00:00hi everyone and welcome to the a 16z
00:02podcast today we're talking about how
00:04CEOs and CFOs work together productively
00:07and balance it all from cash and growth
00:09to advance planning and changing
00:11strategy the conversation is based on an
00:13event from last year which was moderated
00:15by a 16 Z partner Caroline moon who was
00:18a CFO at a number of startups before
00:20joining the firm a few years ago to run
00:22the financial operations practice on a
00:2316 Z's corporate development team the
00:26discussion starts off with Ben Horowitz
00:28talking about his classic blog post on
00:30cash flow and destiny and Scott Cooper
00:32joins in to provide a perspective from
00:34the finance and operational side of what
00:36it takes the topic today centers around
00:39what founders and CEOs can and should do
00:41to drive their companies for
00:42profitability and things that CEO is
00:44deal with on a day-to-day basis and I
00:46was reading one of your blog posts cash
00:47flow and destiny and when you look back
00:50on that period when everyone yourselves
00:51and your competitors included we're
00:53going big and not going home you know if
00:55you could do things over again what
00:57would you have done differently and I
00:59guess more importantly could you have
01:00done things differently given what
01:01everyone around you was joining there
01:04was kind of two things that were very
01:05deceptive at least to me as a founder
01:08CEO at that time one is when money is
01:10easy to come by it's hard to visualize
01:13what it's going to be like if it's ever
01:15hard to come by and the dangerous thing
01:18about that is you don't actually own
01:20your strategy till you're generating
01:22money and that's what I meant by cash
01:24flow and destiny was your strategy for
01:26what you how much money you want to
01:27spend what you want to do like what
01:29direction you want to go in you know how
01:32fast you want to expand your market
01:33opportunity you might not think it
01:36affects your thinking it absolutely
01:37affects your thinking and it didn't
01:39really strike me as how corrupting that
01:41was to my thinking until we start to
01:43generate cash and I like to set my own
01:45strategy and do what I wanted to and
01:47that freedom is worth a lot more than
01:52almost any incremental money I spent so
01:55like that would that was probably big
01:58lesson number one and then the second
02:00thing which is so obvious when you think
02:02about it but you can get carried away is
02:04look more money doesn't mean more growth
02:08it can mean more growth it's not like
02:10you can grow without spending money but
02:13then it's different by department if you
02:15more than double engineering in a year
02:17that gets pretty hard depending on what
02:19you're doing because the communication
02:21overhead the coordination is so intense
02:23and engineering sales is much more
02:26scalable but if you scale sales without
02:30keeping very close track of productivity
02:32per rep that can just be a total waste
02:33of money that happens all the time so if
02:36I had to go back and play it again I
02:38would have thought more when I plan
02:41growth starting with well what are the
02:43limits of my ability to operate this
02:45company and keep communication where it
02:48needs to be and know what people are
02:50doing and so forth whereas what I was
02:53doing was going well here's our goal get
02:55the team together what is it gonna take
02:57you to hit that number that kind of
02:59process don't do that because it's
03:02actually the wrong message to the team
03:04when you give them an unconstrained like
03:06resource to do whatever they want the
03:09flipside of the bubble of course that's
03:11the the crash no one could have foreseen
03:12that and certainly nobody could have
03:14predicted 9/11 those are really
03:15extremely exhaustive events and hardly
03:18something as CFO could really plan for
03:20or CEO Coplan for but with that said
03:22what sort of advice do you have on that
03:24front is it possible to actually expect
03:26the unexpected I don't know that you can
03:28plan for Black Swan events by definition
03:29but I would say there's a couple things
03:31you do one is if you start from the
03:32concept of look we need some constraints
03:34in the system period like so we may have
03:36raised a hundred million dollars but
03:38maybe the answer is look can we do what
03:39we say on 75 million dollars even if you
03:41end up letting go with the pressure
03:42valve over time I think putting the
03:44pressure valve in there around the
03:46budgeting process and forcing people to
03:47actually come back to you and feel like
03:49you're turning the screws on them before
03:51you actually give the go-ahead on some
03:52of those costs the second thing is there
03:54nobody could foresee the crash but there
03:56were precursors to problems I don't
03:58think we understood and appreciated the
03:59exposure we had we could have said okay
04:01where are dependencies from a customer
04:03perspective and tried to think about
04:05okay if the environment changes what
04:07does that mean for the life of our
04:08customers therefore not only can we not
04:10raise capital but our revenue that we
04:11thought had goes away
04:13those are things again which seem
04:14obvious now in retrospect and it's worth
04:16thinking about in the context and doing
04:17some planning around you know if things
04:19directly change there would there be
04:21knock-on effects your business you might
04:23not otherwise anticipated so that
04:24actually takes me to this notion of
04:27really putting it down on paper and then
04:28going through an annual planning process
04:30so when do you guys think that company
04:33should really go through that process of
04:34putting it down on on sort of codifying
04:36it on paper and then going through a
04:38formal plan the easy way at least is
04:40think about what's the story you're
04:42gonna want to tell investors in the next
04:44fundraise I think is a very it's a very
04:45useful model for how to think about kind
04:47of what is the what the goals do you
04:49want articulate the day you close that
04:51series be financing the only way you can
04:54actually have a rational strategy for
04:55what you're gonna do for next 18 24
04:57months is what your assumption is on
04:58when or if you're gonna get that
04:59seriously financing or if you're gonna
05:01actually be cashflow positive that point
05:02in time and so I think you have to kind
05:04of you know you have to almost work
05:05backwards from there and that becomes
05:06your guideposts and then you can say
05:08great this is the manna money we can
05:09spend you got to have some guideposts
05:11and the most logical guideposts was
05:12gonna be either that next round of
05:14financing or a point where you actually
05:15get to cashflow positive then it's
05:16obviously a question of course
05:17correcting all the time you know if
05:18you're on or off plan
05:19the thing about plans change I mean how
05:21many you guys have like a plan that
05:23lasts the whole year like and there's
05:25two different things in that one is the
05:26strategy it's not the way like big
05:30companies do it or management
05:31consultants tell you right like the way
05:33that you all do strategy I'm quite sure
05:35is you think about the company all the
05:37 time and so at some point you
05:39you've articulated to the employees and
05:41whatever like this is where we're going
05:43but every day you're going oh if that's
05:46a data point competitors doing this this
05:48new like chip came out this is happening
05:50and you're modifying the strategy and
05:53what most CEOs do is they never actually
05:57kind of fully articulate out the updated
06:01strategy so a very important discipline
06:04is to at least once a quarter just take
06:08whatever your old strategy is Andrea
06:10articulate it with all the new things
06:11that you've added in your mind and
06:13you've told your staff probably but they
06:15haven't told their people just to keep
06:17people on the same page then how do you
06:20really like that back to the plan
06:22generally like the more formal the
06:24better in the old days when I used to
06:25work on compilers used to be like this
06:27to past compiler was the thing that you
06:30had to do because you couldn't actually
06:31get all the optimizations done on the
06:33first pass I don't know if it still
06:35works that way but budgeting is very
06:36much like a to pass compile so you would
06:38you want to do is have like a very
06:41thing with like the goals that you want
06:43and run everybody through it and then
06:46like see how much they burst into tears
06:49and like where their problems really are
06:51and then do the second pass saying okay
06:54team this is what you got this is what I
06:55want and having that negotiation there's
06:58certain things that are good to be
07:00formal on budgeting raises stuff like
07:02that really early in your history I
07:05think we all know in this room in
07:06particular that that founding and
07:08running company is incredibly difficult
07:09work and it takes a tremendous amount of
07:11optimism so you know the ability to kind
07:13of wear rose carlo's glasses if you will
07:16and yet their time for things don't go
07:17well right and so how do you know when
07:20to take those rose-colored glasses off I
07:22think human beings tend to fall into
07:23that sunk cost fallacy quite often and
07:25you just say oh I just need one more
07:27quarter just one more and then suddenly
07:28like a whole year has gone by so you
07:30know what are some things that you can
07:31share with us in terms of your learnings
07:33on that front and anti-growth had the
07:34best line on this a bunch of CEOs got
07:36fired right in a row and I almost like
07:38Andy like why'd they all I got fired and
07:40he said well cuz like CEOs only listen
07:43to leading indicators of good news never
07:45leading indicators of bad news only
07:46gliding indicators of bad news and I was
07:50like well why is that he's like well cuz
07:52but you take on to go build a company
07:54it's like ridiculous it's impossible so
07:56you have to be an optimist to go think
07:58that you're gonna go build a company
07:59that's continual which will help of
08:01course you're not gonna look at leaving
08:02indicators of bad news you would never
08:03built the company in the first place the
08:04thing that I would say is that the one
08:07leading and hater bad news there's a bad
08:10news thing that happens in the
08:11macro-environment when price has reset
08:13that you just have to you actually are
08:16better off adjusting immediately to that
08:19Peter Drucker said one of the greatest
08:21lines ever which was the only
08:23unforgivable sin in business is running
08:25out of cash when it comes to leading
08:27indicators of running out of cash I
08:29think you do have to pay more attention
08:32to that because there's there's just no
08:35going back and like we definitely would
08:38not have survived it as a company if I
08:40hadn't just admitted to myself that
08:42things might not get better in the kind
08:44of funding environment so when we went
08:46public if you if you go back and read
08:48the articles they all say these guys
08:51must be desperate they're going public
08:54the market and at that time the Nasdaq
08:56was 2,000 and the bottom of the Nasdaq
08:58was like 1200 like it had fallen from
09:025,000 so like five thousand to 2,000 and
09:05they're like they're going out at the
09:06bottom they must be desperate I was like
09:08well one I am desperate and two this is
09:12not the bottom and that was probably the
09:15single best decision I've ever made just
09:18to go like how do you know you at the
09:21bottom you're not sure at the bottom
09:22what's my advice you have on how do you
09:24as a CFO work with a CEO who is by
09:28nature just a tremendous optimist you
09:29know and I'd like to think that you know
09:31I think we got a bad rap as finance
09:32people that were Debbie downers but then
09:34they were realists and so how do you how
09:37do you preserve the relationship you
09:38have because it is very much a
09:39partnership you know by dousing some
09:41stuff and realism and having those
09:42difficult conversations but but still
09:44you know sort of handling and managing
09:46the CEO is personality I think actually
09:48the mistake that a lot of people in this
09:51in in the finance world make is to kind
09:53of be look I've got always like look at
09:56everything from the opposite of you know
09:57rose-colored glasses instead of having
09:59instead of like coming in with that
10:00negative argument I think it's better to
10:01say okay look here's what you just told
10:03me you want to do right so let's just
10:05let's just lay out let's lay out in you
10:07know math numbers like what are the
10:09assumptions you have to believe in order
10:10to get to that plan and then you can
10:12then we can at least have a rational
10:14argument around whether we think any of
10:15those assumptions are real or not right
10:16I think it's it's a bad idea to go in
10:18and say look you know you're
10:19you're wrong like this doesn't make any
10:20sense if you figure out a rational way
10:22to say okay look if you think we're
10:23doing a million dollars next year that
10:25means we got to have this number of
10:26sales reps at this period of time doing
10:27this amount of quota and we get you know
10:29it takes them six months to ramp and you
10:31just kind of walk through those and then
10:32at least you can have a rational
10:33discussion around okay do I believe that
10:35or not or maybe the answer is look it
10:37should be willful suspension and just
10:38belief and that's okay there's a great
10:40actually metaphor for this you guys
10:41remember the group the time where prince
10:43wrote all the music there in Purple Rain
10:45and there was like Morris Day and then
10:47there was Jerome and Morris they would
10:48do is dance and Jerome would hold up the
10:50mirror and dance with them like that's
10:52kind of like what you want to do is like
10:53hold up a mirror like make them look in
10:55the mirror because see
10:57as CEO certain like you used one like
11:00you have better knowledge of the whole
11:02operation than anybody so like if
11:04somebody if CFO comes to challenge you
11:06like if anybody challenges you on
11:07anything and the company first thing
11:08it's like well you know what you're
11:09talking about they might see if I you
11:12know show me the spreadsheet and I go
11:14the map is not the terrain the
11:15spreadsheet is not the business let me
11:17tell you what's inside that if I can
11:18spreadsheet that you don't know about
11:19what happens with most finance people is
11:21they back down at that point because
11:23they're like well he does know more
11:25even if he's wrong whereas going okay
11:28like let's just draw out like here's all
11:30the things you want to do like this is
11:32what it means like look at this that I
11:35totally agreed like that's a much more
11:37effective way to manage a a CEO is to
11:41show him what he's doing it's supposed
11:42to tell me he's wrong you've used the
11:44analogy before in the past about HR
11:46being QA for a company I like to think
11:48of finance it's worth the scrum master
11:49of the company we don't necessarily know
11:52how to do it but we know what things are
11:53running on time and and to
11:55when there are of things that change
11:57whether it's good or bad when should a
11:59company really think about hiring a CFO
12:01when are they ready Silicon Valley went
12:03from this higher CFO immediately in the
12:06late 90s to the era of the Lean Startup
12:09where you you know you just outsource
12:12finance forever look I think as soon as
12:15you start spending significant money are
12:17getting like significant revenue it's
12:20gets to be dangerous not to have a CFO
12:23so like if you're increasing headcount
12:25at any kind of like fast right or if
12:28you're generating revenue particularly
12:30if it's something where there's real
12:32like illegal liabilities of not having
12:35proper controls structure and so forth
12:37that becomes very important we found in
12:40hundreds on the case is that having done
12:42it they all kind of now say gee like had
12:43I done that six or twelve months earlier
12:45it would've been better it could be a VP
12:46of Finance right but somebody who is
12:47that kind of business partner I think
12:49the other point is right for my timing
12:50perspective is if all you're doing is
12:52you know you're hiring engineers you're
12:54doing product development you know it's
12:55you can probably you know you're you
12:57need to just know like do I have enough
12:58cash to make payroll and stuff like that
13:00and probably you can outsource that kind
13:01of stuff to you know an outsourced firm
13:03but as soon as you think about go to
13:04market right and you start to think okay
13:05now I'm going to spend marketing dollars
13:07do I understand what my lead generation
13:08cost now I'm gonna hire sales what's the
13:09throughput and conversion rate and
13:11all that stuff I think then you got
13:13enough moving parts where you're
13:14probably doing yourself at a service as
13:16a CEO if you don't have someone whose
13:17job it is to actually put all that
13:18together and say okay you know if we
13:20spend this amount of marketing dollars
13:21it ought to yield this amount of lead
13:22generation which means I need X number
13:24of sales to go prosecute those efforts
13:25who the hell is gonna keep an eye on the
13:26head of sales if you have a CFO we'll
13:29turn it over to all of you and I do have
13:30some questions that were pre asked
13:31assuming you can control net burn
13:33perfectly how do you think about
13:35determining the ideal burn rate and
13:37runway what factors go into determining
13:39the Goldilocks style middle ground that
13:41is the really hard question to answer
13:43part of the challenges you're tilting
13:44into a bunch of unknown unknowns like
13:46what are the capital markets going to be
13:48like at the next round how are we
13:50actually going to perform against the
13:52plan to you you you know it would be a
13:55hard thing to do if you knew if all
13:56those things were set and then with all
13:58of them moving and having variance it's
14:00even more complicated but you hundred
14:03percent have to get to the next
14:06milestone a really good way to think
14:08about it is is this starting to look
14:10like a good business if we just continue
14:13growing like this given the track record
14:16this is going to be a business that's
14:18worth way more than it is now you've got
14:21to get to something you can scale before
14:23you try and scale it that's you know the
14:25kind of the big mistake in the 90s was
14:26all of us would go like oh we've got
14:30something that people want to buy like
14:31let's build a gigantic sales for us and
14:33just blow it out and then a lot of
14:35people didn't quite have total product
14:37market fit and the company got too big
14:38and it just collapsed so he's the
14:40fallacy between $1 reduction in cost
14:43been in her dollar reduction in revenue
14:44growth there may be some companies for
14:45which that is in fact true but maybe
14:46you're just spending money where it just
14:48doesn't yield anything or you've just
14:49gotten fat in other areas or just
14:50because the capital was there there are
14:52probably lots of things you can do to
14:53have a rational and plan that doesn't
14:55actually you know literally take a
14:57dollar out of revenue growth how do you
14:58think about revenue versus margin what's
15:00the interplay between these two
15:02priorities and what should be the arc of
15:03priorities over time when I was public I
15:05used to have this conversation with
15:07investors and they're like you gave us
15:09two pennies and earnings why don't we
15:11get a nickel and I'm like you don't get
15:14a nickel because I'm trying to build it
15:15so I can give you a dollar like so like
15:17stop asking me about a nickel
15:19you're not gonna get a nickel sell your
15:20stock review on nickel like you're gonna
15:21I'm trying to get it out
15:23so there's that we're at a certain size
15:25of revenue if you're generating like 20
15:27if you've got 20 million revenue like
15:29generating a million in cash doesn't
15:31make your company very valuable a
15:32million in cash you know times whatever
15:34earnings of forty or worth forty million
15:36dollars great like with their great
15:37earnings multiple it's just that so so
15:41like you can't over focus on margin and
15:43that's why we talk a lot about like cash
15:45flow break-even as a big thing just
15:47because it means you don't have to raise
15:49money but margin against incremental
15:51revenue is more complicated having said
15:54that if you hire more vice presidents
15:56what is that vice-president do Irish
15:57people builds a big ass organization cuz
15:59like that's what they do you just have
16:01to be conscious of culturally are you
16:04building something that is efficient
16:06productive or for people stepping on
16:09each other where you carve it up into
16:11teeny teeny lighted pieces like your
16:13Henry Ford and you're running the Model
16:14T people hated the Model T job so much
16:16that Henry Ford literally doubled
16:18minimum wage overnight because his
16:21attrition rate on the assembly line was
16:22so high but to me it's like how
16:25can we have a really kick-ass company
16:27where everybody's stretching themselves
16:28and everybody's you know and like and
16:31we're asking a lot of the managers to
16:32get a lot done with a little money and
16:34then we push as hard as we can into the
16:37market you got to be honest with
16:38yourself in a state machine gross margin
16:39operating margin right and so right you
16:42know of course margin has lots of
16:43accounting definition but the subway
16:44think micro smart is like at the unit
16:45level does the business actually work
16:47right so like for every incremental like
16:48piece of output do we actually generate
16:50profit and if you think about it right
16:52opera margin in theory is it's things
16:54like sales and marketing and stuff and
16:55right so look you could argue I might
16:56grow faster or slower generating two
16:58cents for a dollar maybe it's important
17:00for me to go to a pack because that
17:01actually builds a better business and so
17:03in theory in an economic downturn those
17:04things are easier to change going back
17:05to our loud cloud days right like you
17:07know we had this concept of unit
17:08economics where you know like a data
17:10center had to be able to actually
17:11generate profitability and the model
17:13worked well on paper but when we
17:15actually put it in practice you realize
17:16like you know you don't get the
17:18efficiencies you thought I think that's
17:19the real important distinction at least
17:21our margins look you gotta like you got
17:23a you got to hold yourself to of course
17:24margin and operating margins what Amazon
17:26is doing I think it's a lot the right
17:29approach which is you get we have one
17:32business and you get it working and it
17:34generates money and then it can generate
17:36enough money for you to add another
17:38business but you don't like have one
17:40business and it's not making money and
17:42you had a second business and it's not
17:43making my Google very early on in their
17:45history pad a product that just spit out
17:47money and so Larry's like I think you
17:51know what's smart about it satellite
17:53Jedi just went on like every dope
17:56engineer in Silicon Valley he's gonna
17:57work for me and that worked for them but
17:59they had the monopoly like yeah the
18:01monopoly like that's a good method if
18:03you don't have the monopoly it gets you
18:05into trouble and my experience with
18:06engineering has always been that if you
18:09freeze engineering hiring for your
18:11engineering gets way better integrating
18:13new engineers is super time constraining
18:17and then interviewing for engineers to
18:20interview people saps their energy
18:22hiring just slows you down Facebook has
18:25maintained very high product velocity
18:28like a pretty high scale and I think to
18:32me that the thing that they do better
18:34than anybody else is onboarding and
18:36training of engineers like that is their
18:39bootcamp commit to not hiring
18:42but onboarding training getting to
18:47productivity and measuring that you've
18:49gotten there then you grow much better
18:51how do you think about building the
18:53biggest and best eventual business
18:55versus demonstrating the traction along
18:57the way so you get to keep fighting well
18:59one if you want to build the best and
19:01greatest business then generate your own
19:03cash and then I would just also add to
19:07that keep in mind that more money
19:10doesn't necessarily mean bigger and
19:13better vision it can actually mean
19:15smaller and worst vision and bankruptcy
19:17some of it is like god i hate
19:19not knowing if we're gonna survive can
19:21we get faster to the destination can I
19:23like just get there already
19:25you got to resist that you have to kind
19:28of you know walk balanced line thanks
19:31everyone for coming we really
19:32appreciated having you here with us and
19:33we'll hope to see you again soon
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