An Interview with Ryan Keating — Financial Advice for Startups
I recently spoke with finance leaders from a couple dozen startups. Their expertise ranged from seed stage start-ups, where the CEO also served as the in-house finance leader, to growth stage companies where an in-house CFO monitored the entity’s current and future financial health. In these conversations, I observed that each finance leader had a different perspective and approach when engaging with their financial accounting partner.
I caught up with Ryan Keating, Managing Director of Keating Consulting Group, to get his perspective after 20 years of accelerating growth in venture-backed startups. Keating Consulting Group is a Silicon Valley-based firm that provides interim CFO services and back office support to start-ups ranging from pre-seed to Series C stage.
1. Please introduce yourself, your firm, and the services you provide. What’s your journey to starting Keating Consulting Group?
I am from Alaska originally, and made my way out to Boston for college. After graduation, I worked for a couple of professors from Boston University that had a professional services practice as expert witnesses. From there I was recruited by Coopers & Lybrand in San Francisco to join their valuation group — before they became PricewaterhouseCoopers. While at PWC I started writing business plans and creating financial models for startups. It was 1998, leading up to the dot-com era, so everyone was working with startups for equity. Your landlord, your bandwidth service provider, you name it. After a brief stint in investment banking, I missed working with founders and decided to venture out on my own.
For the first few years, I was building financial models for founders that were fundraising. Many of our clients found success and, over time, our operation grew. I expanded our service offering to include outsourced finance, accounting, HR and compliance. Now our firm works with around 100 clients from all over the globe at any given time. We employ about 50 Bay-Area based employees and independent contractors, and all of our leads are inbound via word of mouth, including from large venture capital firms. Through it all, I just loved working with founders.
Our service covers anything in the back office related to numbers. You just build the product; we’ll take care of everything else. Our offering spans four key areas:
- Finance — Our model provides you with a CFO and analyst pair to bring a finance presence. We cover fundraising, board meetings, financial forecasts, dashboard, cap table, banking relationships, etc.
- Accounting — Many of our clients are pre-revenue with an idea and a founding team and a little bit of funding. We come in, build the right technology stack, and establish a scalable operational foundation for that idea to grow on. Our services are designed to meet the founding team where they are on day 1, that can range from getting the EIN to set up a bank account all the way to sitting in on board meetings to provide accurate reporting to shareholders. Our scalable engagement model allows us to keep up with our client’s growth.
- HR — When you raise funding, a common first step is to scale the team. We can help write the offer letter, establish the option grant, set-up and manage payroll, and prepare the employee handbook. As well as all HR matters related to terminations, furloughs, etc.
- Compliance — We keep an eye out for our clients to make sure that they are filed and paid and registered wherever they need to be based on where they operate and their business model. While we don’t file the actual tax returns, we ensure that tax returns are filed and ready to go. Basically, we want our clients to be diligence ready. You never know when someone will want to start diligence.
Our goal is for our clients to scale, so our success is measured by our clients’ success. Agility is critical for startups that move fast and pivot. We bill by the hour with no minimum spend and we adjust our role as our clients grow and their needs change. This business model was not part of my original master plan. It’s insight gleaned from listening to our clients’ needs over many years. We are able to expand with clients from pre-revenue through $40M to $50M in revenue. We often are the first to identify when our portfolio companies are ready for full-time finance and accounting and HR staff to step in and where that new hire could be most useful. We often help with the interview process and even provide training for a graceful transition on the way out because that inflection point is a metric of our success as your partner.
2. What are the services that startups most utilize you for? What are services that startups underutilize and should use more?
Accounting is our most utilized service. Nearly all our clients use our accounting service. It makes sense as accounting is less strategically important to bring in-house and it is often a time suck for founders who wear many hats in the early days and really need to be building out their product and getting into the market.
Financial planning is our most valuable service. It’s not uncommon for a business-minded founder to take this responsibility in-house; about half of our clients use our CFO and financial analyst services. Building and maintaining a pro forma model — that also doubles as a near term cash flow budget — is required for not only fund-raising and board meetings but it is also a tool for making decisions about near term execution and managing your cash runway. Our CFOs also help with running board meetings, managing cap tables, advising on all financing related topics and scenarios. Essentially acting as a financial sparring partner for our clients. Even if we handle the task, it’s important for the founder to learn how these finance elements impact the business, so we do our part in coaching founders too.
Our HR service is underutilized. Startups should embrace it more. The interesting thing is, if a founder has been through the startup cycle even once, they tend to place a higher value on HR. In an M&A or funding situation, significant diligence happens in the HR function. But for many first-time founders that we work with, HR seems to be a bit of an afterthought — at least until they are faced with a sticky employee related or diligence related HR situation.
3. What do clients do to make it easier to work with / not as easy to work with? What can they do on data processing to make them better clients? What should startups have a better pulse on themselves?
I’m always thinking about what makes us and our clients a good fit. The clients that we add the most value to are those that view us as a financial partner or advisor, rather than just a transaction. Some startups see us as an expense and focus on limiting our time and areas that we help with. It’s understandable; founders need to manage burn and the finance infrastructure may not be high on the priority list. However, when a founder uses us to free up their own time so they can focus on their product and has the mindset of ‘I don’t know what I don’t know’ — that is when we can add the most value.
It’s not so much about having the back-office technology and process in place, we can help you with that. Rather, it’s about having the mindset that we are a valuable partner to help you grow. We can do much more than manage transactions on Bill.com. Take a B2B software startup that is subject to complex SaaS revenue recognition rules, we can build the process to properly recognize recurring subscription revenue — even making sure our client’s engagement letter supports the rev rec policy. We bring the experience of implementing strategies with hundreds of startups to make sure your financial processes are taken care of.
4. When your clients scale and hire their first in-house finance or accounting person, how should they think about who to hire? How does the working relationship change between you and the startup? How do you split the responsibilities / maintain your value add? How can both sides make the transition easier?
Accounting is more formulaic: X number of transactions equates to Y number of hours; when Y hours billed at Keating’s rate exceeds the cost of a FTE, then it’s time to consider hiring a full-time in-house accountant.
Be cautious not to hire a full-time controller too soon. You are paying them for the most valuable task that they perform. Say you hire a controller to close the books but 75% of their time is spent on daily transactions; you’re overpaying for that role. Outsourcing allows you to split up the tasks, so each task is pushed to the right rate.
Your first finance hire is more “feel.” Accounting is a solution but the CFO is a personal relationship. Part of the dependency is how much importance is placed on finance by the other executives and the Board of Directors. Another dependency is a company’s path to revenue.
We recognize that success for Keating means losing a client. As I mentioned earlier, our goal is to get you to the point where you need a full time CFO and accounting team. We do see it coming from months out; we have written CFO job descriptions and have interviewed candidates for the role. Ultimately, we want to turn over the reins to a full-time in-house finance and accounting team. That means we’ve done our job in helping you scale.
5. In the current pandemic, what financial advice do you give to early stage startups? What can they do to stay resilient in the face of economic uncertainty?
Communicate multiple runway scenarios. When the nationwide shelter in place happened, we advised our clients to immediately send out communication and prepare for the next board meeting as it would not be business as usual. You don’t want to show up and ask your board members, “what do we do?” You show up to the board meeting ready to discuss strategy proposals on how to extend your runway. Cash is king, so preparation and communication is the first thing you do.
Be a surgeon as you look for areas to cut cost. Cost cutting is a delicate art as you must balance several conflicting needs. You want to make cuts early enough so it materially extends your runway, but not too early as it may impair your ability to bounce back when things recover. Staggering cost cuts is an approach that allows you to prioritize what and when you will cut based on different scenarios playing out. Ultimately, doing a spend audit is a particularly good exercise for any startup. One of our clients found out they were paying $5,000 per month for Twitter posts they didn’t need.
