This post is for all of the Chief Financial Officers, Chief Operating Officers, and advisors of early-stage companies in the room. A quick word about managing the budget and cash flow process with the founders/CEO’s you advise.
Someone asked me last week how to manage a planning process where the always optimistic CEO is pushing for higher revenue, more investment, and greater risk taking.
The advisor was worried, because cash was tight, and one misstep could quickly run the company off of a cliff. But they kept going round and round on revenue goals. Every time she successfully thought she had revenue and expense targets in a reasonable place, two new initiatives were thrown into the plan.
Founders have a super power. It’s known as the Reality Distortion Field. Sounds scary, and if you’re not a founder, it is. This concept was first applied to Steve Jobs, who was well known for being able to convince a room full of skeptics that anything was possible.
“The reality distortion field was said by Andy Hertzfeld to be Steve Jobs’s ability to convince himself and others to believe almost anything with a mix of charm, charisma, bravado, hyperbole, marketing, appeasement andpersistence. It was said to distort an audience’s sense of proportion and scales of difficulties and made them believe that the task at hand was possible. Jobs could also use the reality distortion field to appropriate others’ ideas as his own, sometimes proposing an idea to its originator after dismissing it the week before.”
Now, a Reality Distortion Field is an important super power. It’s what allows founders to take the great risks associated with starting a company in the first place. It allows for decision making along the way under the belief that there is a path to success against immeasurable odds. If there was no Reality Distortion Field, many great companies would never be launched.
But at a time when the company’s cash is dwindling, cash burn is increasing, and there is no sign of any progress on the KPI’s that are going to support the next fundraise, the Reality Distortion Field can be a real problem for the company.
I have found only one effective means to consistently be able to break through at times like these.
You need to move the discussion away from revenue and expenses, and focus on cash flow. If you have 18 months or less of cash based on your projected burn rate, you’re within 12 months of starting a fundraise. You should have a very clear sense of what you need to accomplish to successfully raise another round of funding. And you should be very clear on the specific tactics you need to focus on to try to deliver on those KPIs.
If every conversation you have with a founder is about different revenue projections, you are playing under the dome of the Reality Distortion Field. Because it’s easy to convince yourself that if only one or two things go right, revenue growth will accelerate and everything will be fine. And in these discussions, the assumption always comes back to those one or two things going right.
You need to create urgency around cash flow, and the risks posed by very real possibility that everything won’t go as planned. This is your turf, and I have found that the cash flow model sits outside of the Reality Distortion Field.
If you start with a model of your P&L that is built on the core tactics that are focused on the most important KPIs to support the next fundraise, you have a baseline cash flow. Create a high, medium and low scenario, and show how much your cash burn accelerates with even just a little bit of underperformance on this plan. Watch your runway shorten.
Then you can layer on all of the other investments your CEO or other members of the executive team want to make. Show a ‘low’ scenario where bets don’t pay off. Watch the cash burn accelerate and your runway shorten.
When you are in a revenue discussion during your planning process, you’re living in the world of hopes and dreams of business success. It’s a nice place to be.
But cash flow is where the nightmare scenario of running out of cash and sending everyone home happens to live. You need to use that tool to keep people focused on making the hard decisions on what’s most important to keep the company moving forward to live another day.