- Kirsty Nathoo, CFO of Y Combinator, discusses common mistakes made by startups regarding their cash flow.
- She emphasizes the importance of knowing three key numbers: bank balance, money coming in, and money going out.
- These numbers can be used to calculate burn rate, runway, growth rate, and whether the company is default alive or default dead.
- Startups should regularly monitor these numbers, ideally on a weekly basis, to ensure the health of their company.
- It is crucial to accurately represent expenses, as they often increase over time, including costs related to hiring employees.

- An employee's cost to the company is typically 25-50% more than their salary
- Paid acquisition costs tend to increase over time, so it's important to consider future costs
- Outsourcing financial responsibilities to a bookkeeper is common, but founders should still understand the numbers and question any discrepancies
- Hiring too quickly can be detrimental, and it's important to ensure that each hire provides a return on investment
- Scaling before achieving product-market fit is risky and can lead to wasted resources
- Letting runway (available funds) get too low before raising money can make it difficult to secure funding

- Always assume that you will never raise any more money and aim to get to profitability on the money you have raised.
- Stage money is easier to raise than money at series A and beyond, where sustained growth and product market fit are required.
- Don't leave it too late to raise money as your leverage decreases when you are running out of runway.
- Aim for at least 12 months of runway before considering raising more money or getting to profitability.
- Most companies die because they run out of money, so it is important to manage cash balance, understand expenses, and have a plan to get to profitability.
- The decision to be profitable or raise massive amounts of money depends on the stage of the company and should be balanced.
- A CFO is usually brought in late, post-Series A, and there are services available for consulting CFOs.
- It is better to build financial projections yourself, but there are tools available online.
- If you haven't found product market fit yet, it is not necessary to provide forecasts in your deck at the seed stage.

Kirsty Nathoo, CFO of Y Combinator, highlights the importance of monitoring key financial numbers for startups. These numbers include bank balance, money coming in, and money going out, which can be used to calculate burn rate, runway, and growth rate. Startups should regularly track these numbers to ensure the health of their company. It is crucial to accurately represent expenses, consider future costs, and understand the financial implications of hiring employees. Timing is important when raising money, as it becomes more difficult as runway decreases. Aim for at least 12 months of runway before considering raising more money or achieving profitability. Managing cash balance and having a plan to reach profitability is essential to avoid running out of money. The decision to be profitable or raise large amounts of money depends on the stage of the company. Bringing in a CFO is typically done post-Series A, but consulting CFO services are available. Building financial projections and providing forecasts may not be necessary at the seed stage if product-market fit has not been achieved yet.

YC Partner and CFO Kirsty Nathoo shares the most common mistakes startups make with their finances and how they can prevent them.

You can find the lecture slides and transcript here: https://www.startupschool.org/videos/70

Find more Startup School and YC content at https://www.startupschool.org/library.

Morning everybody, thank you for coming in at 9 o'clock.

So as Kevin mentioned, my name is Kirsty Nathoo and I'm the CFO here at Y Combinator.

So I've actually helped now 2,000 companies almost as they've come through Y Combinator.

So seen a lot, seen a lot of successes and seen a lot of failures.

So I'm going to help you just understand some of the big mistakes that we see some of these companies doing based on their cash, based on their money.

And so for every business, whether it's a startup or a mom and pop shop, cash is its lifeblood.

And if you run out of cash, then the business dies.

There's really no going back at that point.

And it's actually surprisingly easy to run out of cash.

We see many startups not realize that they have done that until it's too late to actually be able to turn it round and do something about it.

So we're gonna talk about these 3 early stage pitfalls.

So this is probably most relevant to you right now, and then we'll talk through another 3 that as you start to raise money and are starting to think about hiring, are some other mistakes that companies make.

So we're going to look at what the numbers you should be looking at, how often you should be looking at them, whether your expenses are realistic, and then thinking a little bit more about hiring and looking at responsibilities.

All right, so let's move on to the first 1.

So the first mistake is really not knowing what numbers to look at to make sure that the health of your company is good.

And really, there are 3 things that you should know.

Your bank balance, the money coming in, and the money going out.

You don't need anything fancy to be able to do this.

This is all information you can get from your online banking or your bank statements.

You don't need bookkeepers, you don't need financial software.

This is super straightforward, but you would be amazed at how many companies don't look at this.

And then using these 3 numbers, you can then calculate some other things.

You can look at burn, you can look at your runway, you can look at growth rate, and you can figure out whether the company is default alive.

Your burn is purely money in minus money out.

Again, you can get this from your bank statements.

It's effectively just the change in bank balance between 2 dates.

You have 25K expenses, you have 10K of revenue, so your burn is 15K.

If your expenses are a little bit lumpy, some companies, you know, you might have a one-off month where, I don't know, paid a legal bill or something that's super high, you can do this.

You can look at average expenses as well to figure out your burn.

And that's often referred to as average burn.

So you might look at it over 3 months to kind of get more of an idea.

So then once you know your burn, then you can start to look at what your runway is.

And what this means is how long do you have until you run out of money?

way that you calculate that is you look at your existing bank balance divided by your average burn and that gives you a number of months.

We've just calculated our burn rate to be 15K and so we have 10 months of runway.

Again, super straightforward but you'd be amazed at how many companies or how many founders don't know these numbers for their company.

And just a point here that, again, the burn might change over time, but this is a number for you.

This is not a number to try to make things look good.

So looking at the burn and going, well, this month it was 15K, but let's just pretend it was 10K, so then that makes it look like that we have 15 months of runway left.

You're still gonna run out of money on the same day.

It's just making you feel better right now.

So it's super important to really be honest with yourself on these.

And so this is just looking at 2 periods of time.

So your money in in month 2, minus your money in in month 1, divided by your money in in month 1.

So this is looking at the rate that your revenue is increasing.

So in our example here, we have 10 K of revenue in July, 12 K in August.

Just a note for the people that weren't the math wiz at school, a constant growth rate is what's going to give you the J curve in growth of revenue because if you have 20% growing each month as your numbers increase each month that 20% is a larger number.

Okay and then the final 1 is whether the company is default alive or the other the other side of it is is it default dead.

So the way you calculate this is, if your expenses are constant, and your revenue growth that you've just calculated continues, have you got enough cash to reach profitability?

And there's a handy little calculator that Trevor Blackwell, who's 1 of the founders of Y Combinator, created for you to do this.

And basically there are 3 things that you can play with.

So you can look at your monthly expenses, which is the red line.

You can look at your monthly revenue starting point, which is the green point over at the start, and then you can change the gradient of that line to be your growth rate, and it will calculate where you become profitable and how much capital is needed.

Now this example isn't the same numbers as the ones that we've just been working through.

So in this example, this is assuming that you will need 150k of money to get to profitability and it will take you 2 years.

And so those are really key things to know because if you only have 100K of money in your bank account, you know that you've got a problem and you know that you either need to find a way to increase your revenue growth or you need to find a way to cut expenses.

Because the whole goal here is to be at the point where you can find a path to profitability because it gives you freedom.

Being profitable gives you freedom because you aren't in a position to need to raise money.

And kind of like dating, if you don't need to raise money, you appear less desperate, so the investors want to give you money more, so it's easier to raise money.

So it's actually really important to have that option.

It can sometimes, you know, it can be a switch as well.

You don't have to necessarily be profitable right now, but If you know that you could turn off 1 specific expense or do 1 specific thing and be profitable, then that's also a great safety net.

There's also a really great essay that talks about this in more detail.

This was written by Paul Graham, and you can see the link here to where that, that gives you more information on this.

And again, it's the kind of thing that when we're doing office hours with founders, it's 1 of the first questions we ask, and you'd be amazed how many people don't know the answer.

These numbers, super easy to calculate, super straightforward.

The next problem is that people go along and they say, okay, I've looked at my runway, I've looked at my revenue, I know all my numbers, and then kind of forget about it.

But actually, This needs to happen pretty often.

You shouldn't be looking at it every quarter or every month.

You should be looking at it at least every week.

And if your runway is getting low or things are looking, not very constant, consistent, You should be looking at it very often, like sometimes daily.

And whenever anyone asks, you should know your numbers.

How many of you know how much money is in the company bank account if you already have 1?

Slightly less number, slightly less hands, but that's pretty good, I like it, I'm impressed.

Okay, the next 1 is under-representing your expenses.

So if you think back to that default to live calculator, that assumes that your expenses are going to remain constant.

And actually in reality, that's probably unlikely.

Most startups, their expenses will ramp up over time.

And you should understand how that's going to happen.

You know, what kind of expenses are going to increase and what are they going to increase to?

So some examples of expenses that may change over time is the first 1 is undervaluing your own time.

Particularly in the early days where you're doing everything and you're either paying yourself minimum wage or some very small amount, which by the way in California everybody should be paying themselves minimum wage, and you're also doing things that don't scale in order to acquire users.

And that's totally fine and that's what we recommend that people do, but it can make your customer acquisition costs look lower than really they are.

And so you should be aware that over time, as you start to hire people to look into these, that those expenses are going to go up.

For every person that you hire, you need to provide them with equipment, you need probably desk space, You need health insurance probably, depending on where you're based.

And so all of these things cost extra money on top of the salary.

And so depending on location, a good rule of thumb is that an employee will cost about 25 to 50% more than just their salary.

So if they're being paid 100K a year, then your fully loaded cost to the company is going to be somewhere between 125K to 150K.

And again, that's super easy to forget about.

You think, oh, I'm going to hire an engineer.

That means, you know, that's all it's going to cost.

But it's amazing how those numbers do add up.

Finally, assuming paid acquisition costs remain constant is another mistake that we see people make a lot.

Whilst it may not seem like this, oftentimes in the early days, it's actually easiest to find your early users because they're the ones that are totally motivated to use the product.

And actually over time, it gets harder to find and convert users and so the cost of doing that goes up.

And so again, you should be thinking about that, you should be looking at what your costs are right now and thinking are they reasonable, what do we think they might go up to?

Because if you can look at things in the worst case scenario and you have, you know, in the worst case scenario you calculate that you have 8 months of revenue, 8 months of runway left but actually then things are better than that and you end up with 10 months of revenue, then that's bonus, right?

You've got, you've got a bit longer to figure things out.

It's not 1 of these things that's supposed to make you feel good.

It's not 1 of the things that's supposed to be used to, to, compare yourself against other companies.

It's for you to know the health of your company.

Don't, you know, try to massage these numbers to feel like it's making yourselves better because All that's going to happen is you run out of money and it'll become a shock.

All right, so these ones now are starting to get a little bit more as you raise money, as you're starting to hire people.

So it's good to bear in mind right now, but these are probably less relevant to a lot of you for now.

Okay, the first 1 is outsourcing responsibility and often the CEO will hire a bookkeeper to prepare the finances for a company as they start to get a little bit more complex and that's a total normal thing to do.

It's usually once people raise some money, it's not a good time.

It's not a good use of the CEO's time to be doing the books and the CEO can be doing much more high leverage things.

But the thing to bear in mind is that even though the bookkeeper is Doing the books and preparing those numbers, the responsibility is still everybody's in the company, particularly the CEO, but all the founders, everybody should know what these numbers are.

An external bookkeeper isn't going to know the business like you know the business.

You know, oftentimes they will, the way that they they work is that they will get hold of bank statements and they'll see money coming in and they'll see money coming out and they'll do their best guess about what these things are and they won't always be right and you can't really expect them to always be 100% right because they're looking at it from a very removed position.

And so it's up to the founders and it's up to the team to look at those reports that the bookkeepers send every month and to make sure that you understand them and to make sure that if anything that comes through that looks strange, you question.

It's not necessarily, I think a lot of it is that people are concerned that asking questions will make it look like they don't understand their numbers.

But usually what happens is if you don't understand what these numbers are looking like, it's usually because there's been some misunderstanding in the reporting of the numbers.

And so if you're like, well, I thought my revenue was going to be a bit higher this month, what's going on?

Then you can actually go in and look and query what's going into that and you might find that there has been a mistake made.

And this is probably 1 of the number 1 things that I get founders coming to me complaining about.

They'll come up to me in this total panic and they'll be like, the bookkeeper messed up and they told us all this wrong stuff and now I have no runway and I don't know what's going on.

And actually what happened is the bookkeeper sent them the monthly reports.

Founders didn't look at the reports, didn't figure out what was going on and now there isn't enough time left for them to turn the business around either to get profitable or to raise money to figure things out and the company dies because it runs out of cash.

So super, super important to be on this all the time.

Hiring too quickly and scaling the company too quickly is a, it's really easy to do, to hire too quickly because you're under a lot of pressure to hire people.

It feels like it's a really easy, really measurable piece of information.

You talk to founders and 1 of the first questions that they will often ask is, oh, so how many employees are you at right now?

And you say, oh, I'm at 25, and you're thinking, oh no, I've only got 10 employees, that means they're way more successful than I am.

So we already mentioned that Hiring employees cost more than just their salary.

But you should also be conscious that every hire is actually an investment into the business and you should be making sure that you're getting a return on that investment.

And now for some types of employees, that's super easy to measure.

So, you know, you think about a salesperson, if they're not bringing in more sales than it's costing the business to hire them, then clearly you're not getting a good return on investment, but then think about a community manager or a, you know, a support manager.

It's much harder to measure that And that's kind of 1 of the things that as a CEO, you need to be looking at and you need to be figuring out to make sure that all the people in your company are actually working to make the company more valuable.

And sadly this is the point where, you know, if people aren't working out, you should be prepared to fire fast.

You know, if people aren't pulling their weight, then they need to leave the company.

And like I say, it's easy to fall into this trap that the more people you have, the better you're doing, but actually the best companies do more with less.

And so actually the real way that you should measure yourselves is what's my ratio of revenue to employees?

Because the higher that is, the better you're doing.

And that's the path to being profitable from an early stage, which then takes the pressure off to the worry about whether the company is going to continue.

And it's also easy to feel like you have to kind of compete with all the flashy startups that have raised bunches of money and they're all hiring data scientists right now and you know, oh that means I must need a data scientist so I'd better hire a data scientist.

You know, again, the best companies do more with less.

And if you can build a really great company with less employees, then that's amazing for everybody involved.

And bear in mind, you know, you should be treating this money carefully.

It's not a case of just, oh, I need to hire this person.

I need to hire that person because what the investors who are giving you this money for, they're asking you to do something, basically a miracle.

They're asking you to take their money and turn it into 10 or a hundred times that amount of money to give back to them.

And the way you're going to do that is by being careful with your expenses and making sure that your revenue grows.

As a follow on to that, scaling before you get product market fit is also another dangerous thing that people fall into quite easily.

At the point where you're still figuring out what your product is and you're trying to find product market fit, you should be spending as little as possible.

And then that will give you the runway to have time to figure out what it is that you should be building.

And then, you know, people will be beating down the door to buy your product.

More employees will not help you get to product market fit.

It will not help you get there more efficiently.

And 1 of the conversations that I have with founders is something along the lines of, oh, my sales are low because I don't really have enough salespeople.

So if I hire another couple of salespeople, then my sales will obviously increase.

That doesn't sound like product market fit to me.

If you have that, then customers are beating a path to your door and it feels like the wheels are trying to, wheels are falling off as you're trying to look after all those customers.

So just hiring more salespeople isn't necessarily going to be the thing that sets that going.

Also, convincing yourself that you need more developers or you need more people to get the thing that gives you the product market fit.

Another conversation along this is something like, I need 4 more developers because then I can build feature X, Y, and Z and then obviously everybody will buy it.

But again, if you have product market fit, then even your janky V 0 that doesn't have all of these fancy things is solving a big enough problem for everybody that they're willing to pay for it and they love you for it anyway and then you can start building up on the more features and then you can start hiring to do that.

This is, This is the 1 that there's no coming back from.

The other ones, if you make these mistakes, you can probably solve this and you can, you know, if you hide too quickly, you can figure that out.

If you don't know your numbers, you can learn your numbers.

This is the 1 that is, you know, no going back.

So if you let your runway get too low before raising, you're going to have problems raising your money.

So the first thing is you should always assume that you will never raise any more money.

Always assume that the previous money that you raised will be your last and that you should be aiming to get to profitability on that money.

So again, the conversations that I have with founders where they say, oh, it's fine, my investors are going to put in another million dollars, it'll be totally fine.

That's kind of scary if you're relying on your investors to do that because they don't always, sometimes they might, but they don't always.

So stage money is the money that you'll raise off and on just an idea.

You know, you'll be able to talk to investors about a, an idea for a product.

You've got a hypothesis that you, you want to be able to check and they will give you some money.

Once you get to series A and beyond, that becomes much, much harder.

This is why it's a lot harder to raise money as you go through the life of the company and in particular, don't leave it too late because if you're running out of runway, your leverage goes down as you're trying to raise money.

So if you have 6 months of runway, let's say, and you think you're about to go and start raising money, that's pretty scary.

It could take 3 months more to actually get an investor to agree to put money in.

And as your cash balances are decreasing over those 3 months, you're losing leverage.

You can see from here that probably at 6 months, maybe you can just about pull it off, but really you want to be thinking at 12 months runway, that's the point where you're thinking, okay, maybe I need to think about whether I raise money or whether I'm thinking about getting to profitability.

And also if you get to 6 months and you're unsuccessful in raising money, you really don't have a lot of time to turn this around, to get to profitability for the company to succeed.

Again, there's a really great essay on our blog that goes into this in more detail, link down here.

So you can, you can read that, at your, at your leisure and hopefully take that on board.

Okay, so in conclusion, most companies die because they run out of money.

It's super easy not to run out of money just by looking at a certain number of things.

Knowing your cash balance in your runway, understanding how your expenses are going to increase, understanding that the ratio of revenue to employees is a better metric than just the number of employees, and having a plan to get to profitability because you should assume you're not going to raise any more money.

I've always thought that you're saying that you should try to get profitability on a shoe strand if possible.

But I've read articles which claim that being profitable is actually bad somehow in Silicon Valley, and you should try to raise massive amounts of money and not be profitable and get giant market share and go along those lines.

What do you think of those claims and that's something you can be vulnerable or appropriate about?

Yeah, so the question is how do you balance the 2 sides of you should do things on a shoestring and be profitable as early as possible versus you should just throw money and get market share as fast as possible?

I think it depends on the stage of the company as well.

You know, in the early days, then probably being careful with your money and making sure that you are, you have a plan to get to profitability is a good thing.

Just having a plan doesn't mean that you necessarily have to actually be doing it.

You know, so an example might be, maybe you're plowing all of your revenues back into marketing in some description or rather.

And knowing that you could actually slow, The way to reduce your expenses is to reduce your marketing, which might slow your revenue a little bit, but it would conserve that cash to preserve the runway.

And, you know, I mean, the other thing you have to bear in mind is that obviously the investors want you to spend money super fast, they want you to come back to them cap in hand with, you know, please, please give us more money.

So there is that there are some tensions there, but it's all about just being responsible with it and giving yourself enough time and enough runway to be able to figure it out.

You mentioned the CFO area and I'm just curious at what stage do you bring

Do you start with a part-time CFO first and then graduate to a full-time CFO.

Okay, so the question is when do you bring in a CFO?

Even probably post-Series A, you probably don't need a full-time CFO at that point.

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Kirsty Nathoo - Managing Startup Finances