Monday, April 25, 2011

How to manage cash in a small company

Notes from a talk I gave at Berkeley Haas School of Business, April 4, 2011

I am going to assume that you know the basics of modeling cash flow. How to build a P&L, read a balance sheet and calculate working capital. Given that, if you are running a small, growing company here are my top 4 tips to manage your cash.

First of all – why is it so important? While VCs may be falling all over themselves today to fund new companies that think they are the next Facebook or Zynga that will not always be the case because good times come and go in the venture community, and it will certainly not be the case if you ever hit a bump in the road.

Part of your job as CEO is to keep the company funded with the capital necessary to run the business and grow – whether it’s your personal cash or from Sand Hill Road. Cash is finite, it’s very expensive in your time to raise (not to mention the dilution to your ownership), and you can’t save your way into growth so you need to make sure you have enough. I see many young companies in Silicon Valley forgetting this today because the money is flowing – but their chances are 1 in 10,000 their company is the next big thing; 80% of them will fail but by being imprudent with their cash they increase the odds that they are on the wrong side of the line.

When I was CEO of Simplex in 2000 cash became a crunch issue for us. We were growing fast, profitable and we needed more working capital to fuel our growth (hire sales people, open international offices etc.) but we could not raise cash from new investors and while our current investors were very supportive they were ready for a liquidity event. The investment community and the bankers were fixated on dot coms – eyeballs and click-throughs (as they are today) - and we were a traditional enterprise B2B software product company. And because the dot com bubble had just burst the public markets were closed to pretty much everyone.

We had no choice but to open a line of credit against our receivables, draw it down and manage every penny. $40M+ in revenue, living off a $4M line of credit until we could raise money in the public markets (which we did in 2001). Combine this with my experience managing FirstRain through the recession and I am a little intense about cash flow.

Tip #1: Build your own model

A good finance team will build you models every day and twice on Sunday but there is no substitute for building you own. Build a P&L, collection and cash flow model yourself. It won’t be perfectly correct because you’ll probably not get all the operating costs right, but by building your own you will have a profound understanding of the underlying assumptions you believe apply to your business.

What is the cost of every engineer? What does health insurance cost really? What is your true collection time? What is the monthly productivity of each sales rep and how many months does it take from hiring to positive cash flow for each rep? What ASP and average transaction size are you assuming – is it realistic? What percentage of your sales reps will fail or turn over – it’s a guarantee some will so how many do you assume? Building your own model will force you through the thinking. Send it to a trusted board member and they will then ask you all the assumptions that you had not thought of and by the time you are done you’ll have a strong gut feel for the cash levers in your business.

Tip #2: Cap your own salary

In most young companies the single highest expense, overshadowing all others, is salary. It’s very tough for any executive to argue that they should make more than the CEO (with the exception of the VP sales when you include his/her variable compensation). So if you cap your own salary below market you can better manage the cash outflow from the salaries of the executive team. This requires that you have enough equity in your option pool to strongly motivate your execs and key engineers (an important part of your negotiation with your investors) – and that you can explain with integrity how the leverage of their options exceeds the leverage of cash you might pull out of the business to pay them more in cash.

It’s a delicate balance because your team needs to make enough to live and not worry about their families, but no more, because in the end they’ll make more money from their options when you reach a successful liquidity event. Basic risk/reward. If someone wants too high a salary – exec or employee – their interests are probably not aligned with your team’s and your investor’s so don’t hire them.

Tip #3: Hire a tight fist in finance

In a small company every dollar counts but you can’t watch every transaction. As CEO, having a persnickety, detail-oriented, negotiating, thick-skinned finance lead at your side is essential. You don’t need a CFO unless you are going public, in fact hiring a CFO too early can hurt you (they tend to need staff), but you do need a controller who can negotiate better pricing with every vendor, manage your DSOs with a strong collections process, push out payables and play chicken with the landlord. Plus the books must be perfect every month, every quarter. You don’t have the time for any mistakes in your accounts.

Tip# 4: Test every decision you make

Every day, for every decision, ask yourself what is the impact on cash flow? For example should you hire more engineers now or 6 months from now, should you hire permanent staff or consultants – how will that change your revenue and collections? Does it drive top line growth? Your engineering team will talk to you in terms of releases and features, you need to translate it in your own mind into sales productivity.

Or when should you hire the next VP? You may be struggling with your own bandwidth but at what point will adding a VP change the revenue growth curve? Or conversely when is waiting hurting the business but you can’t see it because you are buried? Travel policy – everyone in coach of course. Food – build relationships with your local vendors. Office space – go cheap. Interns – yes if you can create a win-win with them. But don’t scrimp on health insurance – personal insecurity kills productivity.

It’s not easy. I have made every mistake there is to make – as you will find most CEOs have if they are honest with you. Growth takes risk, risk means mistakes. And often times I have seen VCs and boards push for growth (and hence cash consumption) too early because they are impatient so you need to keep a clear head on your shoulders. Keep modeling your cash, keep testing every decision against it, and work hard to keep payroll in line and you’ll give yourself the runway you need to prove out your business and give your team the best odds to succeed.

And when the time is right – spend your cash to punch through.

Hustle and Dust

When a whole city is a building site the dust is hard to believe. Gurgaon is a new city, changing every day. Office buildings, hospitals, a metro all being built at a pace unimaginable in the States.

Office buildings go up so fast they are left unfinished. Standing at the window of our 15th floor office at Unitech Cyberpark I could see rough globs of putty awkwardly holding the pane in, with smears across the glass that has never been cleaned off. Who has the time? The city is short of hotel rooms but there are 4,000 new rooms being built at the airport that will come on line in the next few months. Every road is jammed with cars with no rules, no lanes, no sense of one side or the other, but with drivers with an uncanny sense of proximity so they can drive within 1 inch of each other and not touch.

Hustle and dust and haze.

But at the top of the hotel I stayed in there is a beautiful pool. Not heated but a perfect temperature. Empty at dawn and waiting for me. I stood on the roof looking out at the extraordinary growth, creativity, passion and energy that is bringing India onto the world economic stage. Like in New York, I could feel the pulse in the air. It wasn’t hard to tap into that energy and get into the water, swim intensely and wake up to be ready for my packed calendar every day.

Sunday, April 24, 2011

The deceptively savage English garden

Is there anything as perfect as an English garden on a warm Spring day? The profusion of lilac, cherry blossoms covering the trees like last winter’s snow fall, a persistent hum of bees and the horse snickering for a carrot in the field at the end of the lawn.

Yesterday was such a day in my parents garden - unseasonably warm so every plant is bursting into bloom (except the wisteria at the front which my mother sharply reprimanded for letting her down for my visit) and as I sat in the sun on a lawn chair with my much loved parents I thought there could not be any point in time more perfect.

But there is a savagery underneath – a survival hierarchy this perfection belies!

First I ask about the patches of soil in the grass on the upper lawn? Moles I hear! Smoked out, dug out, trapped, sworn at – WW I had nothing on the all out warfare that has gone on against the moles over the last 12 months. It’s then pointed out to me that the bottom 24 inches of several bushes have been eaten by the muntjac deer – now banished from the garden by hidden wire fencing (hmm, a good idea I think for the bunnies who ate all my brussel sprouts in California).

I suspect fencing was the solution for the muntjacs only because you can’t shoot them. I amusedly listened to my parents bicker about the pigeon my father shot for having the temerity to try to eat at the bird feeder. What was it thinking – that it is a bird and it’s a bird feeder? But the issue with my father shooting the pigeon is not (as I am thinking) poor pigeon! No! It’s that he’s hidden the carcass from my mother who wanted to put it out on the lawn as carrion for the red kites to come and eat. This woman would lull you into a false sense of gentleness up until this conversation, which is followed by her going to get more bird food. Seeds I think? No, a bag of dried worms…

There’s more trench warfare going on around the bird feeder – a gun is not enough. Squirrels are greedy and fast so for them the base of the bird feeder is covered with such a sticky substance that after one touch the squirrels will not put a foot on it. Instead they sit in the trees and scold in their frustration. The crows are clapped at, the pigeons shot, the squirrels gooed; who pray is the bird feeder covered in dried worms for?

And then I see the softer side to this savage garden. It’s for the little ones. It’s for Frankie and Johnnie, the pair of collared doves who have mated for life and have a family in the kitchen wisteria every summer. It’s for the robin who loves his worms dead or alive, the mistlethrush who comes back from Africa every Spring and the tits and sparrows who survived the very cold winter with my mother. They all came to visit yesterday. Cooing and whistling, welcoming me home, urging me to stay in the sun with them.

But it’s April in England. It’s unseasonably warm. I am sure it’ll be back in the 50s and raining by Monday and I’ll be gone.

Thursday, April 14, 2011

Dirty feet in Rome

Stopped in Rome for a couple of days on my way to India with one purpose in mind -- to see the exhibit at the State Archives on Caravaggio in Roma.

Caravaggio was the original bad boy of the baroque. In and out of trouble with the police, carrying a sword without a permit and yet the most sought after painter in Rome in his time. That is until he killed a rival in a dual in 1605.

Today I saw the original documents of his many arrests, his rental contract with his landlady (which documented him removing half the ceiling to make room for his paintings), a painting he did of Il Papa (the Borghese pope of the day) which has not been shown for 100 years because it is in the Borghese private collection - and the most important to me - the piece of parchment documenting his commission to paint the two paintings in Santa Maria del Popolo. And the contract for the St Matthew paintings in Santa Luigi Dei Francesi. Nose down, maybe 3 inches from the documents, I could not believe I was seeing them. I was dizzy with the intensity of my feelings.

Caravaggio was a common man. He made the sacred profane. He painted religious subjects as ordinary people. And one of the most shocking aspects of his paintings at the time was that he painted bare, dirty feet (one of his paintings was rejected because of the bare feet!).

Now if you have spent any time in Rome at all you know your feet get grey with grime. In the Crucifixion of St Peter the saint's feet are a gentle grey as they crucify him upside down, but the man who is on his knees pushing up the inverted cross (on the left) - his feet are black with dirt. As shocking are the feet of the pilgrim in the Madonna of Loreto in the Basilica di Sant'Agostino (on the right here). These are paintings that make your heart stop beating in your chest and I stand in front of them for unseemly periods of time, drinking in every detail.

But today was not only in the 15th/16th century. I got my feet plenty dirty walking miles and miles. It was that or fall asleep since I landed mid morning. And for the first time today I saw Ara Pacis. Not on the beaten path for most tourists but between Ara Pacis, the now abandoned Augustus mausoleum and the Pantheon - which 2000 years ago bordered a large "field" (which is now densely packed with 16th century housing) between these three you can catch a glimpse in your minds eye of how dramatic and ceremonial the northern, recreational part of Rome was. I wandered back along Via Corso, looking at the shops and crowds, but in reality I was walking down Via Flaminia laid down 2,200 years ago.

Friday, April 8, 2011

Pecs and profits - Abercrombie and Fitch

Courtesy of Footnoted.org (thanks Michelle) I came across a hilarious and novel investor day deck. Abercrombie and Fitch - not above using young barechested men to sell clothes - are now using the same to sell their stock.

Check out their slide deck here. As Footnoted says "We counted no fewer than 13 slides that featured shirtless dudes baring their pecs. That's nearly 20% of the slides in the 67-slide deck." and the stock went up 8% Tuesday. Because of the bullish projections - or because of the general well being felt by the sell-side analysts after the presentation - and what was the gender split in the audience I wonder?

Since our society uses sexual images of women to sell everything from clothes to cars to technology I suppose it was only a matter of time until we used bare chested men to sell stocks. In my mind both forms of objectification are annoying but hardly new, and unlikely to go away -- but maybe could be getting a little more balanced?

Saturday, April 2, 2011

Ben Horowitz: CEO psychology - or Don't Quit!

Terrific article in TechCrunch this week by Ben Horowitz - What's the Most Difficult CEO Skill? Managing your own psychology.

Managing inside my own head is by far the most difficult thing I do as a CEO and I appreciate Ben being so out and candid about what's going on inside. As he says "Over the years, I’ve spoken to hundreds of CEOs all with the same experience. Nonetheless, very few people talk about it, and I have never read anything on the topic. It’s like the fight club of management: The first rule of the CEO psychological meltdown is don’t talk about the psychological meltdown."

Ben covers classical psychoses like "If I am doing a good job why do I feel so bad?", and the cliche (and truism) "It's a Lonely Job" - especially when you are facing a crisis like the worst recession since the great depression and you have to make the decision to cut staff which impacts the livelihoods of the very people you are working so hard for and care about.

The piece of advice I liked that was new to me - is Focus on the road not the wall. It it so easy to stare at all the things that can kill your company - and at any moment in time, even great times, any number of things can wipe out a small company. It is this single difference that makes being a CxO in a large company feel so emotionally different than being a CEO of a small company and I have done both. Large companies have mass and momentum - you have time to recover from mistakes most of the time. (Note for Cadence Design Systems (CDNS) which crashed and fired it's entire executive team on one day - it's coming back because of the resiliency of the installed base and the R&D leadership team's commitment to great products.)

The aspect Ben writes about that I have had in my head many times in the last 15 years which I can testify never goes away is A Final Word of AdviceDon’t Punk Out and Don’t Quit As CEO, there will be many times when you feel like quitting. I'll add though that the most effective management tool I have found for this personal challenge is to get in the pool and pound the laps until my head is clear - which can be anywhere between 1 and 2 miles before I am calm.


If you have an ambition to be CEO one day read the article very carefully several times.

Friday, April 1, 2011

1000 miles of colleges - Preppy to hippie and in between

1000 miles. 7 schools. Preppy to hippie, Amherst to Bard and NYU in the middle. And an "OMG I'd better study for the next 6 weeks" reaction from Sebastian (a junior) which meant mission accomplished for me.

The US college system is so very different than the UK that it's really a debate in my mind which is better. Is it better (as I did) to specialize in maths and physics at 16 and then from 18 on only study maths? I came out of a 3 year program with a BA and an MA in maths and an incredibly deep but narrow academic education. And not very employable until I had learned to type first and then to write software. But as a result of my education I approach every problem from first principles.

Compare that to the liberal arts education at one of the colleges we saw (Amherst was a favorite, so was Dartmouth - hence the grades panic). The students study a huge breadth of subjects and can graduate with a BA without going deep in any one subject. Does this give them better long term careers because they have (hopefully) found a field they love, learned to write, learned to make an argument and studied abroad? Or does it make them superficial and in need of a real degree next - hence they all go to grad school?

What was great for the two of us this week was visiting a wide variety of colleges and styles and so my son was able to articulate that, despite his parents hoping, he really does not want to go to engineering school exactly because of the need to commit to a career path earlier than he is ready to. So unless he changes his mind in the next 6 months he's headed for a small liberal arts college like his sister and I am going to learn to both keep my mouth shut and appreciate his choices.

Listening to the funny, articulate student guides this week I think every school we visited except one would offer plenty of challenge and a solid, interesting education (mine was certainly not interesting to me). I'm reminded that in all of my education the single most powerful skill I learned was public speaking. I use that almost every day as a CEO. And that I learned in high school doing competitive public speaking competitions, not in college. College gave me credentials, confidence, bridge skills and my husband, but not much else.

Because junior year Spring break also needs to be fun we are ending up with two nights in New York. Last night was War Horse and words cannot begin to communicate the experience. It is quite simply astonishing. An education in the extreme innovation and creativity that is possible in live theater and I expect NYU will continue to go up in Sebastian's college ranking with every theater performance we go to.

War Horse - emotion through puppetry that has to be seen to be believed

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