Startup Accounting: Sandy Yang on Due Diligence and FinTech

0:01 Hi Sandy, welcome to Venture with Grace today.

0:04 Hi Grace, how are you?

0:07 I'm good. Sandy has been a long time friend and she's like one of my closest friends from college and now she is a head of accounting at Plaid. To give the audience a little bit of background. Do you want to introduce yourself to the audience?

0:21 Sure, yeah. Grace and I are longtime friends. We, we met in college. So after college I came to the Bay Area, started my first accounting career with PwC. I was there for three years, learned a lot of basic accounting and auditing skills. Currently I lead the accounting team at Plaid. Plaid is a late stage venture backed company in the fintech industry with the mission to unlock financial freedom for everyone.

0:53 Been here for almost two years. Prior to Plaid, I worked at One Medical where I was a director of accounting for two years. Some of the notable things I've done or heavily involved in at One Medical include several M and A deals, from large to smaller deals. I was the first hire after the IPO of One Medical. So where I built and scaled financial reporting processes and teams and revenue accounting operations there.

1:24 Before my Medical I worked at two SaaS companies. I joined both Anaplan Amplitude Pre IPO and they're both now public companies. I also worked at Seagate. I did SEC reporting there for one and a half years and I mentioned yeah I started my career with PwC. So I've overall had close to 12 years of experience in accounting. Yeah excited to be here and thank you for having me. I'm not the typical background you will have for most of your guests are either venture capital investors or startup founders.

1:59 So happy to offer my unique perspective to your audience.

2:03 Amazing. Hi Lakita, great meeting you. So I just want to wanted to say hi to the audience anyway so I guess like I wanted to start with since like our theme today is like Basically Startup Accounting 101. I wanted to start with like the outcome first. So you have worked on like multiple acquisition or like IPOs which we consider as like exit strategies for startups. And I wonder like what are some overall theme that you have seen that like successful company have been doing like in terms of accounting when they are you know, earlier stage.

2:42 And I wonder what are some lessons that you've learned from these like you know, working on pre IPO strategies. Like what does it look like for a company from very early stage to like ipo? Especially like, like what does it look like when a company is actually IPOing what does the process look like?

3:01 Yeah sure. Just full disclaimer. I've never really joined or worked at super early stage companies. Most of these companies I joined, when they hire, for example, the first SEC reporting person is pretty late stage. They're getting ready. Typically it takes somewhere between less than a year to two to three years for the entire process to get ready. It's not just getting your S1 filed or getting your bankers and lawyers and auditors in a role.

3:32 It's more about for example the CEO CFO getting used to the earnings process. When you're a private company, you don't have to meet your quarterly forecast and all these higher results every single quarter. As a public company you're under pressure, right? Once you go public, you can't miss a beat. If you miss any quarterly results, you'll see your stock pretty much tank.

4:07 So that's really high stressful. Secondly, is your operations, is your finance or accounting team ready to turn out numbers accurately and completely? Are you going to get dinged by the SEC for restating your financials? And nowadays SEC has a new rule of clawing back executive bonuses and comps. If the bonuses are being paid on it's based on the wrong result. You announce your EPS is $1 and in reality two years later you restated that your EPS only half of that.

4:41 So so you have to pay back your stock and bonuses for that. So a lot of things really just getting the team and the operations ready. And this is not just accounting and legal job. Everybody in the company needs to have a rigorous process and mindset that they're all part of this. Because sometimes accounting is the sort of the downstream of everything. You take the data provided by your sales team in terms of revenue, you pay expenses and everybody is spending money and going for traveling.

5:17 So if people are withholding any expenses or doing side deals, you will not be able to know and report that number correctly and accurately. So in order to be a successful public company you have to have vigorous internal controls and that's also one of the requirement. So for earlier stage companies, in order to have an exit event, I think it's just important to again you have limited resources, you might have just raised a small round in your pre A, A or B.

5:48 You're struggling to find product market fit. You're trying to sell the first deal to your first customer. So when you are focusing on that, it's really easy to sort of ignore or don't have time to keep a good clean book. So then for that I would recommend either having accounting software. Now nowadays there are more advanced or AI driven software that can Just really automate the bookkeeping or just have outsourced it to somebody like a contractor or offshore or have one person in house to ensure I have clean bookkeeping.

6:24 Because if you don't have clean bookkeeping, it's one mess you have to clean up. When you need to provide financials as part of due diligence to your investments, when you raise money, when you get audited, you might have to go back and rework a lot of the things. And thirdly is you don't know the accurate number. For example, you don't know your Runway is right. If you don't know how much expenses is being paid out, how much money am I getting paid by my customers, how many customers are not paying me or not paying me timely, am I paying my vendors too fast and I'm getting paid by my customers too slowly, then I might have a cash flow flow issue or Runway issue.

7:07 So if you don't have the right and accurate data, you can't make the decision as accurately as you can. So the data quality, financial reporting, bookkeeping is also pretty essential in my mind from an earlier time, earlier stage.

7:25 I wonder, can you walk us through like. So I guess a couple questions are like number one is how do like what should founders do to like keep the book clean? Like and who are the I guess like top software or like CPA firms that they should be considering using and how do you select the like firm that are actually going to deliver the best result with a friendly budget? And I guess yeah like that's question one.

7:53 The other question is about like you know, IPMA and related things.

7:57 Yeah. So how to keep the book clean? I think if you're just the one or two people team for to start with it's probably the founder, the CEO doing the bookkeeping very beginning when you are not making money, you're pre revenue, you haven't raised a lot of money. So then I would then recommend that just doing maybe an old school way it might not be worth paying or spending money on software. You can either keep everything in Excel or it's important to just keep your personal space, spending and finances separate from your company's finances.

8:33 And that's one, keep all the receipts invoices separately, have the record all cap separately, that's one. And second is know how much money is in your bank, how much money is going out and coming in and do that every single week, every single month and know your numbers just like how you're managing your household financials. Right. You always want to have money at least 12 months of Runway in your bank.

9:03 Because the number one reason that kills a startup is you run out of money. So survival is key. If you can survive, you can always come back and grow your company again. So if you don't have money and now you're just scrambling to raise money and under this current environment, it might take even longer than before to raise any money. So you might also lose a lot of the leverage. So always have more than 12 months of Runway and start to think about hey, do I need to go out and raise money?

9:37 Am I going to be profitable enough so that I can continue my Runway longer or do I use a different strategy? I want to grow at all costs and then go out and raise funds to do that. So weighing the growth versus profitability is also important. Certainly I think it's just keep a chart of account or you know, just if you have a system or for example if you're using QuickBooks yourself, keep a clean chart of account.

10:10 Hey, here are my revenue accounts, here are my expenses account, here's my payroll. Maintain that and just keep growing that, that. Keep a good list of that. In terms of how to select the bookkeeper or the right firm to keep your book, I think it initially firms might be too expensive. You can just hire an accountant or bookkeeper. Even outside of US Sometimes I see companies do one time cleanup at the end of the year, but I would not recommend that because at any given time you might not know what is my burn rate, how long do I have in my bank that I can last based on my current revenue and expense coming in and going out.

11:00 So I would recommend at least monthly or quarterly bookkeeping so that you know where you're at in terms of cash and run rate. Does that answer your question? And is the third question about. Yeah.

11:16 So I wonder what are like so beside like. So when you were thinking about like hiring outside of the U.S. how do you find this person? Is that like on upwork or how do you evaluate if they are capable of doing things in the right way? And are they familiar with like how US culture has been like or like the entire like I guess like accounting legal system to make sure that you are on track. And I also, I'm like, I'm wondering so in terms of like you know, fundraising as startups, like you're constantly fundraising and I wonder how do you keep your books ready when like investor ask to do due diligence on your like accounting side of things?

12:05 Yeah. In terms of how to find the person onshore, offshore, so within the US I think talk to other founders and see hey, are there trustworthy or reliable accountants others are using? Can you use the same team, same people or can they? I think word of mouth is helps better than it's easier for you to go out and find someone on your own without the sort of the layer of trust. And for offshore, I think you can work with a lot of the offshore agencies and they can find trustworthy people and you just do interviews or again talk to other founders people in your network to find people that have worked for other companies.

12:51 Then in terms of how to keep the book ready when investors are asking for as part of due diligence, I think it's two things. One, revenue. If you're pre revenue then you have nothing. But if you're making money and you're selling product your post revenue, how are you recognizing revenue? At least you know, is there any complexity in your rev rack model? What revenue streams do you have? Secondly, are you getting paid fast enough so that I'm saying oh I sold 100 contracts this year, I sold 50 million but I'm only collecting 30.

13:33 And then what happened to the 20? Is it just slowing collection where the customers are not good quality, they're not paying, then do I need to actively turn them right? So I think the quality of revenue is also really really important. And sometimes the founders are not calculating the burn rate correctly by using 50. In reality you only collected 30. And then in terms of expenses, yeah, sometimes you see not all the months have the same flat or expenses.

14:06 Some months might have a pop, then you just go in and investigate. His is a one time expense or should I straight line that expense over time? Is it a prepayment for a three year license of some sort of software? Important to keep the expense under control, you have to also realize hey, what are some of the fixed costs and what are the non fixed cost, variable cost and personnel expenses for example is not just your employee salary.

14:39 You also need to pay health insurance or fringe benefit, travel expenses, equipments, sometimes office spaces, these all count. And for non personnel expense, sometimes I see the biggest being the legal expense or vendor software cost. Right? Just make sure we keep all the expenses on track. Sometimes I see companies using the corporate card. You put all the company related expenses in the card and then that software can help you automate a lot of the expense tracking.

15:17 Then the next point I have I guess is when you have revenue expenses under control, then what are my KPIs, what are my key metrics? That that's Important to my business. And that's something you have to show the investors that you're keeping a good KPI. For example, you're a SaaS company. Most SaaS companies have annual recurring revenue or ARR net retention rate. These key metrics. Sometimes I see companies report the GAAP revenue which is the revenue recognizing according to accounting rules versus annual recurring revenue.

15:52 Sometimes it's a number that's not according to accounting rules. So we call it non gaap. If you have a huge difference between your GAAP revenue and non GAAP ARR, then I like to know as an investor, are you making things up in terms of hey, are you? If I have revenue only 20 million but you are claiming that I have a ARR 40 million, then where does the actual 20 come from? Are you inflating the number?

16:19 So I just think that it's important to be crystal clear on your GAAP financials and on the KPIs are generally non GAAP and how do they connect and how do they reconcile? So in terms of efficiency of the business, right. Are you generating the most amount of revenue with the least amount of resources you can? And nowadays it's all about

16:47 being capital, being lean.

16:48 Yeah, yeah, maybe revenue per employee number, you keep track of that and sales efficiency. A lot of SaaS companies use a long term value divided by CAC. How soon are you getting paid back for the money you're spending to acquire your customer? Customer acquisition cost, you can track employee efficiency sometimes might not be as easy if they're not a sales employee. But for engineers you can equip them with now AI software copilot or even better tools and you can track engineering efficiency, GNA expenses, all of that.

17:29 So I wonder what do you think is like the biggest expense for startups typically you have seen and then also you have worked on like Metabol, like many different SaaS companies. I wonder what are you like three factors that from your perspective that makes a company healthy financially.

17:49 So the biggest expense depends on what type of company. So if you're a SaaS company, I would think in terms of gross margin the biggest cost of revenue should be your hosting, aws, Microsoft Azure and these data center hosting expenses, right? That's probably the top three. And then secondly is personnel expenses, your own salary, your employees headcount and all these personnel related expenses.

18:22 And thirdly, it's probably software or vendor expense.

18:30 First like personal expenses, like how much can people kind of get reimbursed and how do you kind of track employee expense in general?

18:42 Yeah, you Typically have to have someone that manage your payroll. Right. Everybody get paid also like another question

18:53 is like so like piggyback on like what you mentioned about like you were helping, you know these companies building up their financial team to a degree. I wonder who should be on the finance team and what does like a large company look like on the financial side? And then like what does that look like compared to if you only have like a five people company?

19:15 Yeah, if you only have a five people company I think you're just the founders are wearing multiple hats and they are doing the bookkeeping and just the basic thing is to do just make sure you know what's coming in, what's going on in your bank, how much money you have in your bank, how long can you last to survive and to just keep efficient. But if you have a larger team, like let's say you have a 50, 100 people team where you're starting to see rapid growth and that's when I feel like you have to have at least one in house finance or accounting personnel to help you manage all of the revenue, billing your customers, collecting from them, paying your vendors timely.

20:02 Right. So that you can help scale and invest in the company's growth. So at that stage you just have to at least have one or two and then the remainder can be offshore as needed or contracting basis. That's in terms of who. And then your earlier question was

20:29 so I wonder so like like what us. What does it look like for us to kind of like manage the finance on a daily basis? Is this like you take a picture of your like your receipts of like going to a coffee shop or something and upload into like a software or does it look like I manually glue a bunch of stuff onto like a piece of paper? Like what does it look like for you for or like or using the, what is it Quickbook or something Books or some systems.

21:03 Yeah, I've never done this at a startup, but I'm just thinking from a founder's perspective that it might be the easiest if you use one of those corporate cars to track all your spendings, like for example a Brax card or you use Navon for for tne and ramp. All of these companies that do exploit expenses real time. Once you just swipe the card, I think the system or the software is smart enough to figure out what category and how to.

21:34 As long as you have the back the rule of accounting built in then they should be able to automate. Hey, I just went took my client out for a coffee. This is an Expense or I just purchased 10 laptops for my new employees, I should then capitalize these equipments and expense them over three years. Right? If you have a certain set of rules built in and use these smarter softwares, I feel like you can save yourself a lot of time.

22:01 So as a CEO or founder your time is precious. You shouldn't be spending time collecting gluing receipts on a piece of paper. Hopefully you automate those or just outsource those as much as you can. So you spend your time thinking about strategy, building your product and selling your to your customers and talking to investors and these more value adding things.

22:26 So you work at like one medical and now you're at plaid and prior to that you were working at like some other SaaS companies. I wonder when you're thinking about these two like all different type of companies, what are the similarities and differences in terms of accounting people people should consider.

22:48 Yeah, there are a lot of similarities. I think no matter what type of product you're selling, what industry a company is in, whether it's healthcare, software, hardware. I was at Seagate for two years and it was mostly hardware. So the revenue model is very different. Different revenue streams, software revenue. Often people say it's the easiest. You sell a subscription to a customer 3 years, you just recognize revenue 1/3 each year versus hardware is more.

23:22 Oh, you have to recognize revenue upon delivery of your product. Sometimes you have a combined software with hardware, then that introduces more complexity. So I would think that the revenue accounting could be different based on the type of company or the industry the company is in. But on the expense side, every company needs to hire employee. Everybody needs to have capex, have equipment, office space.

23:54 They all pretty much use the similar vendors in terms of hey accounting, software, legal expenses, hr, all these back office expenses, I feel like they are. There are a lot of similarities but again depending on the stage of your company the operations could vary drastically. Like how a 500 companies run is not the same with how 5,000 50,000 companies run. You have more specialized team and you have a lot more people.

24:27 When the company grow and just focusing for example, you might have 50 people just doing fixed assets. When you if you're a capital incentive intensive company. A lot of times now we see AI companies having to purchase this GPUs and these hardwares and they're heavy, heavily capital intensive and how do you account for those? It's different from a company that doesn't need to have a lot of these heavy capex spending.

24:57 I wonder what does it look like when A company go ipo, so what kind of paperwork do they have to do? And then same as like what does it look like? Maybe we, we start with like the acquisition first. So like you know, when you were at one Medical, there were a lot of like MA deals. Like how do you do due diligence on these deals? Like what does the overall process look like when a company is trying to acquire a company or being acquired?

25:24 Yeah, for M&As. Typically as a buyer, I'm not in a corporate development team. So that team is responsible for the main going out for deals and finding the right target. But in terms of pre acquisition, usually accounting finance get pulled in the later stage. When you have a target in mind, right. You want to do diligence on the target to make sure what they're claiming, the number, the numbers are accurate and you are aware of the risks as you are considering buying them.

25:57 So in terms of financial diligence for larger targets, usually they have audited financials. So you would need to obtain audited financials and look at who is the auditor and how many years of audited financials can you see? And for smaller companies, they might not even have an auditor where they don't even have a clean set of financials. So that is a separate story. But for larger companies, you look at their balance sheet, income statement, cash flow, you look at anything that's, that's unusual.

26:31 Do you agree with their revenue recognition accounting? So one example could be a lot of the times we see companies paying a multiple based on the revenue of the target. Right. Let's say I'm paying 10 times revenue. So it's important that you feel confident of the revenue number that they reported because you might be overpaying if the revenue is inflated. Even if sometimes companies are, are audited. One example is growth versus net revenue. Right.

27:01 Your, your revenue could be a hundred dollars. But in reality under US GAAP you should only be reporting revenue on a net basis outside of, for example, if you're a payment processing company, you pay, I'm just saying 80% of the money you get to Visa and Master so that you Only end up $20 in your net revenue. So then this is, yeah, again important to understand how, what are the revenue streams and how the company is recognizing revenue.

27:32 And secondly is I think concentration of the revenue and the assessing the quality of the revenue are a lot of the revenues generated by a single set of customers. For example, your top five customer account for more than 50% of the revenue. In that sense I see this As a high risk, high concentration risk. And if anything were to happen, the company might might not even survive.

28:03 The revenue might be cut in half. Or is revenue heavily concentrated in one industry? For example, are a lot of the customers in crypto industry that sometimes are more risky? Is that a risk you're willing to take when you're buying the company? And then the last point about revenue is you're claiming you recognize 100 million as I said. But are you collecting those? Are you getting paid? Are you seeing a lot of bad debt expenses that are ended up not being collected?

28:32 Because in the end you need to see the money coming in. Otherwise you have a Runway issue and you might run out of cash for expenses. Side I I think just look for anything unusual their one time large expense. Are there expenses that are being deferred? Are there potential liabilities that are not currently in the book? Then you after you acquire them you got hit by some sort of a large expense where you owe IRX tax bill.

29:03 I see pretty often that startups sometimes in terms of giving employee options RSUs they might not have completely fully filed these tax filings with the IRS and they might end up owing a larger bill two, three years down the road. So being aware of your liabilities and just scoping in that in your general warranty or escrow as you as you draft the the purchase agreement, I think then track the efficiency.

29:39 For example you can look at G and expense as percentage of revenue, look at their key metric. But again yeah it's important to just also when you are buying something that's on a larger scale, typically companies hire external advisors to help you with the financial diligence. So you are not doing these on your own, you are just working with these advisors. And but then you need to review their work and know how things, how things work.

30:13 Lastly is I think the look at the equity cap table, right? How are you going in and what is the cap table currently looking at? Are employees granted options? Who. Who are my investors? Who, who's on the cap table and these kind of things.

30:36 I wonder. So I want to tap into like some like I want to double click on like some of these subjects that you mentioned. So I wonder for example like look at who is on the cap table. What are things that should people be like alerted to? And when you mentioned about these like unusual expense or like large expense. Of course like if there' a large expense obviously it's like really easy to see. But like sometimes like I feel like most companies I feel like it's probably Gonna be like the, the books are probably gonna be like really?

31:12 It's like because when they're like handing in to you, they're already doing a lot of like fixes or whatever. I wonder what are you, let's say like three checklists on your like you know, laptop that like you would like see. Like I guess like double check on these like three things to make sure that like you don't miss anything. Can you give us some example of like things that like were not so easy to be seen, like how to

31:45 find the hidden things behind the financials

31:49 or like not the hidden things but like I feel like it's just if I'm like not a counting expert. I personally felt like it's really hard to tell like if a company is in good shape, especially when you're investing in like hardware. I think like there's a lot of costs like but when you're evaluating if a certain cost makes sense, you can only see like if they're large enough. Unless you got to see like so many companies behind the scene that like you can compare two different, let's say robotic company or something.

32:22 They share the same expenses. Otherwise I don't really know how to do due diligence on like if a certain expense is comparatively reasonable. Yeah, exactly.

32:36 Yeah, that's a great question. So again in terms of first I will talk about revenue. In addition to all of these things I said about revenue, the quality of revenue in terms of collectability, concentration of customers. It's also important to know just do diligence on the customers. Talk to the customers. There are a lot of third party companies you can use to do diligence on our customers to make sure they're not being like made up or.

33:03 Yeah. What are some companies that they will talk to the customers?

33:07 I don't personally know the names because I as accounting or financing, we're not the one involved in this. Yeah the customer diligence. But I can, I can find out and let you know later about some names. But yeah, if a company is post revenue important to talk to customers because we've seen so many times in the news. Right. So and so JP Morgan bought some company and these names were all inflated. The fake emails. You just want to avoid that.

33:38 You also want to, I mean like

33:40 if Morgan cannot do the due diligence, I don't personally think I can do.

33:50 Yeah. That's why it's. Yeah. There are always risks in involved in M&As. You will never know 100%. Right. You just assessing the risks you're weighing, the sort of the risk versus the benefits and you're just making a informed decision based on these.

34:14 When you're doing due diligence on a certain deal, is there times that you have rejected a certain company because you feel like the financial. Sure, we're like not working out. Or typically when they are already sent to you by the MIA team or like the corp dev team, they're already kind of got like checked up. So like you just look for like severe red flags.

34:39 Yeah, I think I look for severe red flags. I look at the three statements again, balance sheet incomes in the cash flow. I look at the bank statements. I've never dealt with things that I felt oh this is fraud or you know, the book isn't accurate. I haven't personally haven't seen that. But again like I said in some of the past examples I've worked on in terms of M&As, we've had to have for example consult with SEC to make sure the revenue recognition model is what the company is claiming to be.

35:23 Right. They're claiming to have a hundred dollars in revenue and that's not $20 because we're paying the company based on $100. So in terms of complex matters and technical accounting matters, as a public company you might have to do that and the consultation with the SEC or your auditor's national office might take months. So yeah, I don't know I can name the specific company or the name but these have happened before and also just digging in to find hidden liabilities like what you earlier asked about, hey, how do you what are the three things on your checklist or what are the.

36:04 How do I find out as the non accountant that sometimes to see things that are not being shown in the face of the financials and how do I know as a robotic. You're just, you know, looking at a robotic company but you're struggling to find comparables. You don't know whether the expenses make sense for comparables. I would think that one you can look at what are some of the remotely comparable public companies? Right. Public companies all file with SEC on a quarterly basis.

36:38 You look at their financials on sec.gov then you can do basic benchmarking. Right. To for example is the capex making sense inventory. Are they managing the inventory properly? Are they churning out the products and selling them quickly? Or if it's pre revenue probably R and D expense and capex the most amount of expenses on the book.

37:06 I wonder when you you mentioned like you can compare these Companies with the, basically the SEC or something. What is the fastest way to find these like expenses on the government documents? Because I personally feel like I don't have the patience to like read a thousand pages of things. I guess. Where are they located?

37:30 Yeah, I don't read it. E. So usually you open up the, you go to Google and you find the filing page of the company. Then you look for the most recent 10k. Usually the 10k where an annual report has the most amount of financial information compared to the quarterly report. The quarterly report is more condensed. It does not have all the disclosure that's required on an annual basis. So go in and find the most recent 10k and you just do a keyword search.

38:04 This is how you can do without having a software. But again there are accounting softwares out there that can help you. Just like Google Database, you put in a keyword. Here are the list of companies I want to look for, or here's industry and here are the keywords. Show me the results of all these filings. And then the software can just give you 10 or 20 results and you can just see it on there. But again without that software, just do a control, find a keyword search.

38:32 For me personally, I have these 10 companies I normally look for. When I want to do benchmarking, I just go in keyword search. And obviously you need to know what keyword you're searching. So you might have to familiarize yourself with the gap, sort of the terms, accounting terms. And then you can talk to maybe founders or advisors or friends to see, hey, how, how to find these comparables and how to find the data.

39:03 But again, if there's no public comparables, how do, how do you know this is like a new industry or, or brand new company that's just, you know, there's nothing to compare with on the public market. I guess that would be a harder case. You have to just go in and talk to the company and the founders. Right. And ask sometimes when you ask questions, show me how this expense, what is like for example, you have, you see a ten million dollar line item on the P and L.

39:37 What is that? Show me the details. Right. Can you give me a list of things that make up this expense from that? You don't need to go in and audit that. But just by talking to the, the team or the founders or the bookkeepers, you sort of can get the comfort or do they know what they're doing? Yeah.

40:00 What are the keywords that you mentioned that like you would typically search?

40:07 What do you want to Search, you can give me an example so that I can't think of.

40:12 Let's say like we're doing like a robotic company and then a wonder. Let's say it's like an arm to like make coffee or something. This is definitely something by the way. This is something I made up. Let's say like you know these like coffee machine that makes like coffee or whatever. I wonder, I want to find the comparison of like what does, what does it cost for like other company that who produce this? Let's say if this company is trying to sell it to like Facebook or whatever like like a big tech company and then they are reporting a certain level of revenue they just started generating and I wonder, I wanted to know like how much let's say Google or Facebook or whatever like is already spending on coffee and then will this thing make sense?

40:55 Typically companies will not and it's not required to disclose the specific names of the customers. They don't want to do that. Right. It's. It's highly confidential. But companies are required to disclose any concentration risk or 5%. So if you have a customer ABCDE that each accounts for more than 5% of the revenue or accounts receivable for example, you are required to disclose that to answer because it's considered a concentration risk.

41:26 In terms of finding out the expenses you can. There are two places normally I would go. One is on the non financial pages. It's called the MDA management discussion analysis section. That's where you will see hey, usually company will show a year on year quarter over quarter results and they would explain hey, my revenue went up by 5%. This is mostly driven by XYZ.

41:56 My sales and marketing expense decreased driven by XYZ. So each line item on the P L companies is required to give the fluctuation analysis on the 10K or the 10Qs and then in that you can see the details say is it personnel related expenses going up, is it stock based compensation or is it a one time legal fee? So and so forth. So then the second place I sometimes would go is to look at the financial pages.

42:28 Of course you start with the five statements for public companies and then you follow those and you supplement those statements with detailed footnotes. The footnotes give you a lot more detail. For example in revenue companies require to disclose disaggregation of revenue. Sometimes companies disaggregate their revenue by geographies. I have 50% revenue coming from Americas, 30% from EMEA, so on and so forth. Or in, in the. There's A lot of meat in the revenue footnote.

42:58 Usually I enjoy reading that. As nerdy as that sound, I enjoy reading the revenue footnote because I I can see how. What are the key red RAP principles, what backlog they have? So backlog is a number that's also a required disclosure. It gives you a sense of how much do I have customers committed in signed contracts but have not yet been recognized in revenue. So this gives me a sense of oh, I already have 100 customers that are being committed for the next two years.

43:33 That's worth 100 million. Then that helped me forecast or get a sense of by adding that with any new customers in the next two years, I will have a rough sense of what the revenue would look like in the next two, three years. It's just adding the backlog number with your new ACV or ARR.

43:51 What is like okay, so from your perspective as in accounting, like what do you think is the most money making industry? Because I'm sure you've seen these books of all these like big SaaS companies or like SAS unicorns, what do you think? It's like an industry or sector that's like most profitable.

44:13 I think it changes over time. In terms of probability, shouldn't that be the pharmaceutical and insurance companies or just more profitable and the drug companies? But again not going into the details in that. Generally people like SaaS companies because they have high gross margin. Right? It's hard to achieve a 70, 80% of gross margin with like a hardware company, the cost of good sold or the cost of making that product.

44:44 You look at Apple's financials, you look at Amazon's, they typically have a much lower gross margin. The cost of revenue is a lot higher. But with SaaS company, the reason why their gross margin with the cost of revenue so low is because you just need to invest one time in R D expenses. And R and D expenses isn't hitting your gross margin. Then on the ongoing business as you start to sell your subscription or software to customers, the main expense of hitting your gross margin is just your web hosting, your data center cost, AWS of the world.

45:19 So it's very sustainable model. You invest one time, you make that software, then you just go out and get a lot of people to subscribe to it. There's not much of an ongoing cost associated with that. So I see why investors like SaaS companies because of these mechanisms of how the companies work. But things might change right? Right now Fintech's being hit pretty hard. The valuation isn't as hot as before.

45:49 SAS as well. So right now we see the, the hottest company or the most popular targets are these artificial intelligence AI companies. But these companies, I haven't heard of anybody making money. Right. OpenAI is burning money. That's why these AI companies need these GPUs and graphic cards and these data centers to constantly run their model.

46:22 Right. It's, it's very capital intensive. You see now series A AI companies raising millions of billions of dollars at billions of valuation just to have enough money to go out and purchase this equipment so that they can run their model. So how they can become profitable, especially with a lot of AI companies being open source, I think it's a question mark. But, but the technology is certainly exciting. Right. With the sora we recently saw video. Amazing.

46:54 Yeah.

46:56 What are. So when you are thinking about like if a company can reach profitable profitability when you're looking at these like a late stage company, were they in like the early years, at what point did they started making money and like in terms of like the revenue growth from your perspective, like what does it look like for a company to reach like you know, the unicorn status?

47:24 Yeah. I think in the zero interest rate era, which is pre Covid, you see most companies with the mantra of grow at all costs. Nobody cares about profitability, investors don't care about it. If you have, if you want to go public where I'm on ipo, the bankers will only ask for revenue growth. I don't know if you heard of the rule of 40 for SaaS companies. Basically the rule of 40 means you add your revenue growth rate with your operating margin.

47:54 Let's say you are growing your revenue at 50% year on year. You have a negative 10% of operating margin, then 50 minus 10 is 40, you can reach 40 in any sort of combination. You are a great and attractive company. You will get a great valuation multiple when you get acquired or go public. And back then it's grow at all cost and companies are all just spending money chasing the growth and taking the market share. But nowadays more the recent two, three years with the old austerity measures, I think profitability is becoming more and more important.

48:30 Right. Nowadays it's hard to go public if you're losing money big time or if you don't have a pathway to profitability because it's cost more to raise money with the high interest rate and it's not coming down anytime soon. So to me right now, if I were to go out and advise founders or found my own company, I would want to try to be Profitable from day one. Right. How can I achieve the most with the least fewer expenses or fewer resources as possible?

49:02 How do I make sure my employees are efficient? My vendor and software cost and spending is generating positive return. How do I negotiate with vendors? I don't want any auto renewal. Right. Whenever a software renew, I need to make sure I'm renewing at the cheapest and the low expenses possible. I always need to go out and look for new vendor for competitive bids. And that's one example. Look at your AWS expense. Are there things you can cut?

49:32 Just really, really control your expense in terms of personnel again and non personnel costs. Are there fringe benefits you can cast? Can you go full remote? Can you cut your office expense? Because lease, it's like the fixed cost that doesn't go away. You sign a lease and it's usually minimum of 10 years. Unless you do like a co working space and month to month we work kind of things. Yeah. If you can achieve sustainable growth, more profitable growth.

50:06 And that's, that's the ideal case. But again some Companies might be negative 5, negative 10% and they can go into a profit mode as long as they want by turning some sort of leverage. I think that's great too. But you don't want to be in a position where you're burning a lot of money by not pulling in enough revenue. Then you are giving out your leverage when you need to constantly need to go out for more fun.

50:35 Right. Ask for more fundraising.

50:38 Totally. I want, I wanted to learn more about like you know we prior to this like we were chatting about like the IPOs. So I wonder like what does it look like for a company to go ipo? What, how like what type of parties are involved? Is that like. And then what does like the process look like for a company to go public in general?

50:59 Yeah, I think for IPO there are. I'm not the expert, I'm just speaking from personal experience. I think three ways in my mind. One is the traditional route I. E. You go out and raise money. So you ought to hire bankers, lawyers and auditors. You would sell your share at a predetermined price to the bankers and that's an IPO price. And when you flip to when you are listed then the bankers now can hopefully make money by selling those shares to the public.

51:31 So the, and the company do raise money in that way. That's a traditional ipo. Then more recently we see a lot of companies do the direct listing and this is where you have raised enough money in the private round. You don't need to raise additional funding, you can just flip the switch and all your shares are now available for trading on day one across and cons on each. The third way we've seen a lot is the spac you know, you just found, you can find usually for companies with no revenue or just, you know, no revenue now, but revenue later.

52:08 Like you're relying on a forecast to attract investors. So you might have to find a SPAC to go public in that way. And in terms of the process, I haven't dealt with SPAC or direct listing in my experience. I will speak to the traditional ipo. Typically you form a team for public readiness working group within your company, hopefully ahead of time. I've also seen companies scrambling to get ready in six months and just went for whatever reason.

52:42 Maybe they want to catch the the hot market or they are, they just need the money. But the downside risk is after you're probably, you're not ready, you might not be hitting your quarterly result, you might have to restate your financials. And these are the things you absolutely want to avoid. You want to be ready or at least 80% ready when you go. So forming the team and having different work streams within your company to just get the process ready is important.

53:12 And you know, seeking help with external advisors, they know the best. It's not just, again as I said, accounting, finance, legal, is everyone right? How do you think about compensation for your employees? Usually companies establish ESPP program right before they go public. Right. You can allow employees to purchase shares at a discount, usually 15% discount. These are attractive programs for companies that are traded in the public market.

53:43 So compensation, HR is involved. Everyone needs to be educated. Usually there's a quiet period a month before the listing date. You can't advertise or actively market anywhere on social media. All employees need to be in the know. And if you have anybody violating this rule, the SEC could just shut you down or you could be jeopardizing your IPO timeline. So employee education is important. Everybody needs to be involved.

54:16 For traditional ipo, as I said, you typically work with three third parties. The bankers will help you sell shares, the lawyers will help you draft your your s1 or your prospectus and all of these legal related compliance filings and things. And typically what I see is the lawyers will drive the whole project. They own the whole work stream. Then you have your auditors. Right. Before you're a public company, you might only get audited financials once a year.

54:48 Why would a private company want to go out and have audits done or revealed every single quarter. It's very, it's very just labor intensive. But to be to go public you had to have at least four to eight quarters of financials listed in your S1 and then you'll be reviewed and signed up by your auditor and your. I won't go into the details in accounting. For example, accounting policies, internal controls, they all need to align with the public sector standard.

55:16 So there's a lot of work. And you also again don't want to go out with some holes because they will have to be disclosed. If you have holes in your internal control, such as significant deficiencies, material weaknesses, they are disclosed in your financials, in your report and everybody can see it doesn't certainly look good on the company itself. So. And also it's just not the final product.

55:47 I feel like it's just the start of a rigorous process. You ought to just after you are a public company, follow this rigorous quarterly process. You make sure you close the book timely. Everyone's again every quarter under pressure to close the book. FP&A perform the forecast. You put the earnings stock together. You go out and do earnings release. You file your 10k and just rinse and repeat.

56:16 I wonder like what is the process? How long does the process takes and what let's say if it takes a year, what does it look for look like for you as the person on the accounting team?

56:29 Yeah, for time. I think it depends on where the company is at in terms of readiness before you consider this as a potential route. If the company has a great process to start with. Right. They invested wisely from the get go. They don't have a lot of things they need to change. For example, maybe they have all the right software. They don't need to change the accounting software, billing systems. It might only take you six months to just be ready and go.

57:01 But if you're very messy in terms of systems and operations and all these other things or your numbers don't look great, you might have to wait longer or if the, the market condition isn't right. Right. And you have everything internally that's ready. But external factors also play a huge role in, in when you can, you can ipo. So in your other question is in terms of accounting team, what does it look like in.

57:32 Yeah, yeah. So how do you work with like, like you mentioned like the lawyers or like the bankers. How do you guys all work together?

57:42 Yeah.

57:43 And like what are those meetings look like in general? And then what are like the step to step on like a Day to day basis for you to like prepare someone to go ipo?

57:56 Yeah. So you go out and find the right three parties first. Then once you're ready, accounting team find

58:05 or like do like.

58:06 I think it depends. Definitely not accounting. I think mostly the CEO CFO calling a shot or you have your core IPO working group making decisions. Who makes up the team? You can determine yourself. But again usually the CEO CFO will call the shot of who you choose. Right. I want J.P. morgan, I want boa.

58:30 Yeah, but like when you are thinking about like another quick question is like when you're thinking about as a startup, like for you to pick the CFO, how do you kind of evaluate the CFO's ability to do something to like make sure they're like right for your company? Is that like you know, like they have done, let's say Google IPO or something?

58:52 Yeah. I've never, I'm not in a position, I was never in the position to do that evaluation. But just speaking from my mind, I think it's culture fit. And is this person, if this person has the prior experience, has the person run a public company before? Has the person had prior IPO experience? These are all great. And maybe you go talk to a board, can they recommend people, go talk to your investors, go work with the recruiting agents, executive recruiting agencies.

59:32 But I think it's just important to, to make sure you're working with the right person. And if this person doesn't have any of the experience, it might also work. We're not born with this experience. Nobody's born to know how to run a public company. So I think the soft skills, right. Is this person ethical? Are they a fast learner? Can they lead the company to become public ready and then run the company in terms of having a rigorous process and financial results on every single quarter?

60:13 So yeah, I don't have a lot of experience in finding CFOs, but I've worked with great CFO. So I can tell you the quality of these great CFOs. Somewhat diff. Same. Yeah, very sharp. They're all super hardworking but they're all you know, compassionate, empathetic, great people, managers as well. So you, you have to just unite the team to drive to the one, the same goal as a team and drive people.

60:44 On that note, on that note, I know we're hitting the time, so what about we end with like a one minute fire round?

60:51 Sure. Okay.

60:52 What, what is your content diet to improve yourself in your sector?

60:59 My content diet, I, I listen to

61:01 podcasts what podcast do you like?

61:05 I like your podcast. Thank you. Smart venture. And I'm also a loyal listener of the all in podcast.

61:13 Amazing.

61:14 Yeah.

61:14 What are like if people are trying to improve their like skills in like accounting or like just like overall in general for founders who are trying to just be more like financially aware, what do you think is like a good

61:29 resources for them in terms of getting more accounting finance savvy?

61:35 Yeah.

61:37 There are webcasts actually free quarterly accounting webcast published. Anybody can sign up by the big four accounting firms like the PWCs, Deloitte Earth and Young KPMG. I just go into their website and search for for example quarterly accounting webcast KPMG. You sign up for those. Once you sign up for one, they keep pushing you the next quarter in this webcast. Again, a lot of them are pretty accounting jargony and very technical.

62:08 You don't have to understand all. But at least you know what's going on, right? What's being considered, what's being worked on by the accounting FASB board or the sec, what's what's in the news. And just keep yourself up to date on these things. For example, the executive clawback clause that's effective or going to be effective. It will matter a lot for every single CEOs and CFOs out there. So just keeping yourself up to date. And tax as well, right?

62:38 Global minimum tax for companies that are operating on multiple jurisdictions that they might really be of a critical matter to you. And then the R D tax credit thing that recently sort of got revised by Congress. It might hit companies in a meaningful way if you have a lot of R and D expenses. So just keep yourself up to date for these free accounting webcasts and then you can just also even go out and maybe find some accounting podcasts.

63:12 I personally don't listen to any accounting podcast because I'm just so. I need to listen to something else so that I can refresh my mind. I can't be thinking about accounting all day long.

63:26 So where can we find you outside work

63:30 right now? Mostly at home. Just had a newborn baby so I can't really go anywhere. Every three hours I'm tied up to the baby.

63:39 Yeah, congrats again.

63:40 Thank you.

63:43 Awesome. Where can we find you on the Internet? Give us your social handles so we can follow you.

63:50 I'm a pretty social person. Yeah, I don't have Facebook, Instagram or Tick Tock or any of those, but I am on LinkedIn.

64:02 Yeah, just follow her here.

64:04 Yeah.

64:05 Amazing. Thank you so much, Sandy.

64:07 Yeah. Thank you, Grace. It's a fun time. Thanks so much for having me.

64:12 Okay, I'm gonna end the stream.