This Relay series aims to offer an insightful window into how founding/first operators help bring more structure and meaning to different SaaS functions that founders have already begun to shape.
“It’s very easy to understate the importance of the finance function at a startup,” says Knak’s Head of Finance, Christopher Chan, “because finance is a multiplier, and if your baseline is zero, finance does nothing.”
Hence as many startup beginnings (problem validation, experiments with potential sales motions, first hires, and others) are composed, finance is played and perceived in a minor key.
In the following Relay exchange, Christopher explains why that perception lingers strongly, sets down the criticality of finance as a strategic enabler for every single function, offers a necessary model for considering SaaS metrics, and recounts his accidental foray into SaaS:
— Stumbling into SaaS, stealing finance playbooks, and shaping your own path
— Why the finance function is typically the last to be brought in-house
— How useful metrics are always a function of decisions you’re trying to make
— The distinction between measuring inputs and their many multi-dimensional effects
— The perennial magic of asking, ‘how do you know you’re successful?’
— Why funnels can be sought and found across functions, not just GTM
“The financial maturity at Knak is a direct result of the financial maturity of a number of companies”
Everybody, to a certain extent, ends up in SaaS by accident. I’m sure very few people would really claim, ‘one day, I’m going to be a SaaS finance leader.’
My own journey was no different.
I genuinely didn’t understand SaaS/software before I joined Knak. I used to work at a small, local public accounting firm and prepare Knak’s taxes. At the end of one year as we were discussing returns and some financial planning, Pierce, Knak’s co-founder and CEO, mentioned that they were looking for someone to own finance in-house.
I went home that evening, took some time, and drafted an email for Pierce. Where essentially, I shared how I didn’t know much about the SaaS industry but that Knak as a business seemed to be doing really well and I was curious about the position.
And how I probably had no idea how to solve that lack of specific industry knowledge, but if they were willing to pay me to learn, I’d be onboard. They decided to roll the dice and give someone like me, a generous chance. That’s pretty much how I got started in SaaS.
So I legitimately had no idea what I was doing when I got there. I didn’t even understand SaaS metrics. Maybe conceptually I did, but not the details. For instance, the difference in calculations between MRR and revenue on a monthly basis.
The first thing I did there involved fundamentals. Knak was on QuickBooks, we’re still on QuickBooks, but we were using this template, super basic chart of accounts. And I realized that if we’re going to be making important decisions, they cannot possibly be based on that.
Luckily, at about a month into my time at Knak, a fellow SaaS finance leader (Alamin Mollick) in Ottawa reached out to me on LinkedIn: ‘Hey, I just noticed your recent title change on LinkedIn, and I’m looking connect with more young finance folks in the space and would love to get some coffee together.’
We went out. Chatted for almost five hours. And I basically stole his playbook. I asked him, ‘what did you do when you started out in your role?’ And he just gave me his playbook of setting up a business that needed some help maturing financially.
Thus our chart of accounts was based on an older version of his company’s chart of accounts. A lot of the reporting that I did was reliant on how his base reporting was set up back in the day.
That dynamic is quite interesting within the finance function. Because finances are very, very private, unlike other functions, nobody is publishing their internal finance playbook or even guides on how to get going.
What I’ve been learning in my career, having connected with more and more finance leaders, is that if you connect with them offline, they’re willing to tell you anything you want. ‘Here’s my financial model. Feel free to copy it, just don’t share it around. Or here’s my chart of accounts, do whatever you want with it.’
In fact, I’ve slowly realized that in order to be good at what you do, you have to get behind the doors, have these deep conversations, borrow people’s ideas, modify them, and make them your own.
Process by process, that’s how I’ve continued moving from not knowing much to scaling Knak’s finance function. Figuring out whatever the next necessary addition might be, as and when the need arises.
For example, we recently completed our Series A and now we have a bunch of cash in the bank. We had been bootstrapped up until this point, so I never really had to think about what to do with the cash. The mandate was to ensure that there was enough of it. That’s it.
Now, we have all this cash and the big question is to learn what to do with it. Again, I’m going to find someone who has already solved this problem and pick from their playbook.
There are very few new and original unsolved problems in the world if we’re being honest. Just consider how many SaaS companies there have been. There have been thousands if not millions of SaaS companies and most of them have had some flavor of problems you’re facing right now.
The financial maturity at Knak is a direct result of the financial maturity of a number of companies, their finance leaders’ problems, and of the solutions that I have taken from their contexts and put to work at Knak.
Why it’s easy to understate the importance of finance
It is very easy to understate the importance of a finance team. If you have a solid product and a solid sales team, you can get away without needing deeper financial insight for a very long time.
That’s why finance is typically the last function to be brought in-house. There are startups that have done a series B with a fractional CFO and a bookkeeper on staff. You can certainly make do with that.
To me, the reason for that is because finance is a multiplier, rather than an additive function. If your baseline is zero, finance does nothing even if that finance multiplier is a 1000. That’s why finance focus is either non-existent or outsourced in the early days.
You still need to run payroll, you still need to pay your contractors, and of course you’ve got to collect money. But those tasks, especially early on, don’t involve the multiplier/accelerator characteristic of finance.
[Finance leaders] …aren’t really decision makers but decision enablers. Yes, I need to decide on what bank we’ll want to work with. But largely, at a strategic level, my job is to sit at the table with other people and help them make better decisions.
My decisions are kind of a black box that nobody wants to hear about. Like ‘what’s our risk propensity for investing our cash?’ That’s something where the only other person that cares about knowing the decision is the CEO. No one else even at the leadership table really wants to deal with that.
My involvement in a lot of other people’s decisions helps us as a company make better decisions. I have very few strategic decisions of my own. I think this really is the role of the finance leader.
Why there’s no one-size-fits-all SaaS metric
There’s an infinite number of metrics to calculate that will be helpful in different ways for different users/businesses/contexts. I really don’t think there’s a one-size-fits-all answer for metrics.
It is much more about understanding what decisions are being made, and measuring metrics around the information on the decision that allows you to slowly disentangle cause and effect.
If you go to an investor and say, ‘I want to raise,’ they’re going to say, ‘okay, well, what’s your LTV, what’s your CAC? What’s your LTV to CAC? What’s your CAC recovery? What’s your MRR growth rate?’ So on and so forth. There are certain metrics that they’re just always going to ask for.
Coming from public accounting, there’s a very defined rule set. Everything works according to that rule set, and any deviance from the prescribed rule creates issues. On the other hand, the core ideas are there in SaaS metrics, but standardized rules surrounding measurement of metrics simply don’t exist.
Metrics change and evolve as your business grows and changes. For instance, at Knak, we had a metric that we called the MRR Gap or ARR Gap, which isn’t even a defined metric by SaaS standards. We just came up with a contextual calculation and we named it.
If you look up ‘ARR Gap,’ I almost guarantee you, it won’t be whatever it is that we were calculating. However, despite its irregularity, that metric helped us as a bootstrapped company that has a very irregular cash flow to get a holistic view of our cash flow position (we’re an enterprise SaaS that bills upfront, so there’s no monthly predictable cash flow). A metric’s utility is in its contextual application to decisions you need to make.
In a bootstrapped company that’s trying to grow really quickly, or has the pressure to grow really quickly, the question is always, ‘When can I hire somebody else? Can we afford that?’ When you have money as a funded company, ‘Can I afford that’ is not really the question. The question is, ‘when am I going to run out?’ Those are distinctly different questions.
The closer you get to ‘I’m going to run out,’ the more you start to question, ‘can I afford that?’ When you have no money to begin with, it’s always ‘can I afford that?’, so we were tracking the difference between our gross monthly cash burn and our MRR.
The difference between those two isn’t really a true net burn metric, but it was the closest thing we could get. Again, that’s not a standard metric and I doubt that anybody that’s funded would ever calculate that.
There are an unlimited number of metrics that you can calculate that are or are not standard, but fundamentally a metric should help you make a decision. Understanding the decision making process is what allows you to back into what information and metrics you might need to measure to support those decisions.
How measuring progress is more complex than we think
Another thing about metrics is that certain things ($ spent on PPC ads) are always inputs.
But the effects of those inputs can be so multidimensional that analyzing the input is highly dependent on what decision is trying to be made.
Spending more money on pay-per-click ads. That’s an input. At any given moment, you have control over that, you can say ‘no more money on PPC ads, done.’ And then spending goes to zero. That’s your input. You can always control that.
But the effect of it can be a total question mark. You might get way more leads. But then what does that mean? Are the leads actually good? Then you have to start measuring conversion rates to answer that question.
On the other hand, maybe you’re just measuring website traffic, you just want more people to go to your website, you don’t even care if they convert into leads. So that’s a different metric. That’s a different outcome that you’re trying to affect.
Here’s an example that illustrates what I mean when I say the effect is multi-dimensional: Money spent on PPC ads has many, many outcomes. One of them is that you’ve spent more money. And maybe that’s the goal, say, you’re out of ideas on how to drive more dollars and you want to crank the crap out of your PPC budget to get traffic. But is it efficient?
Maybe your CAC is too low, so you’re willing to be more inefficient with your marketing spend to get more customers. But then, the effect of an action is so multidimensional that analyzing the effect of an input really depends on what decision is trying to be made, because you can’t analyze all of the effects of an input.
It really comes down to figuring out what output you’re trying to achieve and measure and whether or not you’re actually achieving that output. You may have adverse outcomes from it that you don’t even realize if you’re not measuring them.
But that’s the reality. There’s so much information in the world that you can’t actually keep track of all the outputs.
An inter-team ritual that Christopher is deeply committed to
If I want to start a conversation with any department leader, I always lead with the following question: how do you know if you’re successful? Because they may not even know. At that point, that’s a whole other discussion. Now you’re getting into a discussion point of ‘well, let’s figure out a way to measure whether you’re being successful.’ That’s the starting point.
For ex: How successful are you really being with an HR department? Maybe the success lies in retention levels. What’s the average percentage of people that stay beyond a couple of months or a year. Are you hiring people that will leave in six months?
It’s not very hard to give somebody a really good salary for a job that they’re not good at and then have them leave within 12 months.
When the functions have an answer for the success question, the next question follows really well: how do you know that you are more or less successful than last cycle?
It’s one thing to say, ‘oh, we were successful because no customers have left in the past month.’ Okay, ‘well, did any customers leave the month before? Why are we more or less successful than the last cycle? What changed?’
That’s the inter-team ritual. I try to have regular touch points with each of the C-levels. We’re a small finance team, pretty low on bandwidth, but ideally, what I would love to understand quarterly is:
Is the success metric that we were using last quarter, actually a good metric? Can we adjust that? Is it a bad metric because it makes you look bad? Or is it a bad metric because it actually is measuring the wrong thing?
Probing funnels from GTM to HR
Finance people are numbers people. So the easiest place for us to latch on to something is the go-to-market machine. The GTM machine is just numbers from top to bottom. How much money did you spend? How many leads did you get? How many of those did you convert?
And so on and so forth. Eventually, how many dollars did you bring in? I think it’s very easy for finance people to start there. And you can infer a lot of conclusions from analyzing GTM.
I can review a report and say, ‘we added another BDR two months ago, but the number of outbound leads that we’re generating hasn’t increased,’ That immediately raises some questions about the BDR’s performance or about your training program. Either or perhaps both need attention.
But I think if you’re able to visualize the funnel that exists around a process anywhere in a business, you can understand the context it operates in.
The whole HR function is about getting people and keeping people.
From a functional standpoint, there’s a whole bunch of people out there that want a job, and I have a job to offer, and I want them to come in and do that job well. That’s the whole funnel.
If you can understand that, you can start to break down the components. E.g. ‘how many people did a recruiter talk to? How many recruitment leads did we actually have last month? And the month before that? Is the number of people that actually showed up for interviews consistent?’
Similarly, from a product standpoint, you’d say, ‘well, what features are we talking about? What features are customers asking for? Are those monetizable features or are they quality-of-life features?’ And you can start to play with that.
You can start doing TAM analysis on particular features. And ask, ‘what’s the actual market for that feature?’ Whether it’s in dollars or extrapolated numbers of requests if you have an estimate of how many people in your database will actually respond to a survey, and then extrapolate how many people from those would actually want that.
You can make a funnel out of everything if you have the right information. When you can visualize and understand what that funnel is, you can lay down context for what the decision is that’s trying to be made.
As a finance leader it’s not up to me to decide what product feature to roll out next, what should go into the next dev sprint, how many people a recruiter should be talking to?
It’s just up to me to point these questions out. ‘Is this how you want to be measured? Is this a good way to measure success? And how do we optimize for that?’
When you’re at an executive level, one of the fundamental things that changes is you don’t necessarily need the answers anymore, but you have to find the questions to ask. You have a team around you to help answer the questions and operationalise the solutions, but a leader’s job is often just to be asking the right questions.
It’s a hard shift to go from always answering questions to people now looking at you and wondering what question you’re going to ask. And realizing that has become your responsibility. The responsibility to not have all the answers but to ask the question.
