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Apr 9 2019 - San Francisco, CA

Fundraising: CEO & CFO Roles: Michael Tannenbaum

Chris R:
Welcome to brex in the black, where we discuss finance for operators. We have our CFO here today to talk about fundraising, and how the CFO partners with the CEO. So Michael, how should CFOs and CEOs interact during the fundraising process?
Michael T:
So the CEO is leading the fundraising process externally, meaning the investors consider the CEO the point person on the fundraise. And I'd say the CFO is leading the fundraising process internally, meaning other people with inside the company are interacting with the CFO, as the point person on the fundraise. And ultimately, I'd say the CFO is responsible for timing, execution, process management. The CFO is responsible for evaluation, who the counter parties are, what are the counter parties - in this case, the investors. So the CEO is sort of the strategy: who are we meeting with? What valuation are we going to get? And who are we going to select if we have options? And the CFO is saying: when will close? What are the terms, who's responding to inquiries, who's coordinating meetings and making sure that things progress?
Chris R:
So if you're a startup, and you've hired an experienced CFO, that CFO is going to have a lot more experience in terms of dealing with finance people than the CEO. How do you integrate that?
Michael T:
Yeah, I mean, I had to deal with this, me being 31, having some experience doing multiple rounds before at my prior company, and then also having been both an investor and investment banker, I have a lot of fundraising experience. But at the same time, in my case, our CEO, as you know, is 23. So much different.

I think what I was careful to do actually, is step out of the fundraising, at least the initial meetings, because even though the people that have my background, are the ones meeting with the CEO, in some ways me being there sort of kills the vibe, right? Especially in an early stage company, the initial fundraising, fundraising meetings are all about what could be, and how big a company can be, and how this is exciting. And if you've got this person across the table, sitting there that looks and feels like you and has your background, it sort of takes it back from back to reality. And sometimes you don't want that in the initial meeting. So I was actually careful to remove myself, and then kind of showed up later in the process, kind of like the mean person that negotiates the docs, which I like, that's a role I like playing — not everybody wants to do that. But I think that it was effective for early stage, and as we've gotten bigger, I'd say I'm more at the initial meeting, and the CEO would be presenting the vision and the story. And then I'm talking about how we're going to get there, what are we actually going to do.

And I think that distinction is important, because many investors, they buy into the story worried that the CEO is talking about. They are excited about the vision, and then they're going to want to understand well, what's happening today? And how are you guys going to get there? And that's really on the CFO.
Chris R:
So in terms of your past finance experience? What are the main cultural differences between VCs and more traditional investment banker types?
Michael T:
VCs tend to be less fundamental oriented. So you know, if you work in investment banking, private equity, they teach you these fundamentals, generally, around cash flow — businesses are worth a net present value of cash flows that they could get in the future. And I think you sort of have to suspend that training, if you have to work in VC. And I don't think that's necessarily bad, it's just that VCs are operating in a different realm. And it's much more relationship driven, in some ways, and a little bit more about discovery. And second, as a VC, you are meeting and talking to founders and have to be much more in the flow, whereas if you think about traditional financial services you know who the big companies are that you want to call on, for example, in investment banking, who's going to be raising debt this year, there's only so many that are out there. And they're all known, they're not forming each minute. And in a private equity world, companies that are big that are going to be buyout candidates, there's also only a select number. And typically, those are the options. So there's a lot more. The venture person is much more of a relationship person. And they're suspending traditional financial metrics to be able to compete and operate in the world of a really early nascent company.

And, you know, you kind of read today in the journal, you know, people criticizing tech companies for having non-GAAP metrics that talk about growth. I read an article recently that was talking about ARR. ARR is a huge fundraising metric in tech - annualized run rate revenue. So basically taking, you know, the revenue from this month and multiplying by 12. So I mean, if you think about a company like this one, Brex, what revenue we did, LTS — last 12 months — would be nothing, right? 12 months ago, this company hadn't even launched. Now we do, let's just say millions of revenue a month. And so it's much more relevant to take this month and multiply by 12, than it is to look in the last 12 months, because it's irrelevant.
Chris R:
In the decision making of the actual fundraising process as you're supporting the CEO, when you're raising money from investors, how important is it to have the investors with the right name or the right network versus the money?
Michael T:
So money by its nature is fungible. Right. $1 is sort of $1. That's the point. But I think that if you're in the fortunate position to be able to pick to not only consider valuation, and to also consider — I mean, that's again, that's more of the CEO decision. But I think as a finance person, you want to counsel the CEO on that decision, which is, who do you want in the room with you? Of course, that's also going to be a function of how much power does the person in the room with you have, right? If they're not joining the board, and they don't have limited rights? Frankly, you could hate them. Who cares? But probably not the best situation. But I think that it's a little bit of who do you want in the room with you? What value can they add?

So here, one of the things is engineering - recruiting is a big deal. So making our partnerships, making sure that you have at least one investor that people have heard of really helps, because that's typically the first or second question that someone's going to ask as a new recruit, or as a BD partner, which is who are your investors, right? And if you can say someone that they heard of, then that's better. So I always think about my father in law, for example, when I joined this company, he was suspicious. And when I said, oh, well, you know, the co-founders of PayPal invested, he said, well, at least he had heard of that, right. And so I think you want to pass the father in law test, at least with one investor.
Chris R:
Right. How much would you recommend the CEO to raise?
Michael T:
So what I've found in early stage capital raising is that how much you raise, there's sort of this rule that you're typically going to give away 20-ish percent, in the early rounds of the company, because otherwise no investor is going to want to join that company or invest if they can't own at least 20% — its kind of the standard. And so what that tends to do is there's a push and pull sort of a tug of war going on between valuation and ownership. And ownership is sort of set. Right? So if you think, it's a little bit like I talked about on an earlier podcast, how much money you need, what's the use of proceeds. So there's a push and pull of, okay, I want to raise a certain amount of money to get to a specific milestone. And I think after that milestone, we're going to be worth so much more that I don't want to dilute myself too much at this low valuation, so that I can be there. And it's not always super clear, because you're talking about years in the future, when you're a very small business with not a ton of predictability around your business model.

But I guess what you'd say is, ideally, you'd want to position yourself to have around two years of runway from each round. I'm just I'm trying to be helpful by give some actual answers. So if you have two years of runway, how much dollars do you need? So then that's how much you're raising, maybe you have some cushion there, and you want to give away 20%. So that will kind of dictate the valuation that you're raising at. That might not always work, right? Some investor may say, well, that's just crazy. And we're not going to pay that. And then in which case, you either have to give up more or raise less. But generally, that's the way I would approach it.
Chris R:
When you were fundraising for brex, what was the variance in terms of investor opinions on whether this was crazy or not?
Michael T:
So it's a little bit of a supply and demand market, right. So I think the most applicable round would be our Series B. And we received a term sheet early on that we thought was decent. We then went out to a bunch of different companies — not a bunch of we went out to two or three other investors pitch them the story and basically did a market check. The trick there is not to give people a number, right? Make them give you a number. And we got numbers that were higher. Then we went back to the original person and said, look, you know, the market feels like it's here.
Chris R:
Michael, thanks so much for coming on and talking about fundraising.
Michael T:
Thank you, sir.
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