THE BLOG

28
Oct

Getting the most out of your accountants (we fired ours)

We recently received a bunch of invoices from our accountants that had the following line item: “Accounting: $2000”. There was no backup and the bill came 3-4 months after the work was done. When we asked for an explanation we received an indignant email from the accountant asking why we were questioning their billing practices. Our answer was: you’re fired.

I’m not suggesting you fire your accountants. On the other hand, don’t be afraid to demand great service from your suppliers. Here are some things I always look for:

  1. Prompt Billing – You probably think it’s crazy to demand more invoices but getting a bill every month means you can keep an eye on your expenses. After three months it’s too late to regret what you’ve spent. If they can’t get their act together to bill you monthly that’s a red flag.
  2. Detailed Bills – Anyone who generates hourly fees must provide a breakout of what those hours were spent on. As in a timesheet. Lawyers already have software that does this so don’t believe anyone who says it takes too much time. No details, no payment.
  3. Freebies – Our ex-accountants billed us every time they answered a question (with no timesheet backup of course). This discourages clients from relying on them as a trusted adviser. Look for people who don’t mind answering a few questions once in awhile, off the clock.
  4. Value Add – I’ve referred clients to our ex-accountants but they certainly never reciprocated. I had low expectations until I met our new firm who, before signing anything, referred a client to us. This is great relationship building. If you’re not sure about your firm’s value-add potential, get customer references.

I had a great experience with our lawyers yesterday where we were discussing some templates for legal agreements we need. They made it clear they weren’t charging for the meeting, would not charge for the next brainstorming session, and would give us fixed fees for all the work they would do. They even offered to donate some time to kick things off. All of this was unprompted.

It’s time to get a bit more demanding with your suppliers, just as you’re being asked to tighten your belt. Be fair and reward great service but don’t tolerate anything less than excellence.

Anyone have any good/bad stories to share about service providers they rely on? You can hide the names to protect the innocent.

24
Oct

Bootstrapping Part 2: Government Funding

You wake up everyday and look in the mirror and say, “I am a capitalist.” You have The Wealth of Nations on your bedside table. But in tough times, smart people look for handouts from the government. $700 billion worth of bailouts has even made it socially acceptable!

In Canada, almost $2 billion (just .28% of the US bailout) is granted annually to companies doing R&D via the SR&ED program. Most provinces also piggy-back on this program and provide additional funding of their own. For (Canadian) startups, these subsidies mean cash in your pocket because they come in the form of refundable tax credits. This means you still get money back even if you aren’t profitable, which you probably aren’t. In Quebec, for example, the combination of federal and provincial tax credits means you could get 80% of your developer salaries refunded to you. That $80k developer really cost you $16k!

What’s the catch? First, you won’t get your refund until after you spend the money. You file for your SR&ED tax credits at the end of your fiscal year and after 4-6 months of “processing” you receive a check in the mail. So what’s the use of a refund on expenditures if you can’t afford the expenditures in the first place? Good point and one that the lending market still hasn’t quite solved yet. But you can turn a potential tax credit refund into cash in the following ways:

  1. If you have a good balance sheet and a some personal assets, you might find a bank to loan you a portion of your expected SR&ED refund in advance. Honestly, if you’re a pure startup this will be very difficult because the bank cares more about your real assets than a future tax credit. Some government programs will provide loan guarantees which can help you get that bank loan. But banks are notoriously conservative about even taking on a tiny amount of risk (anyone out there with some stories they’d like to share?).
  2. If you have finished your year-end there are now some secondary lenders who will loan you a % of your SR&ED refund for the 4-6 months it should take to get your check. These guys are expensive (1-2% per month) but they might be your best/only option. I know of two who advertise their services: Goldeye Capital and R&D Capital. I haven’t worked with either personally.
  3. Many investors highly value the cash flow that SR&ED tax credits bring and might be convinced to invest more dollars, using your future tax credits as collateral. I’ve done this several times myself and it usually works out well for everyone because, unlike banks, investors know people who can claim the tax credits even if your startup, gulp, isn’t around to collect.

Canadian startups need to be very familiar with government programs given the economy and the relative lack of startup capital we have in this country. Next time we’ll talk about other programs that exist including Quebec’s new e-business tax credit and some of EDC’s funding programs.

24
Oct

Bootstrapping Part 1 – Outsourcing

Not everyone agrees that bootstrapping a startup is the best way to go (I do). But the economy has recently made you a bootstrapper, whether you like it or not. Mark has already posted a great article about bootstrapping which I encourage everyone to (re)read.

One good way to achieve bootstrap success is to ask yourself what needs to be inside your startup. Most entrepreneurs don’t ask themselves what really needs to be inside vs. outside because they fall prey to the following myths:

1. Contractors are always more expensive – Most people compare the high hourly rates contractors charge with a computed hourly rate taken from a person’s salary. Usually there’s no competition: salaries are cheaper by the hour. But you have to factor in hiring costs, overhead, benefits, and management time as well. Be realistic about these costs, especially the opportunity cost of your time, and you’ll probably find that contractors are efficient. Try not to think about the fact that some of your hires won’t work out…

2. I can’t outsource THAT function, it’s too important
– That’s usually the wrong question. The real question is whether outsourcing a key function might actually give you superior results. E.g. you might not be able to attract the best CFO to work with your little company but you could probably get that person to help you with a specific project, e.g. fundraising.

3. We need to retain knowledge – Find good people, write good contracts and give contractors a reason to work with you long-term. Don’t forget that most startups don’t have any formal knowledge management tools anyways. Plus key people regularly walk out the door. The point is you don’t automatically get knowledge retention just because you have payroll.

4. But we’re a software company, we need to have developers!
– Whether you run a software company or a funeral home (a great recession-proof business by the way), the goal of your company is still to make money. If you can build a better product with less money by contracting out you’ll have more money leftover to re-invest in making your customers happy. I work with a San Francisco-based company whose products are used in some of the largest hotel chains in the world. They’re profitable but still have no HQ. Their R&D is in Montreal, their VP Operations is in Chicago, and their CEO is in San Francisco.

5. We can’t give up control
– You’re probably assuming, incorrectly, that a) you have more control over employees than contractors and b) more control = more performance. First of all, most control you have over employees is coercive, i.e. “do it or you’re fired.” The problem is, the more you use this control the less people will like you and want to work for you. Contractors, on the other hand, are used to being paid for performance, especially for fixed-bid contracts. They often have more incentive for doing a good job. Sure you can bonus employees for good performance but you can’t cut their salary if they underperform. Sometimes giving up some control gives you a better end result. If you’re not a developer yourself it’s almost always better to outsource to someone more experienced. Hire a great external team and they’ll save you from yourself.

So in summary, ask yourself the hard question of what really needs to be inside your firm. Don’t forget that employees imply a lot of overhead costs and risks, including the risk of sitting idle if things don’t work out as planned. If you’re a first-time entrepreneur outsourcing the headaches of building and managing a staff for the first time will pay off in spades as you focus on your products and your customers. There are risks in outsourcing too, so be diligent and get good references. But when things get tough don’t forget that “supplier credit”, i.e. slowing down your payments to suppliers, is a source of short-term cash flow. I wouldn’t try doing that with employees…

24
Oct

National Angel Organization Summit – Roundup

I attended the NAO Summit recently in Halifax and was encouraged by the number of Angel investors who not only took the time to attend the event but were bullish about investing in startups. I met some Angel groups I knew about and some I have never heard of. Here are just a few of the participants:

As well as individuals Angels like Austin

and Marnie Walker.

One topic that was discussed a lot was co-investment, i.e. syndicating deals across multiple Angel groups. This is becoming more practical as Angels become more organized. It’s also needed as funding dries up from early-stage VCs and startups require longer runways. I’ll be attending next month’s Co-Investment Summit in Toronto, also put on by the NAO. It should be a great event.

Raymond