VIDEO: Startup Finance For SaaS_Founders – Peter Reinhardt
“Finance can be an amazing enabler for your business” says Peter Reinhardt CEO of Segment, you should “use finance as a weapon to grow”.
In this video Peter illustrates why Finance is a very important skill for you to learn – for building your pricing strategy, forming master service agreements, arranging credit with your bank, and fueling growth.
In this video you will learn:
- 6 x tactical finance and accounting tips that you can use as a SaaS startup founder
- Why you need to get a much better handle on your finances
- The difference between strategic finance / financial planning and analysis for SaaS startups
- Why Segment set-up 3 x Bank Accounts for their business
- Why a ‘Master Services Agreement’ is your key to getting high net revenue retention and high expansion rates across larger customers
- and Why ‘Annual prepayment’ in SaaS pricing is one of the most important things that you can get right
Learn how Segment started out, how they raised $100 million in funding (they now have >19,000+ customers and 300+ employees) and why you should consider hiring a part-time CFO for your SaaS business. As Peter says, understanding Finance is “intensely valuable as you’re building out a software business” Click play in the video below to hear more.
* This keynote was presented at SaaStock18 in Dublin. If you are a Startup based in the West Coast wanting to change the SaaS world as we know it, Our Startup Program is for you 🚀. Don’t miss out – applications close next Friday, 23rd August.
Peter Reinhardt is one of those people who always dreamed of going to space one day. He even studied math and aerospace engineering. However in his last year of college, he dropped out to start Segment with three college friends. He scaled the company to 130 team members in five years and learned several tough lessons in his founder’s journey. One of the main things he has learned are what are the things you can delegate and what are the things you cannot delegate as a CEO.
Start of Transcript
SaaS Finance – a very important skill for you to learn
– Okay, so for any high growth startup, especially SaaS, it really helps to have a deep knowledge of finance if you’re actually going to build a company. And I think most technical founders actually really undervalue finance.
So actually, how many of you here in the audience right now are SaaS founders? Okay, almost all of you. So, the thesis today is that really, this is a very important skill for you to learn. And it’s really helpful not just for building your pricing strategy, but also for everything through to paying your employees.
So, I’m Peter, and in 2011, I started a company called Segment. And I started with a couple of friends from MIT who you can see behind me. And to give you a quick intro, Segment provides customer data infrastructure for companies to put their customers first. So if you’re revamping your data pipelines or rebuilding your marketing analytics stack or rebuilding your analytics stack, we can help you, that’s what our core product does.
Starting Segment and raising $100 million in funding
So since then, since starting the company, we’ve raised about $100 million. We have about 19,000 customers today. The likes of Levis, IBM, Intuit, et cetera. And we’ve grown from just four founders to about 300 people today. We work out of San Francisco primarily, with other offices in Vancouver, New York, and actually here in Dublin.
Understanding accounting as a Saas Startup
But let’s go back to 2011 for a second, when we first got started. And back then we had no real experience or knowledge with finance. We didn’t understand accounting, we didn’t understand profit loss statement, we didn’t understand anything about making financial projections. And that was really sort of our strategy. That was, yeah, you’re laughing, that’s right. But it actually worked, and it worked until it didn’t. And the until it didn’t is when we were about a million in revenue, and we raised a $15 million series A from Excel. And I saw this cash land in our bank account, the wire transfer, and I thought to myself, “Holy shit, we really need to get “a much better handle on our finances “now that there’s so much money “moving in and out of all these things.” And so I made it a priority to actually understand the basics of finance. And on a flight to Australia, I spent the 13 hour flight reading a book on accounting, and actually started to get a sense of the double-entry system and all these sort of core finance topics.
Six tactical tips to understanding SaaS Finance,
And since that moment, I’ve learned a lot more about finance. And I thought today, I would actually go and just share six very tactical tips that hopefully you can use as startup founders yourselves as you go through your journey. So, the first is that there’s really two big pieces of finance. One is accounting, and the other is strategic finance, or financial planning and analysis.
But what do these things actually mean? Well, accounting is rigorously pedantic. It’s all about what has happened historically. So, it’s about understanding where revenue is coming from, what you’re actually spending. And frankly, that’s probably a little boring. That’s not really what we like to spend our time on as founders.
Strategic Finance in Saas
And so instead, strategic finance is really where most of us spend our time. It’s about looking forward. It’s about understanding projections and what’s going to happen in the future, understanding risk. And I think, most founders really should be spending most of their time here, potentially hiring a part time CFO to help, but this is really where you should be focused.
So accounting may just seem like score keeping, but I think it actually can be very strategic, and is a source of, actually, a significant number of failures. So how many of you are familiar with a company called Zirtual? No one, okay, well, they were a company, past tense, that actually went out of business because they had a small error in the way they were doing bookkeeping around payroll, and they weren’t properly keeping track of what was actually happening.
3 x lessons in Accounting and Finance for SaaS Startups
And so basically overnight, they realized that they were gonna have to lay off about 400 employees. And I think with that in mind, there’s three unique learnings that we’ve had about accounting that are worth sharing. The first is how to structure your bank account. Sounds straightforward. Hopefully, you’ll learn something. How to deal with credit cards. I think a lot of startups struggle to actually get access to credit. And then third, how you should actually go about contracts as you’re starting to sell to larger businesses.
Bank Account Structure for a SaaS Startup
So first, bank account structure. When we were just getting started, we thought, okay, just like a person, you should have a checking account. That seems relatively straightforward. But then we raised this new round of financing, and we hired a part time CFO. And we had 2 million in the bank and a payroll to hit, and all of a sudden, we started to get nervous about that $2 million just being in a very accessible account.
As our customer base was growing rapidly, we were doing more invoicing, and so we started sending this bank account number out to all of our customers so that they could pay us via wire transfer or ACH. And this started to feel a little awkward, we have our entire livelihood in a bank account where we’re sending out all this information. And so then we raised our series A, and now we had another 15 million in this account, actually 16 million total.
Tip: Set-up 3 x Bank Accounts for your SaaS Startup
And so we needed to be able to spend money easily, but we didn’t want to reveal it, we wanted it to be more secure. And so our part time CFO said, “Well, there’s actually a really good structure “that you can use, which is you basically “split your bank account into three bank accounts.” You have a accounts receivable account, which is all of the numbers that you actually give out to all your customers to receive payments. You have an accounts payable account, where you actually are paying out, and that’s where you actually keep money. And then you do a daily sweep through these accounts, so that you actually keep money in secure places and separate out things very easily.
And so this also has some nice things for your accounting team, in that they can see in one list all the payments coming in and all the payments going out. You also get some interest rate on the treasury bills in your sweep account. So, fairly simple to set up. Most banks like SVB will just do this for you, but it helps a lot with simplifying things.
Using Credit Cards to fuel your SaaS Startup
Okay, the second big learning was around credit cards. How many of you have struggled to get a credit card as a startup? Okay, not many, wow, that’s great. Maybe things have changed since 2011. Well, we have struggled with low credit limits for a long time. And from the beginning, basically every six months or so, we would have the same conversation with Bank of America trying to get a higher credit limit.
And it goes something like this.
They’d say, “What credit limit are you looking for?”
I’d say, “Well, we need at least 20k “for our monthly operating expenses.”
And they’d say, “Okay, well, I have a few questions. “What was your revenue last year?”
And I’d say, “Well, around $40,000 a year.”
And they’d say, “Got it, well, “what do you expect your revenue to be this year?” I’m like, “Over 2 million.”
And they’re like, “Uh huh, yeah.” Suppress some laughter. “Okay, well, I’m going to approve you “for a credit limit that’s way too low.”
And so this problem went on for a long time. And eventually, we were able to start transitioning the conversation with them, which was once we had raised money, we were able to talk instead about how much cash was available in other accounts that weren’t revealed to them. So using your other cash balance was extremely helpful to us as a hack after we had raised some money to start raising our credit limits.
Structuring a contract for an enterprise customer
Lastly, as a SaaS company, usually you will start selling to smaller companies, you’ll start selling to small startups, or maybe even some mid market businesses. But over time, you start growing into selling more and more to the enterprise. And as they’re starting to grow into these larger customers, they often expect you to sign contracts, custom contracts. And so rather than just self-service credit card payments, you start needing to think about the structure of an actual contract that you’re gonna have with these customers.
Setting up a Master Services Agreement
So for us, this was very new. And if you haven’t seen it before, contracts are usually structured like this. You have a master services agreement, which is the sort of core agreement, and it usually covers contractual agreements around liability, confidentiality, payment, termination, things like that.
The difference between a Master Services Agreement and the Order Form for a SaaS Startup
And then the order form, by contrast, is usually used to just execute a quick payment, and it’s a readable description of what’s actually being bought and sold. So, the master services agreement is really designed to allow future orders to happen much more quickly. And so what you wanna do is really get the legal part done, and then start executing order forms across all of the other business units in the enterprise. So the master services agreement is really your key to getting the high net revenue retention and high expansion rates across larger customers.
Liability and Cyber Insurance for a SaaS Startup
And then what we found is that the most hotly negotiated term in the agreements is the liability section. So, be sure that for the liability section, you actually go and get insurance to cover that. What we found is that it’s about 10 to 20k dollars, so translate that to euros, to cover not just sort of normal business insurance, but also cyber insurance. So if you’re gonna start signing contracts with real liability in them, go get insurance.
Strategic Finance in Saas
Okay, so that was accounting. These are some of the things that we’ve learned along the way. But once you really have a solid foundation in accounting, you can start switching more into strategic finance. So, what’s the fuzzy unknowns? What are the things that you can do to really sort of project forward what’s going to happen? And I’m not going to discuss fundraising in depth, I think many people have discussed fundraising in great depth, and I would point you to Paul Graham’s essays around how to raise money, investor herd dynamics, and how to convince investors, three really fantastic essays that are often talked about at Y Combinator. And instead, I’m gonna focus on some of the more untouched material, again, hopefully very tactical tips for you.
Why you should hire a part time CFO for your SaaS business
Basically, when and why we hired a part time CFO, the importance of annual prepayment to a SaaS company, and why we decided to avoid venture debt so far. And lastly, shadow budgets. So first of all, hiring a part time CFO. Looking back now, I actually feel really strongly that if you as a founder are spending any time beyond the basics of finance, or in just sort of raising money from investors, you should absolutely hire a CFO and a bookkeeper.
There’s a lot to learn without some experienced financial help. And simple things like, oh, we need to get insurance, business liability insurance, can balloon into a multi-week project for you as a founder, when for a part time CFO, they can go get this done in an hour. They have all the right contacts, they know what to look for in the liability insurance agreements, and so forth. So, really strongly recommend that you hire a part time CFO.
What should you look for in hiring a part time CFO?
For us, it was when we were just about six months into signing our first contracts, and then right after we raised the series A. So, what should you look for in hiring a part time CFO? The main thing that we looked for was that it was someone who we were actually learning from. So, someone in the interview process who would tell us things about liability insurance or about strategic finance that we just hadn’t heard before. So as you’re interviewing, really try to see if this is someone who’s going to teach you the basics of finance.
Annual prepayment in SaaS is one of the most important things that you can get right
In the end, we worked with a part time CFO named Jeff Burkland. For those of you who are based in San Francisco or in New York, they have offices there. But I’m sure you can find a local CFO company that works just as well. He really had a phenomenal impact on my peace of mind and our overall execution as a company.
So, one area that Jeff really pushed me on which I wanna highlight, and if you take one thing away from this presentation, I hope it is annual prepayment. Annual prepayment is one of the most important things that you can get right. And we had a early sales advisor who told us, “Hey, you should just push “for annual prepayment on every single contract.” And I was like, “Okay, sure, whatever man, that’s fine.” And then a few years later, I realized that I hadn’t really understood what it was about annual prepayment that made it so valuable.
So I’m gonna show you some graphs here. But basically, what happened is, as a result of us not realizing how important it was, all of our contracts slowly slipped to quarterly payments or biannual payments, or occasionally even monthly payments. And the result was, you’ll see cash flow in a second, but the result was an operational burden, both for us and our customers that was really, really bad. So it ended up creating a huge, huge time sink for our customer operations team.
So then one day, as we’re in the middle of this, our CFO, Jeff comes to me, and he says, “I wanna show you this graph.” And he showed this to me, which is cash in bank. And this is actually the same company, and the only difference between this company being wildly cash flow positive and the difference between being wildly bankrupt, is actually the cash payment terms.
So, both of these graphs are based on 17% month over month growth, and 8.5% month over month growth in spending. Literally, the only difference is cash prepayment. So, if you are currently not pushing for annual prepayments, I think you’re making a huge mistake. You can basically get your customers to fund almost all of your growth, and really accelerate things if you are able to push for annual prepayments.
Why you should ask for Annual Prepayment in your SaaS pricing model
So this made a huge difference for us. We had one year where we were significantly cash flow positive despite raising a bunch of money because of the annual prepayment flex that we had. And just in case you were wondering, quarterly and biannual payments are not really that much better, you really have to get to annual before you start seeing the sort of returns on cash flow.
Is venture debt right for your SaaS business?
So, last question, or second to last question, is venture debt right for you? And I think many banks are really, as you sort of develop relationships with banks like Silicon Valley Bank or so forth, they’re really going to push you hard to take on additional products that they offer, and one of those additional products is venture debt.
And so it’s something that I think a lot of startups start to really think about, what is the right place for thinking about venture debt? And what’s interesting is that venture debt is really only collateralized against additional capital that you can raise from VCs or against additional VC funding. So it’s reasonably expensive to take on, you have to give up some equity in order to get access to venture debt. The only place where it really makes sense, I think, is if your business is incredibly predictable. And that is if you really know that you’re gonna be able to take X amount of cash and turn it very, very, very reliably into X amount of revenue, then venture debt can make a lot of sense, and it can be a cheaper alternative to venture capital. But the problem is, it is typically used as a lifeline to make it to your next round.
So if you take on venture debt as a way to sort of grow the company, and then you aren’t able to raise venture capital, the lifeline that you maybe had with venture debt is no longer accessible. So I would really strongly recommend actually against taking venture debt unless it’s really your only option.
The Shadow Budget
So, the last topic that I wanna talk about is what we call the shadow budget. So, the shadow budget is basically a way to avoid a lot of the bureaucracy of having a full budget in and of yourself. So, I think focus, speed, and agility are really the best benefits that a startup has against all of the incumbents. And any sort of internal bureaucracy is really a startup’s worst enemy.
So, budgets implemented without a clear purpose are definitely unnecessary, and that’s bureaucracy. And so we have tried to implement budgets only as needed. And what that really means is trying to find a way to understand how spend is happening without trying to create burden on team leads and department leads. And so instead, what we’ve done is we’ve tried to enable teams to spend money as they see fit, and in the background, have myself and our CFO actually just project what we expect them to spend. In other words, a shadow version of what we expect to happen. And once we have that very crisp and clear shadow version of what we expect to happen, then on a monthly basis, we can do a sort of business projections versus actuals understanding of what did they actually spend versus what did we project. And at the very minimum, then, we have a model for understanding whether we are roughly on track or not, and whether a conversation needs to happen to adjust spend. And so the shadow budget is effectively a projection that allows us to make that diff.
The result – a super focused team
But the key is that it’s extremely lightweight in comparison, right? It doesn’t require team leads or execs to spend any time thinking about the budget, which then allows you as a founder to have an exact team that’s super focused on just building the business.
So, let’s go back to the start. We’ve learned a few tactics, hopefully helpful to you both from accounting and strategic finance perspective. And I think for any high growth startup, it’s important to get your accounting buttoned down first, and then you can really start thinking about the sort of fuzzy futures around strategic finance. I think finance is intensely valuable as you’re building out a software business. And for those of you who are technical founders, I think it can be a second major weapon in your arsenal in growing your company.
And for further reading, I would recommend starting with the basics. This amazing book, “Accounting Made Simple “in 100 Pages Or Less,” I promise you can read it on the airplane ride home. And it has been the initial sort of thing that got me into understanding finance, and I think it’s been incredibly helpful just to understand the beginnings.
Finance can be an amazing enabler for your SaaS business
So, if there’s one thing you take away from this presentation, I hope its annual prepay, followed by the fact that finance can be an amazing enabler for your business. And you absolutely should not get bogged down in the details, hire a part time CFO, hire a bookkeeper, but use finance as a weapon for you as you grow. So, thank you. Our booth for Segment is out at the front. If you are looking for help with analytics or marketing stacks or data pipelines, we’re happy to help, and feel free to follow up via email or Twitter if I can be helpful. Thank you.
If you are a Startup based in the West Coast wanting to change the SaaS world as we know it, Our Startup Program is for you 🚀. Don’t miss out – applications close next Friday, 23rd August.