PAUL: It’s Paul.

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FLORIN: It’s Florin. What are we grinding today?

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PAUL: We are grinding financial disciplines a founder must have, especially when dealing with angel investors vs venture capitalists. Florin, why do you think that it’s important for a founder to track cost, expenses, revenue streams, basically to track these toughs?

FLORIN: Well, in my experience, people don’t really like tracking anything, and they’re basically very happy to rely on blind luck. And it’s like if I’m tracking something and seeing that something goes wrong, that’s bad. And I want to get that feeling that everything is going good. And I think this is one of the main reasons why people don’t track anything.

PAUL: Okay, so basically if I’m a founder that I have a lot of money, I don’t track some costs because if I have money to pay them, I don’t want to know and to see how much money I spend on coffee, for example, for the office.

FLORIN: Exactly. You do have the money right now and that’s all that matters. Having the funds now seems sufficient, but it’s a common trap, especially for founders funded by angel investors vs venture capitalists. They may not track spending because it feels like everything is under control.

PAUL: Okay.

FLORIN: It’s a really great pitfall that I guess a lot of founders fall into, especially founders that have been funded by investors. They fall into this trap of not tracking anything and they basically have no idea if they’re generating cash or wasting cash.

PAUL: Do you think that usually founders think at cost and revenue streams initially when thinking about their startup, or it’s just something that at some point I might get to if I have the time?

FLORIN: It’s not easy to answer this question.

PAUL: Why?

FLORIN: Because most founders, they do think about costs and revenue streams in the initial planning phase when they write down their business model, especially because they need to present that to investors. But then they either go bootstrapped or they get actual financing. And after this step in their process, they no longer track costs and revenue streams because they’re all in the business plan. So why would I bother with them on an ongoing basis? So I guess the biggest problem comes from funders who quit studying these metrics after actually starting out with their own money or with money from investment.

PAUL: I would be curious, so those who listen to us, just drop us a message in the group because if you ask yourself now, do you know on what your money goes on a monthly basis? Let’s say the top three cost and top three revenue streams for your startup. I would be really curious. I don’t know about you, but I would be curious to see how much of our listeners actually know which are their top three expenses on a monthly basis.

FLORIN: Yeah, I agree. And it should be something… For me, it would be interesting to see that you know the specifics, so you know the exact cost. You don’t know the group of costs, but you know the exact cost where you spend most of your money.

PAUL: Because, for example, in our situation, I remember that as technical founders, we didn’t have any tracking at all of expenses or revenues. Basically, we didn’t have at least an Excel file in which to put the total cost that we have each month. I remember that basically in the first year, we didn’t have anything. In the second year, we started just with a simple Excel sheet in which we had the revenue on one column and the cost on another column, but only as totals. No budget, no nothing. Next year, we compared our revenue with the previous year, so it was a little bit better. Actually, we started doing budgets for the cost and I will get immediately to this part. How was your situation?

FLORIN: I wasn’t allowed to make such an oversight. Basically, when I first started my first startup, I had a guy, he was a financial officer at Microsoft in Seattle, and he was advising our startup, trying to help us get investments and stuff like that. At one point he said, Dude, do you guys really want investments? Then you have to learn what’s inside this Excel sheet. If you don’t know that, don’t even bother asking for my help again. I learned early the importance of understanding every detail within our financial projections to secure investments from angel investors vs venture capitalists.

PAUL: Actually, I didn’t formulate the question quite well. The idea was Excel was in your situation the best friend also at the beginning or was some other tool?

FLORIN: Obviously Excel. It had all of these guys’ formulas inside and we tracked cash flow, churn rate, growth, subscriptions, lifetime value, all of that stuff inside this Excel file. So it was a super huge Excel file. It took me a while to fully understand it. It was quite complicated for me as a first time entrepreneur. It was way too much because I had no training in finance and this was even before I made some studies into business administration, got a mini MBA and stuff like that. So basically all of this was completely new for me.

PAUL: So I think a nice takeaway from here would be that if you’re at very beginning or you don’t have any financial education, just initially talk with somebody about this to get some help.

FLORIN: It doesn’t really matter where you are. There’s going to be finance guys who organize events in your city. Try to find these business events where they talk about finance and how you can grow your business purely based on financial data. Go to those seminars or join some webinars on this. Find a couple of courses and lectures on Coursera and you will find a lot of knowledge. And this is something you need as an entrepreneur.

PAUL: You said about revenue streams, about lifetime value and all these parts. So all of us know that the business model canvas is the most common, if not one of the common tools for the startup founders. How do you think this is related to cost? Does this help the founders to think at the cost from the beginning? Does it not? So initially I’m looking at the business model canvas. Is this part that I’m focusing on or is it ignored?

FLORIN: Many don’t consider their immense time investment as a real cost, which can lead to burnout and financial misjudgment, especially when dealing with angel investors vs venture capitalists. It’s just like those last few steps in your BMC in your business model canvas that you need to complete. And people just do it because they need to complete that part. But nobody actually knows what’s going on inside revenue streams and cost structure. I can give an example. So most of the funders at these events that I go to and I mentor, I ask them about their cost structures and everybody’s like, We’re going to have hosting costs. I’m like, Yes, of course you will have hosting costs. You guys do stuff based on a freaking cloud and you have servers. Yes, everybody knows that. But what about your real costs? Taxes, salaries, office space, internet provider, rent, exactly.

PAUL: Your time?

FLORIN: Yeah.

PAUL: Because I think this is one of the most important costs that the founders don’t take into account, their time. I remember for us, we were working a lot. I mean, a lot. We were like, when we’re leaving at two, three in the night from the office and just doing development. Actually, we had this discussion with a friend of mine who’s a manager in a big company. He was like, What are your costs? I was like, Zero.

FLORIN: We.

PAUL: Were staying in a friend’s office, so we didn’t have to deal with this. We have our own laptops. We didn’t pay for the Internet because it was from there. It was like, Really? No cost? I was like, No, I didn’t pay anything this month. Zero money. I don’t have any cost. I was like, Okay, let’s see. Two developers. Let’s say on average, you work 200 hours per month, 400 hours, or I don’t know how the development hour is now in different parts, but let’s say, or a few bucks, it was like, This is your cost.

FLORIN: Yeah. yeah. It’s actually something that nobody really takes into account because when you start out, you think that you will have the drive to keep it going forever on a cost structure where everything is free except your own time. And then you’ll get to one point where you will figure out that you can no longer do that because you will be overburdened and you will simply not function properly. And in that case, basically, you will no longer have the opportunity to pay the costs. And that’s when your business tanks. So yeah, I think it’s really nice. And I think that a lot of people don’t really think about this.

PAUL: Yeah, because in the end, it’s the most important thing that you have and you actually invested in.

FLORIN: Yeah, and you need to think about it as an investment that has to stop at one point because you can’t drag it on for two years. You may do it for one year, maybe, maybe one year and a half, but you will not be able to push through two years of doing the same 16 hours a day work days. It’s crazy. I’ve done that, so I know, and it’s crazy. And years after that, you will sometimes regret the decisions because you’ll be too tired. You will see that you could have done a lot of other things in that time to earn more money or to develop another business. There’s a cost of opportunity attached to that. So time costs a lot.

PAUL: Cost of opportunity. Can you detail a little bit more here for who’s not very familiar with it?

FLORIN: Let’s say that you have a startup doing something, I know, food ordering or whatever, you dedicate tons of hours to it. You do 16 hours a day gigs to keep that so-called business going. It’s not really a business, but you think it’s a business. And you do this for one year, it doesn’t work. And then you will have a revelation after doing that. Maybe in that time, in those 16 hours a day for one year, you could have worked a lot of different things which would have gotten your next business funded. Now, this is the cost of opportunity because you’ve basically wasted a lot of time, but that time could equal, I know, $100,000. Maybe you would have made $100,000 which you now don’t have because you’ve spent it all on the defective business.

PAUL: Continuing on this idea, I think there is another cost that people should be aware of and should track it, and it’s the cost of acquisition.

Understanding Financial Discipline: Navigating the Differences Between Angel Investors vs Venture Capitalists

FLORIN: This is the problem with time because I know a lot of founders, I know myself because I’ve done this, my co-founder has done this, and a couple of people working for us have done that. It’s like, Yeah, you know what? Our marketing doesn’t cost a thing, man, because we are doing that nonstop and we’re basically acquiring so many users and we do all of that, we do it for free. Yes, but how much does your salary cost? How much does the salary of those employees cost? Get it all together, add all of the taxes, all of the relevant taxes, then add the office space, the coffee they drink at the office, the other benefits that they have, plug in how many hours they work on that free marketing, and then see how much cost is associated in your business with keeping those engines going.

PAUL: And besides this, just think in those hours that you invest in these marketing campaigns, how much money you could have made by thinking at the strategy of the company. Actually, Florin is enjoying the coffee too much now.

FLORIN: Yeah, this is really good coffee, man. What did you get us today?

PAUL: It’s the latest Ecuador from Square Mile. Those guys from London are making great coffee. Actually, we’re not paid by them, so we just enjoyed their coffee.

FLORIN: We aren’t paid yet.

PAUL: Yeah, but if you want to buy us a coffee, just go to buy us a coffee.

FLORIN: Yeah, go to the website, startup espresso. Live, and you will find the link there because we’re good at user experience.

PAUL: And stuff. Now, seriously, on that part, just think of that part, the hours that you invest in doing email templates for the marketing campaign, you could have spent those hours as a founder thinking at the strategy and the direction of the company. So the cost of opportunity here is, again…

FLORIN: Yeah, it’s pretty large.

PAUL: On that part. Yeah. For us, in our example, you were saying you hear about the hours that you invested in marketing. So for us, we’re at a point in which we did the invoices in Excel because we were bootstrapped and we didn’t pay for the software tool for the invoicing.

FLORIN: And then we just… That’s actually great because a lot of founders will go and get expensive tools like $50 a month tools where they make one invoice and that’s just wasted money. Excel is probably better.

PAUL: I would like at some point in the episode to get back to this part of different tools that could cost and you may replace them by something else which is free in the beginning. But in our situation, we were at a point in which we saw that we are doing recurring invoices. Actually, when we were looking at the time that we spent doing certain things during the day, we saw that there is some part that we were investing in doing ourselves, the invoices in Excel. Then we outsourced it to a company, but we saw that it’s even good from a cost perspective for us just to pay for software that is doing recurring invoicing. In our situation, we are using something which is specific to Romania, given the fact that we are selling only on the local market. But maybe do you know something which is internationally that you could recommend for the people, for example?

FLORIN: Yeah, there’s Fresh books. They suck at customer service, I will give them that. But luckily, I don’t really need their customer service too often because their platform is good. This is a great recommendation. But yeah, we’ve been using FreshBooks for a while for the Oasis. Actually, it’s.

PAUL: Pretty good. You open this subject and I think would be so customer support. I f you want to do it properly, I think you have a lot of cost there because it takes you some money. Even if you have a really awesome product.

FLORIN: Look, I don’t want to be one of those finance douchebag gurus that says it’s not a cost, it’s an investment. But most of the time it is an investment. We could make a whole episode about how to deliver customer service, but the idea is that in our case anyway, we grew a lot in the first two years only because we were the best in our market at customer service.

PAUL: More about the customer service and how to do it properly, probably in the next episode.

FLORIN: In our case, it was definitely an investment. It helped us grow, even though we did spend a lot of time doing customer service. And also customer service will help you create a much better product if you do it right? If you do it right. So basically it’s a cost that helps your product become better. It helps your sales get better and it helps word of mouth to go around related to your company. So if you do it right, you can make money out of it. Otherwise, it’s just an annoying cost which you will want to outsource to India like Microsoft does.

PAUL: Hosting. What do you think about hosting from a cost perspective? Should you invest a lot in it? Because in my opinion as a tech person, I think you have, for example, with Azure from Microsoft, with AWS from Amazon, or with a Heroku, for example, you could go with very cheap. I think these parts in which you pay on demand depending on how much you use, it’s really nice in the beginning. It’s not really nice. Why? Because you can’t predict it?

FLORIN: Yeah.

PAUL: You can’t predict it. But you can.

FLORIN: Budget it. Yeah, but on Azure, you can have costs just randomly because Microsoft says it’s a bug and then you will end up paying thousands of dollars during a month. And there are other companies doing this. So it’s not only that one. There are a lot more companies doing this thing from my discussions with other founders. So you shouldn’t really rely on that because you need to make sure that they don’t open up a lot of unused inventory just because they want to hit their revenue targets for the month or their cash flow targets for the month. Now, I think that you should buy, especially if you’re just starting out, you don’t really have customers. You won’t have customers in the next few months because, let’s be honest, you want to really rocket marketing. And it’s much better if you just use a couple of very cheap hosting solutions, cheap but very reliable, like you have in Germany, and then you can start a pretty good machine with €30 and it’s all you need. And it’s a lot better than cloud architecture and stuff like that. For example, we were on Azure Plus on Microsoft’s BIZSPARK program or whatever that was, and we had $60,000 of hosting from Azure, and it was more painful to use.

It got us distracted from building the actual product, and we learned about cloud management and other stuff that we’ve never, ever used. Then we switched back to our very cheap Hetsner servers and we kept offering that service for hundreds of thousands of sites and we didn’t really care. It was a much better choice for us.

PAUL: Building on this part with budgeting and stuff, for example, let’s take some scenarios. Let’s say a very early startup that is working to validate the idea, a startup that is somewhere trying to get to the product market fit, and a startup in, let’s say, some growth phase. The initial one, what do you think should budget a lot? I think that it should budget a lot on development and on the market research, actually the customer interviews and everything.

FLORIN: We tend to disagree on this episode. Actually, I would only budget for customer interviews, no development whatsoever.

PAUL: I’m a tech person, so I still want some money for the developers.

FLORIN: True. You’re going to get stuck in market research, my friend. Yeah, so just market research. If you really want a great piece of advice, all of you people listening to the podcast, I found out that when developing tech products, you can actually even white label license technology at first. Basically, you can have your product built by other companies and then just sell it under your brand. This is done a lot in retail and a lot of the products that you buy on a daily basis. Don’t worry, it’s completely done in tech. I’ve recently found out a lot of ideas and a lot of companies making tens of millions in annual recurring revenue and they are basically white labeling everything and you will not know that those solutions come from them. And it’s really amazing what you can do. If you don’t build the product, you just validate. And once you validate it, then you go and build your own product and actually do the thing. I know it’s a really big shift in perspective. I’m not sure if you can do it across any industry, but if you can, this is the best solution. This is the best idea for validating businesses.

PAUL: Okay. Because actually, the way I was thinking was to build something, test it, iterate, test, iterate. The building was part of the validation, but to validate with some small iteration like… I’ve done that. Small MVPs.

FLORIN: It takes a lot of energy. It is very distracting. I found that to be very, very ineffective. It was for our case anyway. It was completely ineffective. That was not a great solution for us.

PAUL: Let us know if you have experience on these parts, how you did it and if it works or not.

FLORIN: Join our Facebook group and let us know what you think about us. If you would go strictly on market research at first, or if you would try to develop as much as possible while also being lean.

PAUL: As in a lean startup? Yeah, exactly. Like iterating a lot. A startup that, for example, has the initial revenue and it’s somewhere hitting the product market fit here.

FLORIN: By the way, did I tell you… Sorry for digressing, but did I tell you that at one point we spent like… This was in another business, another startup that I never really got off the ground. It’s another story. But the thing is that we were trying to build a digital literary circle where people could get on the platform, they could write their poems, their novels, and then other people would read them. And we’ve basically spent three weeks trying to develop the platform, and then a couple more weeks in which we didn’t work so intensely on this. We didn’t build anything. It was horrible. We didn’t have anything to show for it. And then in one weekend, I single handedly built all of that thing using Body Press in WordPress. All of it. All of our plans, all of our sketches for the MVP, all of it built in Body Press in one weekend.

PAUL: So yeah. No, actually, it’s my first time on a telling me this.

Really nice. So I think that, yeah, we sidetracked a little bit, but I think it’s okay. So here I think it’s very important the background because, for example, in my situation as a tech founder, it would have been more easier to build that stuff from a technical perspective. In your situation, for example, you actually hacked the product, let’s say like that, didn’t develop it, but actually built the product with some existing tools there.

FLORIN: Yeah, exactly. You can totally hack it together. You just want to show people that something is made and something works. Once you know that it works and you start to reach product market fit, then you can go in full developer mode and really start doing that because you will know that you will earn a lot of money which will help you develop the product.

PAUL: Yeah, because I think it’s very important to know that what to build is what the customers want, what the users want, because the development costs a lot. And you don’t want to develop something based on some hypothesis that you didn’t actually test. Yeah. I learned this on my skin.

FLORIN: Me too. I’ve learned it on my skin, on my own actually, after I’ve built two successful products. The third one that I’ve built was completely unsuccessful because I’ve done exactly this. I had the hypothesis, I thought that I tested it right, I didn’t. Then I’ve built a lot of stuff which took a lot of years, a lot of developers, and we didn’t get anywhere with the product. So yeah, that was a huge burn. That was really bad for cash flow.

PAUL: So to join the other two examples that we initially said, we’ll discuss them differently. So there would be a need to invest a lot in market research and customer development, then at some point start to move easily by building the product and growing the product.

FLORIN: Yeah, it’s not nice. Funders usually don’t really want to talk to customers because it’s hard, because it’s out of their comfort zone, because they think that the customers will say that their baby is ugly and other stuff like that. This is my startup, this is my baby, this is my child. I put a lot of passion into this. And then the customer walks in and says that he doesn’t need that or that the product isn’t good. And you don’t really want to hear that about your passion project. And that’s why a lot of people are super afraid of getting out there and talking.

PAUL: To customers. And even more if you invested a lot in developing it.

FLORIN: Yeah, like two years.

PAUL: But, man, it was only our time. We didn’t pay no one.

FLORIN: No, actually, I did.

PAUL: So in our situation, we’re two developers that we invest a lot of time in. Yeah, and I think we started with financials and we got to some disagreements in this episode.

FLORIN: Yeah, I guess so.

PAUL: If there would be a take away that you would suggest to our listeners, like on budgeting and looking at their financials, what would that be?

FLORIN: It’s so interesting. You really need to know what goes into cash flow and especially to plot out recurring revenue, how it keeps growing because in the first few months you will see that you have recurring revenue and it’s annoying because it grows so slow. But it’s like a snowball effect. The more you get into it, the more you acquire customers who are paying on a monthly basis, the more money you will earn overall. So in nine months you could be earning a lot of money, even though during the first three months you see that there’s not a lot of revenue coming out from that. And if the lifetime of a customer, so the time that he spends with your company, with your subscriptions is huge, then that snowball is only going to get larger. Then you need to know how that’s going to be affected by churn because some of the people on your subscriptions will quit their subscriptions and that will negatively affect the snowball that’s building up. That’s what you really need to know. And really make a lot of plans in Excel and see how these numbers go and how they grow from month to month.

Try to place churn there, try to place growth, try to place a lot of numbers. It will help you really predict what’s going to actually go in your business. And the fact that I’ve predicted a lot of things in my business, like we have multiple products across multiple industries, and it’s really helped me in a lot of the moments where we had problems or where we had huge success, I’ve foreseen it because I kept using this model. Nothing really surprises me a lot because I always know what’s going on, so I know what to expect. When something bad happens, I’m like, Yeah, I’m sorry this happened. This is it, but I predicted it. It’s not a big deal. I have back ups, like five back ups for this situation. So if backup one fails, I have backup two. Then if backup two fails, I have backup three. And I have multiple versions of the files where I keep the costs and the revenues. So if something bad, like super bad happens, I have the other sheet in the Excel file or in the Google Drive spreadsheet, and I will know what to expect. If one of my founders or one of my investors asks me, Okay, so if that’s going to go bad, what’s going to happen to the business?

I have another Excel file. I will show them the other Excel file, and most of the time it will work. This is something that I actually learned from one of my investors. You need to be very good at predicting this stuff because otherwise you will not have credibility with your employees, or your investors. And that’s why I really started to be prepared. Now, a lot of things have gone poorly, have gone badly, but I was always prepared for them. And this is incredible. I know a lot of founders who weren’t prepared for anything, and then they suffered a lot just because they couldn’t deal with the problem that appeared. And other ideas are to follow Noah Kagan from AppSumo. He has a lot of great ideas on how to think about unit sales, how to structure unit sales, and how to prepare for selling more units of your product. And I think that his methods, he even sends you an Excel file in one of his blog articles. I think he does a really great job at helping you plan the sales and the sales targets that you are going to make. When we had the most success, it was in those periods where we had actual sales targets.

Now, because we’ve done a lot of stuff lately in the last year, we didn’t really measure those sales targets as well as we used to. And that has taken our business on the wrong path because we didn’t do that. And now that’s what we’re getting back to. So that’s also super important.

PAUL: Actually, getting back to the Excel that I started with. Actually, our latest version and what we added to it is basically the revenue target.

FLORIN: Oh.

PAUL: Nice. Basically. Revenue target and besides revenue target, a profit target.

FLORIN: Because.

PAUL: That was also what we were looking at. I was laughing at some point. I don’t know if you heard me because I wanted to say that as there are the PowerPoint founders which have a backup slide prepared for every question, I think there are the real founders that actually have, as you say, another Excel sheet for a bad or for good scenario and they are prepared with real numbers, with validated data and not just some PowerPoint with three billion dollar market that I’ll take 1 % and we’ll.

FLORIN: Be happy. See, we can agree. I totally agree with this.

PAUL: Actually, if we take 1 %, we have enough money for the coffee. From my perspective, I think just keep an eye on your cost, keep an eye on your development costs, on your hosting, on your marketing, on the development. Don’t develop it unless you’re sure that it will bring value to our users and invest and budget a lot for customer support because doing it properly will not only save you money, but probably bring you money from our customers.

FLORIN: Yeah, and sales targets.

PAUL: That’s really cool. It’s been enlightening discussing angel investors vs venture capitalists and how founders can better manage their financials. Budget money for bad periods of time. I think the budget time for this episode. 

FLORIN: Is almost done. It’s not on the train.

PAUL: It’s all folks. Don’t forget, we’re not your consultants.

FLORIN: We’re not your lawyers.

PAUL: And we’re not your financial advisors. But we.

FLORIN: Are not.

PAUL: We will accept the coffee, so buy us a coffee and join our Facebook group for more discussions.

FLORIN: Yes, and talk to your CFO. He will definitely like to buy us a coffee for the great non advice, non consultancy and non legal advice that we’ve given you in this episode.

PAUL: See.