The Role Forward | Mapping the Path to Profitability with Kristian Marquez
Joe: Hello and welcome to another episode of the Roll Forward podcast. My name is Joe Michalowski and this episode is brought to you by Mosaic, a strategic finance platform that transforms the way business gets done. Today my guest is Kristian Marquez, founder of Outsource Financial Operations firm, FinStrat Management. Kristian, thank you so much for joining me today.
Kristian: Joe, thank you for having me.
Joe: Amazing. Before we get going, do you mind just giving everyone a quick background about yourself, who you are, the work you’re doing now, how you got there, things like that?
Kristian: My pleasure. So today I serve as founder and CEO of FinStrat on paper in Annapolis, Maryland, based Finstrat Management, though myself and the rest of the team are remote. We’re coming up on our seventh anniversary this January. As you mentioned, we provide outsource accounting, finance, and reporting services to early-stage businesses, majority of which are venture-backed, as well as investors, angels and venture capital. I’m very fortunate. I had a great professional career leading up to FinStrat’s inception.
Prior to this, I was an inaugural employee for a company that subsequently IPO’d for 4.4 billion. It was in the tail end of my tenure. Also co-founded a telemedicine startup with two physicians, learned what not to do with an early-stage business. Unfortunately had to close those doors, but very grateful. I’ve had the opportunity to work with some amazing people and clients over the years and happy to be here today and share what I’ve learned along the way.
Joe: Amazing. I love the deep like operator background, because we’re going to talk a lot about kind of the path to profitability today. And so I mentioned kind of both sides of that perspective, the big IPO and also the early-stage startup that didn’t work out, which is unfortunately the case for many of them. So I want to just start off by sort of setting the stage. And I want to ask you, like, what do you think the expectations are for profitability for like a VC-backed startup right now? Because we always say had pre-2022 growth at all costs mindset, like cash was abundantly available. And then over the last year or so, like super cash preservation mode, things like that. So I’m curious, like, where do you think we’re going now? What are expectations for a VC back start of as far as profitability goes?
Kristian: Great question. I would say that for a very, for a while there, everyone had turned their attention exclusively to becoming profitable. And I do not think that continues to be the case. I think expectations are bifurcated.
I think the exception now is venture capital institutions will make an exception for a breakeven or a loss if the top-line revenue growth is there. And so said another way, if there’s a very promising story and you can back it up with some phenomenal actuals and a pipeline, you still have the old story on your hands. But that said, growth is tepid. Yeah, absolutely. My sense is that VCs are looking for founders who have a better sense of their financials and can point to a path to profitability. I think it’s important to draw a distinction is that not every single VC thinks the same, right? Depending on the size of their fund, whether it’s, I’m going to pick two numbers, if it’s a hundred million or a billion, in order to generate at least a 3X return for their investors, they have different exit expectations. And so the smaller fund will be content with an acquisition that’s a hundred million plus. Andreessen Horowitz is the world are looking for IPOs. And so long way of saying it is binary and you really got to consider whose land you’re looking through.
Joe: It makes a lot of sense. And I want to dig in a little bit deeper. So I think that was a good, that was really what I was getting at. It was like, to me, I was curious if we were just heading back toward kind of the growth at all costs. And obviously, you know, there’s, there’s nuance there. I want to dig into that nuance. And I think to me probably easiest to think about it like stage by stage. And so you’re talking about like, what are those growth numbers versus kind of what the story is in the background? And so let’s talk like early stage. We’re like a series A company. So we’re like a long way off of that exit, hopefully, unless there’s an issue. So how it’s series A, are you thinking about growth expectations? How do you kind of put yourself on that path to the right expectations that you sort of set for us a second ago?
Kristian: Yeah. I mean, I’ll, I’ll oversimplify it. There’s a lot of ways you can look at it, but a way that probably is not too controversial is something called the rule of 40. And so I didn’t create this, you can Google it, but effectively it’s the sum of your growth percentage plus EBITDA margin. And so the idea is that the sum of the two need to be equal to or greater than 40%. And so you can see depending on the ratio, you’re either growing and in which case significantly, in which case someone will take pressure off your bottom line. But if you’re not, then you better be profitable. And so that’s consideration number one. The second part of that is consistently achieving 40% or more in the sum of growth plus EBITDA, right? Versus just a blip. But I think it’s a good benchmark. Are there better ones perhaps? But…you know, one of the things I would tell you is if you’re especially if you’re looking to raise outside equity, if everyone knows the metric, your job’s a little bit easier because you don’t have to convince them. It’s a good metric.
Joe: Totally. It makes a lot of sense. So we have an article on our site about rule of 40. We talk about it a lot. And I actually have a question that I want to ask later on because I have a whole like run I want to do on metric-focused things, mostly like building dashboards for this thing. And personally, spoiler for later. I am not a fan of the rule of 40, someone without a finance background. So, you know, my opinion doesn’t really matter that much, but everything I see, I’m like, I need to dig in on this one.
So I want to get back to the rule of 40 a little bit, but off this point, does that metric work at like early stage versus like growth stage? So we’re talking like series B, series C, you’re kind of getting closer to that exit stage where maybe you’re looking more at even it like as a series A really are you looking at EBITDA? Are you even tracking EBITDA at that stage? You’re so early. So I’m curious what your perspective is, just given all the work you do with these companies.
Kristian: Yeah, the answer is today, yes, absolutely. And I don’t know if it’s for better or for worse. I would say it’s for better. My sense is that interest rates were, I don’t think a mindset that’s conducive for the long run. And I say that because the consequences is we have this inflation today, which is a silent tax. It very much is.
And not to go off on a social tangent, but I think it’s fair to ask questions like, well, if you’re a retiree on a fixed income, is this fair? I’d argue it’s not. My mom is a great case in point. She’s in her early eighties and she’s dependent on social security and a pension check. And so it’s kind of like what’s good for the goose is good for the gander. I do think there is a normal interest rate. I think it’s better for society in the long run.
And if it’s closer to where we are today than 1% or zero, and that means that businesses have to be a little bit more conservative or disciplined, I think it’s a good thing. I think everyone benefits in the long run.
Joe: I think that makes a lot of sense because a question I was going to ask as a follow-up was like what the inflection point is in growth. And so I guess it’s less about like where you are in your journey as a company and it sounds like more about kind of external forces, like obviously like the VC market hasn’t been very hot for the last year or so. So like the money’s just not abundantly available. And so naturally, you know, you’d focus more on profitability in those spaces than you would otherwise. But I think it’s a really interesting point. So it’s less about an inflection point to me, it sounds like, in summary, more like …
Kristian: Well, I, so I say there’s always caveats, you know? So one of the big caveats right now is every day, I can tell you there’s no shortage of price equity rounds that are taking place, not only in the U.S., but around the world.
And there are scenes, you know, and one of the big ones right now is artificial intelligence. And so we should ask ourselves, you know, is this hype or other? I’m in the other camp. And so I’ll use a parallel to the dot-com boom, which I was around for, had the opportunity to witness. And so early stages of the internet and obviously a lot of question marks as to the true nature of it.
A lot of companies ended up going out of business. And so you have a lot of pundits who pooh-poohed all the amount of money that was lost. But there’s a difference between a dot-com bubble and say a gold bubble. At the end of a gold bubble, what are you left with? Same amount of gold. At the end of a dot-com bubble, what are you left with? Entire telecom infrastructure from which you can now launch productivity that, at the turn of the century, helped create a tremendous amount more wealth. I do think there’s a parallel. Do I think there’s going to be a lot of AI-related companies who are raising money at perhaps unrealistic valuations today? Yes. Will they go out of business? Yes. But is it throwaway? I don’t think so. I think this is important because when you look at GDP — I’ll oversimplify it —but effectively, it’s your population and how much they produce. However, the asterisk there is: how productive are they? And one of the things I think a lot of people underappreciate is that the United States, as compared to the rest of the world, is the epicenter of productivity. And when you look at something like artificial intelligence, which can save 50-75% of a professional’s time, that’s significant. And we’re not even, we’re coming up on year one. And so- long way of saying that I’m in the bull camp today as to our outlook, regardless of where interest rates are and where the treasury’s been closing. I don’t think it’s been this high, or I don’t think, was it the 10-year hasn’t been this high in the open market since 96? And so while it’s having, absolutely having an impact on real estate, I think we have to look underneath the surface to really get a sense as to what the state of the US is and I don’t see artificial intelligence getting regulated away. I mean, I think there’ll be guardrails, but in the long run, it’s good for business.
Joe: Yeah. I mean, it’s a really interesting point. I think, you know, probably, I mean, a lot of forces to discuss that are probably way too big for this podcast. So I won’t get too into the weeds of asking you like follow-up questions there, but it’s a really interesting point, just about the nuance there is depending on what industry you’re in and like where you’re building and kind of how that impacts the money that’s available and what’s expected of you as a company. But to your point, it does seem to be, you know, good for everybody. What was it? It’s good for the goose, good for the gander. It’s kind of a rising tide lifts all boats. Whatever cliche you’d like to throw out there that seems to make sense. But I want to talk a little bit about like, I think on the headline of your websites, like financial operations firm. I think we should get into sort of the practicality of this path to profitability.
We’ve talked a lot at Mosaic on this podcast, on content we do, just about like the value of getting financial find foundations in place as early as possible. It’s a thing that startups tend to kind of put off. I’m sure you see that as well. And so I want to talk about like, what should leaders think about putting in place? What guardrails? What structures? What processes do you get in place as early as possible to put yourself on a path to profitability?
Kristian: Let me start by acknowledging I’m biased. Just a little bit, just only slightly. It’s okay. So if you think about really what is a representation in the set of financials. Effectively it’s reporting the news. It’s letting you know what the outcome of decisions were. And why is that valuable? It’s valuable because if you’re bleeding cash, at some point you’re going to run out. And all businesses that go out of business all go out for the same reason, they run out of cash.
And so at a minimum, very practically, you need to know your lifeblood position so that you can make payroll, pay your vendors, and keep the lights on. So that’s number one. When you start to graduate from financial analysis 101 to 201 are budgets. And so the simplest way that I think everyone would agree is, Joe, if I tasked you with building a house, what are you going to do first? You’re going to hire an architect.
You’re not going to go straight to your builders. The builder is just going to look at you and say, well, what am I going to do? And so, said another way, it’s a plan. And it’s not to say that the plan can’t change. If you’re any of your expectations, whether they’re, you know, predominantly revenue, but expense change. Well, then at least you want to know and then make changes accordingly. And then the last part of that would be a forecast. Why I take that back. Second to last part of that would be a forecast.
And in this case, it’s to say, all right, building on the concept of as the year unfolds and you compare what your revenue and expenses are to what you budgeted, maybe there is good reason to change your expectations for the remainder of the year, i.e. update a forecast. And why is that significant? Well, it’s forever the reason you strike a line of gold and all of a sudden, you have to start hiring a lot more people than you anticipated in a quarter.
That has a consequence. Is this a blip? Is this real? Whole host of questions that you can ask that ultimately influence. What does the future have in store so that I can better prepare? And then I say the last part of that is metrics. So for sake of example, if you’re looking at a set of financials, all oversimplified, and say a profit and loss is revenue and expense. However, we did an entire sub segment within accounting and finance at FP&A that starts to answer questions and go, very well, yes, our revenue is growing and so are our expenses, but is this good or bad? And so an example would be, what’s your customer acquisition cost? Is it growing or shrinking relative to your revenue? What’s your average revenue per account? What’s your customer acquisition cost payback period? What’s your return on CAC?
And so taking it a step further, if you know the answers to those questions, you can then make decisions about how to better run your business. But now for anyone who’s on this call, they say, okay, well, I’m not accounting and finance. Here’s how I would think about it. All of those metrics I just mentioned, it’s just algebra. And like any algebraic equation, it’s made of a bunch of variables. And so really the questions we should be asking are, well, okay, fine, that makes sense, but can you oversimplify how I should think about these variables? And the answer is, very good news, yes. If I were to put on my math teacher hat and you know, pull up the whiteboard and we start looking at these variables, almost everything comes back to the average size of an individual client, revenue-wise. And so questions should be common as, all right, well, is there a way for us to maximize that? And so, you know, if you’ve ever had conversations with friends about being a real estate agent.
If you had a choice, would you rather go sell five $200,000 homes or one 1 million dollar? Most people would tell you one million because it’s going to take you a fraction amount of the effort to do that. So if we continue with that line of thought, we should be asking ourselves, how do I maximize that? So it’s either going after larger customers, or increasing pricing, or selling more into an existing client.
I don’t want to say it’s that simple. But really, those are your main levers. And so once you understand that, you can see that, oh my gosh, if I increase my pricing, I can reduce the amount of time it takes for me to spend money on acquiring a new client. Or if I make the decision to go after enterprise versus small, medium business, I can reduce the amount of time it takes for me to reduce my customer acquisition payback period, presuming your sales cycle didn’t increase, which is another conversation. But between base financials, budget, forecast, and metrics, you’re effectively looking at the menu of what we do, what we look at. And I think about it’s anything else, I forget his first name, but there was an economist who came — Ricardo was his last name — who came up with the concept of comparative advantage. And basically, the gist is you maximize your ROI when you limit what you do to that thing that you’re the best at.
And so Joe, I have a lot of bad analogies, and the one I like to use is, you know, let’s imagine you were a surgeon, but you could type faster than your secretary. It still makes most sense for you to be in the OR with a scalp in your hand versus typing memos, because you’re going to make more money that way. And so I would say to most founders is what’s your core competency? Generally, it’s going to be product development, that’s your selling. Or professional services. And then number two on that would be sales and marketing, or at least the concept of founder-led sales, especially in the beginning. As compared to accounting, human resources, and business support that, I mean, while valuable is not your core competency. So that’s why we get hired. Our services are fractional. And so effectively you get the A-team for a fraction of the cost.
Joe: Love that. I have a lot of follow-up questions. The one that I want to focus on is so that there’s at least what I’m noticing in, in Mosaic customers and even like what we’re doing as a business, it’s exactly what you said, it’s this push-up market because you know, that’s, you know, you sell bigger contracts and you can kind of safeguard yourself against some of these market forces that we’re dealing with right now. Let’s say that we are strictly like a small like we’re selling to small-, medium-sized businesses. Like we don’t have the option to just say like, oh, we’ll just start selling to bigger companies. So there’s plenty of those. If that’s the case, our lever, I guess, like going by what you said, it would be to increase our prices. How do you, as like a finance leader, like think about what do we increase it by? Like how do you go through the thought process of actually executing this when you don’t just get to say, oh, we’ll just go after companies that are, you know, twice as big as the ones we had today?
Kristian: Sure. So I think it boils down to understanding there are two types of buyers, price sensitive and value sensitive. And price sensitive, regardless of how good a job, we’re always going to ask for a discount and for you to lower your prices. Value-sensitive people say, you have solved my problem. You’re doing a great job. I will pay for this.
And so I would tell you fundamentally, it’s important to distinguish between the two types of buyers because most successful businesses are focusing on value sensitive buyers. And so what does that mean? It means that when you get requests for discounts, you respectfully decline and say, no, because there are consequences to my quality, my employee retention, and my outlook, and my ability to run this business if I make concessions when I shouldn’t have to if I’m genuinely focused, I’m doing a great job.
So if we focus on value-sensitive buyers, the next thing I would ask is, okay, well, how do you do price discovery? There are no shortage of articles that people have written out of price services, but I will make it super simple. Just start by charging a lot, and even more than you think that you would buy, and see whether or not someone will purchase from you. Because there’s no, you know, all the theory in the world is great if no one gives you money. And so psychologically, it’s always easier to start higher and come down than it is vice versa. Now is there analysis that you can do to inform that? Absolutely. Probably the most consistent way that people are doing that is bottoms up analysis. So effectively asking, what are your cost of sales? What’s your OPEX? What’s your TAM? What do you think you can generally sell? And where do you want to go? Effectively it’s walking numbers backwards within a budget. You can always change later on, but based on those inputs, you can then, like the algebraic equation I said before, you can hone in on a variable of what I’m going to charge. But it’s because speed is so important and you can spend so much time thinking about, what do I do? I say, go high and go out there and see what happens. And everyone, you know, and here’s the other big thing too, it’s
I’ve definitely met people who are really good at asking questions and listening. And I think it gets underrated just to saying, okay, if you’re not going to buy from me, how come? No, I’m too expensive. Okay, well, what price would I have to sell this to you for in order to get me to buy? We’re allowed to have those conversations. We’re allowed to say, hey, you know what? I’m a founder and I’m new and I’m hypersensitive to driving value, but I’m also a bit of discovery. You’re a customer so why don’t you engage me if you generally are telling me this is a problem you’d like solve.
Joe: Totally. I love that. And yeah, to that point, it’s not just, oh, well, competitor X is selling for this much. Like it has to be that. It’s not like it’s not this transactional back and forth. It’s really like, to your point, really listening and understanding like what value they got out of it, how they price that value themselves in their head and kind of moving on from there. I love the explanation. Yeah, I love it.
I’d offer up for your listeners, I just got done reading Alex Ormosi’s “$100 Million Offers”. Great book. He did a really great job of covering this subject. I give you a fraction of the Cliff Notes, but it’s basically what we’re talking about is when you’re really focused on doing a phenomenal job, people will pay. And so as long as that’s your mindset and you’re really thinking about, there’s value to be had, that’s a great approach.
Joe: I love it. The other follow up I want to get to and you know, you mentioned first of all, love the simplicity of the explanations, like not simple in a way like, oh, like we’re not getting to the meat of it. I just think it’s a really clear way of thinking about some of these problems we’re discussing. But simple does not mean easy. So like, obviously, if everybody could do this, like one, like they wouldn’t have to hire you and they wouldn’t need a whole bunch of things that people are selling them services for.
I’m curious like what do you see in clients or maybe like just anecdotally some of the biggest challenges or overlooked processes when trying to get on this path to profitability. You mentioned kind of those four pillars. Like is there one that stands out more? Curious what you’ve seen. Yeah, I said it’s two parts. Well, there’s a bunch of parts, but two that really come to mind. I don’t think enough people acknowledge the fact that there are many elements of building a business that are boring but they still need to be done. And so as a species, my sense is that many people default to doing what they know versus what they’re supposed to do. And the reason being is those things are supposed to be doing them boring. So it requires a degree. So I think you just knowing that’s the case is valuable. Like, okay, I’ve got something boring, but it needs to be done. Well, you know, okay, well, I know this is part of it. It is. And so you then have to have the discipline to follow through and get it done. And then the faster, the better.
There’s always value in speed because you learn more quickly, better in tone. Another part of that is just how do you think about lead generation? How do you think about closing deals? I think it’s a very, very important subject. And again, I’m sure there are professionals out there who talk about it all the time. But Jason Lemkin, the founder of SaaSter, said something great that really I think gets to the heart of the incorrect mindset that many founders have. And that’s just, oh, let me hire a VP of Sales and they can sprinkle some sales on. I’m paraphrasing. But I have seen this many, many times before, and I don’t know if it’s out of ignorance or not a desire to have to go sell. But my very strong counsel is any founder should start their company with founder-led sales.
You know your product the best, you’re gonna be the most passionate. And while there are a lot of things to do, I acknowledge that, in the beginning, and I’m not gonna time backs beginning, but let’s just say in the beginning, you’re a significant portion of your time should be devoted towards selling. So lead gen, looking at the emails that may be in your sequences, tweaking them, engaging prospective clients, current clients, really ensuring that you understand what’s going on so you can hone your messaging. And only until that point where you’re consistently closing deals do I then say, go out and hire two, let’s call sales reps and teach them what you’ve learned prior to hiring a VP of Sales. And only until which time you have two sales reps who can consistently close do you then consider going out and hiring your VP who can then take them off your hands and manage them. I think the part that a lot of founders don’t understand is that really a VP of sales is intended to manage a process and occasionally close a deal because they understand human psychology and they know how to pull the levers to get someone to say yay. But VP of sales are not, generally not, you know, preferably speaking, picking up the phone or, you know, they’re making sure the reps are keeping the pipeline accurate and that they’re giving feedback on the way to hitting the budget and numbers. And so I’d say those are the two really, if any, if you know, if you focus on any two things, those would be it.
Joe: I love it. I think it’s a great way to kind of answer that question. And I want to ask one more sort of tactical question, kind of on this vein of processes and things people should put in place.
I want to talk about tools for a second. So like when you work with a client, like are there certain tools or systems that you’re saying like, Hey, we need to get this in sooner rather than later. I’m curious what your take is on tech stack and anything else related to this topic. So if I were to go out to our website, finstratmgmt.com, we actually publish our stack so you can see it. That said, for purposes of our firm, we already use QuickBooks Online. Intuit owns over 70% of the market.
They have a marketplace where third-party developers can sell their apps, includes reviews, so it’s a phenomenal asset for purposes of running a business, not just accounting and finance. After that, it’s funny, we generally… So we’re a bit unique in the space. Trying to make an avatio to only say nice things. But let me say this. We represent, what I like to describe as, fix it once. 99 out of a 100 sets of financials that we inherit when we onboard a new client are a mess. It’s just a degree. And I’m just going to say it. I’m going to stop my comment there. So we’ve actually developed a reputation for cleaning up the messes and making financials investor-friendly and compliant, which is very important because it sets the foundation for debt facility, a price equity round or a sale. But perhaps more importantly, the second part.
The second part answers your question and that’s dashboards and models. And so the other reason, in addition to fix it one time, that we get hired is business intelligence in support of monetizing the business. So we have fractional CFOs who lead our client implementations. These are accounting and finance professionals who spent decades in the role. But every single founder and C-suite member says the same exact thing, showing my dashboards. I want to break down.
And so we understand that’s the case. We benchmark individual components of financials. We’re publishing ratios, we’re publishing SaaS metrics. And that’s really where, you know, the magic, if you will, lies. Everyone just loves seeing, you know, what their performance looks like. And then, you know, saying, okay, well, help me interpret the T-leaps fractional CFO. And so, yeah, in our case, the irony is all this lifting takes place in the background, significant amount of lifting, but it’s all kind of unsung because no one really cares about debits or credits or ensuring invoices get paid on time. But it just so happens all of that is necessary in order to make business run efficiently.
Joe: This is great. First of all, I’m going to link the tech stack you mentioned on the website. So that’ll be in the show notes. So anyone that wants to see it can click through and go to the website and see that.
But you gave me the perfect segue into like kind of the last chunk of a conversation. I told you I was going to get back to rule of 40 and metrics and the question I had was about tracking your progress on kind of like paths of profitability. And so if you were building out a dashboard as you obviously do, because you just mentioned that is what everybody wants to see. If you’re building out a dashboard to track this conversation that we’re talking about, this path to profitability thing, what are the metrics you’re putting on it?
We already talked about rule of 40 and I will get that follow-up question in there, but other than the rule of 40, like what are you looking at? Whether it’s day to day, week to week, month to month, quarter to quarter?
Kristian: Yeah. So in our, so let me give some shout out to some vendor partners out there who were big fans of, so we use Visible for our dashboards based at Chicago. Great, great tech. They really get it. They build dashboards, not only for founders, but for VCs as well. And, I am a big fan of Excel.
But Excel has limitations. And so to answer your question, and on the path to profitability, it really boils down to forecast. And so what are the inputs? So if you think about a forecast, it’s where your actuals pick up. So for sake of example, we just closed in September, so Q3. And if we want to see the rest of the year or the first half next year, we now just need to start estimating what revenue is going to look like.
It depends on the business, but it’s going to be a function of, hey, where did revenue close? What is my trailing six months, new percentage, expansion, next percentage, growth, I mean matured percentage because all of that’s going to influence October, the rest of the quarter, next year. I now also need to go do an extract from my CRM. The sales team should be keeping HubSpot, Salesforce, Copper, up-to-date. When do they anticipate deals closing? What’s the actual ACV, extract that, probability adjust it, and then use that to marry it up against what your current revenue is.
All right, so now we have a revenue forecast. Same concept on expense side. We know what the preceding expenses are. Question is, do we have any new ones coming up? Whether it’s new vendors, hires, what have you, and all of that information should be incorporated in your expense. And what do you get? You ended up getting bottom line, which you can then start to take a look and say, well, what’s happening in my cash? Now, where it gets a tiny bit complicated is depending on what the business is selling. And so for sake of example, if a business is selling prepaid 12-month subscriptions, that has a different cash profile than someone who’s selling monthly subscriptions. And so, you know, here’s again, I admitted I was biased.
Here’s where software programs and accounting and finance providers start to separate themselves because it’s not — especially if you’re preparing your financial loan on an accrual basis, which as a SaaS company who’s selling subscriptions for the month, you have to do if you’re going to have metrics that are coherent — you now need a forecasting platform that includes Owner revenue, prepaid expenses if your cash profile doesn’t match your PNL. Giraffe does has a cash flow statement, which is looking at effectively changes on your balance sheet, which is a derivative of your PNL in order to better understand what your cash looks like o
over the coming months.
Joe: So that the, the system conversation, dashboard conversation, I appreciate all the, the insight there. I want to get to, so I’m running out of time with you and I want to get to this rule of 40 question I’ve been asking about. We’ve done work with, I don’t know if you know, Ray Reich runs formerly RevOpSquared, now Benchmarkit, but he does these like annual SaaS metric surveys and benchmarks. And so his big shtick for, I don’t know, what seems like the last year or so has been that rule of 40 is now like the primary driver of like a SaaS company, like a VC-backed SaaS company’s valuation. Like that’s what we should be looking at to see whether or not you’ll be valued highly in the market.
It seems like such an oversimplification of a metric to me. I want you to either disagree or agree. Make the case for me to believe that rule of 40 is like a critical metric on path to profitability. Cause to me, it just, it seems to lack nuance to me. And I’m curious how you think about that. So I’ll start by saying.
Kristian: I offered up rule of 40 as a potential benchmark, but by no means does it drive my decision-making. I’ll tell you, so today, I serve as the CEO, but when I started the business, I had a fractional CFO hat on. I’ve been in a variety of accounting and financial roles for the previous 20 years. Next year I’ll mark two decades as a CFA charter holder. And so very fortunate to understand that kind of going back to what I said about the plan, you know, if you’re going to get, if you’re going to build a home. That’s called that you’re this, let’s call it when your home is finished and you’re ready to move in, the sale of your company.We should be asking questions. Well, how do we get from here to there? And what I’ve learned was maybe something you did, we both did as a kid. And that was, remember when you went to McDonald’s and you looked at your happy meal and they had a maze on the back and you know, you try to figure it out. Well, I don’t know about you, but I ended up looking starting at the end. And I went backwards.
I was like, hey, I figured it out. It’s an identical concept that we employ with our clients. We ask them first, well, what’s your end goal? Because if you tell me you want to sell this company next year for 50 million versus IPO and as a unicorn, those are two different sets of plans. Time horizon impacts that as well. Before I would start a conversation around growth or profitability, it first and foremost is, what’s our destination?
Where are we going and what amount of time? How much gas do you think you have in the tank, Founder? From there, we’ll actually create a model that works backwards. Now, I’m going to exaggerate to make my point. If we hire a client that’s in year one, and he’s like, I want to sell them next year for a billion dollars, I’ll say, here’s the plan, but guess what? This growth percentage is not realistic. Said another way, if you think about my analogy, we’re really just using something like the rule of 40 as an overlay to test whether or not our assumptions are within the realm of reason. Is it say it’s absolute? By no means. There’s been no shortage of businesses who have had hockey stick growth, but I’d also say that in the exception. And so that’s where I think a real fractional CFO’s value lies is common sense and saying, I hear you loud and clear that you know, you want to retire next year, but let’s talk about reality.
Joe: Okay. I feel better about it, to be honest. Thank you. I appreciate you indulging my rule of 40 shtick that I’ve been on. In the background, honestly, I’ve never brought this up to anyone. So you’re the first person I’ve actually asked, but it felt appropriate to this. So I wanted to run with it. I appreciate that. My pleasure. All right, Kristian, I have two like sort of zoom out questions for you. They can be quicker. One is like very, we’ll call it fluffy, but the first one is a little bit more real. I want to ask what one piece of advice you have for it. So for companies that raised really big rounds in those years of like peak VC activity, like they were all in on the growth at all costs sort of phase and now like have this jarring sort of transition to where we are now, which is like, Hey, it’s time to get a little bit more cautious with that capital. What’s your biggest piece of advice for shifting operations to a more, let’s call it profitable or potentially profitable growth trajectory?
Kristian: I think it’s an understanding that as circumstances change, it’s okay that we change. And so Loom recently got acquired, albeit effectively at the same valuation as they did prior to the previous round. See that whole host of institutional investors who didn’t make any money. While unfortunate, I hate to say, that’s life. I mean, all things being equal. You know, if you can see a material liquidity event at this point in the market, I tip my hat. And so, you know, you think of founders are generally type A — hardwired do really really well, but, I think mental health is a real thing. Beating yourself up, you know, because you can’t three act your last investors money. I mean, of course I will you want you want to. Right. But if things change, I think it’s okay to let yourself off the hook. Obviously not ideal. I’m hardwired to win, you know, just as much of any other type A person, but I think there is tremendous value and understanding that things don’t always go as they plan.
There’s a tremendous amount of value and recognizing that. And sometimes saying, you know what? A double is better than a home run sometimes.
Joe: That’s a great way to put it, especially with, I think it’s tonight game seven of ALC or NLCS, so great baseball analogy to bring us toward the end here. I have one last question for you, Kristian. I ask everyone that comes on. It’s not necessarily about what we just discussed, but very simply, what’s something you know now that you wish you knew when you started your career?
That’s a great question. There’s two parts. Look, there’s a macro part and then I’ll go very tactical. If I’ll go strategic, then I’ll go tactical. So strategic, any would-be founders, I would tell you to start with something that broadly looks like professional services, i.e. something that can get you to profitability as fast as possible before you roll out a product. And the reason being is, that I’ll oversimplify, but it gives you tremendous amount of optionality.
Because you’re not in a position like, you know, the majority of VC-backed companies who are not profitable and now find themselves with less ability to make decisions because they have institutions on their cap table. And you can, and for a founder to give themselves more options, your cash flow positive, you’re in a better negotiating position should you decide to take money. So that’s number one. That’s strategic. Tactically? Oh my gosh.
There’s such a negative stigma around the trades and non-MBA type jobs that I think young founders, especially in their 20s, do themselves such a disservice. So said another way, you know, if I was 20 again and I was starting all over, I’d go start a plumbing company. You know, and not because I was going to be a plumber for the rest of my life, but the world needs plumbers.
And if you can be a phenomenal plumber, you can create a profitable plumbing business, then you can go create your plumbing app or whatever it is that you’re gonna go do next. And it’s fun to unpack things like this. One of the things I love is talking about is just what are the ingredients to success. I think people discount competition. So case in point, if everyone’s doing the same thing, there’s a tremendous amount of competition.
Where does the competition lie? Well, just look at a normal distribution. It’s most people are in the middle, right? Well, that’s where all the competition lies. So how does that affect us? Well, then we should go do the things that aren’t those people aren’t good. And one of the things, you know, and if you look at either tails, well, which one are you gonna choose? Well, I prefer riches over poverty. So I’m gonna go big, because that’s where the least amount of competition is. And so I think we should be asking ourselves how many 20-year-olds are starting construction businesses or dry cleaning businesses or lending, they’re not a lot. And when, you know, you have that amount of energy at your disposal and you don’t have kids because families absolutely, I don’t want to say complicate things, but it changes the dynamic.
Joe: It changes priorities quite a bit. Yeah.
Kristian: And so case in point, a shout out to my son, John Marquez, who is the founder of Franklin, Tennessee-based Bridger Design and Build. He graduated college last year and decided to go start a roofing business. And he’s 24 years old and there are a lot of elements, I’ll oversimplified by saying he’s hardwired to do a great job, but knock on wood, business is good. And does it mean he’s going to continue as a contractor for the rest of his life? No, but he’s accumulating a lot of experience. And so I will leave this as a last thought I’ll give you. You know, we tend to hold people like Bill Gates, Mark Zuckerberg in high regard. There’s something really practical, but a very practical benefit when you start in your early twenties versus your thirties or your forties. Think about Mark competing with other people his age today, he’s got decades more experience under his belt. The sooner you can start better.
Joe: I think this is episode 45 of the podcast. I’ve been doing this for a while. It comes out like every other week, generally, I never had anyone mentioned plumbing, construction. This is a very unique answer and a very good one. So I appreciate it. I always liked that question because it’s a podcast for finance folks. I am not a finance person. And this question always kind of like zooms us out a little bit. And it’s always stuff that I can take away as well. I appreciate that. It was a good answer, but that does take us to the end of my list of questions. So, Kristian, thank you so much for being here. I’m going to turn the floor over to you. Where can people go to learn more or to connect with you, to learn more about FinStrat management, the work you’re doing? The floor is yours, whatever you would like to promote, sir.
Kristian: Oh, well, thank you, Joe. Thank you again for having me. Glad we got this time together. Thanks for having me.
As I mentioned at the beginning of the call, we provide accounting, finance, and reporting services for early stage businesses, predominantly venture-backed, big emphasis on B2B SaaS, but investors as well, both angels and venture capital firms. And if you go out to our website, the address is F-I-N, short for financial, S-T-R-A-T, short for strategy, M-G-M-T, aggregated from management, dot com. You can find a Contact Us there. Someone on our team will circle back.
Joe: Well, this is a great conversation. I love doing this podcast. I love meeting people like you. So I had a good time. Yeah, hope maybe we can do it again sometime. Kristian: Sounds good. Thank you, Joe.