The VC behind buzzy startups Calm, GoFundMe, Udemy and Gong is bullish on FP&A. Ryan Abdullah an Investor at Norwest Venture Partners tells FP&A Today says there are four reasons why VCs rely on FP&A, particularly during a downturn.
Firstly there is a huge increase in appetite for forecasts. Secondly FP&A must take account of labor shifts in startups (not least caused by large layoffs). Thirdly, ( investors who are all about growth) see FP&A as an ally and “profit center” to help businesses “grow and do better”. Fourthly FP&A is delivering an agenda with other departments to define budgets “rather than just entering numbers in a spreadsheet.”
In this episode Paul talks to Ryan Abdullah covering:
- How VCs look at the role of FP&A and the benefit to their portfolio companies
- Which financial insights and KPIs matter most to investors
- The role FP&A plays in big fundraising?
- What do VCs see as FP&A magic
- The importance of realistic and accurate models for VCs
- The importance of robust software for handling and cleaning financial data
- The challenges and opportunities for SaaS KPIs
- His biggest success and biggest failure
- Ryan’s photography hobby and how it helps him to think about investing
Watch the full show on YouTube
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Paul Barnhurst:
Hello everyone. Welcome to FP&A Today. I am your host, Paul Barnhurst, aka the FP&A Guy and you are listening to FP&A Today. FP&A Today is brought to you by Datarails, the financial planning and analysis platform for Excel users. Every week we welcome a leader from the world of financial planning and analysis and discuss some of the biggest stories and challenges in the world of FP&A. We’ll provide you with actual advice about financial planning and analysis. This is going to be your go-to resource for everything FP&A. I’m thrilled to welcome today’s guest on the show, Ryan, Ryan Abdullah, welcome to the show.
Ryan Abdullah:
Great being here, Paul.
Paul Barnhurst:
Yeah, we’re glad to have Ryan. I will tell you a little bit about him and then give him an opportunity to introduce himself. So Ryan comes to us from the Bay Area in California. He currently works as an investor for Norwest Venture Partners, investing between $40 and $250 million in SaaS companies, FinTech and various marketplaces. He went to the Wharton School of Business and studied finance and he has spent his career working in multiple investor roles for various firms. So can you just tell us a little bit more about yourself, your background
Ryan Abdullah:
For sure, Paul. So I’m currently part of the growth equity team here at Norwest where I spend most of my time investing in SaaS, FinTech and marketplace type businesses. Usually these are businesses that are post-product market fit. These are established businesses with revenue typically anywhere between 5 to at the higher end, $100M ARR. Most of them are capital efficient. By that I mean they’re either breakeven, profitable, or nearing profitability In terms of SaaS investing, like vertical software and more horizontal type software as well. My main area of interest is in hard to adopt industries. These are industries that software has not really penetrated that much. These are industries like manufacturing and transportation and is why I said most of my time looking at vertical type software solutions. Before working at Norwest, I worked at other growth equity firms and in investment banking and I think this role is a truly great one where you’re able to work with entrepreneurs who are building the next great thing, getting in the trenches with them and trying to help in any way I can and recognizing that the entrepreneur themselves have it much harder than we do and always trying to do whatever is best for them and try to optimize for what’s best for the business.
Paul Barnhurst:
That all makes sense to me. And just so our audience is, some of you may have noticed there is nothing about FP&A there in his background, which is a little unusual for our guests. But what we wanted to do today and what we’re going to be discussing is from an investor role, what do they look for FP&A how do they look at it, an FP&A team, and what kind of data, how do you prepare for it? So a lot of those things that FP&A gets involved in when they’re going out to raise a round of funds. So there’ll be another number of questions around that. So we’ll definitely have an FP&A angle to this, but it’s kind of fun to have someone who comes to it from a completely different angle. We get a few guests like that from time to time, but we’re pretty direct FP&A heavy. So I’m really excited to get into this and chat with you some more
Ryan Abdullah:
Completely.
Paul Barnhurst
So maybe talk a little bit about just Norwest Venture Partners in general. What kind of investment firm are they? What areas do they cover? Just a little bit about the company
Ryan Abdullah:
For sure. So Norwest was founded back in 1961, so one of the oldest investment firms out there. The broad thesis of Norwest is investing in businesses that are growing and now that takes a lot of different flavors. I would say we’re split in a few teams. The main team being the VC team that invests in fast growth startups. These are startups that are often growing a hundred to a hundred percent year over year, the ones that you’re familiar with like Uber, Snapchat, some enterprise software solutions like Gong. And on that business we will invest anywhere from the really early stages like the seed or pre-seed stage up to the pre IPO stage. So really supporting a business throughout its lifecycle. The other team, which is the team I’m part of is the growth equity team. And so this is investing in more mature businesses that are usually slower growers but more capital efficient.
And so that’s a different type of business. Usually the TAMs are a bit smaller, so it’s probably would never become the next Microsoft or the next a hundred billion company, but it can and has reached two levels in the several single digit billion dollar valuations and size. There’s also the healthcare team that invests in pharmaceuticals and medical devices and healthcare software. And we also have a team based in India and Israel. So our team, given our history, has done quite a few different business models. I’d say most business models that are out there. And we’ve really enjoyed learning every time we invest in a different model in a company and improving our skills as investors ourselves. So in terms of location, I’m based out of San Francisco. We also have an office based in Palo Alto, another one in India and another one in Israel. The team’s always growing and looking at new avenues for growth. These times are pretty interesting, but these are times that I think we can relate to given that the firm has been around for 60 plus years and has been in all sorts of up and down cycles.
Paul Barnhurst:
Sure. This isn’t a new cycle for you. You’ve been through the seventies inflation cycle, you’ve been through recessions, downturns in the economy, whatever it is we’re going through right now. It depends on who you ask and what day it is. It feels like a little bit with job market still staying strong but seeing some layoffs, high inflation, high interest, it’s a little bit unique.
Ryan Abdullah:
The combination of all the previous situations put together. So interesting learnings we can take from past situations,
Paul Barnhurst:
No question. We can learn a lot from the past and we’ll learn from this one as well. We’ll all look back and say, okay, what would I do differently? And I’m sure there’ll be a few things for all of us, but I agree with you. It’s an interesting time for companies. They’re looking to raise.
[Datarails ad]
So when a company decides to go through the funding process, I know FP&A if they have an FP&A team finance in general can obviously play a big role, but what role do you look for from FP&A if a company’s, if they have an FP&A department they’re looking to funding, what are you expecting from them and how do you look at that?
Ryan Abdullah:
I think the role of FP&A today is more important than it ever has been. Just as we talked about the market conditions have now changed quite a bit. They’re more uncertain. Two years ago things used to move very fast so there was very fast growing companies and to that, you know, need more accurate forecasts and the more environment changes, the more you need to reforecast. Now given the bit of a softening in the economy, forecasts are really looked at maybe two years ago there wasn’t as much detail they wanted to forecast because everything was going well. Now not only are things changing in the fact that there’s layoffs happening and most of your costs are in hiring. So new employees are doing different things but also there’s a lot of attention given to every line item to make sure that this is actually realistic.
But there’s also something to consider where given the fact that a lot of labor is moving in and out. Their roles are now taking new meanings and are giving different responsibilities. How you actually account for these roles financially has changed. So a developer that before just used to work on R&D now also has to maintain the platform if there are fewer developers out there. And so now the salary of a developer has to be split between both R&D and the cost of good sold. And so when we look at a business, we want to have an accurate understanding of their P&L and there’s a recategorization now on a lot of employee based expense, which is the largest expense. So more broadly I think FP&A today is no longer kind of a cost center, but rather a profit center where really the insights and analytics that the FP&A department can bring to a business helps their business grow and do better.
And what I’ve seen from the best performing companies is that the FP&A department is growing, it’s one of their main focus areas and is an area that’s really drives the business to do better. And another trend I’ve seen is the collaboration increased collaboration within FP&A and other departments. I think a lot of previous companies and models had FP&A be more in a reporting function. Now FP&A is expected to do a lot of the planning and really connect with the various departments to get their budgets and help them define their budget rather than just entering numbers in a spreadsheet. And so this evolution I think and recognition of the FP&A department and its role more broadly within companies but even more importantly within fundraising has definitely shifted. And I think this is something that’s very positive especially again the new economic situation. So I’m happy to expand on how specifically FP&A plays a role within the fundraising process. But thought I was pause there and see if you had any questions.
Paul Barnhurst:
Yeah, I will. A few things on that and then we’ll jump into that some more. I really like how you talked about how FP&A’s changed the way I used to refer to it is I think historically it was almost FP&R financial planning and reporting. You did a budget a lot of times it was a trend line, you updated it occasionally and you put out these big huge decks that nobody looked at and you spent a lot of time in Excel. And today it’s very much viewed in many organizations, especially the best organizations as value creation. It’s that business partnering. It’s really about how do you deploy the next dollar most wisely. And so I appreciate your answer. There was one other thing I want to kind of drill through a little bit that you said. You mentioned a lot of re-characterization of labor and things like that.
So how often do you see with these companies, because I imagine like you said, the companies you’re dealing with are, they’ve probably been around a couple years at this point they’re $10 million plus sometime maybe up to a hundred million in revenue. And so how clean is their chart of accounts do you typically see? You said a lot of, if you said this is the first time they’re often raising, are you still seeing a lot of issues with the bookkeeping? Is it really still a lot of times cash basis or accrual or what do you see there typically? How clean is that?
Ryan Abdullah:
I think it really depends. I think we’ve seen things that are great and I think we’ve seen things that can use improvement. I think given the increase in the amount of software solutions that are out there today I think we’re seeing an increasing cleanliness of their financial data. There’s a lot more BI tools, analytics tools and different reporting tools which really makes things better. But as you said, a lot of the times when we will talk with a business and see if it’s worth exploring a partnership the way they present their financials is typically not as optimized as it could be, which is one of the areas where we can add value. But that’s at differing stages per business. We have businesses that could be 25, 30 million of revenue that is run by the founder and maybe his wife as a CFO. And that was fine when it was a very small business.
But when it grows to $30 million of revenue and you have many customers, some very large customers that are multimillion dollars of revenue it becomes more important to have proper reporting and systems in place. And so we’re able to help that. But definitely when these systems are replaced from the get-go, it really helps this process become a lot more smooth and a lot easier. And that’s just not for the fundraising process. I think even internally if you have a very clean system of record and software and everything ties in and everything can be queried very easily and segmented, which is by the way another area where we’re seeing a lot of change now being able to connect your different software systems together. So connecting your financial data with your CRM data and getting a understanding of how revenue is segmented by different customers, geography, customer age and so forth, that needs a very clean system. So cleaning a clean CRM, a clean financial system and every other type of person you can possibly imagine. So it’s getting better. But I think a lot of our founders are focused on running their business and sometimes the financial planning and reporting can be secondary, which is completely understandable. And that’s where the FP&A role comes and along and really help the business become better.
Paul Barnhurst:
That all aligns with what I would’ve expected. It’s across the board you have some really good, you have bad, it’s good to hear it’s getting better and not surprising. One of the things I recommend to companies is, and this came from someone I had on the podcast, is to work a lot of startup as soon as you can realistically afford to have in-house accounting and FP&A do it, that may vary a little bit on complexity and size, but you often have accounting debt is how we referred to it. I thought that was an interesting way to put it. You often have kind of finance debt and you don’t want to let that build because it can just be like technical debt. If you wait too long to fix things, it’s a real mess to clean up that chart of accounts and it can cost you when you’re trying to go out and raise when people can’t make sense of your numbers
Ryan Abdullah:
A hundred percent. And I think the cost that you all face is much greater than the cost that it would take to implement these solutions. I think the reluctance I’ve seen to implement these solutions, just time and a lot of these businesses just don’t have enough time. They’re trying to grow. There’s so many things going around, but I do think it’s worth investing in this at some point and the earlier the better because it just compounds as you said.
Paul Barnhurst:
Yeah and that’s usually how it works. We don’t have time. It’s not so much always the cost, it’s the time factor, but if you don’t do it, you’re going to spend a lot more time in the long run but you just don’t want to sacrifice the time today. Like when you build a financial model and you know need to rebuild it cause it’s a total mess, you’re like that will take two weeks and you keep putting it off and putting it off and putting it off. At least I’ve done that a few times. I imagine you could relate to that one
Ryan Abdullah:
A hundred percent completely agreed. And then there’s things like best practices and standard formatting. I think that’s always appreciated. And so there’s a lot that goes into this.
Paul Barnhurst:
Completely agree. So when you’re working with an FP&A department, what analysis materials are you looking for from the fp and a department as you’re going through your due diligence and having those conversations?
Ryan Abdullah:
I mean I think that’s a very good question. I think in initial conversations the data requests are a little more basic and it’s just about understanding firstly what the business does. And once we have an understanding of what the business does and what are the market dynamics around that business, then it makes sense to delve deeper. But sometimes it doesn’t make sense to even look at the financials if it’s in a dying industry or something like that. But once we establish that, it’s interesting, typically we’ll start pretty basic and just ask your income statement, your balance sheet, your cash flow statement, a cap table to see who are the main owners within this business. Something that we really find very important for us is having a document you can get from your QuickBooks or from your ERP on all your customers and your customers spend per month.
So seeing how much each customer is spending per month, that allows us to calculate things like net retention, gross retention to understand the health of the business. And I would say that alongside with a forecast on how you think the business will do in the future that is realistic would be great. And that’s I think is the initial data request. After looking at that, we’ll probably take that and reformat it to our liking, to our standard template and figure out different metrics. So how does your gross margin trend over time, how does your COG churn over time? Things like that just to see at a high level, is this the type of business the makes sense to invest in? And if that all checks out positively, then we get into significantly more detail. And so that typically comes after the IOI stage going into the LOI stage.
And in that we’ll ask a few more documents and one of those will be you’re having your sales pipeline, so understanding all your customers that are potentially going to upgrade and buy a new solution from you or potential new customers and how far in the conversations are you with them and what is the estimate of the contract as they would get. And how does that flow into then next year’s revenue and future forecasts. And we’ll look at a metric called pipeline coverage which says if you expect to grow by a million dollars next year, how much pipeline revenue do you have and how easy to cover that. And then there’s things like weighted pipeline, unweighted pipeline. I won’t bore you with the details. So that’s one type of data request we would ask. Another one would be KPI driven model. So not every business will be able to put this together, but some will and that would be greatly appreciated.
Just to understand how you actually get to your forecasted numbers. Is it just that you say that last year you grew 20%, so unless year go 20% or is it a bit more detailed saying, okay, I have this many salespeople, each salesperson can do X amount of calls historically using our Salesforce we can see that the conversion from first call to product demo to contract to customers X and y Z percent. And then that means given our pipeline, we should convert this amount of new revenue this year or next year. And then going to even more details than how does that impact revenue? Because revenue is when you actually deliver the product there’s timings and so you can build rolling cohorts on when you think they will onboard and when you’ll deliver the product and that will translate to revenue rather than bookings and billings.
So that’s one thing. I think in another area is really having an understanding of how are you going to first of all, you’re raising money. What type of money are you raising primary capital or secondary capital? Primary capital being money on the balance sheet of the business, secondary capital being capital for the initial founders and shareholders that might want to take some chips off the table. Now secondary capital is understandable . Primary capital is also understandable, but needs to be better defined. So how much money does it actually make sense to raise, right? Because it’s good to raise $100, but if you can’t deploy $100 and there’s no point raising a hundred million, you’re just diluting yourself and causing more issues for the future. So I think this is the conversation that the FP&A team and the management team and strategy team has to have internally and see how much capital do we actually need to keep growing and what are our growth targets?
And from that being able to have an ask. And so I think the amount of money you raises needs to be built upon a model that the FP&A team and the management team worked on together. It just makes more sense because if you have a bunch of cash hitting on the bank and you’re not using it, it just doesn’t make any sense to anyone involved. Another thing is slicing and dicing the data. So I’m sure you can imagine revenue by every single factor you can segment, you can think of cost by every segment you can think of that can get pretty tedious with your index matches and your pivot tables maybe it can get pretty bad. So there’s a lot of software solutions out there that help with that some of our companies use and I think that’s very useful. And finally, I think the biggest role in FP&A, at least as it concerns fundraising is actually after the fundraise.
Because now that you have the money, how are you actually going to use it and are you reporting that efficiently? And what are your management and controls to make sure that this is being actually done according to plan and what’s budget and what’s forecast plan. And so I think you’ll have monthly meetings to see are you getting plan or not? And so really your plan that you put forward during the initial fundraising process needs to play out to some extent it’s understandable if it doesn’t for various reasons, but it needs to be directionally correct or at least explainable. Yep. I’ve babbled a bit there but
Paul Barnhurst:
No there, there’s a lot to unpack there. So a couple things I have first you’d mentioned, you know, want to forecast and you’d mentioned some are better than others. So I’m curious are you said a realistic forecast as I think the word you used, how often do you find the forecasts are realistic or do you get a lot of stuff for, you know, could tell from day one this is unachievable, first thing we’re going to need to do is go back and really dig into this and understand how they even believe this could be achieved?
Ryan Abdullah:
I think it’s a good point. I think ultimately the founders and CEOs of the business have a better understanding of the business than I or the rest of my team will have. I want to start by saying that, so whatever we think of the numbers, I think we come with less information than the founding team does. And so I think there’s a great deal of respect there that they know the business better than we do and the value that we are able to provide is to say that hey, we’ve seen and worked with a lot of businesses in the past and we’re able to draw conclusions from these past experiences to better help you. And so when companies send us a model, I think we always take the time to try to understand it. Even if it seems very off at first to us there were situations where they played out and we were wrong.
And I think it’s really important to point that out. And the only way to then do this correctly is to just look at the data and say, okay, if you project to have this much growth, what are you using to back that up? And as long as you can accurately back that up, then it makes sense. And so that could be looking at, like we said, sales pipeline, it could be looking at different data that you have and to the extent that you can actually demonstrate that then even if there’s crazy growth it makes sense. And in fact we actually want to invest in these businesses with crazy growth, very efficient. It’s just the question of making sure that this will actually play out and it’s not more of a conjecture. And so then if you just say that your business was growing 20% last year and you think it’ll grow 20% this year, that that’s kind of hard to define and that’s not very backable unless you can actually justify it and prove that it can.
I think having a realistic and accurate model is important, especially because that’s one of the first actual pieces of data that we will receive from a company and sort of influences our view on the company. So if we believe that they’re conservative and realistic with their numbers, I think that’s good. If we see something that’s not very backable and that has maybe been rushed, I think that pay sometimes a less than favorable image of the business because we think that their financials are extremely important. And if they can take a rushed approach to the financials, are they taking a rushed approach to the product as well? Are they taking a rushed approach to the customers? Are they taking a rushed approach to the rest of the business? And I understand that businesses are a tight timeline, but it’s just a product that we see and so that’s what we base our judgment on. So hopefully I answered that question.
Paul Barnhurst:
It. That makes sense. One of, there are two other things real quick on that that I’ll just kind of mention that you talked about one, you talked about coverage ratio and I think that’s a very important one to understand in your pipeline that really helps you understand, hey can they achieved their numbers? And I worked for a company where the CEO had a big focus, he want every business to have a three to one pipeline, $3 in the pipeline for every $1 that we brought in. I’ve seen others, you know, weigh each stage of it. But really understanding that is important and understanding those drivers because that gives confidence. Correct. In the data, it gives confidence that can be achieved. It’s like you said, okay, 20% just based off last year. Well tell me why that’s realistic And so that’s a great point of realistic and FP&A is going to play a huge part in just pulling data because you’re going to ask questions from every angle imaginable around customers. It sounds like around expenses, around all those things that you need to know to get comfortable that hey, this really makes sense, we can invest here and get the return we need for our investors.
Ryan Abdullah:
Correct. Yeah, I think it goes two ways. So we actually have to report our investments back to our investors and we need to be able to demonstrate quality as well. And so the output of our work can only be as good as the input that we get from the teams. And so that’s why we want to reflect well to our investors and that’s why we ask that as the companies reflect well to us. And I think it’s not just that we ask that from them, we’re happy to help them and if maybe their financials are less developed because they don’t have the right infrastructure, we’re happy to recommend different ways that they can implement software solutions or best practices to be more up to standard. So I think it’s a very flexible approach that’s case by case and we just try to work through it because ultimately we’re really believe in backing good teams that have a vision for the future for their product and the financial function. If it’s not that developed, it could be worked on. Everything can be worked on. But ultimately I think the most important is the people that we partner with and I think that’s what we optimize for ultimately.
Paul Barnhurst:
That makes sense to me. Understand what you’re saying there. So let’s just say a company’s looking to raise in the next year. I know it’s kind of a difficult climate. What advice would you give to the company and in particular to the FP&A department to help prepare?
Ryan Abdullah:
I think it’s never too early to start preparing. So typically these discussions and processes go is that a company might have hundreds of investors knocking at their door if they’re successful for the past three years and they might not have entertained any conversations or might have just answered a few emails, maybe a few initial calls and hasn’t gone much further than that. Typically at some point we see that there’s an event or something that causes the company to want to partner with an investment firm that could be future plans for growth, a change in a market environment, maybe even a personal situation that happens in the life of a founder or CEO or a team more broadly and that makes sense where they want to bring in a partner. And when that happens, it’s all hands on deck, but if you don’t have all the materials that you could have had and put together in the past years, you’re in a huge time crunch to put all of it together. I think the fundraising process, seen it to be really a stress test of the business and it’s various departments at every level. And so not only is stressing the marketing department, the sales department and every department, but most closely the financial department because that is when your product output is actually looked at. If the FP&A team has been slacking for the past three years they need to go through a fundraising process. Well they need to take all the historical data and that’s one it will be looked at and concerns will be brought to the team and to the management team and then it’ll filter back down to the FP&A team and then they’ll say we need this and this. Where are those documents? Why haven’t they been prepared previously? And it’s not because they haven’t been prepared previously, they can be prepared today, but it just makes the process so much smoother if everything has been sorts of taken care of beforehand.
And so to that, I think make sure that all your accounts tie up together, make sure that you’re using the right software solutions. If you’re migrating from one to another, make sure that process tight isn’t under control and that isn’t taking too long because I’ve seen it and I know how it feels to migrate. It takes a bunch of time and you know, end up not finding to migrate at some point just because of the pings of migration. But you can’t have your accounting system and data sitting on two different systems at a one time just makes so much more difficult for everyone involved. Make sure you have the right reporting business intelligence tools as well. I think investing in these earlier helps the business in the long run because you’re able to see trends familiarize yourself with how these platforms work. So once you actually need to give outputs from these platforms externally to investors or to other stakeholders, you’re able to generate them quickly in a correct manner.
I think most importantly it’s starting to build your financial model. Now of course the faster growing businesses really the harder it’s to predict where the business will be in five years. I fully understand that, but at least having a view on KPIs. What are the main KPIs that drive this business? And this can change over time, but the important thing is having an outline of this model built and being able to use this internally and compare the outputs of this model with actuals if you actually did it before, so let’s say you build this model little two years ago, you can see how closely it’s track to real performance and then you can make edits to the model based on deltas and understanding how can I add more nuance to this model to make it reflect the actual performance of the business moving forward.
And that will ensure that once you do get to the fundraising stage, that the model is more built out and it’s more sound and so it’s more likely to be accurate. It also gives you an opportunity to have more of a collaborative budgeting process, which I’ve seen be increasingly important and increasingly valuable. You want to have every department somewhat to some extent be involved in the financial forecast. They might have ideas, ways of doing things, ways they think about their department and how they want to spend or earn money in the future. And getting their input I think is very valuable and because through doing that you can also identify ways to improve the business. So yeah, I think that’s something that’s important. And of course as we previously mentioning plan around how much capital actually needs to be raised and I think that model will be very valuable in doing that if started early.
Paul Barnhurst:
So if I’m hearing right, there’s a couple things I would summarize this as when a company’s looking to raise, first you really want to know how much capital you’ll need, make sure you have capital efficiency and you understand why you’re raising the dollars and what you’re going to do with it. Make sure FP&A department can play a role there. Make sure you have your data clean, your historical financials as much as you can. You have the right systems in place for where you’re at and where you’re going to be in a couple years that you’re scaling your system, you’re not still using the stuff you’re using on day one and just banding it all the way along so to speak. And then having a good model. Making sure you have a good financial model and that the business is involved in the planning that you, you’re doing that as an organization, you’re really thinking through those processes. So it sounds like if an organization’s doing those things and they’re making sure they have those things in place so they can answer the questions quickly and things are clean and in a good place. That’s really the things to be doing today to kind of prepare for whenever that raise comes.
Ryan Abdullah:
Exactly. And it’s never too late to do these. I think starting earlier is always better and there’s a lot of software solutions out there today that make this much more easy than it was call it 10 years ago. So for example, for your CRM data, there’s a lot of data enrichment tools that, and for example, can you like the geography of where a certain customer is and their size just by your Salesforce that makes things much easier and allows you to cut the data in certain ways that you know wouldn’t be able to if you didn’t use the software solutions or manually enter the data. So there’s a lot of talk about data hygiene and I think it’s really important in a fundraising process to have your data be clean.
Paul Barnhurst:
Yeah, no, I’ve been through a process at a company where they were looking at a sale and we didn’t have clean data and we get requests left and and trying to be consistent in how you slice and dice it each time and send it to ’em and it was a real challenge. So I can attest to that importance of clean data, it makes a big difference.
Ryan Abdullah:
And I think as well as it relates to FP&A specifically in the fundraising process the fundraising process is very stressful for the management team. It extremely stressful. They’re on calls sometimes several calls a day, A lot of their time goes into this and sometimes they’re putting aside their business operations to focus on the fundraising for a certain bit of time. And so the more helpful you can be and the more you can take off their plate, the better it is and the more appreciated it is. And in terms of your role and your future in the organization as you can demonstrate that you can take responsibility and ownership over different work streams, I think that goes very well with the management team and on your career progression. So understand that the management team might be a bit irritated because they just have so much to do and so don’t take it badly if they can have a bit of a temper sometimes because it’s under so much pressure. It is a stressful process and I think it’s a good process because it helps the business really identify its areas of improvement and where it’s doing well in order to invest more in. And so the more you can help in that and the more responsibility you can take and lighten up the load from other people on your team, I think that would be a great thing to do and much appreciated.
Paul Barnhurst:
Kind of interesting to mention that I was saw someone who was a CEO, he put on LinkedIn about don’t be afraid to raise in an environment like this. Sometimes pausing and doing raising if it makes sense, makes you really start to think where you’re at, what’s going on in the business, why am I doing this, where’s our next step strategically because there’s a lot of questions you have to answer and he was just kind of commenting about how it was, it can be really beneficial if it makes sense. And so I think FP&A anything they can do to help the founder focus on those strategic things, the key things he needs to do so he can make sure he can keep the day-to-day going because if you let it a sell, an acquisition, a funding round, whatever, any of those big equity capital debt equity capital type changes can be all consuming. They can take up everything. I’ve seen it from both sides providing data when someone’s looking at acquiring company I was in. And then also being involved in doing some of the due diligence and analysis with dev of acquiring a company and how it can be an all-consuming exercise if you let it.
Ryan Abdullah:
Agreed. It is very important.
Paul Barnhurst:
So I’m curious as you’re looking at investments, and I imagine this is going to vary a little bit by industry obviously, but there are any key operational metrics you like to always see within SaaS as there’re a couple within FinTech, so some of the main areas you invest in, are there two or three kind of metrics that you like to really hone in on and that are really important to you? And if so, what are they?
Ryan Abdullah:
Oh sure. So in terms of SaaS, I think one metric that every founder can relate to is ARR, just how big the business is. So a lot of people have different minimums or maximums where they don’t invest or invest in. And so ARR is just a function of revenue. So it your ARR multipl applied by 12 as long as there’s 12 months in a year the last time I checked. So yeah, ARR is one. Growth as you can imagine. And so that’s something that’s important just knowing how fast is this business growing and how fast it’s projected to grow. Another one is profitability and this is one that is increasingly important more broadly for capital efficiency. How much money are you burning a year? Are you profitable? What are your EBITA margins if you are profitable? I think this is increasingly important in an environment where a lot of customers are now spending less money on software or on other solutions and have budget cuts and are now looking to invest in new solutions.
And so if you have a solid financial situation and are profitable, you can weather that storm significantly more effectively than if you’re not and you’re relying on a lot of marketing spending to get customers and that kind of dried up. Another one is net retention rate. And so net retention is just a measure to see how your customer spending has trended over time. And typically what we want to see is that customers that you already have spend more every year than they did the previous year. And that is a function of how much they like the product. If you’re releasing new features, if there’s some upsell involved the negative is if net retention is below a hundred, that means that every year you’re losing revenue from existing customers. And that could be because of churn, which can be because of a company going out of business or it could be because of a company switching to a competitor.
And so when that happens, we usually request later in the process something we call truck codes, which is just an explanation of why each customer start being a customer. And I think that’s very helpful for us to paint a picture of how well the business is and in terms of the product, because I’ll be frank with you, investors are not necessarily technical people and so sometimes we don’t have a great understanding of how the product actually works technically and how users like it would be. You’d have to be a big survey and we do that. But sometimes just looking at net retention, you can get a very summarized view of how people feel about this product. Gross margin is another very important one, determining how a business can turn its revenue into profit down the line. Big part of that is having lower costs of goods.
And so that’s also helps us define whether this is more of a service based business or whether that’s more of a software based business. We see software based businesses starting at 70% gross margin, 80% gross margins are very good software business, 90% gross margin is best in class. Pretty hard to find, but that’s a very good measure of what is the business nature of this. Previous amount of money raised that gives us a good amount of indication on whether the business is capital efficient or not and more granularly and later in the process we can ask things like product usage metrics. How often are people logging into your software every year or every month, every day? Is this something that people interact with all the time? Only one time like a year end, let’s say for HR data, that’s for reviews of employee performance. That’s more not every day, but when it does happen when your review happens, it’s all super high volume. But it helps us understand if this is a software that people use every day, it’s pretty unlikely that they will ever churn from the software because it’s so crucial to their business If people don’t even really use their platform that much, that is a risk
Paul Barnhurst
Stickiness for sure that that makes sense to me and is really important. And understanding those churn, I’ve seen all those things in different businesses. You’re looking at ’em going, okay, either this looks great or doesn’t quite, there’s something going on there. And so all those metrics you mentioned make a lot of sense. Gross margin, Hey, are they best in class? Are they more of a service business? What do these margins tell me? So now we’re going to switch gears here a little bit. We’re coming up toward the end of our time. Just want to ask a couple questions are a little more kind of personal in nature. These are ones we generally ask everybody. But the first one I want to ask is can you tell me about an accomplishment from your career that you’re most proud of? So if I was interviewing you for a job, what would you tell ’em if I said, tell me the accomplishment you’re most proud of?
Ryan Abdullah
I think I could talk about my career role at Norwest. We’ve put increasing effort on adopting different software and data solutions to make our internal operations better primarily as it comes to sourcing. And by sourcing I mean being able to find these interesting companies that we believe in and think we would want to partner with. And so we’ve invested a lot of resources and man hours developing more automated sourcing functionalities, which I think have paid their dividends over time. And I think this is an area that a lot of different VC funds are now starting to look into. And I’m glad that we were able to do that, call it two years ago and have been doing this continuously since continuously looking at new data providers and different platforms we can use to make our sourcing efforts more efficient and better to make sure that we really know what businesses out there are performing well and which one should we be in contact with. And so I’ve been involved in some of these efforts leading some of these efforts and I’m very happy that they’ve been going well and they’ve worked out pretty well for us. So I think that’s an area that I encourage other venture funds to look into, but also companies themselves when it comes to figuring out who would be potential customers investing in different solutions to landscape the market and see which companies would be best customers.
Paul Barnhurst:
Good answer makes a lot of sense to use technology to understand the landscape, to really take advantage of what’s out there because there’s a lot that can save us time, make us more efficient, provide value if we implement them right. So I agree with you there. So next one here, we like to ask a little bit of the opposite side of this. Can you try, describe a time you have experienced a failure, something that didn’t go right at work, maybe an analysis gone wrong, an investment that you wish you would’ve never made and you kind of look at as a failure. And then what did you learn from that? What was the takeaway from that experience?
Ryan Abdullah:
I think related to the previous point trying to do too many things at once. Too quickly and I think this is something that a lot of FP&A professionals are now faced with. The increasing amount of software solutions that are out there which ones do you adopt and when you adopt them, it’d be great to adopt everything from day one, but frankly it doesn’t make sense to do that just because there’s a lot to do with change management. And so this is something I think I may be failed in at the beginning is just trying to do too much at once and changing too many things. There’s a lot of people that are involved across the organization that have their roles defined and trying to change these roles in a very quick manner can custom friction at times because you’re changing how a person works. And so I think I could have placed more effort in change management and making sure that these software solutions that we adopt, there was more time for them to be adopted and maybe more instructions on how they could be adopted and more tutorials but ultimately everything worked out for the best.
But yes, I do think that change management is super important, especially in our environment where everything’s changing and constantly super quickly and at an increasing rate that everyone’s on board know everyone knows what’s happening, why we’re doing this, just to get people motivated because if things are changing too quickly and people are left out of that picture I think they can start just feeling that they’re not involved then that reduce motivation. So yes, definitely involve everyone as you’re deploying new solutions, be it software, new ways of doing things, have people have their say, have people really give their input. And I think what I learned from this process is that’s much, I think the journey is even more important than the goal. You know, really need to enjoy what you’re doing day in, day out and then when you do enjoy what you’re doing, the output just takes care of itself because you’re just passionate and happy to put in the extra hours or the extra work to do this and you will always go and find new ways to make it better. So yes, I think the main takeaway is it’s a team, have everyone involved and really enjoy the process while you’re at it. So really enjoy the companies you work with, really try to find ways to integrate people within decision making and I think that’s the best way to do things.
Paul Barnhurst:
Communicate, change management, involve the team, all really, really important. If you don’t do it, you often end up with a mess when it’s all said and done. So totally understand that. Next one I have here for you, what is something unique that you can share about yourself with our audience? Something we wouldn’t find online, hobby in interesting passion, something you’ve done in the past, whatever it might be.
Ryan Abdullah:
So aside from investing, I’m very much into photography, specifically beauty photography, which is taking photos for I would say makeup companies for ads,. So different types of eyeliners or beauty products. I think there’s a lot of detail that goes into it and I always thought growing up that art was less quantitative and more qualitative. But as I studied photography more, I came to understand and learn that photography is actually a very technical field and the way you place the lights which angle you place them and how many you place them it really creates the look and feel of the picture. And it’s significantly more quantitative than I ever imagined. And to me being more in the financial role, that appeal to me a lot how art actually can be very number driven and analytics driven. And so yeah, I do photography, I really enjoy it and it’s something that keeps me busy and keeps my mind off investing sometimes.
Paul Barnhurst:
Cool. No, that’s a great one. I wouldn’t have guessed that. So I appreciate that answer. It’s always fun to learn different things about people. We get all kinds of different answers of the hobbies of people. So it’s always fun to know what people like to do outside of work. It’s always good to have those hobbies. So here’s our last question before we just ask you a little bit of where people can learn more about you. And this is a question we ask everybody is our show is sponsored by Datarails. Data Rails is an fp and a platform for people that want to stay in Excel. And so we always like to ask, what’s your favorite Excel formula feature function, what’s your favorite thing about Excel?
Ryan Abdullah:
I think when it comes to slicing and dicing data, I think pivot tables can really come out to be very useful especially on the go. And so I’d say pivot tables and if looking for a formula, maybe transitioning from index match into XLookup, that saves quite a bit of time. So yeah, those are two features I like
I’m an X lookup fan and I love a good pivot table. So well, we’ll go ahead and leave it there and just let you tell our audience if they want to follow you, learn about more about you or Norwest Ventures, how should they go about that?
For sure. So feel free to follow me on LinkedIn, send me a connection request if it makes sense. Send me any messages or questions you might have after this podcast that I could expand on or haven’t answered. Also feel free to visit the norwest website mvp.com, just three characters and see if any of the businesses we invested are similar to your business and could be interesting to talk to us about. And feel free to email me. My email is rabdullah@nvp.com. Happy to have a chat and see if we can work together and answer any questions you might have.
Paul Barnhurst:
Great. Well again, appreciate your time today, Ryan talking a little bit about investment and look forward to the audience getting an opportunity to listen to you talk about how FP&A can help navigate, help the business work through that process and make sure it goes as smooth as possible. So thanks again and we’ll be chatting soon I’m sure. Thanks Ryan.
Ryan Abdullah:
For sure. Thank you for having me.
