AI: Accounting Intelligence | Founders, Investors, and the Financial Tightrope

In this episode, Alex Oppenheimer, general partner and founder of Verissimo Ventures, shares his expertise on the critical role of finance and accounting in early-stage startups. Alex discusses the importance of creating an economic model early on, even before incorporating, to understand the value a company delivers and its potential profitability. He also delves into the challenges founders face when balancing aspirational goals with financial realities and the significance of tracking the right metrics for their business. Throughout the conversation, Alex emphasizes the need for clear communication and alignment among founders, investors, and financial professionals to ensure long-term success.

 

• (00:00) - Introduction and Alex's Background
• (01:30) - Alex's Journey and Experience in Venture Capital
• (04:41) - The Evolution of Alex's Venture Fund
• (06:24) - Understanding Economic Models in Business
• (10:54) - The Importance of Accurate Accounting in Early Stage Companies
• (16:31) - The Role of GAAP in Early Stage Companies
• (18:16) - Understanding Revenue Recognition and Depreciation
• (24:45) - The Challenges of Revenue Recognition in SaaS
• (27:45) - The Importance of Metrics in Business
• (28:40) - The Role of Governance in Early Stage Businesses
• (29:30) - The Importance of Audits in Business
• (32:05) - The Role of Founders in Business
• (32:54) - The Challenges of Early Stage Companies
• (38:11) - The Risks of Misleading Financials
• (46:57) - The Role of AI in Finance and Accounting
• (51:50) - Final Thoughts and Advice for Accounting Professionals

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Connect with Alex Oppenheimer
https://il.linkedin.com/in/alex-oppenheimer

Connect with Isaac Heller
https://www.linkedin.com/in/isaacheller

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Creators & Guests

Host

Isaac Heller

CEO @ Trullion | Modern Accounting Technology

Guest

Alex Oppenheimer

Finance nerd, engineer, investor, builder of models. http://Verissimo.vc. Former http://Monday.com, NEA, Morgan Stanley, Stanford.

What is AI: Accounting Intelligence ?

Join Isaac Heller as he meets with leaders in the accounting technology space to discuss how AI and automation are transforming the accounting industry, how technology has evolved, and how AI can help accountants work more efficiently. You’ll also learn how accountants can embrace innovations to improve their careers and lives and get forward-thinking perspectives on where the accounting profession is headed when it comes to new technologies and AI!

There may be errors in spelling, grammar, and accuracy in this machine-generated transcript.

Isaac Heller: Hey everyone, this is Isaac. I'm CEO at Trillian. And today on AI, accounting, intelligence, we'll be talking with real people about real things related to AI and the impact on the accounting industry. Stay tuned. Okay. Hey, everyone. Uh, I'm here with Alex Oppenheimer today. Alex, it's good to see you. Um, Alex is [00:00:30] general partner and founder of Verismo Ventures, a very, very, uh, incredible and impressive, uh, early stage venture capital fund. Um, I've known Alex for many years. I also know that you spent a lot of time at Morgan Stanley, worked on the Facebook IPO. Uh, NEA, one of the top venture capital firms in the world before going off on your own. So, Alex, it's good to see you today and excited to to talk. Good to see you, too, Isaac. And thanks for having me. Alex. Before we get started, on a scale of 1 to 10, how much do you love [00:01:00] accountants? How much do I love accountants?

Alex Oppenheimer: Um, I would say great accountants. Ten out of ten. Not great accountants. Zero out of ten. Uh, it's very it's very polarizing. There's a barbell distribution.

Isaac Heller: Amazing. So we're going to get into a lot today, really around the value and importance of accounting and finance more broadly at the early stage of venture backed companies and even through the life cycle. [00:01:30] But Alex, before we get into all the the debits and credits and, and stuff like tell us a little bit more about some of the highlights of your run at Verissimo. I know you're involved in Monday.com and which is a fantastic story. Just a few of your, you know, exciting high points in your journey.

Alex Oppenheimer: Yeah. So, you know, I have to give credit where it's due. I grew up with a a father who's a, uh, who spent 25 years as a CFO. And so, um, when I said bookings, when I meant billings, I got [00:02:00] called out at the dinner table. Uh, and so sometimes I, you know, I worked in investment banking and venture, but I'm not your standard, uh, banking and venture guy. Just given the rigor that I, I was exposed to and then to this day, am, uh, and have it enforced upon me, but, uh, but, yeah, that's what I grew up with. Studied engineering in college and then and took a actually I took one accounting class. That was it. But, uh, and then I joined Morgan Stanley where they, they kind of teach you what you need to know. Um, [00:02:30] but, you know, I'm a business modeler. That's my that's my background. I, I think about business models the same way that a mechanical engineer thinks about CAD models of how do we create a digital representation of something that exists in real life. And so, you know, you can build whatever financial model you want. Uh, it's always it's, you know, not only is it garbage in, garbage out, but if it doesn't map to the mechanical reality, then it doesn't matter. And if it's also not grounded in the definitions of what actually matters, then you're also [00:03:00] in trouble. So I, I spent two years at Morgan Stanley doing investment banking, and then I spent three years at NEA as a series A, B, and C, uh, investor, mostly focused on enterprise software, and then moved to Israel in 2016.

Alex Oppenheimer: Um worked for a year at a corporate VC and then went out on my own and started advising and started doing this thing, which at the time was pretty new, called like strategic finance, where I've got this semi operational skill [00:03:30] set, having been in a lot of boardrooms and spent a lot of time working with portfolio companies that I could share with them and bring them not just, hey, here's how to create a great deck and a great model to share with investors, but how do you actually build your business better? And so I spent years doing that, and pretty organically came back to the idea of of starting a venture fund. I love working with companies. That's number one. And I just found that working with earlier stage companies, I could have a better and more efficient and frankly, more fun impact doing what I [00:04:00] call preventative medicine rather than like, acute care. Um, the problem is that it's hard to get paid for preventative medicine when there was never an issue in the first place. Much easier to. As I always say, the paradigm is the personal trainer versus the heart surgeon. Um, and so the question is, how do you I would say, how do you get how do you do.

Alex Oppenheimer: Well, and, you know, create value as a, as a personal trainer. And the answer is you you train Tom Brady. That's the, uh, that's the answer. And you get a piece of the upside. And so, you know, companies need help early even if they don't know it. Um, [00:04:30] and so and then rather than trying to negotiate them, I just realized that it's either, you know, if I'm going to be the financing, the finance and financing voice, then I ought to I ought to show up with financing. And so I decided to, uh, raise my own early stage venture fund. And so now we're we launched fund 1 in 2020, fund two and 2022, and we're doing early stage enterprise software investments in Israel, the US and Europe. Um, we have team members in the US, team members in the, in Israel. [00:05:00] And then, you know, a couple advisors in Europe. And, uh, I guess that's the that's the story I had the I had the chance to, I guess, skipping back a little bit, but I did have the chance to work with Monday.com and, and a handful of other amazing companies and really rolling up my sleeves and getting a lot deeper than I. I did just as a, a VC board member, board observer, and that really helped crystallize what a companies really need to operate, not what do they just need to raise money.

Isaac Heller: Got it. Amazing. And and I can [00:05:30] you know, Alex and I met in the early days, um, when I was starting truly in and, you know, you kind of had this really unique skill set. I think you called it strategic finance, uh, where you could both, uh, invest and advise, but also help with a lot of the core finance function as companies get off the ground. And there's really nobody there's really not too many people doing that in the market at that time. Um, and I think now you see a lot more people trying to get into that strategic finance and in the early stage [00:06:00] startup. Now, Alex, you what I love about you is you're an engineer, a Stanford trained engineer. And like the way you talk about businesses is like this economic model, which kind of reminds me of when I was in physics class and they were teaching me velocity and acceleration and all that stuff. I didn't really remember. I'm sure you know better, you know, maybe some talk or some momentum or something like that. But like I tell like, just tell me more. How do you advise these early stage companies [00:06:30] on this economic model? Like how do you put it in, um, plain terms, especially for an early stage company that really has no clue and probably isn't even thinking about economic models, you know, out of the gate?

Alex Oppenheimer: Yeah. I think, um, I think the really important thing for. Founders to understand when they're even deciding to start a business. And again, as investors looking at founders, also really important that the reason you invest in a really early stage company is because there's a big market opportunity and the founding team [00:07:00] is incredible, and maybe they've got a great product already that people like using. You don't invest in a company because you think that the the founders are going to do a great job of managing their financial model and staying on top of their metrics like that. That could be a bonus, but that's not usually the thing that attracts you. And so there's a, you know, running a company requires a ton of different functions. And you know that because down the road, if you look at a public company and you look at G&A, it's a big budget [00:07:30] and they have a lot of people and people say, oh, well, those companies need to do more things. And in my experience, it doesn't matter on the stage of the business. Yes, if you're a public company, there are more things you need to do than when you're a private company. But practically speaking, you got to do everything. And if you say, oh, that doesn't matter and we'll deal with it later, you're just going to you're going to develop this deficiency that's going to be either difficult or painful or catastrophic to try to fix down the road.

Alex Oppenheimer: And so, again, practically speaking, [00:08:00] you've got a CEO and everything is the CEO's responsibility. And, you know, maybe we've got a CTO and a chief product officer, but that's kind of it. And. That means that doesn't mean that those other things that you might hire later CFO, VP of finance, like chief accounting officer that you might get later. It doesn't mean that that stuff doesn't matter now. It just means that it's not a big enough task that it requires having a person full time on it. But what it does mean is then it's the CEO, CTO, founding team's responsibility. And so [00:08:30] and but it's it's not their strength. And so you've got what I call it a non core competence right where it's really important. But it's not the main driver of value in the business. But if you mess it up it can be a major detractor for value later. And so frankly that's our you know that's our strategy is we're not going to help you build your product. That's your job. That's why we're investing in you because we think you're awesome at that. You know we're not going to help you you know, do your your your sales. Like again we're not going to not help with that stuff. We'll give advice where we can, but we're going to help you [00:09:00] with the blind spots, the things that you don't quite. Focus on yet, or really shouldn't focus on at the really early stage of the business.

Alex Oppenheimer: And one of those things is finance and accounting. So I always say that step one, step zero, before you even decide to start a business, before you incorporate, think through what value are we delivering? And how much is it going to cost us to deliver that value, and how much are going to be people going to be able to be willing to pay to receive that value? And if you can't [00:09:30] answer that question clearly, then you probably shouldn't start the company. Now again, instrumenting that, building that up, all that. Yeah, that's a lot of work. And that's the process of building a company. But you know, it always starts again. I'm a I'm an engineer. I'm a finance guy. Like it starts with the model. People say, well, isn't it too early to build a model? We don't even have any numbers yet. I say, how are you going to know what numbers to track if you don't know what model they're going to end up going into? Because we don't track numbers for fun. It's not. It's not just like a who who has the most metrics. What can we actually do [00:10:00] with them. So I guess that's a long answer to your, uh, relatively short question. But it starts from even before you start the business of what value do we deliver? It's very economic focused. And, um, is there a business to actually be built here?

Isaac Heller: Got it. Okay. Awesome. So. So, Alex, um, you know, on the economic model you're talking, I'm picturing a founder that has this great idea, this great enthusiasm. And the challenge that you're giving [00:10:30] to these, this founder or this team is to create the economic model, really for the sake of thinking through your KPIs and even setting up a framework for future tracking, even though, you know, there's, you know, a few customers or some early traction. Right? So I hear that now, let's say let's say you do write the check. You know, Alex, let's say you you lead around or you, you join, call it a $3 million seed round. Right. This company has between 100,000 and 1 million in recurring revenue. [00:11:00] Um, how much accounting do you actually expect from them? Like, do you expect them to have, um, a balance sheet, cash flow, income statement? Do you expect them to have an audit? Like what is what is the definition of the accounting that's needed or expected at that stage?

Alex Oppenheimer: So most of the time. And what we encourage our, you know, early stage founders to do when we come in from day one is [00:11:30] you got to get some outsourced bookkeeping accounting help. Um, you're not going to hire that. You're not going to hire controller from day one. That's not going to be your fourth employee in your company unless you're running an accounting, uh, software startup, maybe. But we often see that, you know, people use these outsourced accountants, outsourced controllers, outsource CFOs, and it's a mixed bag. You definitely don't need an audit, I'll say that, but it's a mixed bag. We see some outsourced CFOs [00:12:00] who try to do more, but then they're actually really lazy about it, and they just plug everything into some template model that has no bearing on the business. They try to do a bunch of modeling for the company without really understanding the business. And and then they sacrifice quality on just getting the historical numbers right. I've seen this many, many times where I'm like, we don't you know, they're trying to build some forward looking model with some really basic, you know, assumptions and no [00:12:30] mechanical bearing on the reality of the business. And meanwhile you look at the historicals and they just don't make sense. And if you show that to a downstream, you know, series, a investor and you're historicals on the cost side are not right.

Alex Oppenheimer: Like, it's just it's a bad look. So that stuff's got to be right. What I always encourage is collect more data. And one of the things that I've seen time and time again is I'm like, okay, yeah. Before you send anything to potential new investors, like send me the PNL and they'll they'll [00:13:00] share it. And it has one line that says payroll expenses. Company has 12 employees and it just says payroll expenses. And that's like 80% of their costs every month. That doesn't tell me anything about the business. Ultimately, we want to understand in the early days of the company is what is the economic force driving this business and the potential that it represents. And that economic piece honestly becomes less important as a business scales, because [00:13:30] the cash starts to fall out and the traditional accounting metrics start to do a better job of describing what's going on in the business. But early on, like if you can't prove that your unit economics positive, you've got a big problem. And if most of your cost sits in your employees, you need to do this difficult exercise. And I know, Isaac, you've lived this where okay, we've got four employees and one is the CEO, and the CEO does product, the CEO does HR, the CEO does sales, right, like the CEO [00:14:00] does finance like how do you categorize that into, you know, sales and marketing R and D, G and A like it's not so easy.

Alex Oppenheimer: You know, I've had companies say or CCaC is zero right now because, you know, I do all the sales and I'm the founder and CEO and I'm like, your your time is extremely valuable and expensive. Uh, it's not zero. And we need to figure out, okay, maybe maybe we don't know exactly how to calculate that. Okay. You're spending, you know, 18 hours a week out of the 70 [00:14:30] hours a week that you're working on sales and your salary, but that doesn't really represent your value. What it's really about is you think through, what's this going to look like when we have a sales team and it's much easier to intuit around CCaC. What is your customer acquisition cost often than it is to be categorizing things accurately with a sub size team into sales and marketing expense. And so you've got to kind of live in these three worlds, right? World. One is cash. [00:15:00] Like, is money coming in? Is money going out like that's really important. Number two is the accounting reality. Like, are your books accurate? Are you doing cash accounting. Are you doing cost accounting? A lot of founders don't even know which one they're doing. And the outsourced finance teams that they bring on make a lot of mistakes. And I think a lot of founders I work with, they're they're often like blown away at the lack of quality.

Alex Oppenheimer: They're like, we thought this would be solved by now. [00:15:30] Like, shouldn't this shouldn't this be easy? And the truth is, the more detail you get into, you realize, like, it's really not that easy. It's not that simple. There's a lot of judgment calls, there's a lot of nuance. And and then the other thing that really matters for an early stage company is that economic model, where I think the mistake that you might make, even if you start with the economic model, okay, are we delivering value? Can we get paid for it? Can we deliver it for less than it costs us to, to make it and to sell it? Um, you say okay. Yes. Check. And then you never come back to feeding that model. It just becomes the [00:16:00] GAAP accounting model. And that doesn't represent the business honestly, until pretty late in the game. Like it's an important picture of the business and it is a strong reality. But again, we live in a world of unit economics and the venture game. And the whole point is that, yes, we're unprofitable now, but let me show you why this $4 million a year we're spending on technology investment is going to stay at $4 million a year, when our revenue goes from $100,000 a year to $100 million a year. And that becomes really, really interesting. [00:16:30]

Isaac Heller: Got it. Okay, I have a I have more of a, uh, theoretical question. I've actually, you know, um, been on a couple of these podcasts before where I've heard people, um, one of David's friends especially bash GAAP, right, the GAAP reporting standard. So we're not going to do that, but we are going to ask some questions around the kind of the viability and usefulness of GAAP. So you talked about like as a early stage founder, at some point you will transition from what you [00:17:00] called cash to traditional accounting. Right? And so when I when you say traditional accounting, I'm thinking then you have to move towards, uh, kind of like GAAP reporting IFRS if you're international. Um, I guess one question I have is do you think that you talk about economic reality a lot, like do you think that gap is closer to economic reality than cash, or is it just like something we have to do, or is it a little bit of both? Um, what is that? The good news [00:17:30] is, like, do you actually see a better picture of the business?

Alex Oppenheimer: Yeah. So in most businesses, especially technology businesses, especially software businesses on the cost side, the good news is that it's pretty much the same. Um, you might get some net terms on something, but most of your costs again, are employees. So that's that's not like a big difference between the accrual and the cash side. So that's simple. Um, I, I have good things to say about GAAP. It just happens to be like 90 years old. And I always say [00:18:00] to people that what I think, again, not an accountant, but the two biggest innovations of because what was there before GAAP, right. It was just cash accounting. What money comes in, what money goes out. And so what I talk about is the two best innovations of GAAP are revenue recognition and this this concept of revenue versus just when cash comes in and then depreciation and having amortization schedules. And on a revenue side, again, a lot of people don't get what revenue [00:18:30] is. Revenue represents what's earned. And we do that by when it's delivered. Now again you step into the software world like especially SAS. Like what does that even mean? Um, the truth is that software is service. So it's actually not that complicated. But the way that it's priced, the way that it's sold there ends up being some confusion there.

Alex Oppenheimer: Um, but it's a very powerful idea. This idea of revenue, it's a it's a again, correct me if I'm wrong, but it's an invented concept [00:19:00] of revenue. And I think that's a great innovation. And then having depreciation amortization just gives you a much better understanding of what's really going on for a business. What are they earning and what are they using. Right. You buy a truck for your business, you're going to depreciate it over ten years. Like you, you weren't unprofitable in that year, right? Like that. You bought it just because the cash went out the door then. So I, I think that gap's important. It has its place. But with the onslaught of new technologies come [00:19:30] an onslaught of new business models. And we can use those concepts that gap pioneered and really take them to the next level. Now that definitely creates opportunities for silly made up. I mean, I'll pick on a company that just announced they're filing for bankruptcy, community adjusted EBITDA, like I actually I get what they were trying to do. Wow. You know, there's another company that they said they had R and the world was like, you are not [00:20:00] a software business, you do not have R. But if you really understand what R is annualized recurring revenue, they do have R.

Alex Oppenheimer: They just don't have the margin profile of a software company. So there's all these, um, these things. And I think it's good to push the limits on it and see, you just have to make sure that you're fundamentally grounded and sound in the concepts and theory that are driving any of these newer, more innovative metrics. But I think that, you know, yeah, every once in a while [00:20:30] you get like just a vanilla down the middle software company, and they're selling on an annual subscriptions and it's like, really? Okay, like this. This cake has been baked before. We don't need to reinvent the wheel. It never works quite as well or as simply as people think it does once they start actually writing contracts. That's another thing that's really important, like what is in the contract, and is that going to look good in your R math? Is that going to look good in your your recognized revenue calculations. So um, yeah, [00:21:00] there's a lot of philosophical stuff. And that's why I actually, you know, when I talk to my founders, I explain to them what I just said about what revenue is. And, you know, what verbs do you use with revenue? Like, do you have revenue? No. You you earn revenue and then you recognize revenue like you don't have it.

Alex Oppenheimer: You don't get it. Um, you know, you're not at it right now. You are at r, um, and I can talk about R and [00:21:30] how people make all sorts of mistakes around that. And also, you alluded this to this before when you mentioned physics. I, I have a slide in one of my, uh, presentations that I've been working on for ten years that talks about different elements of SaaS where I have accounting terms and integral symbols on the same slide. Um, and I can I'm happy to get into that more of what that means. But I think that's the sort of stuff that it, it, it creates an opportunity to push [00:22:00] and to get more creative, but again, stay grounded in reality. It's like, you know, I always say, um, people say, oh, like, is it art or science? You know, like often when people are talking about early stage investing, is it art or science? And I'm like, it's art. But there's this place called Julliard. You know, art isn't just whatever. People feel like there is a method and there is a skill and there is such thing as intentional, good, fundamentally sound art. So it requires [00:22:30] a lot of education and understanding to do good art, in my opinion.

Isaac Heller: Amazing. I love it. So, uh, you heard it. Here. We've got a vote. We've got a pro gap vote. Um, on this on this podcast today. I'm with you, Alex. I do think it needs to be updated like gap, I think. Yeah, for sure. So. Well, we'll talk about it in a second. Like I, I think the the point is.

Alex Oppenheimer: Why don't we have a definition of R in gap. That's a question that comes a lot. And if you actually [00:23:00] saw what these cpq systems look like and CRMs look like and sales contracts look like, you would know why we don't have a gap definition of R because it's like it's it's it's just it's too complicated at this point, at this point to really understand. It's too nuanced. There's really too many variables involved. Every business is different. I talk to founders too, about are you an MRR business or an RR business like, well, what's the difference? I'm like, the difference is a factor of 12, [00:23:30] objectively speaking. In fact, R is calculated based on just looking at your monthly revenue and multiplying it by 12. But it could also be looking at your weekly revenue and multiplying it by 52, or your hourly revenue or whatever you want. But when you talk about R there's this annualized idea. And so if customers are coming and signing up for two months and then leaving and had so half your customers are doing, then can do you really have annual can you annualize that like. No it's not it's not [00:24:00] going to last year. Now again, if you have 100% of your customers on one year plus contracts, then like, yeah, that's r great. Like you can annualize that. So there's a lot of these, uh, these little points in, you know, challenges that come up.

Isaac Heller: Got it, I hear it. So I guess for for those, um, you know, founders out there, just in terms of the two things, uh, Alex talked about one revenue recognition and two depreciation. I [00:24:30] find like in, in, in, you know, my experience, like there's not that much to depreciate in the early years, like maybe you get some equipment. Wouldn't worry too much. But as you start to get into bigger things like trucks and leasing and stuff like that, the depreciation becomes super powerful. And then on the revenue recognition side, uh, yeah, rev rec and SaaS is huge. So I'll just give you one example. Like if you have, uh, an opt out in a contract, let's say you're counting it as one year revenue, but they have an opt out after six months. Rev [00:25:00] GAAP rev rec will wipe out the last six months because you have an opt out clause. And so, you know it's interesting like in retrospect when you're an early stage founder, you have a lot of pilots. You have a lot you might like, especially in enterprise software. You have a lot of potential customers that have they have an opt out, or you might have like two specific obligations to give them. And if that was in a GAAP revenue model, like it would be discounted. But to Alex's point, like I [00:25:30] think the good investors are really looking for, you know, how you think whether you're able to secure that kind of the economics of the business and the potential in the future. Now, when you when I'm interested, Alex, you know, you talk about GAAP evolving. Is that in like you talked about two things revenue and depreciation. Can you think of like a third or a fourth thing where GAAP should probably get on this pretty quickly, whether it's on the revenue or the expense side? Like [00:26:00] what's a what's a rule we should we should push for in GAAP right now. That would help, you know, an early stage investor or really any investor, um, understand a business better.

Alex Oppenheimer: I'll speak on the conceptual side, even though I know that this is not entirely practical. But one of the things that we run into a lot is, you know, what we call kak attribution, right? What's the customer acquisition cost, and how do you attribute that to the customers that you're actually acquiring? Now, instrumenting this for a business [00:26:30] is very, very difficult. But the reality is that a lot of people are like, oh, like what's your you know, let's say what's your kak payback or what's your, you know, your SaaS magic number. And they just say, oh yeah, you just take the sales and marketing expense from the previous month or the previous quarter or whatever you have. Now, if you are a two week sales cycle business, then you would actually want to take your sales and marketing expense from the same month, which is again, in theory, what you would what you should do. And then if you're a year [00:27:00] long sales cycle business and you probably want to average that sales and marketing cost over the last year based versus when that deal is closed. And so if you would actually align the kak with the economic reality and the timing of the business, which again, very difficult to do this, nearly impossible, the instrumentation is very, very difficult. Um, this would paint a much better picture of the company. I'm trying to think of something maybe a little bit more doable than that, but, um. [00:27:30] Uh. That's that's the first thing that comes to mind is like solving that kak attribution issue.

Isaac Heller: I love it so. And I'll tell you. Um, Kak, you've mentioned it a couple times. Customer acquisition cost again. There's just a plethora of metrics. You know, we call it finance. I'm using air quotes here. Um, but it's really just the all the different metrics like Kak and IRR that are non-GAAP but that are really critical to running businesses, especially in, [00:28:00] uh, in SaaS and software. Um, you know, Alex, you mentioned like the founder being included in Kak for anyone out there who's who's entrepreneurial or working with entrepreneurs, uh, we're always in sales at the beginning. Um, I am included in kak, but later on I still do selling. But our kak is low because I don't tell anyone I'm involved. You know, usually people like, you know, they try to be the hero and stuff and like, you know, talk about the sale. But if I pretend like I'm not selling, it's actually better for our kak. So just [00:28:30] a little, just a little hack there. And you make your sales and your marketing team look a little bit better. What you mentioned audit earlier. You said you don't need a financial audit. Right. Let's talk a little bit about governance. Right. Because you know, writing a seed check has to be pretty vulnerable, especially the first few times, right? Especially when you have your own fund. Now, um, you're giving money to someone who's likely never run a business before. It's a lot of money. I mean, we we see on TechCrunch, like 3 million, 5 million, 4 [00:29:00] million, like every day. That's a lot of money that that you're entrusting to someone. And they're they're like sacrificing a lot of their livelihood just to focus on this business. So like, okay, I get it. You don't need an audit, but maybe what type of governance is needed? Um, at that early stage in your responsibility as an investor, especially as it relates to finance? And then at what point, what's the tipping point for needing an audit from your perspective in these businesses?

Alex Oppenheimer: Yeah. [00:29:30] So I think there's a big question on, um. What actually is an audit. I assume most of the listeners here have at least a probably a strong idea of what that is. But, you know, I think that when you're invested in a company, someone needs to be. You know, providing some sort of oversight on what money is going where. You know, we just invested in a company. I say company, right. We invested in a very young founder. He just [00:30:00] graduated from college, very, very smart engineer. And he's like. Well, how much should I pay myself? Right. Am I glad he asked? Because he's like, well, if I accepted my job offer at, you know, top five global tech firm, they'd pay me this much, so I should pay myself the same. And I'm like, oh no, absolutely not. Like not even close, buddy. Um, and and so there a lot of it comes down to, again, most people, when they invest in a really early stage company, they may not want to join the board. [00:30:30] The founders may not be interested in having them on the board. You know, advice to founders you want to work with people that you would want to have on your board. Now, how you set up your governance for the long term success of your business is a different conversation, but you should want to be engaged. And so what I always recommend my founders, even if we do a safe round, is create a quasi board.

Alex Oppenheimer: That's what I call it, and bring together your key stakeholders, you know, whether you know, it's the whole founding team or even just part of the founding team or another employee who's really instrumental, and then any [00:31:00] really key advisors that are involved and, and then your main sources of capital and just come together. And it solves so many problems that when you split it apart, get really messy. You know, one of those problems is, is governance, like people don't not everything's nefarious, but people make mistakes. People have different expectations and it results in a lot of potential gaps. If you're not meeting regularly to discuss something, you know, I like, there's situations [00:31:30] where, you know, I was on with a founder and we don't have a board, but, you know, me and one other investor are like the quasi board, and he's a sole founder. And he's like, you know, I need to move for this and this reason. And in order to, you know, do take care of, you know, my family needs this and it's going to cost us more. And like, okay, the fact that he asked is what's important to at that stage that he has. I said, look, if you need to pay yourself another $2,000 a month so that you can live in a place where you and your family will be just more [00:32:00] productive and better off, then that's fine.

Alex Oppenheimer: Like, do that, but it's good to ask. So I think creating that relationship is the most important thing. Ultimately starting a company. You know, someone asked me about, oh could you in an early stage round, you know, spinning out something where the founder still owns the services piece, but then they raise money for the other? I'm like, no, absolutely not. Starting a company. And, Isaac, you could attest to this better than I can. Starting a company is a tremendous amount of work. It's a huge undertaking. Even if you're really, really good, [00:32:30] you're definitely going to see a lot of challenges and you still may not have success if not everyone is pointed in the same direction, which requires ability. It requires willpower and desire, and it requires communication to make sure that happens, that everyone's pointed in the same direction as soon as you, you know, someone's motivated by that and someone's motivated by that, and someone doesn't understand this and why you did that, then you're just asking for trouble. And it's like. Early stage companies. The whole point is that they move really fast, [00:33:00] otherwise there'd be no reason to do it. You know, at one time a founder said to me, hey, you know, we have six engineers working on this problem. And, you know, Intel puts 600 engineers on it and they couldn't solve it.

Alex Oppenheimer: And I was like, yeah, that's it's kind of the point, right? Some problems are six engineer problems and some problems are 600 engineer problems. And there's very little overlap between the two. The whole point is agility and moving fast. And so if you think about an airplane traveling at 600 miles an hour, or the spaceship, if someone is, if some part of that airplane [00:33:30] is pointing in the wrong direction, right. One of the ailerons is not connected like you're, you're done like you're, it's you have a huge a huge problem on your hands. So I don't think that early stage companies need an audit exactly when you should get your first audit. I. I don't know if I can answer that, like, you know, in an absolute way, but an early stage company, it's not going to tell you a lot like I have. We have to have our fund audited. And the audit report is comical because [00:34:00] our operations are extremely simple as a small fund. So it's not worth the money. Um, it's not worth the overhead of doing that, but but a big but like I as the investor and a lot of investors may not do this. Like okay, let's look at what your customers are actually paying you. And like let's make sure we're all on the same page. Let's make sure that, like if you tell me you have an annual contract, as investors, we all assume that means it was paid up front as an annual contract.

Alex Oppenheimer: If [00:34:30] it's not, then we've got issues and we've got a miscommunication there, and our expectations are not going to be met when we realize that it churned after four months, even though it was an annual contract. Huh. How can that happen? There's just a lot of opportunities for for things to go wrong, so I don't I wish I had a better answer. The best answer that I have is that founders should educate themselves on some of the core accounting concepts. It's not that hard. [00:35:00] It's not that much work. We have a thing on our website at Verissimo VC in the resources section that's, you know, accounting definite like SaaS related accounting definitions. And you can look at that for ten minutes and you'll go and it just goes down. It says, you know, what is GAAP revenue? What's RR, MRR bookings, billings, collections backlog, deferred revenue and reoccurring revenue and all of those things. It just again takes ten minutes to read are okay. So now I have a better understanding of what that really means. And [00:35:30] you know, people often take maybe a little too much guidance from their investors. They'll let things slide like so. Yeah, that's my long answer to a short question. Yeah. No.

Isaac Heller: I, I, I really appreciate it. I mean I'm, you know, it's it brings up a bigger question. We won't we'll unpack it another day. But it's like you really don't need an like it's referring to an audit as overhead. Right. Like I am an investor. I'm a steward of capital. Like that's what you are. And [00:36:00] you are not that concerned with the audit at a certain stage. Right. And so maybe it's a few million in error or maybe it's 10 million, maybe it's 20 million. But it's this idea that what you care about is, is, is more just the compliance aspect, the company or the founder, like being accountable for, uh, risk in the business to investors. And so you kind of have to self define the audit, I guess you could say at the early to Sage like [00:36:30] what actually needs to happen. So it may be different for different businesses. Maybe it's less financial in the early days and more just around the, you know, individuals in the room. I also think it's interesting because you talked about outsourced accounting and outsourced bookkeeper. I mean, now we're at series B, uh, our company trillion, and we have these board meetings. And at first I was like, are board meetings, you know, check the box.

Isaac Heller: But now they become super valuable. We get super good feedback from investors. And also one of our lawyers helps [00:37:00] organize them, right. Like someone on our legal team. And it's free of charge. It's actually a free service. Um, of course we pay them for other things, but I'm saying like they help organize board meeting notes, they get everyone together. They do a lot of the scheduling and stuff. So that could be something for like earlier stage finance and outsourced bookkeepers to think about is just talking with that early stage founder about, hey, do you want me to organize a 30 minute, like, advisory board? Um, and I'll just I'll just put together like [00:37:30] a couple slides. Would that be helpful? Because a lot of these founders and entrepreneurs, they don't have time, but they could build so much goodwill and so much better discipline, like with these practices. So I totally I totally hear your point about the audit. Now, my question on that is more like a hot button, which is do you like you talked about WeWork earlier, right. Community adjusted EBITDA. And that's probably the poster child for all of this.

Alex Oppenheimer: But.

Isaac Heller: Is, uh, private, [00:38:00] you know, kind of venture, uh, investing are companies that are venture backed, becoming more risky because of lack of compliance and internal controls. I mean, we've seen we've seen fraud, right? I mean, again, these are extremes like Theranos and WeWork. But also you you realize this, like there's some early stage companies that mess with financials and they'll raise like a series B or a series C, and it'll be semi fraudulent or at least misleading. And so [00:38:30] do you see like a certain trend one way or another, or is it just proportional to the amount of companies that are getting back these days?

Alex Oppenheimer: Yeah, I think there's two main drivers at play. The first is that high growth early stage companies are, by their nature, aspirational and to be aspirational means to live in a future reality. And that's just asking for trouble. We're not there yet, but we think that's what it's going to look like. And by the way, that's what R is. [00:39:00] We're saying what will we have earned in a year if everything stays the same right now? So. That's one element. The other element is the kind of the cult of the founder and the UN. I don't know what to call it. Unhinged charisma that can be encouraged and promoted in the founder community. You know, there's a high overlap of people who are wildly charismatic, but [00:39:30] who do not have the moral compass to take on the responsibility to properly channel that charisma into something that is, you know, on the straight arrow, I guess. And so you combine those together and like it was like, oh, these founders, they lied about this. Like, look, the stuff's not accurate. Everything's a projection, but there's a line and there's a, there's a clear line where it's like, yeah, that's okay. You know, and then there's another line where it's like, yeah, that's not [00:40:00] okay. I one time had a I was, you know, looking I was like my second meeting with a company that I was looking at advising a few years ago and.

Alex Oppenheimer: I was sitting with. I had only met with like the CEO and the CEO. And then I was sitting with some of the other members of the team, and they were they were on the data team and they were driving and reporting financial metrics. What's our payback? All right. That's a that's an operational KPI. But it's a financial metric. It really speaks to the financial [00:40:30] health of the business and the customer base. And they were not being. That it wasn't any malice. There was just a complete and utter lack of understanding of what is revenue and what is cash. And they said, yeah, our payback is X number of months because some people sign up for multi month plans. I was like, huh? Like. Kak payback is again. There's no rules on this. It's not a gap definition, but [00:41:00] the the community generally understands that it's based on earned revenue. So if you're saying that just because you got someone to pay and you have a low margin or high margins, you know, low marginal cost, then like, oh yeah, then we got our we got our kak payback. Like, yeah, I mean okay, fine. You got your cash back and it took this many months.

Alex Oppenheimer: Yeah. But yeah let's just talk about both right? I had another situation where the founder he was talking about, um, you [00:41:30] know. Actually a similar thing like on how to build your cohorts. And it was whether the cohorts are based on when the the user signs up or based on when the user becomes a customer and actually starts paying. The problem is that the general understanding is that cohorts do not grow. That's kind of the definition of a cohort. Right? So we have these people that signed up in October of 2023. That will always be that group of people. [00:42:00] It will never change. People can just leave that cohort. And that's what people imagine now. He wasn't being disingenuous. He wasn't trying to deceive anyone. But it's a fine line to walk. And so my I'm, I'm a huge proponent of like more data, like you have a strong argument for why you think the sign up cohort is a valuable leading metric for your business. And I hear it and you're correct that it is, but you at least need to call it out for what it is, because when you start reporting, you [00:42:30] know, net revenue retention and things like that. Then again, people expect one thing which oftentimes people don't even know what to expect, like net revenue retention has become all the rage or net dollar retention.

Alex Oppenheimer: And there's 17 different ways to calculate it correctly and another 20 ways to calculate it incorrectly. It's like this company has 142% net revenue retention. And it's like, you know, they're probably some people listening to this going, no, this is how you calculate it. Like, are you sure? Right. There's no there's no legal definition. Um, and it's different for each [00:43:00] business. So anyway, that's um, it's important, I guess, again, to just keep everyone on the same page, track more data. I think, like Isaac suggested, it's super valuable. Early days have bring in that outsourced accounting team with your investors because that person's not on the team. The CEO and them are not sitting next to each other. And so when that then goes to the investors and that person's not in the room, and now the CEO has to represent it and it's just [00:43:30] asking for trouble. It is asking for trouble. I had this with a company recently. I'm a small investor in a company and like what they were showing was just not helpful. It wasn't inaccurate, it just wasn't helpful. And it didn't look good. And like I'm like, here's what people are going to it's going to stick out and it's going to look funny. And and then you want to change, like like if you change your projections, if you're a seed or series a company and you go and you raise money and say, we're at 2 million of R, and we're going to grow to 8 million of IRR, and you [00:44:00] raise money at that moment, and then you only grow to 6 million of IRR.

Alex Oppenheimer: People are not going to be that upset. It's fine. Like you tripled. Great. It's all good. Like yeah we thought we were going to do eight. You know we did six. All right. That's still great. Like you know yeah someone might get upset but that's their problem. It's fine. And that's all in the realm of being aspirational and living in the future. And you got to hope for the best. Otherwise you're in the wrong business. But if you're changing historical numbers, cost, [00:44:30] historical costs especially, that's a big red flag, because now I can't trust anything. That stuff should be simple. That stuff's pretty objective. What did we pay for? Like, okay, okay, we got a refund later. Like for $600,000, we got a refund. Like, no, we didn't. You know, like, that stuff's got to be right in order to engender trust. And then the discussion happens to make sure that we're all on the same page and what we're looking at in the future.

Isaac Heller: Got it. So fortunately, [00:45:00] you haven't had to deal with the, uh, you know, pre-IPO, uh, EBITDA games or I guess, like the fake blood banks or whatever else is going on. But like, you know, more about more about the founders first, understanding what these metrics mean and maybe being a little bit vulnerable to debate them. Like you could put the data up in front, but you you have to agree on what you know, kak payback is or what the cost side is. And so it's not really. Yeah. You know, it's not really as much [00:45:30] of a concern of fraud. It's more like let's make sure we're talking about the same thing. Uh, because it could be it could be a slippery slope.

Alex Oppenheimer: Let me just give two more examples on this or like 1 or 2 more examples, which is a tendencies of a founder early stage like one tendency is that they'll see some blog posts that talks about, oh, here's how you calculate this. And then they, they take that as if it's like a legal definition. And then they, they want to play a game around it. Well, it will look like this if we do that. And it's like it doesn't matter what it looks like, it matters what what really is going [00:46:00] on on the ground. And so one example of that, and Bill Gurley did a great job of calling this out years ago that, you know, all these consumer internet direct to consumer whatever companies. And like service businesses. They were saying, hey, you know here's a we had someone sign up for $100. And then we gave them a $50 discount. And they said, yeah, that $50 is marketing. Like, no, that's called contra revenue. And it just it it comes out of revenue. [00:46:30] It's you never earned it. It never existed. And so you can't annualize against that and try to like hide stuff and play these games. Got it.

Isaac Heller: And by the way, to to full circle, revenue recognition does account for a lot of those things. Um, you know, customer acquisition, certain types of, um, revenue, acquisition costs and sales commissions and things that can, you know, kind of be offset a little bit with the actual revenue that you're trying to acquire with it. Um, Alex, last thing, and hopefully you have hopefully [00:47:00] you've got, you've got a blog on this or maybe one coming at some point I write I, I, I it's all we talk about. You are on the front lines. Give me an example of a real live finance or accounting. I use case that you've seen played with looked at um, and then maybe one that you think is like super attainable and you're hoping someone can crack it soon.

Alex Oppenheimer: Yeah. [00:47:30] So the, the backdrop of this I would say is that. You know, accounting is hard because it touches regulatory right. Gap is a right is a I don't know if it's fully considered a regulatory body, but right gap is a it's it's a it's a standard and for a good reason. Standards move slow and regulatory bodies move slow and tax systems move slowly. And that's how they should be. But businesses move quickly and that creates a lot [00:48:00] of tension. The result is that you need to have people, people who are up to date with what's going on and also understand the nuances of what's changing on the ground in businesses. And so to make an analogy to, um, to autonomous vehicles, I don't think we're going to get to level five, you know, full, full, full autonomy, no intervention, no steering wheel, no pedals, nothing, uh, in, in any in the near term. And I think [00:48:30] that the, the best options are. To be able to connect these different systems. There's multiple sources of truth. This is why it makes things hard, because things need to sync together, and then it needs to speak to the rules and abide by guidelines. And it's just very hard for any AI system requires a ton of guidance. And so where I think the, the near to mid-term opportunity is, is creating a augmented human system, something that picks on a part [00:49:00] of the human's job that humans maybe aren't good at.

Alex Oppenheimer: But computers are good at and automates and uses AI to just make that easier and faster. I remember I was advising a company years ago, and the outsourced accounting firm they were using sent a 100 questions. 100 questions. It was a spreadsheet of questions about different expenses in the business and where they go and and [00:49:30] what is this? And should we look at it that way? And I was like, no founders going to take the time to answer that. Like at an early stage, you got to sell, you got to build. Like no one's going to answer that. And so I think that the near term opportunity is to be able to take some of those, some of those items on the ground. Don't take the human totally out of the loop, augment the humans abilities where computers are really good at stuff and I can be useful, um, keeping in its lane. I don't know if that's exactly what you're looking for, [00:50:00] but there's also this company. No, I think headquartered in Tel Aviv called Trulia. Uh, that, uh, that's doing that's doing a great job of, uh, of helping create this truth. Yeah.

Isaac Heller: No, I appreciate it. And full disclosure, Alex is is one of the investors in Trulia in our company. And, you know, on the on the AI front, like we have been talking about AI and finance and accounting in for years for for years now. And we've probably [00:50:30] been talking about it even before. And so it is really cool to see some of the incremental wins, uh, and milestones in, in AI, you know, whether it's like the ChatGPT kind of gen AI areas or just the more accurate, uh, automations around documents and stuff like that. So Alex and I have been talking about this for a while. Um, Alex, I mean, that that's that's a lot, uh, to to chew on. That is great stuff. I've been excited to talk to you today. I think that a few things that [00:51:00] Alex mentioned, just for anyone listening, Verissimo VC, a lot of these metrics that Alex has talked about are available on the website. Um, again, you know, there's a lot of, um, smart finance and accounting people, but I can tell you that if you read Alex's stuff on medium and go to Verissimo VC and look at this, there is a very, very strong codification and logic behind a lot of these SaaS metrics. And I can tell you that a lot of companies, you know, have kind of followed Alex's guidelines, um, to success. [00:51:30] I can also say that, Alex, you're one of the few kind of finance professionals, you know, banking and VC background that really, really appreciates accounting and understands the value of it. So that's probably why we get along. But anyway, um, Alex, any any parting words or words of wisdom for our, uh, accounting listeners on the line?

Alex Oppenheimer: I guess the main thing is, is to stay human and understand that the the value that you know, humans bring [00:52:00] is, is in the nuance. I, you know, Isaac, we've talked about this before, that accounting was one of the first use cases ever of software because it's a lot of addition and subtraction, multiplication and division at scale. And that's what computers were invented for. So the problem is that policy was built around those original computers. And now the computers are much better. The business is more complicated. The the policy and regulations have not kept up. And that's where accountants themselves really have an opportunity to step up [00:52:30] and differentiate themselves and and live in that world of nuance. And, and I would say measured creativity on how to best represent new businesses, interesting business models, the influx of technology and AI in the future world while also maintaining, you know, a sound, fundamental, uh, grounding.

Isaac Heller: Alex, um, if anyone wants to get in touch with you early stage founders or read about you or some of your work, where should they [00:53:00] find you?

Alex Oppenheimer: Um, so I've got I'm on LinkedIn. Alex Oppenheimer, uh, my fund is called Verissimo Ventures. Verissimo.vc. Uh, I also have a Substack, which is Alex oppenheimer.substack.com. It's called SaaS engineering. That's about it. We also have an investment submission form on our website, and I'm also on Twitter.

Isaac Heller: Amazing. Thanks, Alex. Appreciate your time today.

Alex Oppenheimer: Thank you Isaac.