I once read a funny quote: “English isn’t a language, it’s three languages stacked on top of each other wearing a trench coat.” That’s why English feels so inconsistent – it’s a mix of Latin, Greek and old German, with each contributing different things: structure, vocabulary, the works. I keep remembering this whenever I see founders struggling with the vague and scary monster they think of as “finance”.
To many technical founders, finance feels alien, threatening and incomprehensible. So they do what any normal human being would do – ignore it and hope it goes away so they can go back doing whatever they love best.
But doing that will cost you. I can’t tell you how many founders I’ve spoken to who wish they’d paid more attention to financial matters and have the war stories and scars to prove it.
In your startup journey, your grasp of finance will be the deciding factor between:
- Generating enthusiasm vs. apathy from investors
- Making money vs. being forced back to work from your startup efforts or
- Building a thriving startup vs. one that fizzles and dies
But your choice is not between completely ignoring finance and geeking out on spreadsheets. There’s a third way.
The Three-in-One “Monster”
Finance has the same issue as English – it’s three different things stacked on top of each other, wearing a trench coat. So the next time you are accosted by a threatening “finance” problem, don’t run. Remove the trench coat, and you’ll find it a lot easier to tackle this “monster”.
The Legs: Structure
The “legs” of finance are what makes it move and work. It’s the structure of institutions and practices that allows money to flow. You know you’re dealing with structure when money flow is involved – between you and/or any institutional entities. To understand structure, focus on a few simple questions:
- What type of entity or institution is involved? e.g. is it a VC firm, angel investor or a bank?
- What is its motivation or fuel to act? e.g., 10X returns for a VC/ angel, safe return of capital for a bank
- What are the rules by which it moves? e.g., VC’s base decisions on the future, banks overweight the past and present.
- What’s the reach? e.g., venture capital firms can invest in the tens or even hundreds of millions, whereas banks extend much smaller sums, if they even entertain your request.
The Backbone: The Strategy and Story
The backbone is invisible but essential to holding the body together. In the context of startup finance, the equivalent is strategy. It’s what drives how your business will work, why it will win or lose. It integrates the many moving parts of your startup that interact with each other to produce the end result – the speed and direction of the whole body.
But does it really matter?
Kodak and Fujifilm were both leaders in the photography and film business. Kodak refused to change its strategy, and bit the dust. Fujifilm, on the other hand, adapted more than once, and continues to thrive.
Early stage founders often miss the importance of the middle – because it’s invisible. It’s also because strategy isn’t quite pure finance. But strategy drives everything that matters about your startup – the expectations, the results, the risks, the rewards. And all of those are expressed in the language of finance.
The Head: The Score
The most visible part of all this is the head. It keeps score on where you’re headed, how you’re doing, and what needs attention.
Translated to startup finance, the head is what tells you how you’re tracking to where you want to be. It’s the collection of numbers, financial metrics, that are the signals for how everything else is working – the scorecard.
This is the part founders seem most allergic to, out of all the parts of finance. Founders fear numbers because they see only the head, and fail to see its intimate connection to strategy, which connects to the structure of money fueling their function. When you see that, it’s a lot easier to focus only on those scores that will make or break your venture, ignore the rest of the confusing mass of numbers.
A Simple Approach to Slaying the Fear
So what?
As a founder, almost every problem you wrestle with everyday has finance-related impacts: an investor sends you a term sheet, or you just missed your sales targets and need to correct course pronto. You have conflicting options and opinions, and need to chart your path despite the uncertainty. If these problems leave you paralyzed with fear and indecision, dismantling the “man” inside the trench coat is your best bet to making real progress.
Step 1: Break Out The Parts
Every problem has some or all of these three parts at play. For example, negotiating a fundraising deal means:
- Understanding how investors evaluate and close deals: a structure issue
- Knowing what types of startups get funded: a strategy issue
- Knowing where you come out when all is said and done: a scorecard issue
Step 2: Apply the Right Lens to Each Part
Once you’ve identified the parts, apply the correct lens to tackle each part of the problem:
Structure:
Understand who the players are, what their incentives and motivations are, and how they engage.
When you’re raising your round, it might mean understanding the decision making process of a VC, for example, and recognizing that you have a two-stage sell – to the deal team, and indirectly, to the investment committee of that firm.
Strategy and Story
The strategy part deals with the logical story for what’s happening or what you want to have happen: What is the chain of events? What are the critical links in that chain? Where are the weakness and pressure points?
To get funded, for example, your strategy is how you articulate who you are and why your startup is an attractive opportunity. Does it all add up to a cohesive and compelling whole? Does it match what the funder is looking for? Your focus here is on the logic of the narrative.
Score:
You’ll never see a problem that doesn’t have a financial metric tagging along. Your hack is to pick the one or two metrics that are going to make or break the case from the dozens clamoring for your attention. In fundraising, for example, it’s:
- Key numbers underlying your strategy: e.g., revenue, growth, costs, amount of the ask
- Key numbers driving the deal: Valuation, shares granted, payout preferences
The secret is not how you calculate the numbers – that’s just mechanics. It’s knowing which numbers to worry about and which to let go. The other secret is knowing which levers move the numbers you care about and by how much.
Step 3: Work the Waterfall
With these pieces in place, your problem almost solves itself.
- You know the rules of who you’re dealing with, so you engage thoughtfully
- You understand the game and the players so you craft the right narrative to align with them
- You nail structure and strategy, so you’re clear about the few scorecard items that will seal the deal – for you and your counterparts.
With this toolkit, finance will become as terrifying as the imaginary monster under the bed – a mythical creature with no basis in reality.
A Surprise Bonus
Are there more skills you need? Absolutely! Will it feel uncomfortable? For sure. But a little discomfort and a dash of learning will pay off big dividends in confidence and credibility at the most important inflection points in your startup journey.
I realized an even bigger benefit to founders as I observed the startup landscape. Today too many hardworking founders fall victim to smooth talking operators who appear to help you but are really in it for themselves- often at your expense. I see trusting founders get hurt over and over accepting offers that are too good to be true because they don’t take the step of understanding the incentives of who they’re dealing with.
So here’s your surprise bonus: Understanding the building blocks of finance is really your critical thinking hack to help you smoke out offers that are too good to be true, or impose an unreasonable cost on you now or in the future. Breaking it down into structure, story and score will help you walk away quickly when the math doesn’t add up.
And in startups as in everything else – your safety comes first!
