When should you invest in startup accounting?
Founders bring a specific set of skills to each company they form. Accounting may not be the sexy part of this story, but it sets a precedent for how you scale. It’s a beautiful, complicated language with a concrete maze of acronyms and spiraling levels of intricacy. The level of complexity differs from a startup’s sector and growth trajectory. Still doing something is better than nothing.
We talked to three employees at Brex to get some perspective on accounting. Ritik Malhotra's most recent company got acquired by Brex. Nick DePaul runs User Experience Research, asking and answering founders’ questions. Carolina Christiansen worked in venture capital firm before joining the accounting team. Here are some of their thoughts:
Ritik Malhotra - Head of Payments Product at Brex, former Startup Founder
Q: How did your thinking around accounting change between founding HostingAxis (2005) in high school to founding Silicon Valley Prep (2011)?
A: “It wasn't using official accounting practices, but we didn't need to because it was a pretty simple structure. And then when it came time to do taxes, we had the Excel spreadsheet and had all those forms, and they were able to ingest that. The IRS didn't need anything too fancy there. I think Excel was enough from the perspective of high-level planning in terms of, ‘Okay here's how much I want to spend on marketing.’”
Q: You then joined [startup accelerator] Y Combinator while also being an early participant of The Thiel Foundation and co-founding your next company, Streem. What advice did YC provide towards accounting?
A: “Don't even worry about the books because that's not your main priority.”
Q: At this point, you had founded two companies. Did you have any reservations about this advice?
A: “I actually think that is the right way to do it for a small startup because your biggest risk is not keeping the books, your biggest risk is [whether] we even going to be able to raise money to sustain the business. Today I would do the same thing if we had to. So, it didn't raise any red flags just because we trusted the advice from someone who’s been going for so long.”
Q: Box acquired Streem in 2014, and you founded S2 Capital, a Micro-VC fund focused on seed-stage investment. How did your perspective on early stage accounting change?
A: “It’s the philosophy. I’d like to train accounting skills because it becomes super important when you grow [to] Series A, Series B because now your board is asking you every single month ‘what are the books like.’”
Q: What resources do you recommend to a founder who wants to learn more about accounting?
A: “Believe it or not, Reddit. There's a [subreddit] called ‘personal finance…’ They have a really good curated wiki of all the best resources in terms of what are the best practices for anyone to be able to manage their personal finances. Assuming you’re not a professional that will pretty much get you 90-95 percent of the way there. Also, open a Mint account [and] add all your accounts in there and then take a look.”
Nicholas DePaul - User Experience Researcher at Brex
Q: You speak to founders every day; what do you find is their general perspective towards accounting?
A: “I think the number one mistake is not doing it. You’d be shocked by how many founders aren't doing accounting. They have a concept of accounting, and then they're like ‘well we’re too small right now. We still need to build now. So, we're focused on building; we’ll get to that later.’”
Q: And how do you respond to this?
A: “Of course, it's always up to you how you run your business. I highly recommend not doing that and getting an accounting platform software platform with expense management features to make the bookkeeping process easier.”
Q: What else do you see?
A: “Another mistake people make is not putting this process in the hands of experts — whether that's someone in-house or whether that's hiring a third-party firm, which is more and more what seems to be happening. The founders or C-Suite executives usually aren't the ones doing this because they know that this isn't their strength.”
Q: What’s one piece of advice for founders?
A: “The number one thing is to start on day one. It’s not a faraway day. It’s not a month-six thing. It’s a day-one thing. [Use] Excel, QuickBooks Online, anything. And if you already have money, hire an outside accounting firm because they all have plans for your stage, levels of service, and prices — so if your thing is [a] once a month a call with your accountant, great. That's better than nothing.”
Carolina Christiansen - Accounting and Finance Analyst
Q: What did you find when walking in as the sole accountant to a small venture capital/family office?
A: “When I walked in, they had QuickBooks. They weren't looking at their balance sheet at all. One thing coming in I realized is [that] we underestimate the importance of accounting when we start. One of the first things founders think about [is], ‘how are we managing cash.’ [Their] priority is calculating their cash burn [and] how fast they're burning. People are generally not concerned about having their books when they're in their first six months.
Q: How do you think about accounting as a means to scale a business?
A: “I think the cash burn statement is not so hard to manage because, in the beginning, you don't have many different expense classes. What founders don’t seem to look at is their income statement and the balance sheet and creating a chart of accounts. Always think that one day, auditors and investors will look at your balance sheet and P&L.”
Q: What method of accounting would you recommend?
A: “I’m not worried about what method they use as long as there is a consistent method. Founders should organize their books well, and you make a flow that is consistent and effective with either cash accounting or accrual accounting. CPAs can help you decide which accounting method will be best for your business”
Regardless of stage, starting on the right financial footing when the volume is low will guide your company and team’s growth. Implementing some system — any system — is the first step. Then hire an outside accountant, learn the ins and outs of accounting, or bring on a CFO. Accounting is the language of your business. Learn the language, learn the business.