The Business Times' Column | Beyond Product and Vision, Financial Controls and Performance Metrics are Crucial to Startup Success

Himanshu JAIN | 20 Nov 2023

This column was first published on The Business Times.

Many entrepreneurs often emphasise that in the initial stages of a startup, “product is king”. Founders dedicate a significant portion of their time and effort to creating a compelling product or service, and assembling a team capable of bringing that vision to fruition.

Seems like a straightforward playbook, doesn’t it? However, there is one critical element that’s often missing from many early-stage companies that could suddenly break a business — robust processes and support functions.

This sounds cliché but true: if there are cracks in the system at the outset, scaling and growth only serve to magnify them. For long-term success, it’s essential for companies to integrate strong processes and support systems early on — similar to installing a rear mirror to help guide a vehicle on uncharted terrains.

For early-stage investors like us, this emphasis on strong processes and support functions is crucial, especially since we are committed to driving alongside founders on this long, winding entrepreneurship route. We prioritise stable and consistent growth over rapid, but short-lived business growth.

Successful founders who are forward-thinking would anticipate potential challenges and proactively implement processes to avert unpleasant surprises. Thinking about how one would service their car and check their engine oil is topped up before a long drive in the mountains. They recognise the costliness of rectifying mistakes later in the journey.

But being too careful will slow the business down, allowing competition to catch up – hence, the trick lies in the level of processes and support functions to be implemented at which stage of the business.

Why address this now?

Increasingly, venture capital investors discover that the consequence of “growing at all costs” – neglecting or overlooking basic functions in the pursuit of business development – leads to issues such as non-compliance, a lack of checks and balances, and insufficient employee protection.

As Murphy’s law dictates, like a hidden bomb, these issues tend to detonate at the worst possible times, revealing themselves during business challenges, leading to potential shutdowns, layoffs, or winding-up.

Which support functions should be in place and when?

Two functions stand out as indispensable in the early stages of a startup:

  • Financial management: Effective financial management is crucial for allocating funds optimally, supporting high-potential business units, and ensuring the overall functioning of the startup. This includes implementing Management Information Systems (MIS) and Enterprise Resource Planning (ERP) systems to capture essential information for informed decision-making. There should ideally be a code of conduct for senior management established as well, to ensure check and balance when it comes to company expenses.
  • Human resources: Often underestimated, the HR team plays a pivotal role in cultivating the startup company’s culture and hiring people who resonate with the culture. Nurturing a strong and positive working culture often motivates employees and aids in talent retention organically.

One relatively recent example is Zilingo, which blew up due to financial irregularities and lack of financial oversight. Despite having raised S$226 million, and hence, is not technically an early stage startup, the company also did not file annual financial statements, which is a basic requirement for all businesses of its size in Singapore, for two years – 2020 and 2021.

Not collecting accounts receivable and running out of cash is another frequent observation we note that results in business failures.

On the topic of HR, Prajit Nanu, co-founder and CEO of Nium, shares a valuable lesson learned from experience. He recommends the early recruitment of a capable “Head of People” by grooming someone like an HR generalist with less experience, instead of hiring a numbers-driven senior recruiter from the outset.

Jeffrey Tiong, co-founder and CEO of Patnsnap, emphasises the problem of constant hiring and firing if the culture isn’t set up the right way from the start. He also highlights the challenge that candidates from “cushier” job environments face in adapting to the dynamic startup environment. Their insightful perspective underscores the importance of prioritising the HR function and fostering a strong organisational culture, a step often overlooked by founders, especially in the early stages of a startup’s growth.

How should support functions evolve over time?

The decision not to hire for support functions early on is often driven by a desire to keep operating costs low. But we think that strong founders need to make decisions by weighing the current costs and future risks presented by cost avoidance. Support functions, like other aspects of the business, should evolve according to the needs of the startup at each stage so that the processes and associated expenses keep pace with the business’ growth.

Which functions should startups have from Day One?

MIS: Founders bear the responsibility of delivering a reliable source of truth within and outside the organisation. Implementing automated tracking of key metrics ensures an accurate view of the business at all times. We have encountered instances where young startups face challenges in closing accounts, leading to error-ridden processes, often unearthed during detailed financial due diligence.

In the past two years, besides Zilingo, other well-funded startups such as Byju, BharatPe, Trell, and GoMechanic have also come under heat due to financial reporting compliance failures and governance lapses.

Founders should identify and define crucial revenue and profitability metrics, such as distinguishing between billed and booked revenue. The entire MIS closing process should also be automated, eliminating the need for manual intervention. Integration with key systems like ERP and financial systems becomes essential for a seamless and error-free operation.

Cash flow reconciliation and management: Accounts payable and receivable, along with monthly reconciliation with bank accounts, should not be neglected. Prioritising these aspects ensures more secure control over the cash position and helps prevent outcomes such as bad debts.

What functions should evolve over time?

Strong financial backbone: As startups grow, granular tracking of various revenue and cost heads becomes critical. This requires a ledger for every cost item. Once general ledgers are established, it is crucial to implement a robust reconciliation and consolidation process. This ensures that accounts can be closed seamlessly, and financials are prepared in a timely manner.

Collaborative planning and forecasting: High-quality financial planning is crucial for any sizable organisation. Public companies typically offer quarterly reports and meticulously track their performance against predetermined targets. Although startups are private companies, they should build a foundation to be able to do so in the future.

Compliance: As startups scale, timely submission of required information to regulators (for example audited financial statements, company documents) becomes essential. Meeting these requirements necessitates proper support.

As startups mature (in late-stage series B/C), additional functions like payroll management, cap table management, facilitating board and investor communication, start becoming integral to sustained success. The integration of these functions into a well-supported technological infrastructure is key to navigating the complexities of growth and maintaining a resilient business foundation.

Building a star team in a startup

Scaling support functions requires a thoughtful approach to team development in proportion to the startup’s growth. Using the finance function as a model, startups can strategically structure their finance teams to align with different stages of the company’s evolution.

Early stage: In the early stages, typically one of the founders takes on the additional responsibility of overseeing MIS preparation, implementing systems such as invoicing and accounting, and related tasks. During this phase, startups may leverage outsourcing service firms to assist with compliance and tax requirements, especially when the needs are minimal. As the early stage progresses, particularly towards the end (late series A/ B stage), we advise startups to bring on board an experienced financial controller. This professional would be responsible for running the entire finance and accounting department, supported by one or two accounting-trained personnel, and managing any external vendors (to chase account receivables).

Mid-stage: During the mid-stage, typically in the late series C/D stage, we recommend startups appoint an experienced senior level finance professional who would initiate the development of key processes and systems that align with the functions highlighted earlier. This will set the stage for stronger growth.

Late stage: As startups approach an initial public offering or an exit strategy, it is imperative to hire a chief financial officer (CFO) with relevant management experience from a similar late-stage business. The CFO will be tasked with establishing the four fundamental functions within the finance department that every public company should have: accounting, financial planning and analysis, treasury, and tax.

As venture capitalists, we are in the business of helping startup founders succeed. And we are not trying to set unreachable expectations and overly emphasise profits. We hope to highlight that growing without processes and check and balance is like reckless driving, without having a rear-view mirror or even topping up your petrol before you embark on a long drive. We understand that while we are constantly in search of that “100x” business, good things take time. Growth is good when it is sustained and built on a strong foundation of people, profits, processes and structure.

Himanshu Jain is an Associate Director at Vertex Ventures Southeast Asia & India

We publish monthly on The Business Times Due Diligence column and we invite you to read our previous articles here.

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