Very True by Verissimo

Alex (00:00)
we are back with another episode of Very True with Verismo Ventures. I'm Alex. Great to have everyone joining us again. And I'm really excited today to have one of my good friends, one of my colleagues, one of my thought partners, Ariel Menche on today. And this is actually going to be the first in a series of podcasts because frankly, we just have so much to discuss. It'll become really clear really quickly why we share so many of the same ideals.

what the differences are in our backgrounds and how those are complimentary, but also how sometimes those diverge. And we'll cover a number of other topics, which the hope is that we'll cover everything from fundraising to model building to accounting to expense management, even touching on things like HR and accounts receivable and some of the nitty gritty. But the hope is that we can provide perspective to both founders, to operational finance executives, to investors on how they should look at finance.

how they should understand that this is basically the lifeblood of every company. And I'll elaborate on why I think that's the case and how important it is to get this right. Even though it feels like it's not a core competence for a lot of people, we obviously, we're both here. We agree that it is and why that matters so much.

Alex (01:19)
Welcome to the Very True Podcast. I'm Alex Oppenheimer, the founder of Verisimo Ventures, an early stage venture fund investing in Israel and the U.S. Previously, I was a tech banker at Morgan Stanley and a VC investor at NEA. I then spent several years working directly with startups on finance, business models, rev ops, and more before launching Verisimo Ventures in 2020. I got into this business because I enjoy working with founders and helping them realize their vision and fulfill their potential.

I created this podcast to shine a light on the day-to-day reality that most people are too afraid to discuss. The pivots, the fumbles, and the so-called non-core aspects of building a business from scratch. Rather than focusing on the end of a successful road, we spend time here discussing the tougher, lesser-known parts of the startup life cycle. The goal is to offer insights to founders to improve their startup experience, whether that means avoiding problems and finding success faster or just feeling more confident and less isolated on their entrepreneurial journey.

Alex (02:12)
We will jump in now. I will let Ariel start with his background, how he got to where he is now, what he's currently doing in his company, and then we'll take it from there. So Ariel, I'll it off to you.

Ariel Menche (02:22)
Thanks Alex. also thanks for having me. I'm excited for this conversation as well. So now, right now I'm the CEO of Raftel Strategy. We are an outsourced finance and strategy firm, strategic finance if you will. We do CFO work, FP&A, which is financial planning analysis. We actually recently started accounting for both Israel and US entity companies and also help with a number of strategic projects.

whether it's &A advisory, helping with financial due diligence with acquisitions or helping companies on the sell side as well. But where I started, was back in NYU Stern with business school, studied finance, studied accounting, also art history, because, you know, got to get both sides of the brain in there. ⁓ I went straight into KPMG and the strategy team. At the time, it was ⁓ kind of a startup within KPMG. I was one of the first...

hundred employees of the strategy team globally, not globally, was nationally in the U S and I got to learn strategy consulting from partners from McKinsey, BCG, Bain, AT Carney, Mercer, you name it. and they worked in almost every industry. It was became known that I was the good and the Excel sheets. And so they kind of threw me into Excel and I was building out these models from pretty early on.

working in energy projects and defense and industrial manufacturing, retail was a lot of fun, but, ⁓ I eventually wanted to go in house. So I joined the WWE. They didn't let me go in the ring, but at least they let me join the finance team there. ⁓ and I got to, it was really cool. I got to work with Stephanie McMahon and she was the chief brand officer at the time. And I helped manage the budgets for the marketing, the brand teams and eventually the sales and also the data analytics teams. And it was.

quite an experience to work at a public company that had a really cool product, as you know, wrestling. worked there for a few years. During COVID, things slowed down. We eventually moved to Israel. that's around the time we met, about five and a half years ago. And been helping companies build models since. And build models helped with commercial strategies, pricing strategies. And I come to the finance world.

from very corporate background in the sense that I see how these very large Fortune 100, Fortune 500 companies were working, how they're dealing with Wall Street, how they are using finance internally, very much like the nucleus of a company. A CEO of the companies need to have a pulse of what's going on and to make business decisions. And they use their finance team as that, those arteries within the company to see what that pulse is.

and get the numbers that they could rely on, really, to understand what's going on. And this feeds into valuations, it feeds into capital markets, but it feeds into the granularity of what vendors can we be working with. So finance is one of those terms that means a lot of different things to different people, and people assume it means one thing. So actually, great example is when I moved to Israel.

I told people, I do finance, you're hiring for a director of finance role. And they're like, great, can you process my payroll for me? I was like, no, I don't know how to process payroll. That's accounting. That's not finance. They're like, what are you talking about? The finance and accounting are the same word here, probably pretty much. And so being able to differentiate for people what the difference between accounting work, bookkeeping, accounts payable, accounts receivable, payroll versus strategic work like

finance, being able to model out budget and all those different pieces is really important and it's kind of some of work we're doing today.

Alex (05:44)
So a fun story that I think is worthy of sharing, which is that Ariel and I got introduced the summer of 2020. This was like deep Corona. I had just had my first kid. We did one of these like sketchy empty flights to America to visit our families. you know, we're driving up and down the East coast and Ariel and I met and

We had a phone call and it was like, okay, wow, yeah, cool. And frankly, this happens to me a lot. I've been in Israel for 10 years. Anyone who's like finance related, not everyone, but a lot of people who are finance related ended up coming across my desk. And then sure enough, two weeks later we're flying back to Israel and we were actually on the same flight. So that was Arielle's aliyah flight when he and his family moved here. And that was just us coming home from a Corona summer vacation.

I guess I'll just add a little bit of a refresher on my finance background. And I think it's quite interesting because you've already mentioned kind of the difference between what you do and what is accounting and what people here call it and what they know and what they don't know. And I have plenty of stories like that. My background in finance started because my dad is a CFO. He was actually

the controller of the United Airlines San Francisco maintenance base when I was born up until 1995. Then he became the CFO of an aerospace company. And then he went into tech and was the VP of finance at Autodesk, then became a CFO, did a few IPOs and was a CFO up until just a few years ago when he retired. And so I grew up not with finance, but with finance.

And, ⁓ you know, my dad's 68. He could say finance. It's, I think it comes with the territory. You take a couple of companies public and, and, and that's what you, ⁓ you get to do, but it's, it's interesting. Just the way that these things shake out. And so then my background on the finance side, I got at Morgan Stanley. I did not study finance. I studied mechanical engineering. I like to say, I like, learned how numbers work. have a great grasp on physics and how.

you know, kind of physical numbers move and change. I think most of the physical world can be described through calculus. I relate to that very, very strongly. We'll come back to that later. I took. ⁓

Ariel Menche (07:51)
By the way, Alex,

I think we spoke about this in the past, but I applied to almost all engineering programs. I was very much an engineer. Love, I still look at, watch physics videos on YouTube. And I got into Stern, which just happened to be, you know, the second best undergraduate program for business in the country. I dropped the engineering. But I relate.

Alex (08:10)
Well, you know,

I can relate to that as well, actually, because I always was a finance kid. Like I said, I was trading stocks when I was 11. I worked at a hedge fund when I was 16. I was that kid. I did Stanford Finance. I was like the only freshman in Stanford Finance. But I was always going to study engineering. And I almost did the M &T program at Penn, which is where you get a degree from Wharton and an engineering degree.

At the last minute, was kind of like, I don't really want to do that. I think Stanford is going to be more fun. And I feel very confident in my decision now. I made that decision in March of 2007. So we're coming up on 19 years. And I feel very good about having made that decision. I took two finance classes or finance related classes in college. There was no finance major at Stanford, but there is a business school for it's a graduate business school.

And so there was a class called econ 90 that was, what did they call it? was like accounting for like non finance people. It was something weird like that. was like accounting for non accountants. don't know, but it was a fantastic, like of all the, it was the only, my only exposure to an accounting class, but an Ariela to be interested in your take on this, like it was, everything was practical. There was no, just like learning accounting rules, like learning, you know, accrual accounting, cost accounting, what are like,

There was none of that. In fact, the final for this class was here's a 10 K of a real company and a bunch of accounting questions. I ended up working in investment banking after I graduated and even whatever, I'm not going to go down that rabbit hole of how I ended up doing that, even though it was obviously where I should have ended up. But,

It was like the most helpful thing because a lot of what you're doing in investment banking, which by the way, we can talk about AI as well. AI could do a lot of this stuff really well for you. But one of the things we got really good at as investment banking analysts was being able to figure out what keywords you could search in a 10K on the SEC website to find these detailed, whether it was option investing schedules and pricing or

uh, adjustments to EBITDA or whatever it was. So maybe you got good at hitting control F and putting in a keyword and finding where that was. so identifying what's in a 10 K from an accounting perspective, what terminology they're using, and then being able to have that actually impact the financial model or the valuation work or whatever you're doing. That, that was like a absolutely critical skill for me, uh, in banking. And so was like super helpful, super practical.

And then I took another finance class in college, which I actually now have a friend who's at Stanford GSB. And I was like, you got to take this class.

Finance 335, corporate valuation, governance and behavior. And I didn't really know what that was. I don't even remember why I signed up for this class. It turned out there was a prerequisite for this class, which I didn't take. And so I was like, everything was group projects. So was like, okay. I was like hanging on by a thread. ended up getting like a, whatever it is, pass fails. You got like a high pass, which was like an A or whatever. ⁓

I learned so much about valuation and I love telling a story I may have even already told it on the podcast, which is that the professor says, I am a financial economist. I have no personality, which made everyone laugh. But he was like, I've never done anything. And this is Stanford GSB. this, you I was still an undergrad, but like a lot of these people had worked for two, three, four, five, six, eight years. Some of them in financial services and finance and accounting, whatever, before they came to business school.

And he said, I don't, I've never done these things, but I studied them and I hope you appreciate what I have to share, which is always an amazing way for a professor to start a class sets thing off on the right foot. And you know, it was a business school class. So was a series of cases and projects. And I feel like we actually learned the theory behind valuation, which was really cool. And actually tying it all together, there was actually a deal in one of our case studies about Gulf oil, which my dad actually worked on that deal.

when he was an analyst at Chevron, before I was born, which was pretty wild, how that all comes together anyway. So I learned a tremendous amount in that class as well on, valuation theory, which hard to think back to banking and how much of an impact that's had, but it had a tremendous impact on my investing career and understanding what is corporate value. Like what matters here?

Right? How are people making decisions around what's it worth? How do we value it? How do we put that in the context of a transaction, which is usually where the only place that really matters, either buying or selling either part of it or the whole thing. And so I learned a tremendous amount and anyone who's followed my content knows that I go back to the fundamentals and really this class was the kernel of that for me. And so I guess I have a little bit of a unique.

Finance background. did a bunch of deals at Morgan Stanley, took Facebook public, worked on some debt stuff, worked on some big M &A things where M &A and tech is like, I have a quick story on that. One of the first deals I worked on at Morgan Stanley was selling success factors to SAP. And I had just started. So there were two analysts. I was the first year, there was a second year analyst, very talented guy, who I think had been at KKR or something for the last 10 years. And he was like running the M &A model.

I was like building slides. I called it arts and crafts and you know, we're using the comps method and were you trying to figure out if we can use EBITDA multiples and try to figure out a comp set of like game changing transactions and like this is where banker creativity comes in of like, how can you pump this multiple and justify it to the largest extent possible? And it was interesting when I started interviewing for BuySideJobs, they're like, how'd you value this company on this deal that you worked on or whatever?

And was like, look, yeah, we did all this mumbo jumbo, but ultimately there are only two acquirers for this company. was SAP and Oracle. And we were engaged with SAP. And what we wanted to do was really turn this into a defensive acquisition, because as soon as this goes to Oracle, it becomes a bidding war. And so how do we tell, convince SAP that like, you just got to buy this, here's our clearing price, let's get it done. And the answer was one of my arts and crafts slides, right? And so some of finance is just like,

Hey, here's all the logos of SAP customers. Here's all the logos of success factors customers. Here's all logos of Oracle customers. And here's all the logos of success factors customers. Do you want to lose these customers that you don't have yet? Or do you want to gain them? How much is that worth to you? 4 billion, 3.7 billion? Great. And you know, I still also remember learning how deals actually get done, which is, you know, we had a call with,

with Lars Dahlgaard scheduled and the CFO of the company and it was all the senior bankers and we're all crowded in a conference room and Morgan Stanley and we had just updated our deck and we were trying to go from, you know, $36 a share to $38 a share and Lars dials in like 10 minutes late and we had all been talking through the pages and waiting for Lars to join and Lars dials in and you just hear, I got 40.

Okay, books closed. None of this analysis matters. It turns out that Lars had flown to Bermuda to hang out with Hasso Plattner, who was the founder of SAP in his house in Bermuda, and they got a deal done. that's, know, do all the work you want, but it's always, guess it's an important part to just like hit this perspective is just like, do all the analysis you want. But what it really comes down to is like,

people negotiating a deal and understanding that there is no truth to these numbers that's absolute. It's really about how do we use these to foster a positive and fruitful negotiation. So I'll pause there, but that's my finance background. Then I joined NEA. I did a bunch of deals at NEA, Series ABC, a lot of software stuff. Anyone who's watching this, I'm sure is well aware of the SaaS analysis that I've created over the last 12 years. So anyway, I'll pause there.

Ariel Menche (15:30)
Yes.

Yeah, so there's actually a few. I think there was one or two new stories for me, I think what's really interesting, just to compare my finance background versus what yours is, someone very smart once said to me, strategy and finance are the same thing. It's looking at the resources you have today and just figuring out where to put them in order to maximize your X, which is usually profit, right?

Alex (16:01)
Well, this is why one of the reasons I stopped using the term finance

in general, because people think it's accounting. They don't really know what it is. They think it's annoying. I'm like, I'm just going to start saying quantitative resource allocation instead. And people will be like, what's that? What's quantitative resource allocation? I'm like, don't you worry.

Ariel Menche (16:07)
Yeah.

Yeah, QRA, of course.

Yeah. So

your dad was a CFO. He was doing acquisitions, &A. You just took valuation classes and you did investment banking. My dad had a factory in Brooklyn. He had a duplication of video tapes and then moved into CDs and DVDs. And I grew up with a manufacturer as a father. And the first business class I ever took was him taking me to the factory and saying, anyone could sell something.

but it's another thing to get paid.

So the first lesson I learned was about cash flow.

Alex (16:49)
Networking capital

accounts receivable conversion to cash. There we go.

Ariel Menche (16:53)
Exactly. My point is like finance or strategy. Yes, there's about valuations about the capital markets about where the how you're going to raise money and have money in your company in order to go to the next step. There's you could split it into you know, have the three different buckets in cash flow, you have operating cash flow, investing cash flow and financing cash flow. And so I learned about all three, right? The especially the operating side, the operating side was never

academic. My dad did not an academic guy. And you learned about deals are made by go into the person's house and you have a drink and you have a conversation what's going on. When you told the story about whether it's going to be one of the two buyers, SAP and Oracle. Listen, if you have one buyer, you don't have any options. Once you have more more buyers out there, then you're going to have a conversation about price. If you have one buyer, there's no market for it. And they're going to drive down the price.

wherever they can if it's two buyers and they know about each other you're in a similar position so it's all about knowing what's actually going out going around on this you know you can say on the street it takes not just book smarts to understand how to look at numbers and understand what numbers mean for example the amount of times I see CFOs taking averages of percentages is shocking percentages you can't just take averages they're numbers with different bases the ratios with different bases it's bad math ⁓

Alex (18:11)
or just

incorrect calculations of growth rates, right? You take year two and say it's five, year one is one. People say 500 % growth. No, it's five X, but it's 400 % growth.

Ariel Menche (18:14)
It's just things are just incorrect.

So there's endless examples of bad math being applied, you have to know from the book's standpoint, book smarts, you've got to understand what the numbers mean, what they represent. Then on the other side on the strategy, you also have to know the street smarts, right? You have to understand what we're talking about here, which at the end of the day, it's a bunch of people trying to do something with their lives and understanding those interpersonal relationships is extremely important to being able to do successful business and finance.

It's that's why there's a I think there's all these tropes about finance bros Well because there's a culture around it people are going out there hanging out and that's I think that's the thing up in the other room But I think that's you know, too When you're talking about running a business when you're talking about having a finance function you want to have people You separate the accounting from the from the finance side why because you want your accountants to be as straight-laced as neat and proper as possible

Alex (18:55)
Got my vest on, I'm reppin'. Got my vest.

Ariel Menche (19:14)
You don't want creative accounting, I think is a, you have a good phrase around that. Yeah.

Alex (19:17)
Well, I gotta just say my

line here, is I'll start it with a story, which is there was a certain company that I was advising in Israel and I had gotten introduced through a friend whose wife worked there and he was like, you're gonna love one of the executives of this company. He's like a nerd on all this stuff too. So I sat with him, then I sat with the other key executive in the company and I showed him.

of what I did and what I could do and my analysis and they're like, this is awesome. We've been looking for this. We need this. What's this called? And I was like, this is called finance. And they're like, what? No. Like we have a finance guy. Like he's over there. He doesn't do anything like this. And I was like, let me guess, he worked at UI before and as an accountant, he was like, he was an auditor. He was like, yeah. I'm like, yeah, that's called accounting. That's not, that's not finance. And then I explained that culturally they're very, very different, which is that

If you are a creative financier, you become a billionaire. That's what happens. If you're creative enough as a financier, you become a billionaire. If you are a creative accountant, you go to jail. There could not be starker contrast in terms of the motivations at the basis of a profession from a philosophical standpoint. And so, yes.

Accounting is the language of finance, but accounting is very, very different from finance. And it maps directly to math, which is that you've got arithmetic and you've got calculus. The chance that you can understand and do calculus without understanding arithmetic and being able to do that first, very low, I would say impossible, not going to happen. But this is the other problem is accounting is a lot of arithmetic and multiplication. And if you're doing finance in the startup world,

What do we want? We want geometric growth. want polynomial equations. want exponential things to happen. And so if you don't understand calculus and integrals and derivatives, and you're stuck in arithmetic and multiplication and division, the ability to model it out and understand those dynamics is probably not going to happen. And if you've been trained in a world where creativity is the enemy, don't care. Honestly, I don't care what any accountant says.

If you're a tax person and you want to get creative and live in that gray area, go right ahead. if you're in accounting, you're either accurate or you're not. Creativity, maybe a team is a process, whatever, fine. if you're creative, again, you're going to jail. This is Enron. That ain't it. Sorry, I'll hand it back to you though.

Ariel Menche (21:43)
No, I think that was exactly the point I was trying to say is that once you split out, mean, finance, you the CFO, I would say, has a few different roles under their hat. But already a CFO is a corporate finance person, as opposed to someone who's dealing with the markets or investing and things like that. And so within a company, so we could talk about it as like, there's inter-company finance and intra-company.

where the inter company is like looking at the markets, it's looking at valuations, it's understanding where financing can come from, you're from the debt markets or the equity markets, whether it's VC, PE, private, private or public, which is an extremely important thing to understand and have your finger on. Then once you're in an individual company, your CFO, the finance function is helping you make those decisions on a day to day. It's very much related to the strategy piece. Now, CFO, I would say,

traditionally has worn three hats, would say today is probably four, which is accounting, historical, accurate, nothing should change. Then you have treasury, which has been long neglected. And then when the SVB blew up the other year, everyone's like, oh, you don't have a treasury function? Aha. I could tell you at WWE when I was there, there were maybe 30 people in finance total, let's say. Half of them were the counting.

other half, ⁓ maybe like 20, let's say two thirds were accountants. One third was the FP &A and there was one individual person doing treasury. Treasury, you just need to make sure you have that one person doing their job. It doesn't really, you don't need more than one person, but it's important to have that one person. Let's just put it down to that way. So there's the accounting, there's treasury, and then you have FP &A, which is financial planning and analysis is what we're calling finance.

Alex (23:14)
What the?

Ariel Menche (23:24)
That's the forward looking. It's understanding what decisions need to be made and where money needs to be allocated in order for the company to grow. It's understanding budgets, it's re-forecasting, it's running what-if scenarios. And I said maybe a fourth bucket, which I would put in, which is a lot of times nowadays you have this data analytics team, but it's more on operational data analytics, which I've seen roll up into the CFO of many companies. Sometimes it goes to a CTO, ⁓ which...

Alex (23:52)
I'll add one

more, which is I would say the span of corp-dev and investor relations, which also sits under the CFO usually.

Ariel Menche (23:53)
Okay, yeah, go for it.

It's true, yes. So, corp dev and investor relations is that bridge to that, the other market, the inter-company piece, which is also really important. And I think mature comp, again, I guess I'm working too many with too many startups lately, but with the mature companies, always, when you're thinking about capital allocation, right, there's always a decision to build or buy. And when you're selling your company, right, it's also not something to think about.

Alex (24:07)
Yes.

Ariel Menche (24:23)
is that the person you're selling to is also making that decision, build or buy. And what do I mean by build or buy? It's like, what does it cost me to buy a company that already does this and integrate it versus just building this organically? And so the corpdev function helps you execute on that buy part, right? Also, correct me if I'm wrong, a good corpdev could also have some banking relationships as well.

And also the investor relations piece, they will be dealing with the markets directly. Or I guess a private company.

Alex (24:49)
Those are the two, frankly, those

are the two main touch points outside CEO CFO for investment bankers because either they're, you know, investment bankers on the coverage and relationship side are the access to the investment banking products. And the three main investment banking products are &A, buying, you know, sell side or buy side. And then it's debt and equity. And those are both capital markets functions.

Ariel Menche (24:55)
Yeah.

Alex (25:12)
Yeah, they like to do their strategic stuff, but it is not, that's not a, that's not a thing. so yeah, that's very in line with my breakdown. You know, it's really interesting going back when I was doing consulting before I started Verisimo and I was advising companies, the way that I would kind of pitch myself was that very much in the context of the office of the CFO and say, and I said, there's three functions. And then I said, you know, there's.

the accounting bookkeeping payroll administrative piece. Then there's the FP & A piece, which is, you know, boy, I put the data analytics piece under that because, know, yeah, it also touches the accounting stuff. It'll, it also touches the accounting stuff or it should rather often it doesn't, but it should. Um, and the FP & A piece, which I've, I'll link another podcast. did a short one where I just explained like what I call the FP and A flow.

Ariel Menche (25:48)
It should be. I'm happy to say it because there's so many...

Alex (26:03)
from model to forecast projection to budget and then that loop between those. And then the third category being that FP or sorry, that corp dev IR function. And again, I got called in when companies often wanted to raise money and I was like, if the data is not good and the numbers aren't clear and the numbers aren't good, like you're in no place to go have an IR opportunity and go raise capital from investors. And my dad pushed back on this categorization.

And what's really interesting is the piece that he was like that you're missing that's so important. And this was back in like 2017 was he was like, you're missing treasury. That's a core function. And so I guess, you know, Ariel just figured out how to, you know, settle this disagreement between me and my dad. As I was, cause when he said, was like, ah, it's just part of accounting, you know, like it's not that strategic. Like, no, it matters. Um, it also.

Ariel Menche (26:49)
you

if that's it.

Alex (26:57)
To be fair, like, yes, we've had the, we had the SVB collapse and then it mattered all the, all of a sudden, but we mostly work with companies who lose money. Companies who make money need this function. That's part one. Part two is interest rates were basically zero. And because of the terms of financing that you get when you raise venture capital, you can't do anything with that money.

Ariel Menche (27:06)
Yes.

Alex (27:19)
When you could put money in a savings account and get 5 % all of a sudden, again, first of all, the treasury becomes like, this is like a thing and we're leaving money on the table. And the second part again, when we talked about like CFO, CFI, CFF, meaning cashflow from financing, cashflow from investing, cashflow from operations, right? Like all of a sudden that cashflow from investing thing became a thing, right? It's like, our money makes money. Like that's cool.

Ariel Menche (27:47)
It's funny, we have a...

Alex (27:47)
versus our operation

loses money and our cashflow from financing makes money. then the third thing is just null and void, right? so.

Ariel Menche (27:56)
Yeah, I was gonna say that we had a client start with us a month ago on the accounting and also the CFO, FP &A side. And by just looking at the treasury position, they've now made money working with us, which is not something you can say often when you're working as a finance function, as a back office, but basically the amount of interest that they're able to get is covering our costs and plus some. I their costs for us, but you know, it's...

It's a really, it's an important piece. And also there's just a, you know, I'm having conversations now with people about, you know, potential downturn in the market. What are the different ways to hedge that? And so having that, just the mindset on, on being able to understand where your money is, where, it's coming. And then by the way, that treasury piece is one part of it. The other one is working capital management, which is huge. saying, and just to explain what working capital management is, is that when you're growing your business,

you are spending money for vendors, you are receiving money from customers, and potentially you are tying money up in inventory if you have physical inventory. And being able to manage the cash cycle about knowing when you have to pay your vendors, receive from your customers, and also buy inventory could make or break a business. A famous example of this is, like Costco has what they call a negative cash conversion cycle, because what they have is net term, net 30 days with their vendors.

And that means they pay their vendors 30 days after they receive the goods. Right. But where do the goods go? They go into their warehouses. Wait a second. What's their warehouse? It's their store. And they have a turnover is two weeks. So they've already sold all their inventory before they even had to pay for it. So that's a good business model.

Alex (29:32)
Yet the concept

of networking capital is one of, it just never gets touched on with startups. And I feel like I'm like the only guy at the early stage who's flagging that as either a benefit or as a real drawback to a certain business model where does your business throw off cash by the nature of it or does it consume cash? And just to double click on that for a second and get a little nerdy on the financing, but effectively

You look at a balance sheet and you can see how much accounts receivable is an asset. Accounts payable is a liability and inventory is an asset. And these are your three drivers of networking capital. And we've all kind of been programmed, I hope to think that like assets.

Ariel Menche (30:16)
There's a few other pieces in

there, which is the flip sides of accounts receivable and accounts payable, which would be deferred revenue on the liability side and then the prepaid expenses on the asset side.

Alex (30:21)
⁓ yes.

Yes. So we've all been trained to think that assets are good. And then I guess it's been kind of all the rage right now to think that debt is good and liability is good. the big thing is it depends. It really depends. And if you listen to Howard Marks, he's very much like debt increases volatility because your ups go up more and your downs go down harder.

Startups, I always say, you don't need more. We'll have a whole episode, we'll talk about venture debt. But the way that you actually model these things out when you're building a three-statement model to try to figure it out is you say, okay, accounts receivable is based on revenue. Accounts payable is based on cogs. Inventory is also based on, well, we base inventory on cogs, right? Yeah, inventory is based on cogs.

Ariel Menche (31:07)
Cogged, inventory is usually cogged, yeah.

Alex (31:10)
As these things grow, you basically can take a percentage, but then the way we express it is actually as days. So now you're bridging, this is a great example where like you're bridging between here's the numbers on the page. Here's how we're going to model it forward. And then here's what's actually written in the contracts. And all of these things matter. like you have a customer contract, you know, if you're a consumer SaaS, right? We're using Riverside right now. Fantastic product, right? Like just from the sales side.

Now we're just talking the accounts receivable kind of piece of it. You've got the booking. You've got the activation, which is when we start recognizing and earning revenue. And then you have the collect, you have the billing or the invoicing, and then you have the collection and these all can happen at different times. In consumer SaaS, they really all happen at the exact same moment. As soon as you virtually swipe your credit card, all of those things are happening instantly. Revrec for.

software companies is as soon as the customer has access to the platform, you can start recognizing revenue. You're swiping the credit card, you know, it's through Stripe. Oftentimes you have access to that cash instantly. Sometimes you have to wait three days. So again, your, you know, your accounts receivable is three days, but the conversion is like super, super high unless you're dealing with chargebacks, which is a whole different part of, of this world.

Ariel Menche (32:11)
Maybe.

Alex to the point you were saying before about, you know, sending an invoice, let's say you booked the revenue, you they activated, you invoice them and they're waiting to collect. It goes back to my first lesson that I learned about getting paid. You know, how many times do people then deliver the service, give access to the platform and the payments just never

Alex (32:43)
Yeah. And so when you, when you start getting up into the enterprise tiers and so we'll talk about this initially in the context of software and why I'll just mention briefly why this gets ignored, right? And the reason this gets ignored in the software world, but it shouldn't is in part because of what Ariel mentioned, which is this concept of unearned or deferred revenue, which is effectively the opposite of accounts receivable. It's contra accounts receivable.

Counts receivable is you are giving your customers a loan saying you can pay me in 30 days. Deferred revenue is your customers prepaying you for a good or service. And so you're actually, they're actually giving you a loan for free. Now people are like, this is so good that, and then by the way, like in the, if you're a software company, like your vendors and the people you have payables to, it's often net 30. So again, you're getting prepaid.

on the revenue and then you don't have any inventory and you have time to pay your bills. So it's like, let's just not even talk about it. Now here's where you run into issues though, which is everyone knows intuitively that annual contracts are better than monthly contracts because what we care about is the durability, survivability margin, we'll talk about that later, of revenue because revenue is an invention. Revenue was invented. We didn't talk about this yet. I'll get back to it.

We care about money in the door. We care about how quickly and how reliable that money will come in the door. so, annual contracts are better.

Ariel Menche (34:07)
Valuate,

just pause on that point. Valuations are cashflow forecasts. And what is the predictability of that cashflow? That's what it is. In a nutshell, if you're taking all of valuation, no, but that's what it is. That's what people care about. They care about, am I gonna get cash out of this business? We do revenue multiples, even done multiples, because we're trying to deal with companies that don't have cash yet today. But in the end of the day, that's what they're trying to figure out. They're trying to figure out, can I get cash out?

Alex (34:17)
We got a whole episode on DCFs.

and it's just, too easy to...

So the mistake that I've seen over and over and over again is bad customer contracts. I don't know if they come from lawyers, if they come from AI now, or if they come from some repository online, but like these companies, when I was advising, they'd be like, yeah, we have annual contracts. I'm like, well, your cash coming in doesn't look like you have annual contracts. well, they pay us monthly. I'm like, dude.

That's a monthly contract. No, no, no, but it says it's a year contract. And I said, yeah, and what happens if after six months they decide not to pay you for month seven? Are you going to take them to court? Like, are they going to pay you? No. Like they're just going to be like, we don't want this anymore. Bye. And all of a sudden you gave them a discount because they stand up for an annual contract, which makes you feel good, but it actually doesn't really improve the durability of the revenue, anything beyond what a monthly contract might do.

and by the way, there's other crazy things that happen. heard a story recently from a friend about this who was working at a company who's currently working at a company that you need auto renewals in your contracts. You don't want to have a new negotiation, a new sales process. Even if you're on annual contracts getting paid upfront, which again is the Holy grail of what we want to do in enterprise software. Like.

If at the end of 365 days, you're starting back to square one and you're not having auto renewal where they just get a new bill and they just pay it and everything stays the same, where there's some agreed upon price increase, like, bro, you're playing the wrong game. You're fumbling on the one. You had this opportunity. Don't give discounts unless the cash comes up front, right? Otherwise, it's just a glorified monthly contract. Don't leave auto renewals out of your customer contracts, because then you're not a SaaS company either. It's just the bigger version of that.

So this point of, who cares about networking capital because we're a software company? No, you could still mess it up. And the beauty of software companies is twofold. And I've talked about this and written about this extensively is it's the predictability of the revenue and what, like, what does that really mean? So part of it is grow or die, right?

the world of software. It's grow or die unless you're throwing off oodles and oodles of cash. And you can look at the companies and how they're valued who are throwing off oodles of cash. It's not as happy and flowery as you might hope or think because the margins are never as good as people think the margins are going to be. But not anymore. Not with AI, baby. Now they're paying rent to the landlords of the 21st century. So

Ariel Menche (36:46)
I thought SaaS companies have 100 % margin.

Alex (36:54)
The, and they always were, it was just cheaper rent. wasn't prime real estate, which is what these AI models are apparently. So, but they have to get cheaper. Again, another conversation. but the, ⁓ the issue that you run into is again, the reliability of the revenue, but more importantly is that it compounds, right? The compound interest thing we've all talked about, we've all heard about, but like the revenue adds up. So,

We talk about this thing in SaaS. Again, I don't know, people don't really talk about it that much more than one. It's just sales efficiency, let's call it. People will talk about SaaS magic number. When that idea was invented, it was a very good idea. think Michael Scott invented that concept of SaaS magic number, which is your net new ARR divided by your associated, associated, attributed sales and marketing spend. So what this is, is this is like the engine of your business saying if I'm an investor and I put a million dollars in,

how many dollars of net new ARR are gonna come out? And when I say net new, it's not just new, it also includes all the churn, the down sells, the up sells, and the new customers. And we care a lot about this. But if you just take that as a second, say, okay, if we put a million dollars in and we get $2 million of net new ARR, that's great, right? But we had to put that money in beforehand, and so we're losing money. then we...

But then we get to 2 million. Okay, great. Now let's do that again. Okay, let's just, we're not going to talk about exponential growth because if you don't understand linear growth, you're never going to understand exponential growth. So this is the power of the SaaS model. Now you have $2 million of revenue that's come in in the last year that you've earned and you've collected the cash on it, hopefully upfront. And now you're going to spend another million and get another 2 million. But now if we just fast forward a second to like gap accounting land.

Let's say you earned, again, if you're at 2 million of ARR at the end of the year, if you have a linear curve, let's say you earned 1.7 million of revenue in the year, but you collected 2 million, so who cares, of? It's a little bit of both matter. I know I'm moving through these numbers quickly, but now let's fast forward to... ⁓

Ariel Menche (38:57)
Just to people listening

understand the lag between revenue and ARR and the cash.

Alex (39:03)
We're

not going to get into that right now. Just leave it because we'll get to this point first, which is that, okay, now in year two, let's say again, you do the same thing, but this year, that 2 million of ARR that you had at the end of last year, which you're going to expect to continue into this year, you just have it. So now on a gap basis, if you just think about, okay, we spent a million dollars on sales and marketing, we had $2 million of revenue.

Before we even, before January 1st, on December 31st, we knew we had 2 million in revenue coming back from last year. So this year, we have so much more margin to play with. We went from a business that was, let's say, spending 50 % of its revenue, just again, rough numbers, on sales and marketing to a business that's now spending, you know, at the end of next year, it's going to be, again, 1 million on 4 million. All of a sudden, our margin halved, like our sales and marketing margin halved. I hope I explained that like...

roughly clearly enough. Now companies want to accelerate and so they end up spending more and more and that's where we hope to get to nonlinear growth. But if you just look at a scaled company, there's a bunch of public software companies that grow less than 10 % a year. Their magic number, if you just look at what their revenue growth was from one year to the next, like the absolute dollars, and then you look at like, let's say you look at 2024 sales and marketing spend, and then you look at how much additional revenue they...

did from 2025, 2024, you're like, this magic number is garbage. But yeah, they're growing 10 % a year and they're on a billion dollar revenue base. So like, who cares? They don't need the good margins anymore. These things matter a lot when you're at small scale and they don't matter at all when you're at large scale. And so that's why we could have a whole episode about this. Why like these hack metrics, these quick diagnostics, when you're growing from $300,000 of ARR to 2 million of ARR in a year.

matters in one way. When you're growing from, let's say, 50 million of ARR to 80 million of ARR matters in a different way. And we're growing from a billion of ARR to 1.1 billion of ARR. It matters a whole different way. so, again, this is where the non-linearity and being able to understand these things matters so much. The number of times that I've talked to Series A, Series B, honestly, I'll just say Israeli CFOs,

⁓ and I've talked to, it's not really fair. Most of my professional career at this point has been in Israel. So I've talked to more Israeli CFOs than I've talked to American ones, but because you don't have a bit, yeah, you don't have a big like investment banking, private equity pool that's driving into CFOs. And there's not like a big culture of people coming through FP & A ranks like, like Ariel did. and so you just get a lot of like PWC people who then be moved into finance and that becomes the ethos and the culture. anyway,

Ariel Menche (41:23)
skewed pork.

Alex (41:40)
I remember meeting a company, a growth stage company, and I was with a couple of other investors and they kind of brought me. was at the time, like frankly, I was in Yeshiva, not even working. And they were like, come to us, come with us to this meeting. And the CFO was just like, no, we're going to do this and we're going to get that. And I'm like, no, but don't you want to like do this? Like I'm making a curve motion right now. Don't you want to, you know, have it curve up? No, no, no, we're just going to do this. And I'm like, yeah, that company's dead now. Literally dead.

⁓ because you know, when you're in grow or die, it's not just that simple. It's nonlinear growth. Or you die. Like if you're thinking you're going to put just one foot in front of the other, and you're never going to accelerate, like it's going to be a long road down in, in SAS land. So again, that will, we'll, couch that as like mini rant. Number one, I'm wondering if there's specific things there. I'm sure Ariel, you have some things we should unpack from that, because I think just from that discussion, probably have six hours of content. So everyone buckle up.

It's gonna be a Rogan episode, let's go.

Ariel Menche (42:36)
I'm trying to think of which which parts to double down on, but I think I kind of want to talk about the linear versus nonlinear growth and maybe SAS land is not the what it was. And so I

Alex (42:46)
Well,

but by the way, I started this off by saying, let's just talk about software. But now what we took for granted in enterprise software, which as the acquired guys always say, and I couldn't agree more, it is the greatest business model of all time enterprise software. that's legal. And, but, but the business models are getting different now. The math isn't working the same. And I heard a crazy take on a podcast recently, which is like,

Ariel Menche (43:03)
Yeah, for sure.

Wait,

before we drive too far, remember the hot take. Something I did want to say about the deferred revenue networking capital that we mentioned before is that, you know, I'm working with a company and trying to fundraise, trying to extend their runway. And so there are a few levers that you could pull to extend runway, which is understanding increasing networking capital is one of those levers. How do you do that? Well, you start implementing upfront payments. Once you start upfront payments,

You could.

Alex (43:36)
decreasing networking capital.

Ariel Menche (43:38)
No, could increase, you could, decrease, well, because you're increasing networking capital in terms of how much money, yeah, yeah, no, so I'm thinking in terms of increasing your receivables, but you're not increasing receivables, you're decreasing your receivables, but making it go negative, you're going to deferred revenue side, the exact part that I was talking about earlier.

Alex (43:43)
We do assets minus liability. This is like a very confusing thing. So we'll just take a moment. Yeah. Exactly.

And I mentioned this before, exactly. Assets are good,

liabilities are bad. Well, free loans are good. And people owing you a lot of money and you not having cash to pay payroll is very bad.

Ariel Menche (44:04)
Right. So you decrease your network capital, meaning you decrease the amount of money that you need to invest into the company to keep it going because you get so much money out of the deferred upfront payments. You have now a balance of cash. So by just switching to upfront payments for, you know, brief periods of times, even if you do quarterly, not just annual, you could extend your runway. You could have extra hundreds of thousands of dollars depending on your size or your speed. I'm just sitting on your balance sheet and sitting in your bank account, which is

where you want it to be, and you could use that to extend your runway.

Alex (44:36)
Yeah. And that's, again, it's an important concept is that like businesses consume cash, like they consume and use cash. And so the, probably the right way to think about it is like how much money is tied up in just operating the business. And that's where like, again, when you see an and A deal, you see there's like restricted cash sometimes. Now, sometimes that's covenants for debt or whatever, but sometimes it's just like, there's cash that you need to run the business. So yes, there's a, there's a

what we used to call more exactly aggregate value or enterprise value. They mean the same thing, right? That's different from equity value, right? So you can net cash against that because if you buy a company, let's say for billion dollars and it has $200 million because you buy all the stock. So you buy all the stock, let's say there's no debt. You buy all the stock. It's a billion dollars. But the company has $200 million of cash on its balance sheet. You only paid

$800 million for that company because there's $200 million on the balance sheet. You just put that on your balance sheet. And so it didn't cost you, but you can't put all $200 million on your balance sheet. That company still needs cash to run. They need money in the bank account to pay for things, to pay employee salaries, to pay rent, to pay vendors when they need it, to just have a little bit of a cushion. These things all matter in terms of the practical side of running a business.

I'm going to hark back to a comment I made earlier because I think that this framework is really useful for our conversation, which is you've got the practical how deals get done. You've got the academic and then you've got the analytical. And these are our three approaches. And I think part of the reason that finance needs to be demystified is that the ethoses of all these things are very different and the personnel are different. And this is why it takes 15 years.

to become a CFO. Like, you know, I mentioned my dad, like he was the CFO of an operating business inside a conglomerate. That was his first CFO role. But before that, again, he was a controller. Before that, he was an analyst. So yeah, there's a bunch of different steps that you need to go through to grow out these functions. And frankly, a lot of people that are becoming CFOs now, they don't have the full gamut. It's not reasonable to expect someone to have depth at every single function inside the CFO role.

More likely it's to know enough to be dangerous and then to have your guy. So like my dad always had like, he didn't come through the accounting world like a lot of CFOs have. And so he had like a chief accounting officer that he brought with him, like everywhere he went, you know? then at one point that chief accounting officer went to a slightly different company that is worth like $80 billion now. And he's the most successful chief accounting officer in the history of the job title.

Anyway. ⁓

Ariel Menche (47:16)
But

I resonate with that because that's that's kind of how we operate at Raftel. Like I have I have a CPA, but I'm not the accounting guy. I know enough about accounting to get by and be able to look at it and know when something's up. Right? I could do some forensic accounting stuff. That being said, I'm an I'm an FP & A guy. I'm a CFO. I'm not a capital markets person, but I have a capital markets person. I'm not an &A guru, but I have my &A gurus. And so whenever we're coming in and on a deal,

Alex (47:30)
That being said, I'm not eating.

Ariel Menche (47:41)
we have the CFO with the specialized hat that could come in and come in and we're, you know, joining together on the team, which is very different than having someone in house. If you have someone in house, you have to hope that they're wearing as many of those hats as possible. And so that's why I kind of like what our model is. It allows us to go deep on those different areas that a CFO needs to go on.

Alex (48:02)
Yeah.

I mean, I'll compare it to like this concept. Can I watch what you're No. We're recording something. Can you go back outside? No, but I want to hear what you're talking about. Okay. So you need to sit on the floor and say super quiet. Can't make any noise. Okay. Okay. So I'll compare it to this like idea of being a product manager and owning a product and

What is a prognitor? say, it's a mini CEO, right? Why? Because they understand marketing and sales and engineering and design, and they bridge all these things and they can kind of hold their own in each of them and manage to a unified goal across these disparate functions. And it's like, yeah, CFO kind of has to do that too. It's just all different flavors of numbers. But it's very analogous in that way. Like it is a multifaceted thing.

think the mistake that you make, or not that you make, that the mistake that a lot of founders make is just being like, that doesn't matter right now. And then like, well, not all of it matters right now, but some of it certainly matters right now. Like, do you even have the opportunity to make money? Let's talk about that. That's one of my main things that I do.

Ariel Menche (49:07)
Right. know,

harping on that point, I think obviously the earliest stage companies, they need to try to find product market fit. Right. And so they're kind of going all over the place and trying to figure it out. And their main challenge or opportunity to use finance is to see, actually, this is a great example. I had someone visit the office today, a good friend who's starting a company and he's like, I just need a basic model. Just, and I call it, I call it scratch paper.

It's a model that basically tells you what you need to get done and get your goal. So my friend's goal, I wanna make $100,000 in December. Now what does $100,000 in December mean for you? That means essentially they're run rated. If you think about it, it's not all MRR. Let's say most of it, half of it was MRR, but it's a pretty, it's first year of a business. It's solo entrepreneur, no VC backing.

And so we laid out the math and we're trying to figure out the pricing. If you're spending $10,000 every time someone on boards, if it's $1,000 every time for maintenance and people staying on with you. And so we were able to start building out the math and you're like, okay, so based off this, you need 50 clients by the end of the year on retainer plus six new projects on that month. That's how you get to 100K. Oh, okay, 50, I could do that. That's 50 divided by...

10 months, whatever it is five a month. was like, well, it's not really five months. It means you're closing five a month, which means if you have a 10 % close rate, that means you have to be talking to 50 new companies every month, but that's not that month. need to, how long is your sales cycle? Right? Oh, it's, it's 60 days. So you have to start talking to 50 companies two months in advance of, know, in order to get to your close. And so you have this conversation, which

is a strategic conversation, but it's also a finance conversation that you need at this early stage. Then once you go up and you actually start having business, you're having, know, invoices coming in and payables going out, you need to set up these systems because otherwise you start building up what's called organizational debt. What is organizational debt? It's a type of debt that you don't know how big of a loan you took out. And you also don't know when the maturity date is going to be, but my God, you're going to find it when it does hit, you're going to feel it.

And when you feel it, it's usually around, hopefully you don't lose your company, but maybe you have to fire half your staff, which is a very shocking thing. Or maybe you end up getting sued into oblivion. So the way you avoid organizational debt is by investing into organizational things, is including, it's legal, it's HR, but very much is also finance. You need to have good accounting. You need to have good processes around your finance, your payables, your receivables. And that's extremely important.

when you're setting up these companies. Then only once you have the baseline, I I saw, I forgot what the name of the person was. It's not my idea, but it's something of like a Maslow's hierarchy of needs. was the company's hierarchy of finance. And so the bottom layer is bookkeeping, it's accounts payable, accounts receivable. If you have the ability for money to go in and money to go out and to just stay compliant with law, that's level one. Level two, reporting.

Can you use those numbers for getting the reports out to see what's going on the company? Only then you get to FP &A, and after that you get to strategy. And the idea there is that, well first of all it's another thing that we talk about, don't know, we have a whole podcast on this which is garbage in, garbage out, right? If your books are just compliant, which is by the way how most companies are doing it, especially in this country, you can't use those numbers to understand what your business is doing.

They're just compliant with the law and they don't actually reflect what your activity is. so making sure they're invested. Yeah.

Alex (52:44)
I have a-

Yeah, I have stories about this where, you know, I'm working with companies and try and help build their models. And I'm like, you got to go yell at your accountants. you know, they're using outsourced accounts at this stage and like, there's no understanding. There's just like one line for like payroll. I don't know what departments they're in. It's just like nothing split out by department. Nothing's like, ⁓ you know, nothing's accurate. And

And then I'm like, well, guys, like you got to do better than this. And then the founder was like, yeah, this, outsource account sent us this list of questions, which is good. Cause right. Like this is what a bookkeeper needs. Like here's a list of questions, you know, like, to clarify that information so we can split it into more detailed buckets. It was 400 questions in a spreadsheet. You're going to, you think you're going to take a CEO's time. It's like, well, this is an unsolvable problem. I'm like, well, it's really not unsolvable. And.

It requires, and frankly, I think the best solution to it right now is probably Ramp. Ramp's done a tremendous amount of work in this area. AI can do this extremely well. You have one person who's just like, hey, tell me what this is, and you answer the question once, and then AI now knows it, and then boom, it's in the ethos. For Ramp, it's again, they've got thousands of customers, and they're all spending money on relatively the same things. If they learn what one is, they know what it is for everyone too.

And again, how you allocate these things, sometimes you got to ask the question in a way that's like easily answerable. 400 questions in a spreadsheet. CEO should, I would be upset if the CEO was like, yeah, I pulled them all nighter answering all these questions. like, oh my gosh, what a waste of your life. That's not going to drive the business forward.

Ariel Menche (54:13)
I mean,

yeah, the bookkeeping is a big part of it. And part of it, even before you get to the bookkeeping, you have something called the chart of accounts, which is like what you mentioned with a payroll being one line. You need to organize the chart of accounts in a way that makes sense for your company. An example of a really bad bookkeeping just reminded me of a horror story where the accountant sent over a report and ⁓ there was a line in COGS and the cost of goods sold of negative inventory.

cost, like, which is a positive, it was just, it was hundreds of thousands of dollars a month, and no no idea what in the world this line could have been. And we found out that it was just like, the no, whenever they just put money, they're revaluing the inventory on a monthly basis. And they were just throwing the expenses and kind of like on a dartboard, just kind of like, okay, that's where those expenses are going. Ended up with these negative cogs balances. It was

Alex (55:06)
Yeah, and this is just to tie it up here. I think that we'll probably kind of focus on this one point, then we're going to record more here soon. I know which is like if you don't understand how numbers that you're measuring are going to be used, you're probably not going to measure them properly. And that applies in science. It applies in finance. It applies in business modeling. I get people ask me all the time, of course, right? Like

Ariel Menche (55:06)
Unbelievable.

Alex (55:32)
I'm the pre-seed seed guy who like focuses on business model and people are like, well, how do you build a business model if you don't have any, you know, financial data for the company? And I'm like, how do know what financial data to collect if you don't know what business model it's going to go into? Do we care about collecting data for the sake of collecting data? Like, no, we don't. Again, you have to be compliant. Yes. But don't think that's the most valuable thing you're doing with your operational data. That's, that's fumbling at the one. If there's one takeaway from here, it's that it's that like, again,

your business model mandates what data you collect and how that data is defined. Yes, you need to be compliant. That might be a different function. You might need to be doing this twice. Fine. The accounting rules are old. They're not up to date and up to snuff with all the newest, coolest, fanciest business models and what really economically is going on in terms of how these companies are earning and making money. And so yeah, you might have to do it twice.

And that's where, again, you referenced this earlier of like that data analytics person. In theory, and like I mentioned, they should be working with accounting and with FP &A. But if accounting is doing their thing and it's compliant and it's accurate for the purposes of accounting and tax, great. But if it's not helpful for mapping to the business and being accurate to what's actually happening in the business, then it ain't going nowhere.

Ariel Menche (56:47)
And I think to add on that point, the data analytics must be working with finance for definitions, because you could have situations where the CEO is looking at these dashboards that the data team is putting together, but it does not reflect the actual financial reality of the company. And it just reflects maybe some data sources like, oh, they're pulling from a Stripe integration. Great. Now we're going to rerun some numbers. But in the end of the day, that cash is not in the bank.

where the revenue was just not there, or there's so much bad debt going on and it's just not being caught in those numbers, or what I've seen is just the definitions of balances change. So for example, are you looking at your customers at the end of the month, or are you just looking at a customer who popped their head in the window during the month? know, active customers versus customers that are actually there versus customer who showed up for three days and decided to leave. Like, how are you counting all this stuff? It's not, you know, it's

Alex (57:35)
Not so simple, defining these things.

Ariel Menche (57:43)
you think it would be easy, but and you think it'd be done before, every company is different. Benchmarking is almost waste. Like it's just a waste of time because guess what that other company and this is a you this is a Alex.

Alex (57:56)
I would argue,

yeah, benchmarking is a complete and utter waste of time and no one can ever do it.

Ariel Menche (57:59)
Right, that other company is not your company. That's great. Now

you compare it to yourself to a company that is not your company. Great job.

Alex (58:07)
So they're doing

better than you. What are you going to take away from this? Or, they're doing worse than you. Okay, so now you're just going to give up and be like, no, we're good. Now I can go to sleep. I don't have any desire to get better. Anyway, I'm very anti-benchmarking. think benchmarking is helpful for people who sell data like, know, prequin or whoever, you know, these type of things that are absolutely useless. They are helpful for people who are bad investors who think diagnostic, quick and dirty.

Ariel Menche (58:09)
You

Alex (58:31)
things, it's in the top quartile of this based on this report and somehow you're going to make an investment. it all like a bad investment? Yeah. The headcount growth is growing quickly. The only place that it's useful is when you need to do something for the market. That is market. like sales compensation, like, yeah, you got to know what other people are paying salespeople and how they're achieving.

Ariel Menche (58:36)
⁓ payroll is a percentage of revenue at this company at this stage in this specific sector. I just don't know, man. Maybe you should hire three people.

Alex (58:55)
because you're gonna have to pay those same salespeople that are gonna churn through your doors and their doors. So yeah, it's useful there. But if it's not something that actually is mandated by the market, which again, the ins and outs and the details and the complex ratios, compound ratios inside a company or so, I'm not saying never calculate LTV, but never calculate LTV in a way that you read how to calculate LTV online. Like, this is what the Bessemer report said is how you calculate LTV.

It just doesn't matter. Again, I realized that a long time ago and I created this whole new way of calculating LTV, which is also not useful. The reason to calculate LTV is to compare one customer or one group of customers to another customer or group of customers inside your own customer base to figure out where you should be investing your customer acquisition dollars to optimize for the durable revenue of your company in the long term. It's not

All right, I'll TV this and I'll text that so I can sleep well tonight. Like, yeah, if that's how you're running your business, good luck.

Ariel Menche (59:53)
Yeah, no extra comments on that.

Alex (59:55)
There's so many rants we could go on here.

but we covered a lot of good points. I would say that in conclusion, the things that we talked about today are the culture of finance. What is finance? You know, what is this thing called finance? How does that relate to accounting? What is the cultural and ethos and philosophy behind finance?

What are the different roles within finance? And then we spend a decent amount of time talking about how you can mess all this up because of a lack of clarity of what these things mean, why they matter, how to look at them. And so we'll cover a whole bunch more subjects in our future episodes together. We'll cover horror stories. We'll cover glory stories or whatever we want to call them. And then we'll also get really tactical and give some really clear tactical tips for how you can build your business model.

how you can not mess these things up, how to evaluate outsourced accounting firms, outsourced CFO function, and how to make sure that you're not gonna be totally blindsided, either at series A when an investor asks for something or when you run out of money. Anything you wanna close up with, Ariel?

Ariel Menche (1:00:59)
I think that in the end of the day, if you're thinking of finance, just as getting my taxes done, then I think you're missing out on an opportunity, not just opportunity, but the idea of how you allocate your resources in your company in order to opt optimize your valuation. That's, that's what finances and that's what strategy is. And this is.

goes from not just your unit economics, could also go into your, a CEO or a founder, it could go into how much of the company that you own in the end of the day, right? Understanding the capital markets, the financing, raising equity, or really what I call selling a piece of your company, going into debt. There's dilution in there. There's understanding the return on investment from your personal level. This is all part of the conversation, and that you have to think about it on the company level.

on the founder level, on the employee level, and it's just the tip of the iceberg here. And I'm excited for the future conversations. A lot of work to do.

Alex (1:01:54)
Yeah. All

right. Thank you so much.