Bursts of Color - Not All Cash is Created Equal
Plenty has been written about FTX already, and I suspect we are just getting started. The thing I’ve found most shocking so far is the alleged misuse of customer deposits — meaning the company seems to have used customer assets to finance the company’s own operations (as well as those of several inter-related entities). Wait, what? That’s like your bank paying its rent directly from your checking account.
And while the FTX saga is clearly a special case, it’s a good reminder to all of us that not all cash is created equal… and that we need to be clear about what’s what.
Prepaid Revenue
To those who have successfully gotten customers to pay for services months or even years in advance: kudos! That is amazing, and has all kinds of obvious advantages for a business. However, it’s also important to remember that the business has not earned this money yet, so is not available to spend in the meantime.
In the example above, the $3m prepaid revenue was attributed to a single three-year deal with a first year value of $500k. There were also a number of “breakup scenarios” in which the client company would be entitled to its cash back. Thus, while it was nice for the startup to have all that cash, they had to be careful not to touch most of it in the meantime.
One simple hack for limiting confusion: setup a separate bank account for pre-payments, and then only move funds to your startup’s primary account as they are earned over time.
Who’s Your Finance Leader?
Because a startup’s early days tend to be led by product and go-to-market, the finance function can be an afterthought. But once a company gets to a certain stage — say around 25 employees and any meaningful revenue — it’s invaluable to have a dedicated finance leader in place to ensure that things like cash management are being handled correctly. I wrote about this previously in Of Plumbers and CFOs. For those of you seeking input or candidates for a new finance leader: friendly reminder that we are happy to chime in, and that Burst partner Rob Krolik is a career CFO with lots of experience hiring and interviewing for such roles.