Reducing burn is top-of-mind for many founders right now. With VCs tightening the purse strings, founders are looking to cut back on spending and maximise efficiency, while also demonstrating the sustainable growth that VCs still want to see.
Capital-efficient growth is the M.O. But this is a stark contrast to the "grow at all costs" mantra that preceded us, and one that demands a different type of operator.
Investors aren't only looking for good tech, a strong team, and solid traction. With the power dynamics shifting, founders need to be prepared to have a clear path to profitability and confidence to be challenged on all aspects of the business.
That preparation starts with having an effective finance function.
Your finance function forms the foundation of an investible and scalable business. But if you're in cost-cutting mode, it can be hard to think about bringing on new team members - which is where outsourcing comes in.
When you outsource your finance function, you’ll get insights into the areas of your startup that are working and where you can economise, without compromise. It's a smart alternative that frees up resources and gives you much-needed insights into your business performance, without all the overhead.
Not only does this mean that you can make your runway last longer – you can find ways to increase efficiency in your spending and put your business on the pathway to profitability.
If you’re looking for ways to make your capital work smarter, here are 6 reasons why you should start with your finance function.
- A smart way to slow cash burn
- Conserve capital now, put your foot on the pedal later
- Have the confidence to be challenged
- Strengthen your position for a future raise
- An objective lens on your business
- Upskill your in-house team
1. A smart way to slow cash burn
"Startups that have extended their runway by making cuts must ensure that they have strong results, particularly when it comes to unit economics and growth rates, when they next tap the market for funding in one to two years’ time." - Benjamin Chong, Right Click Capital
When there's mounting pressure to increase efficiency, founders still need to demonstrate that they can operate effectively in this environment. Investors don't just want to see that you've made cuts - they want to see that you've made strategic decisions that are sustainable and that still deliver growth.
The message from US investors is to cut the "nice to haves" but continue to fund the core R&D. Aspects of your finance function can be outsourced without jeopardising the future of your business; while cutting sales and marketing may result in challenges with pipeline when you do need to commercialise.
2. CONSERVE CAPITAL NOW, PUT YOUR FOOT ON THE PEDAL LATER
When you're trying to extend runway in the short-term, one of the most obvious targets is headcount. But the catch-22 is that you need people - and good people - to grow in the future. It also takes a significant amount of effort to upskill these new hires, sometimes in the realm of one to two years (which is the equivalent of a lifetime in this market).
With an outsourced team, you have greater flexibility.
If you're in an uncertain market, you can bring on a team for basic bookkeeping support in the early stages, and then scale up those services as you grow. You can access an outsourced CFO to provide strategic insights for board meetings or hire a team to help plug in any gaps if an integral employee resigns or needs to take an extended break.
Ultimately, this means you have more flexibility and more breathing room. And if you need to scale down further, you don’t need to worry about employee termination or redundancy if you no longer require their utilisation.
3. Have the CONFIDENCE to be challenged
"The product vision, the problem, the solution…that's table stakes and expected for an exceptional founder to be able to clearly communicate. But the real thing that sets a founder apart is where they're really solid on the numbers and the unit economics of their business." - Jerry Stesel, OIF Ventures
In this operating environment, make no mistake: expect more due diligence and expect your financial models and revenue forecasts will be challenged.
When you're outsourcing, make sure you're not compromising future raises. It can be tempting to go for a sub-par short-term solution to get by, but this can put you in a precarious position when it comes time to raise or exit.
Accounting and bookkeeping can seem like straightforward tasks, but as you scale and expand, the demands grow increasingly complex. The smallest of errors can lead to problems down the track, particularly if you’re raising, being audited, or preparing for exit. You may also find that things slip through the cracks.
Experienced outsourced teams from larger firms work with government bodies and multinational corporations, which means everything needs to be accurate and compliant. When you work with them, there are control measures in place to ensure the accurate processing of all records for both financial and tax compliance (which saves a ton of headaches down the line).
4. strengthen your position for a future raise
On that note of due diligence, investors and buyers alike are putting even more scrutiny on the numbers than ever. You’ll need to be prepared for your books to be an open book – sometimes as far back as 12-24 months. If your financial reporting isn’t clear or you're burning too much cash, this can raise doubts about your business, or you may find an investor sees this as a reason not to back you.
This is paramount as a flood of startups are predicted to enter the market in late 2023 and 2024, after running out of runway from their last raise.
Even if you have enough for the next 18-24 months, it pays to invest in your finance function now so that everything is in order when you do go for your next round of funding.
Who you work with matters as well. Having a reputable name in your corner can help instil confidence with investors, build trust in you as a founder, and demonstrate that you're taking the business seriously.
5. An objective lens on your business
"What I keep saying to my founders is that it's time to get back to business basics. It's time to really focus on your strategy [and have] ruthless prioritisation of where you're going to put your energy and your resources. Then once you've prioritised, really understand those unit economics. Understand a dollar in, how many dollars out...what is the input and what is the output of that dollar, and how can you get super efficient around that?" - Rachael Neumann, Flying Fox Ventures
Unfortunately, cutting back doesn't mean slowing down. Investors still want to see growth - the caveat is that they want to see it with efficiency. Founders need to be more deliberate with their spending and focus on having good unit economics, sustainable growth, and clear paths to profitability.
However, if you're flying a plane and fighting the law of gravity, it's near impossible to take a step back and view the situation from an objective lens. Even CFOs and other members of your leadership team can quickly get sucked into the day-to-day and find it challenging to step back and view the business the way someone from the outside does.
That’s when it benefits to have an external view on your startup.
An outsourced team can take a look at your business from an impartial lens, share insights on the state of your business performance based on what they’re seeing in the market (and their own professional experience).
They'll be able to provide insights on points like:
- how to cut burn while still ensuring you can operate effectively afterwards.
- where you may be overspending or where you're underpricing and leaving money on the table.
- how to demonstrate that your cost-cutting measures are sustainable and successful.
- whether your current trajectory is sustainable.
6. upskill your in-house team
Contrary to what you may believe, the goal of an outsourced team should never be to take that function and hold on to it forever. Investors don't want to see that you're outsourcing your senior finance roles at a Series B. They want to know that you have the capability and insights in-house.
That's why when you're outsourcing, it's critical to have an exit strategy. The best business partners should constantly be upskilling and educating your in-house team with the goal to help you strengthen your existing unit and step away to a supporting role.
Top-quality advisers should bring their experience and expertise to your business and pass the wisdom on, so that your team can benefit from their knowledge and use that to make decisions for your business in the future.
If you're looking for support to strengthening your finance function and maximise capital efficiency, KPMG High Growth Ventures can help. Our services are specifically designed with founders and their teams in mind, and delivered by specialists who have worked with, and understand startups.
Get in touch with us to see how we can help you with your business.