Is there some other broader thing that we want to maybe put on the back burner for now and say, “We think this matters’? Okay, but now it needs to be on the strategic priority list.

Those conversations are going to always be awkward, because someone’s coming in and saying, “All right, tell me what you did this month. What do you have to show for it?” It’s like, “Oh, well, I did a lot of good stuff.” And it’s like, “Okay, well, let’s figure out a way together to quantify that. Because I agree, it’s good, but let’s quantify it so that when it’s not just you and it’s 100 people, hopefully, then we can actually run a machine rather than have it be touch and go at a small scale.”

Barry: Yeah, and quantify specifically to revenue, which is dollars.

Alex: I mean, everything comes down again to that. In accounting, the terms are revenue, gross profit, and operating income. But those dynamics, especially in a subscription business where it becomes a calculus problem instead of an arithmetic problem, you have to lean on those concepts, the fact that revenue is earned rather than just going with the hard definitions of what the government says are these things in these categorizations.

For example, this is something that gets totally missed. When I was at Morgan Stanley, we used to value SaaS companies on price to free cash flow and DCFs, because they had cash flow, so you could do a DCF. And then the revenue multiple was really just the output relative comparison. Say, all right, a dollar of revenue here is worth X versus a dollar of revenue here is worth X times 1.5 or whatever it may be.

And it’s like that output that gives you, but it’s not a core way of doing it. But when you lack those other financial metrics, people just lean on that. And then as we saw over the last two years, that got completely out of control because there was no basis for it in anything fundamental. It’s just a relative comparison, like 10 X revenue, 50 X revenue. These things on their own have no basis. So they have to map to other more fundamental ways of looking at businesses.

I wrote a post about proxy modeling and ultimately how you really have to go back down those steps to understand what it really gets to. But what happened to the free cash flow? Two things happened. The first is that people realized that if you invest a lot more and thereby burn a lot more, you can grow these things a lot faster, and the growth rate brings in the entire DCF analysis and increases the value of the whole thing. So let’s go for it. But again, that, like most things in life, has been oversimplified and all the nuance went away and it’s just like, “Oh, just grow as fast as possible.” And now people are saying, “Growth at all costs, reasonably responsible growth,” these sort of qualitative things. That’s one thing that happened.

Then the other thing, once cash flow went out the window, people forgot that the whole point of a SaaS is that you get people to pay upfront for revenue that will be recognized over the next 12 months. And again, the cash thing is different from the revenue thing is different from the bookings thing. I have a whole definition list of what all these things mean. But you’ve got now it’s like people are like, “Oh, yeah, it’s an annual contract, and people pay monthly.” Well, that’s a monthly contract because there’s absolutely no way to enforce it.

If they quit, you’re done. So the contract’s over. What are you going to do? Are you going to hunt them down and get you to pay the $100 a month? But if they pay you $1,000 on January 1st and then the company goes out of business on June 5th, they’re not going to be like, “Oh, can we get 500 bucks back?” No, you got the cash. It’s yours. Great.” And by the way, you recognize revenue for the rest of the year because a company still has access to that platform.

We need to bring back cash flow, but we need to not make it really overly simplistic either because revenue does matter. You need to deliver value to your customers. So even if you collect upfront, if they churn at the end of the year, then that defeats the whole point of the model. So anyway.

The Most Important Metrics for Startups

Barry: Absolutely. We only have three minutes left. So I do want to ask one last question and then tell people where they can find you if they have any questions or follow-up questions. We touched on this before, but the charts that you share with your founders with the key business metrics. Do you want them to share that with their team, their sales team, and their marketing team? Should it be on a TV, like, “These are our business financial metrics. These are our growth metrics. These are the cash flow that we’re gaining, and this is how much it costs for that”? Or should it be more private?

Alex: Like every good answer, it depends. I’ll be going through stuff with founders and we’ll be building charts, and I’ll say like, “Ah, that’s the one. That’s the one that should be on your TV in your office for everyone to see because everyone can connect to that and relate to that and they can see how what they’re doing impacts that.” And there are other things where I generally say that every company should have three sets of metrics. 

The first set of metrics is for the executive team, and it’s a lot of stuff and it’s several dashboards. And most of it is potentially negative leading indicators, meaning if something is going wrong, we will see it here. Right? But also those key north star metrics.

The second set of metrics is for your board, where you’re removing most of that, except selectively where you think that their advice might actually be helpful and so that you can you manage expectations. 

And then your third set is for new investors, where it’s like, “All right, here are our three charts that we care about,” and boom, boom, boom. And then all that matters is long-term consistency. Can you continuously hit those?

We used to do this analysis when I was in banking. Every quarter, every 10Q, every 10K, do you want to be disclosing that? Is it something you feel like you can rely on and you’ll have a feel for it in the business? Whether it’s a leading indicator or a lagging indicator, it actually just makes sense. And the answer is that there are certain things that always matter. You have to figure out what your right top-line metric is, but you also need the standard stuff.

Barry: Absolutely. So in the next season, we’ll get you that on the podcast to discuss more about financial and growth metrics for startups.

Alex: We can pull out the spreadsheets.

Barry: Exactly. So if someone has any questions on this podcast or if anyone wants to see some of your posts, can they find you on LinkedIn? Do you have any other platforms that you write with?

Alex: Yeah. So I’m on LinkedIn. I have a Substack. I also have a Medium. They all basically have all the same stuff. And I’m on Twitter, so yeah.

Barry: Okay. Perfect. Well, Alex, this was really informative, really interesting, and definitely a different perspective from a lot of our guests. So I really appreciate that perspective and looking forward to staying in touch and staying connected and learning more from you.

Alex: Absolutely. Thanks for having me. Have a good one.