Get insights from this informative discussion about the shift in strategic focus for tech companies from
growth to profitability. Our panelists discuss both the venture capital (VC) and tech chief financial officer (CFO) perspectives in this dynamic market environment.
Speakers:
- Scott Clark, Head of Finance, Instabase
- Javier Cortes Angel, Chief of Staff, Flexport
- Venky Ganesan, Partner, Menlo Ventures
- Isaac Oates, Founder & CEO, Justworks (moderator)
Transcript
- Good morning and good afternoon, everyone. My name is Chris Coleman, Head of Business Banking for First Republic Bank. I hope you all can hear me now. Hold on just one moment. Sounds like we're good to go. Thank you. I was just thinking coming into this, how lucky it is, I am to be able to welcome you here today. We have a long history of trying to bring together, create community and exchange best practices and it couldn't be more timely with the new environment that we're in here today. This is session one of our virtual CFO conference and we've entitled it Shifting the Strategic Mindset from Growth to Profitability. We've invited an expert panel of speakers today. Let me just quickly introduce them, Venky Ganesan, partner at Menlo Ventures. Secondly, Scott Clark, Head of Staff at Instabase. Scott, wave, it's great for the crowd. Thank you. Javier Cortes, Chief of Staff at Flexport. And then Isaac Oates, who is the founder and CEO of Justworks. Before we begin, I'd like to acknowledge again this very unique environment not only joining here virtually but the whole COVID situation, the economic downturn, and the social protests that are going on in the country has created a really unique environment, unique in my career for sure. First Republic is here to help you navigate all of this as represented by this seminar webinar today. And in particular, we want to do it for affirm our commitment. As an organization we have a long history promoting diversity, equity and inclusion. And I think it's again representative of even our panelists here today. Despite of all these challenges were encouraged by what we're hearing from technology leaders about how they are using new strategies to respond to change. I hope this discussion will provide some further insight into those strategies and be helpful to you. Before we start, a quick housekeeping note, we will take questions at the end of the session. And if you want to submit a question, if you look at your screen on the bottom bar, right in the middle, it says Q and A, just go ahead and click on that and type away and we'll try to get to as many questions as time permits. So with that, let me now turn it over to our moderator, Isaac Oates. Isaac, it's all yours.
- Amazing, thanks, Chris. I appreciate you and the First Republic team having all of us on the panel today. So yeah, so we're gonna walk through a couple of topics we've been discussing ahead of time that I hope everybody finds really interesting. But I thought maybe before we got started, it would be useful if each of the three panelists, and maybe even me, could describe both the companies they're at, and then the stage that they're at just so we kind of understand what everybody's context is. And maybe Venky we can start with you, in terms of what kinds of investments you make, and so on.
- Absolutely, Isaac, thank you for having me. Hopefully, people can hear me okay. Excited to be here. I've done many things, but this is my first Zoom panel, so I'm excited to see how that goes. Menlo Ventures is a 44-year-old firm. We were started in 1976. The manage around 15 funds on $5.5 billion, been really fortunate to have backed over 250 companies, 70 IPOs, over 100 M and A activities and most recently, we have had a very strong few years where we were lucky enough to be an early investor in Uber, and seen that company grow, Roku. And so our focus is on the early stage, we tend to write eight to $10 million checks to lead series A and seed investments. Our focus areas are cybersecurity, SAS, consumer life sciences, and we're doing a little bit in AI and robotics. And I'm excited to have this opportunity.
- Sweet, thanks, Venky. Scott, how about you?
- Thanks for having me as well. You know, this is my sixth startup in a row. So this has been a fun journey for me, most notably Pinterest and Zenefits and Live previously. So some of my examples might come from experiences from there. But Instabase is a relatively young startup. I would say we started in 2015 although first customer was 2018. We're still sub 25 million in ARR to give you a sense of size and it's about an 80 person company today in three countries. And Instabase is a platform to build custom workflows. So you can access like really complex documents information off of these documents and help you automate your business processes. And so obviously most notably the kind of PPP movement, maybe some of the companies that you're at applied for loans with your financial institution with the PPP. Our software helps the banks process those documents instantly and without human interaction. So some of the kind of capabilities that our modules have but excited to be here and look forward to the conversation.
- Oh, thanks, Scott, and Javi, how about you?
- Hi, everyone, and you know, same. Thank you, everyone. Thank you, FRB to bring us here, this is great and very exciting. This is my second Zoom panel. So I have a bit of advantage from everyone else. So, I'm a Chief of Staff at Flexport, I also run corporate strategy and operations. So and before then I was doing a high growth company Instacart where I was the Head of Finance. And I've been you know, in the last six years, I've been you know, working a lot on how to make these companies profitable and how to focus on unit economics, you know, in a hyper growth environment. So, I was very happy that the theme was towards that profitability shift. So for Flexport, Flexport is a modern freight forwarder on the global logistics business, you know, what, like, the company's just Flexport for to move freight, mainly that's my core business also to clear costumes and in general to make smart decisions about supply chain, you know, we use, you know, expertise and technology to be able to actually give solutions to our customers. In terms of size we are, so we are around 1800 people right now across 14 different offices. We are headquarters in San Francisco. But we also have a lot of people in APAC and in EMEA. And yeah, we've raised around $1.3 billion in the last only five years. So the company has been growing a lot, but we're a young company as well. So yeah, super happy to be here.
- Oh, that's awesome. Yeah, huge variety of perspectives and experiences. I have been doing the same thing for about seven and a half years, which is running a company called Justworks. We help small businesses with payroll and benefits and we're around 100 million in ARR to give a sense of scale. And I will say that, you know, we were talking about this before the panel, but you know, there's a saying in crisis, there's opportunity, and there's certainly no shortage of crisis going on right now. And I think that means also no shortage of opportunity. And so hopefully, we can spend some time talking about how to seize it today. So I guess, you know, maybe we could start with talking about how your business model has been affected kind of substantively or if there's strategic shifts that have kind of come around from the current environment. I'll share, you know, two specific things, I guess, that we've seen, just to kind of kick it off, but, you know, one is we work with small businesses, we do payroll benefits, that means that our revenue is driven by the number of employees on the platform, that means it varies with employment or unemployment amongst other things, and so, you know, one thing that has been happening for us is, you know, we've changed kind of the way that we're managing our financial plans. We'll talk about that a little bit later. And then the other thing is, like very substantive in our business, is that a lot of the government stimulus programs that have come out over the past few months, FCRA, the Cares Act, including the PPP loans, a lot of that is delivered through payroll providers. And so, you know, for us, like there's been, you know, this amazing opportunity to support our customers in ways that we frankly, just didn't know were possible. And I guess they didn't either. And so, you know, it's been like a period of real intensity for our team as we support our customers through this but I think the flip side is one of the opportunities is that we've been able to really be there for them in a way that just like isn't even possible in normal circumstances. Scott, maybe you could start. I mean, are there sort of shifts that you've seen in how you're spending your time or how the organization is prioritizing things?
- Yeah, absolutely. So, you know, Instabase being an enterprise software company, lead times on the sales process is generally six to nine months. So we've definitely seen some impact on our kind of early first quarter, second quarter results as kind of decision makers are less likely to make a kind of quicker decision right now. And so our mindset right now is less about maybe achieving specific ARR results in the next six or 12 months. I think what we've been thinking about as a company is what does the end of 2021 look like? So kind of almost thinking about the next 18 months. And working back from that and saying, okay, we need to go into 2021 with this massive acceleration, not necessarily ARR, but what is the other things that we can grab on to like, pipeline generation, do we build the right team? Do we have the right platform software processes? Is the company ready for that growth? And so we're still really considering this more foundational than kind of an explosive growth here. That's not what I would have said last November. So that mindset has changed a little bit. We were gonna use this year a little bit more growth. So that's been one big shift for us just making sure that we're ready for next year.
- Oh, sorry to interrupt, Scott, I'm wondering, do you have a specific example you could share of something that maybe you would not have prioritized last November or you wouldn't have imagined prioritizing but now you're spending your time and energy on?
- Yeah, so our sales strategy is exclusively been, you know, greater than a $1 million average selling price kind of big platform deals. And now we've shifted that focus to allow what we're calling more solution-based. The PPP app was a solution-based approach where we essentially gave a piece of software that did one thing really well to customers that needed it. And so selling these kind of smaller, kind of more solution-based sales has reduced the kind of ARR but it's also increased our customers, the number of customers that we're able to acquire this year. And so we're really using this like land and expand model now other than this huge platform sale, and hopefully next year and the year after are huge expansions on the current customer base. So that kind of land and expand model was something that we weren't really doing at all last year, and we're planning to do this year. We're still thinking greater than $1 million platform sales.
- Right on, amazing. Thanks for sharing that. Javier, what about you?
- Yeah, so I think the main thing that has changed for us is you know, re-emphasize and maybe not change, but re-emphasizing how important is to understand your customer base, really understanding what they need, you know, in this, think of my business, you know, I move freight for companies from one side of the world to other. So everything that has been going on with COVID you know, first in APAC, then in EMEA, and then in the US is been impacting my logistics infrastructure a lot. But what has reinforced is that people have been looking for something like Flexport is offering, right, it's how we can do that in a digital form. You know, we've seen a lot of traction on companies trying to see how can we help them. You know, and I think that has been, you know, our main takeaway from the whole COVID since January. It's true that before COVID was, you know, the trade wars between the US and China that was very impactful for us as well. And one of the things that I think the company has been great and has been their main focus is not thinking about what's coming next. You know, we're spending less time trying to forecast the unforecastable. There's the uncertainty in the world right now. Makes me believe that it's better to use resources to create a company that's agile to overcome anything that comes next. And that's exactly what we are focusing on. And we're really proud of the employees because we've shifted to this working from home environment to being able to actually do customer meetings on Zoom or BlueJeans. You know, that's been the day to day and it was a forcing function. We didn't train anyone to do this. We just told them we're gonna close the offices tomorrow. And has been a great learning. So very proud for the employees in the company as well.
- Yeah, that's really cool. You know, it's funny, my we had an all hands back in January so it may, I, guess was on the horizon, but really thinking about it. And our CEO made the slide that said, "Our first job as a leadership team "is not to predict the future "but to be ready for whatever may come our way." Which was I think it's probably always true, was very timely. Venky, how about you? What are you seeing in your portfolio or just hearing about in general?
- Yeah, so our perspectives a little different in that sense that Menlo Ventures itself, you know, because of the way our funds are raised and managed, has a high degree of predictability in our revenue streams. So it didn't affect how we could function. But it definitely impacted both our portfolio companies and new companies we're looking at. So at the portfolio company level, I think we just a bunch of us have been through previous crisis, whether it was the global financial crisis, or I'm old enough to have been in the dot com crisis and 9/11. So those were, you know, those are fundamental events that did shape us and so what, you know, things we learned from that and just hope it's not a strategy and then you just have to look at the reality of the world as it is and, Javi is absolutely right, you cannot predict the future. One thing we all should know is that nobody knows the future, right? If you can just go and look at people's predictions, you just realize that even the experts, they don't know what's going on, because it's just there's too much noise in the system. And so what you need to do is to set yourself to prepare, that's what we did with our portfolio companies. And then I think when we are looking at new companies, we have really tried to understand people who can be capital efficient, and who can fit into the world going forward. And so the biggest mistakes I think investors make is they fight the last war. We start thinking about the next one. And I do think like, there's been some incredible learnings for us. Honestly, if in February you had asked me can Menlo function with nobody being in the office without us seeing each other? We happen to think that we need to spend a lot of time, we need to meet people in person. We are a people business, we invest in people, we help our companies recruit people. But in the last 14 weeks, since we've gone into quarantine, we have given out 14 term sheets, two of which are people who we've never met in person. We have hired senior leaders and various members of our portfolio companies, we have done one M and A and one IPO. And all of that has convinced me that a lot of the assumptions we had in the past are no longer true. So now, I think very differently about remote teams, I also think very differently about looking at companies outside the Bay Area. We used to have such a premium for companies in the Bay Area. And I'm not even sure and we used to say we got to meet someone before we can hire them as a CEO or VP of sales, but I just don't think that's true anymore. I think there are different ways, it's not perfect. Like I'm not saying you can do remote work easily. But I think you have to learn new skills and that's been a learning for us and an opportunity.
- And Venky, I'm curious, there is a question which I know we'll do questions later, but since we're talking about it anyway, about raising money without meeting in person. Have any of the term sheets that you've made, have any of them involved not meeting people in person?
- So I think it's important that for term sheets, I would say three of them were people we had met in person before, but didn't meet in this fundraising cycle. So somebody in the firm had met them before. One investment was something that nobody in the firm, no partner in the firm had met with them in person. But post term sheet we did do a socially, physically distance walk with one of the partners just so that they can actually make sure you know, they are who they say they are. But I am convinced that we will be able to make investments without meeting people. And it's worthwhile because we asked this question, what is the thing that we are missing by doing this in Zoom and not in person? And we've tried to force everybody to write down exactly what it is, what would you notice in person that you can't notice in Zoom? And honestly, no one could come up with anything concrete. It all boils down to a feeling. And my sense is that's just a trained behavior. It's just really comfort. And over time, I think you'll get comfortable to do it. It's just you're not comfortable doing it. All humans were built to do business a particular way. But it's gonna change. And I think in particular, I'll be really interested to see, I think enterprise sales is gonna change. I mean, for a long time, it used to be the successful enterprise salespeople were people with big personalities and charisma, who would go and have a steak dinner with their client or take them to Super Bowl and close the deal. And I think that personality's not gonna work in a Zoom world. In a Zoom world you got to be very detail oriented. You gotta be problem oriented, you can't be personality oriented. And you've got to win on the basis of logic and solution selling, not on the basis of your personality. And so that's it's going to create opportunities for people but then and personally it's also going to create opportunities for people who might have not been exempted from this big value creation in the Bay Area. Like I look at now there gonna be companies in Virginia and North Carolina and Arkansas that I might not have looked at it before, but I'm definitely gonna look at now.
- So let's shift gears a little bit to talk about financial outlook and planning, you know, kind of the meat and potatoes here in the CFO world. So this is sort of like a two part question. But one is, you know, to the degree you have a view on sort of like financial environment in the coming 12 to 24 months, I'm certainly curious to hear what it is, I bet everybody else's as well. And I'm also very interested to know how you are managing your financial plans in this environment? Is it just like the same fiscal year and like, whatever? Or are you doing something a little bit different? And if so, what? Javi, maybe, do you wanna start there?
- Yeah, yeah, of course. I mean, I think, you know, based on my previous response, you know, one of the things we are thinking is trying to work more in the agility of the company, rather than spending too much time on planning. It's true that we're still doing planning. I think we're starting seeing some signs of recovery. You know, obviously, as we are moving a lot of freight it's true that, you know, we were able to do a lot of work during the COVID-19, moving a lot of the PPE that was required across the world. So that's something that we also feel very proud so that's still continuing. So we're trying to make sure that we keep doing that because it's good for the world and it's good of the business as well. But one of the things that we are really spending a lot of time is understanding my unit economics. You know, and it's not that we have an understanding before, but right now we are getting deep into really understanding how much do we charge our customers, how much cost to serve each of the customers and being able to actually have a really, really good understanding on unit economics. So we can actually plan for the future. You know, right now, I think, you know, it's clear that growth keeps being important, you know, as well as profitability, but one of the things that we've been thinking a lot lately is the market share, you know, and the customer retention. You know, so those are the two things that before maybe we were very focused on growth and in my business profitability and growth go hand in hand because the more volume you have, the more procurement power you have. So the margins increase, but the reality is that we think that in that crisis, being able to actually monitor your market share, and how you're progressing compared to the competition, and being able to spend more resources in the existing customer base, and make sure that you retain those customers that they're good customers for you for both economically and just like for value. That's been probably the main driver that we've seen on the planning for 2020 and 2021 and beyond.
- Yeah, that's helpful. I know, we've been one of the things we've always talked about, you know, is so in the payroll space, or HR services, you know, it's like a very high switching cost kind of business. And so, in general, you know, you're fighting very, very hard to get really like any kind of market share, but, you know, at least for us, and we anticipate some amount of turnover in the small business space. You know, some businesses will fail, new ones will start in their place and it changes, like your ability to kind of shift share. And suddenly, I think your ability to be relevant to your customers becomes like just a little bit more important than it normally is, even though of course, we would like to think it's important all the time. So it's a really big opportunity. I think it's-
- I agree. And to be honest, you know, like really spending the time because, I mean, we are a company that serves other companies, and a lot of them have been going through a lot. So we're spending the time and the resources to really understand what do they need, and really understanding the problems they're facing, because it's different company by company. I think that's the most important for a company like mine, you know, like because the fashion industry, the tech industry, like every industry has been hit differently. So being able to actually spend the time with them, understanding their pain points and being able to actually serve them and retain them, that's been critical for us to be able to plan for the future.
- 100%. Scott, how about you? How are you and your team kind of managing through the financial planning process?
- Just in context, you know, Instabase has raised historically around 130, of which 105 million was last year. And so the intent of that raise last year was to really invest heavily this year, next year on growth. And so, obviously, as a result of COVID, when we thought about what should change, we kind of deep prioritized some product initiatives with the goal of focusing, right, and I think that's one of the major things that's come out the last couple of months is, you know, we had plans to probably expand beyond enterprise and go into mid-market and SMB and build sub-teams to help build out those, it's a completely different structure in terms of how you support your customer in an SMB or mid-market than an enterprise and so the complexity we're probably just not ready for yet given the current environment. And so really just making sure that our OKRs, our product roadmap, our financial model like everyone is aligned on what is our focus, what's our priority, and the management team has spent, we meet every other day just to make sure that we're chatting about things that come up. And we're doing a full reforecast at the end of each quarter just to make sure everyone is reiterated with that same kind of alignment. And so it's hard to get people to feel that alignment and accountability in the remote world. And so we're just doing our best to make sure that it's really clear to folks. Last year, and in the years prior, there wasn't kind of an OKR process or product roadmap focus. So I think this year, we're getting much tighter on that. And it's helped. But we're still in growth mode, more so than profitability mode. Butt historically the company was relatively cash flow neutral in the early years. So we're expecting to burn in the next couple years. But our focus is how quickly can we get back? 24 to 36 months is our window that we're thinking about right now. And that's the window that we want to get back to profitability. So how much capital do we have today? And where do we want to invest it to ensure that we're growing, to get back to that profitability? But certainly has been an interesting few months.
- Yeah, I think it's been so interesting to watch, I think, how sort of like how focused, you know, people have become on different things. I mean, we certainly seen it in our organization. I mean, when we launched this functionality that I was describing that help businesses get access to the COVID relief programs, it was like we rolled out the software like, I don't know, 10 times faster than we normally would roll out something of a similar magnitude and not like 10 times more. I mean, it was, you know, the quality was as good or better than anything else we're doing. But you know, it's like you almost have this right to kind of say, okay, well, these things are important and all this other stuff, it's important too, but it's not as important. And I think in like a peacetime environment, it's just like it seems a little bit harder to do that. And it's been interesting to see the kinds of results, I mean, not just in our organization, but just sort of like out there, you know, from like different organizations and how people are moving and adapting, and we were just talking on this before the call started. So I'm based here in New York. And, you know, one of the things that the city did recently is they basically closed blocks, and they stopped parking so the restaurants could just seat people outside to eat on the street, where, you know, normally it'd be like a three year permitting process or something, and they just like, went for it. And I think, you know, you just kind of see this behavior, I think, manifesting all over the place, which is pretty cool. You know, for us from like a financial planning process, you know, we basically our fiscal year ends in May. And so it just kind of worked out that basically the last quarter of our fiscal year sort of went in the garbage can. And we just started doing this kind of like 12 month like rolling forecast and like rolling plan. And so it's like our big kind of like contract with our board, I guess, is to have like a certain amount of cash in the bank as of next May. But each month, we're kind of like reforecasting and replanning and saying, like, what kind of hires do we want to make? You know, what do we need to like, just wait until next month? And I think one of the things that I have noticed for our senior team is that we're way more aware of areas that we're spending. And, you know, like we're sort of scrutinizing, like all these decisions, and I think making much better decisions. The flip side is I think we're probably not as expansive as we might be otherwise, you know, in our approach. You know, I'm curious to know along the lines of financial planning, there had been some questions about cost reduction. And you know, obviously, this is something that's been on everyone's mind. But I'm curious to know, like, what kind of steps you have taken around cost reduction, if you have and then, you know, if you're actually going the other way, and you're kind of increasing your cost footprint, sort of like what the what the rationale is that kind of makes that work. Scott, maybe do you wanna talk about that a little bit?
- Yeah, so there's only two team members on Team finance. So it's only me and one other gentleman but you know, the two of us, we have a full grasp of the line items that are on our P and L and what we're spending on credit cards. And so we identified obviously, the ones that were overlapping or the easy low hanging fruit. That was easy, right, like duplicate software that we didn't need. Obviously, our travel budget got completely reallocated and we stopped business travel, things that were also related to the physical office like food and other things got reduced. But, you know, the biggest one and the moneymaker for us has been, you know, getting out of or renegotiating leases, which if you haven't done it already, I certainly encourage you to, that one is our second largest line item other than payroll. We did not reduce headcount though, that was something that we just didn't need to do. I know other companies had potentially reductions in force and other kind of more catastrophic events in their businesses. But we were fortunate to not have to reduce our current headcount, however, we reduced our forecasted headcount. And so we significantly reduced that ending headcount for the current year, just to make sure we kind of wait this thing out for next year. So we've done all of those things, I think, when we're talking with the board, the first question is how much runway, you said May of next year, that's only really more like 12 months, they were actually asking us for 24 months, like how much cash do you have for 24 months, that was the number that they have. We've got more than enough for two years, but it's just how do we use it in that two years? And so I think that was definitely one of our focuses was how much cash do we actually want to use? Not that we don't have it, it's just how much we actually want to use.
- Yeah, totally. Venky, what have you seen in your portfolio companies we've interrupted, like, the most effective ways that they've managed our backs.
- Yeah, so I think our recommendation is to really think about your cost, you know, think about two different areas. First, let's take a look at your cost. And then we ask our company to categorize the cost as what is fixed and what is variable. So you can understand really how much flexibility you have. So I would say people on the fixed the variable cost or you know, things like travel, maintenance, your marketing, your SAS spend. And so we want you to have a good sense about what is fixed and what is variable and then look at your fixed cost structure because your variable cost structure is probably the easiest to bring down, and the faster to go up. Your fixed cost structure is usually the toughest to bring down 'cause it's people and it's emotional, there will also be the rate over time. So we want people looking at the cost structure. And then we want them when they look at the revenue plan to look at how much is gonna come from your existing customers, and how much is gonna come from new customers. And our feeling is that your existing customers, assuming you're doing a great job, that's gonna be the higher probability revenue, you're gonna get. New customers are gonna be harder because it either means you're gonna have to get them to take solve a problem they didn't have or you're getting the customer from somebody else who's gonna fight really hard to keep them. And then we try to tell people to have a probabilistic view of the world, right? I think most often people are like black and white. That's not really helpful. I think you divide the wall into these quadrants and then you put probabilities on those assumptions. So if you have an existing customer, we say, okay, go to your existing customer base. And can I like rank and probability? What do you think people are gonna renew and upsell, so you can understand. And then build a probabilistic model. And once you build that model, check those assumptions and the probabilities every month, because that's gonna give you the best way of managing it. And I think like, ultimately, with venture-backed companies, it's not about just survival, because survival is not gonna do anything. It's about how do you get past this pandemic and triumph? And so we want to set up these companies to succeed. At the end of the day, like, I'm a big believer, like, I think you use a phrase I said that every crisis is also an opportunity. I think that's the Chinese word for crisis is opportunity. So the opportunity of this pandemic is you're going to find a lot of things. One, you're gonna have incredible focus in your organization, you're gonna find the people on your team who are gonna step up, because in situations like this there are some people who are going to step up and show leadership. And then some people are gonna step behind. You want to find the people who step up. And you also want to find out, are you selling penicillin or are you selling aspirin? Every one of us thinks that everything we do is important. But you know, your customers are gonna vote with their feet every month. And by the way, that's data that's helpful. If you're selling aspirin, and it's not selling, you'd rather know, because the most important thing I tell people is time is the most important asset in your life. Every hour you spend at work is an hour you're not spending with your loved ones, your family, is an hour, you're not doing something else. And the most important thing you can not get back is time. You can make back money, but you cannot make back time. And so if you are not doing something that is really essential to the world, just stop. Better to quit and then do something that is. Why waste your time and in this pandemic will really tell you in very clear ways if what you're doing as a company is essential or not. If it's not essential, no problem. Failure is not bad, it's an opportunity to grow and do something else. Resolve a new one. If it is now you can doubling your commitment that what you're doing is worthwhile. So that's the way I look at it, that's the same way I look at my own personal decision-making process. I think, you know, it's too often, the worst thing is to let fear affect us. Fear and the danger of not knowing that maybe something we love isn't as important as we thought it is. But it's still good. It's better to know it and better to deal with it, than to try to ignore it. So that's the philosophy we try to push into all our portfolio companies.
- Yeah, so it's easier said than done, but pretty good one. So shifting gears a little bit, I wanted to get perspective from the group on boards and investors specifically. These could be kind of the same thing or they could be different things, I suppose depending on the structure of your board, but, you know, I had like I guess where we've been, you know, just to start, is our board is mostly outside directors, we have two investor directors, but three outsiders. It's a great board. And it's like very interesting, I think especially as sort of March and April, I think there's sort of like anxiety coming from the board, you know, really wanting to know that I think we comprehended, you know, like the magnitude of what was happening. And we're sort of like, taking a sort of commensurate steps and, you know, thinking like, you know, not being in a situation where you're really underestimating the kind of situation that you're in. And I think, you know, there's three or four weeks that were pretty challenging as we all kind of, like reset our expectations, and we got on a new footing after that. So, you know, the board I think, played an important role for me and for my management team, but really, mainly for me, in just making sure that I wasn't underestimating kind of like the magnitude of what this could be, right. And that I was willing to consider even scenarios that didn't seem likely. I'm curious to know, from others on the on the call, what kinds of experiences they may have had or how the board, what role they played kind of through this. Javi, do you want to share your perspective?
- Yeah, I think I said. I think we're super happy with the board members, I will have to be honest. And since the beginning, they've been super supportive of everything that was going on, you know, like really understanding, you know, what are the challenges that we were going to face, you know, the understanding the uncertainty. But I think the main thing that we work with them very closely on what's next and that was really important for us. You know, like, in a global business like mine, you know, Flexport, it was great to have the support from the board members where they offer assistance on connections and, you know, different companies that were going through similar situations. They introduced to a lot of people that was able to help in the different parts of the organization, not just on the top level, but, you know, on the finance side of things, on marketing they see, and, you know, using their network has been really helpful for us because we were able to actually have access to resources, and that's what you normally expect from the board. Like not being just the passive board but being proactive and being able to actually have conversations and being open with them on what are the main pain points that we're going through. I think that that was super important. And then going back to your other comment that I think what Venky was explaining it was very relevant, because we did about the variable cost and fixed cost, we really went back to really dig dive into my P and L and really understanding every single journey and understand and this is an advice I give to everyone, the level of scrutiny that I went through with the finance team, really understanding what's variable and what's not. And then really thinking, very creative on how we can actually maintain the costs down, maintain the cost or just keep costs down as we grow. And think about, you know, my real estate strategy that Scott mentioned, please look at your real estate, really think about what's the next way of working and think about how you can save there. Location for new employees. You know, do we have to hire people in San Francisco, in New York, there's alternatives. There's a lot of avenues that before might not have been well taken, but now they're really the way to go and I think the board has been super supportive on all those things and giving advice on how to execute on some of those things. So very happy with the relationship in the last five months to be honest.
- It's great. Scott, how about you?
- Yeah, so first time founder for our CEO, and I think he's done an amazing job of listening and getting help from our two board members and our two main investors every month for as long as I've even been at the company. So our communication and our involvement with the board has been very, very strong, pre-COVID. And I think it made that relationship even easier to go into maybe tougher conversations in the COVID world 'cause it's not that you have to present bad results to the board. That's not necessarily what their goal is here. It's how do you collectively, you know, get the help that you need. And, you know, we've gotten half of our customers as intros from this group of folks from our board and investors. So they've been really helpful in generating new business for us during this time. Obviously, we talked about kind of that 24 month cash reserve that was more for making sure that we can make it through this time. And the other kind of key thing that we were looking at was, you know, are we able to maintain that two to three x growth, right? When you think about growth rates and whatnot, what we need to do to maintain at least that threshold to kind of have good year over year growth. So really thinking about that. And this is not a new thing, I've done it in many companies, but you know, not just having one model, but having very kind of scenario-based iterative planning processes. So you can look at a ton of different outcomes at the same time. We're still doing this in Excel. We haven't graduated into an actual platform yet, but you know, I've got probably like 10 kind of different mini models that I'm looking at as we achieve different results, then we can kind of turn on you and do other things. So, you know, everyone's aware of what we're going to be doing if we hit certain thresholds. And I think that kind of forecasting is helped us right now. Because if we don't hit a certain thing, then we're going to pull back headcount in these places or whatnot. So just kind of keeping a pulse on kind of dynamic, iterative process. Yeah, they've been super helpful. Very, very helpful.
- I mean, that's amazing. I remember starting the company and somebody explaining to me that the board could be an asset or a liability. I was like, well, let's go with the first option. Venky, I'm curious to know, what are your most effective CEOs and CFOs do to kind of work with their board? Especially during a time where, you know, there just is so much uncertainty out there.
- Yeah, so first, I think you want to have good board composition, and I think a good board composition is one in which there are different parties represented. So you want investors represented, you want management being represented. You want ideally, someone from a customer perspective represented, and you want a true outsider who might have no bias on the issue. And I think board composition is really important. And that's key. And a lot of times I think people are in either having too many operators or too many investor board seats, or too many management board seats, and not enough balance. So one is good composition. Second is then I think, communication and coordination. So at the end of the day, the board is there to help you. So I recommend CEOs think about information in three buckets. There's the bottommost bucket is I need the board to approve. So what are board approvals? Okay, so that's the bottommost bucket. The first bucket is a bunch of things I'm gonna tell you, so I want you to know, but I don't need you to react to that. And then the second bucket is a bunch of things that are open issues that I'm struggling with, that I'd like your feedback on. And the third bucket is the approvals I need options, compliance, governance and the minutes, that kind of stuff. And so I think a lot of times people confuse the two, they will spend a lot of time giving the board information, but they don't need input on. And I would say anything that you just need to inform, put it in writing, send it out, don't use a board meeting for that, because all you're trying to do is just tell me here's what happened. And so a lot of financial reporting, all those things should be set ahead of time, so that people just know. The middle bucket is what you really want to use the time and at the end of the day it's very important for both and that the only decision a board makes is to hire and fire the CEO. That's the only decision they should make. Every other decision should be made by the management team and they should be no confusion on who makes a decision. And where companies get screwed up is when boards try to micromanage and try to remote control. So after you made the decision that you have the right CEO, who will , let them and the management team run that. But you can the middle of the category, you can use the board to get inside information. So the best CEO saying, here's all the financial data. Great, take a look at that. Here are the two or three important strategic issues I'm facing here. Here's our thinking around it. Here are the pros and cons on it. Here's other things I'd like your input on. I don't need your input on should I do this or not, what I need your input on is on some of these issues. Give it back to us and we as a management team will go in process the input from the board and come back with you with a recommendation. And I think those, when done that way, board meetings are really well structured. People know the issues, people know the rules and guidance, and you don't ever disempower the management team. And you want to create a culture where they do all the work. And then the board inputs it but the board doesn't think just because they gave an input, management's gonna do it. In fact, every company I've been involved with has been successful is because a management team decided to do something the board didn't want to do. And more I almost tell you that the companies that are not successful are the ones where the management has decided to follow what the board said. And then the board doesn't live in your business day to day, you do, and finding the right balance on figuring out how to take advantage of the inside, yet, making sure you have your own agency is critical for a good board.
- That's great. I've got some takeaways for myself right there. Okay, so, last question. And then we'll jump into a little bit of Q and A. Is around timelines and milestones. So I think, you know, obviously, there's a lot of uncertainty right now. I think, you know, to the degree that you can share how the current situation has changed your thinking around, you know, a sense of, you know, acquisition down the line or an exit or an IPO or whatever. I'm just curious to know how you and your teams are thinking about this Javi, if you wanna start.
- Yeah, so, I think right now, you know, I mean, you know, for us at the stage we are as a company, you know, IPO will be, you know, one potential exit at some point, but right now, we're just fully focused on how fast can we turn the company and profitability, I think, similar to what Scott was saying, that's super important for us right now, really understanding the company, the numbers, having a really deep understanding on what levers do we have to pull to make sure that we turn profitable. We do have enough cash in the bank, obviously, because we've raised very sizable rounds and we are doing a lot of good work on the path to profitability. I always like to change the word cash burn that we use as a company to cash invested, you know, is that's a term that you have to convince your investors that you're not burning cash, you are investing the cash in the right things and I think my company right now is exactly doing that. So milestones we hope that, you know, in the next, you know, 18 to 24 months, we'll definitely turn around the company to be profitable, and then we can think about what's next.
- Amazing, and Scott how about you?
- Given our stage, you know, IPO isn't even talked about right now. I think we're still in growth mode. But, you know, from a finance perspective, the work that I've done is least you know, especially with a first time founder, you know, giving him the data of here's every enterprise company that's gone public in the last three or four years, and here was the previous three years of ramp of ARR. So just making sure he understands at what point whether we are at profitability or close to, that'll determine how much multiples we get. But ultimately, you know, I'm showing them, hey, that traditional kind of triple, triple double, double, double kind of reach on the ARR But, you know, for us, it's, you know, we're looking at 100 million in ARR as our kind of target right now, not from an IPO perspective. But how do we get there? Is it two years or is it three years? How quickly can we get there? And that will really determine our path. But, you know, I think people that worry about the exits aren't worrying about the right things because you should be worrying about your business. And if you build a really great business, good outcomes will happen either way. But definitely want to make sure that at least I provide the data and obviously the investors are or have a ton of this stuff already. Especially if you work with an investor that's got operating partners and that kind of stuff. They can do a lot of the work, even for you to pull that data.
- Amazing, right on. Okay, so I'm gonna hand it over to Kelly to help out with Q and A. I know we have just a couple of minutes left.
- [Kelly] Thanks, Isaac. Yeah, so we'll have time for just maybe one or two questions. And if we don't get to your question today, we'll do a follow up. So keep an eye out for that. So I think this one goes to Venky. VC-backed companies still need growth capital. How do VC firms assess profitability in pre-revenue company?
- Yeah, so we don't think about profitability as the ratio, we think about it as what is the dependability of your business, what's the size of the market, and how big is the opportunity? So we understand the businesses we fund are going to need to make cash investments, as Javier said, as opposed to cash burns, to keep going. And so we just try and think about, okay, do those investments make the business better? Is this going to a big market? And can it get to a big long term outcome? And I think that's how growth capital works. And so part of what you are trying to do as an entrepreneur is to paint the picture about why the investment the VC firm is gonna make is gonna make your business stronger, more defensible, and bigger. And if you can make that, VC funds will make that investment.
- [Kelly] Great, thank you. So let's just do one more question. What are the most common current drivers of strategic acquisitions?
- I can maybe take a first stab at it. So I think it depends, right? I think right now, when you do a strategic acquisition, obviously, and that will be a little basics, but if you're trying to acquire market share, you're trying to acquire new line of business, you're trying to acquire talent, you know, it all depends on what are you trying to acquire, that will be more suited for you as a company? I think, you know, for us, we're not very active in acquisitions right now. But we definitely look at the market and see, you know, where the opportunities are based on those three, four themes. And if there's something that is interesting, you know, we get more engaged. Right now also, just, you know, I think there's a lot of opportunities for partnerships rather than, you know, like M and A per se, I think, you know, in the current environment and the world that we're living, being able to get strong partnerships with companies across your industry makes a lot of sense, you know, for both, you know, just to grow together and also be able to serve your customers better. So that's something that I would advise everyone to explore as well.
- Yeah, I think just to add on to that, you know, we have never acquired a company in our seven and a half years of running. But, you know, for the first time we're actually thinking about it, you know, and obviously, in these cycles, you know, there is always some consolidation. And, you know, I think, you know, there are some businesses that are harder to operate in this kind of environment, but you know, could be really creative for us, either, you know, because of talent or products that we want to bring in. So, you know, I would say our organization is far from expert on this, because we just don't really have experience doing it. But I think the dynamics are certainly presenting an opportunity. And so, you know, at a minimum, we're just taking the opportunity to learn more and, you know, make some moves, which would be pretty cool.
- All right. Well, thank you guys. I think that's a wrap on our discussion today. I know we didn't get to everybody's question, but keep an eye out, we'll hopefully be able to answer some of those via email. So I thank everybody for attending. And thank you to our speakers for your insight into strategies to help startups through the current market conditions suffering. So I thank Isaac for moderating.
- Just one thing I wanted to say is, I am biased, but I just want to thank, I've banked with First Republic for over 10 years. Amazing experience. I have a great banker. And so if anyone thinks about a place to bank, I would say First Republic is on the top of my list. My experience has always been amazing. I want to thank everyone for that. Thank you.
- [Kelly] That's very kind of you, thank you.
- Amazing, thanks so much for having us.
- Yeah, thank you.
- Thank you.
- Thank you, guys. We'll follow up with an email that has links to some related information. And then just keep in mind everyone that this is session one of two, we will be having our second session on July 9th, and you'll be getting an email about that session where we're gonna be talking about exit strategy. So kind of what we discussed today we'll be leading into that discussion. And at First Republic we are always proud to serve you as a part of the innovation community across the US. Please feel free to reach out to us if you have any need. Thank you, everyone, and have a good rest of your day.
