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Graham Stanton ran accounting and finance at Peloton. He hired the first CFO, oversaw a troubled ERP implementation, and resolved to someday make it possible for every QuickBooks company to avoid a costly ERP implementation.
Show Notes
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Attention: This is a machine-generated transcript. As such, there may be spelling, grammar, and accuracy errors throughout. Thank you for your understanding!
Graham Stanton: [00:00:00] Stories like that speak to how these businesses aren't really operating on the general ledger and the numbers coming out of it. I can't believe whoever was making all their critical business decisions when we're at tens of billions of dollars without any insight into their business. And my guest, without knowing anyone over there that they were viewing the other QuickBooks instance as an afterthought now, well, we just have to get the books done. And like us, there were they were making business decisions on non-accounting systems.
Blake Oliver: [00:00:36] Do you have any startup clients on QuickBooks Online that someday plan to go public? Are you a CFO dreading the need to migrate to an expensive and complicated ERP just so you can clear all those Sox compliance hurdles? What if you could be SOX compliant? Go public and stay on QuickBooks Online? Stay tuned to hear more from our sponsor Advise later in the episode. If you'd like to earn CPE credit for listening to this episode, visit earmarkcpe.com. Download the app, take a short quiz and get your CPE certificate. Continuing education has never been so easy. And now on to the episode. Welcome, everyone to another episode of the Earmark Accounting Podcast. I am your host, Blake Oliver, CPA. And I feel like today we have hit the big leagues. We are- we are a new level of production here with our guest today, Graham Stanton, co-founder of Peloton. Graham, welcome to the show.
Graham Stanton: [00:01:43] Well, thank you, Blake. I feel like I've hit the big leagues just by being here, so really appreciate it.
Blake Oliver: [00:01:49] I am so eager to talk to you about your experience of Peloton and your new business that you have started Advise. But first, like for our listeners that are curious and confused, what, what brings the co-founder of Peloton to a show about accounting?
Graham Stanton: [00:02:08] Well, that is that is a good question.
Blake Oliver: [00:02:13] And do you have a finance accounting background? Are you an accountant?
Graham Stanton: [00:02:18] Yeah. You know. Yeah. I want to just jump right into it. I mean, I'm not an accountant. I. I have something of a background. My dad was an accountant. My grandfather was an accountant.
Blake Oliver: [00:02:32] It's in the blood.
Graham Stanton: [00:02:33] Yeah, it's in the blood. But, no, I say that I joke that I drew the short straw and having to figure it out. At Peloton, among the co-founders. Just because I had some exposure to accounting in the past in finance. And I learned just how hard it is to actually do accounting.
Blake Oliver: [00:02:58] So you and your co-founders, how many of you were there?
Graham Stanton: [00:03:03] So there were five of us total.
Blake Oliver: [00:03:05] Five co-founders. Okay. And everybody was deciding, what am I going to do? How am I going to, you know, help Peloton grow? And you got assigned accounting, finance. Did you volunteer for it? Was it just like somebody has to do it, so I'll do it?
Graham Stanton: [00:03:19] Yeah, I think that's probably the best way to look at it. It's the way it goes with a number of startups. Most startups, I'd say, where there's just so much to get done, everyone's running around. And there we just all pitched in as we could. So, I I've worked as a paralegal for some of it. I actually wrote a lot of the Android code for the tablet because I used to be a software engineer at one point and did a lot of the marketing and got finance and accounting started.
Blake Oliver: [00:03:50] So you said your father was an accountant, is that right?
Graham Stanton: [00:03:55] Yes, it was.
Blake Oliver: [00:03:56] And what kind of accountant? What did he do?
Graham Stanton: [00:03:59] Well, he was he did public accounting. There was an auditor at a at one of the big six firms, as he puts it.
Blake Oliver: [00:04:07] Okay. So, I imagine was that while you were growing up, was he, you know, gone doing audits or did he have his own firm at some point?
Graham Stanton: [00:04:17] Yeah, that's yeah, that's a good question about how it how that actually affected my formative years. Yeah, he was yeah. My youngest years. Yeah, absolutely. It was off doing audits at the big firm and then and then he switched over after 12 years of public accounting. He went in-house and took a CFO job.
Blake Oliver: [00:04:43] Got it. So, I imagine he was around a lot more after that. Probably.
Graham Stanton: [00:04:47] Yeah. I mean, he still worked pretty hard, but tough. Tough to match. Yeah. Out of firm life, especially when establishing oneself.
Blake Oliver: [00:04:57] So I've got to confess, I don't own a peloton. I've never used a peloton. I don't to be honest, I have much of a desire to ride on a Peloton bike, although I know that there are many other products that Peloton is expanding into now. Are you an avid cyclist? Like did you get into this because. You were passionate about the device itself or was it more of a just business opportunity? Here is something that I can participate in growing.
Graham Stanton: [00:05:30] Yeah, there was a little bit of both. I would say I as Fortune had it, and there was a couple friends of mine, old coworkers, who were just getting started and asked if I wanted to join. And a few months prior I had taken my first indoor cycling class and found it to be a lot of fun. But no, I mean, I wasn't a cyclist. My background wasn't like a big fitness person. And I think that was that was really a part of what made things work out because we didn't really none of us came from that world. And a couple of my co-founders, a lot more athletic than I am, but none of us was like a professional fitness entrepreneur or trainer or anything like that. There were just passion about delivering a good user experience, and that's not something that was fun.
Blake Oliver: [00:06:31] Yeah, that's interesting because I think a lot of times with startups or products, there's always, you know, one person who had this vision for a product that they themselves wanted, and so then they go out and create the company to build it. But you're saying that it was it wasn't it wasn't that there wasn't like a single person who had that vision?
Graham Stanton: [00:06:49] Well, I would say that I would say that John Foley, that founding CEO, had that vision for a product that he himself wanted or his wife wanted. And he did a good job selling that vision to the rest of us. And so, we all wanted it. But yeah, she wanted that as a consumer. And that's how we all that's how we all approached it. And there. Yeah. I think, you know, talk a little bit there as we continue about their how that eventually transitioned into starting an accounting software company. Yes. And there are some real parallels there of how. Yeah, I mean, I wasn't a fitness trainer beforehand. None of us were. And I'm not you know, I'm not an accountant by background and certainly not a professional. Yeah, it wasn't a professional accounting software creator, but it wanted to create the software that I myself would use. And now I should also say that my co-founder, who was an actual CPA, was also.
Blake Oliver: [00:07:53] So let's talk about that journey then. So, take me back to the beginning. At Peloton, you are going to take on accounting. Did you just sign up for QuickBooks? Like, how did it begin?
Graham Stanton: [00:08:08] It began with my showing up for my first day of work in our in our office in the garment district in New York City. And my copilot, Arsenio, was sending me a spreadsheet of all the expenses the company had incurred to date and saying, Well, we should probably do something with this. Let's figure it out.
Blake Oliver: [00:08:34] So just like an Excel file, he sends you what, like, like he exported from the bank and categorize transactions and sends you that and says, this is our this is what we got. This is where we're at right now.
Graham Stanton: [00:08:44] It wasn't even that. It was mainly maintained. And he was meticulous about keeping track of every penny that had been spent. But rather than entering that into QuickBooks or some piece of accounting software, I think in terms of double entry bookkeeping, it was really something of a single-entry accounting. This is what we've never.
Blake Oliver: [00:09:09] Here's the expenses. That's it. Well, I guess in a startup it's easy, right? Because at the beginning you just got burn. You're just spending money. So.
Graham Stanton: [00:09:17] Yeah, it's pretty straightforward. Yeah, there's no revenue. There's for accrual accounting, there's minimal in terms of a short-term liability is still out there. It really is just the best of the cash we've spent. So, it was not that hard to get started, but. We did initially work with. Work with a local CPA firm who now work great. I think their expertise was more restaurants and car dealerships and more traditional businesses than a fast-growing startup. But there were at least able to help us get started in QuickBooks, and I have something of a record.
Blake Oliver: [00:10:04] Got it. So, you went to a firm right away. You said, help me get set up on an accounting system. And they got you on QuickBooks.
Graham Stanton: [00:10:13] And they did They, they or they recommended a bookkeeper who would who was great. And I would say, you know, thinking back on that, one of my one of my regrets was that I. Didn't at least try to do the books myself to get started. And some sense from having worked on a bigger company that if I was one of the co-founders, it was, you know, violation of segregation of duties. If I was also booking journal entries. And of course, that's something of a joke. And it's a tiny company of five people. There's no one to care about such a thing. But what it meant was that I didn't have a I didn't end up having a close enough relationship with this with this accounting firm to actually talk through. Okay, well, this really this is how the business works and how we should how maybe we could collaboratively figure out how to shape the accounting to represent the business as it was.
Blake Oliver: [00:11:16] Tell me more about that. So, you felt they were just doing the books and you didn't have the input that you wanted to have, or you weren't able to shape it the way you wanted to shape it?
Graham Stanton: [00:11:27] Yeah, I think I think it was a common situation where, yeah, as you said, they were doing the books and that was their mandate. And I did. And in hindsight I realized I never asked for anything else. I think probably most people know. And what that meant was they could file our taxes, they could deliver GAAP compliant financials to make the investors and lenders happy that they wrote down. We have real financial statements and now we weren't we weren't doing audits, but they were able to provide some degree of review, but we couldn't run the business off any of that. And so, what that meant was we ended up maintaining parallel systems, spreadsheets and databases that. Gave us more insight into the business but didn't necessarily want to. The official financials got it.
Blake Oliver: [00:12:27] So they were doing the books for tax purposes, for reporting to investors, for financial reporting purposes. Let's say you were running you and your co-founders were running peloton on a separate set of metrics that you were tracking in a different system.
Graham Stanton: [00:12:44] Yeah, I think that I think that's fair to say. And they were pretty close to each other. And if they were ever far off, we could dig into it and explain why. But most and most of the business decisions until it really was time to grow up and, you know, ultimately we had to comply with Sarbanes-Oxley. And yeah, everything really had to be all one. But in the years before that, it meant that we had systems that didn't tie to the official financials, that didn't have the financials that ultimately were audited, that didn't benefit from the thousand years of history behind double entry bookkeeping. And I think we were poorer for it.
Blake Oliver: [00:13:35] So what did you use to do that? Were you doing that in spreadsheets? I'm talking about the management reporting. The reporting you and your co-founders were using. Was it spreadsheets? Was it something else?
Graham Stanton: [00:13:48] Yeah, it was a number of things. So, we yes, we used so many spreadsheets. You know, we get to the point where when tracking individual orders and trying to try to translate things to for actually getting into the books down the road. What were the 5050. Yeah.
Blake Oliver: [00:14:10] What were the like what were the top indicators that you watched that that you and the co-founders were peloton management, if you will? What were you focused laser focused on?
Graham Stanton: [00:14:24] We were laser focused on a handful of metrics. The top one was bike sales. And so, we were tracking the orders as they came in. Mm hmm. And that already is slightly divorced from, you know, GAAP recognition of revenue. Right, Right. We didn't we did wait for the bike to show up in someone's home before we read knowledge that the sale had happened. And but then there was a potential loss of information between those two. So, it was bike sales and we wanted to make sure that we were getting these bike sales for a reasonable amount of marketing spend. So, we were really close to and tracking very carefully how much we spent on each ad channel and how many sales we could actually attribute to that. But that that was yet another source of potential mismatch because we track the ad spend manually in spreadsheets or we get reports from online advertising portals. And there's a risk that some of those numbers wouldn't necessarily put to the invoices that we ultimately got that the accounting team would use. Right. To book the financials.
Blake Oliver: [00:15:42] So you're saying, like, for example, you're doing Facebook ads and you wanted to be able to say, we spent this much on Facebook ads, and we generated this many orders for the bikes.
Graham Stanton: [00:15:53] Right? Exactly. And we want to know if we said that we want to average $300 spend per bike sold, but on the margin, we go up to 1500. We'd want to very carefully track that, and we'd use we'd use Facebook's online portal to track Facebook spend. And this is the same for Google and others and Facebook, from what I recall, was actually pretty good about the invoices, ultimately matching what we had from the online portal. But Google could be off substantially because they had room for a number of adjustments in either direction between the time we pull the data on a daily basis and when they send us the invoice. So, there was real risk for us thinking we're super precise and then discovering later that, well, we're not, but we don't know quite where.
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Graham Stanton: [00:18:14] And the. And then the next most important one to us that became the most important over time was tracking people, continuing to use the bikes and continuing to pay their monthly subscription. Though we tended to view that as a downstream metric for are they actually using it? And we'd be focused more on that.
Blake Oliver: [00:18:37] So usage, I mean, I know the bikes are connected to the Internet and I guess, you know, when somebody starts a workout, right, Every time. Is that what you were tracking? Like how many like how often they're using the bike?
Graham Stanton: [00:18:50] Yes, that that's it. It would be we'd be focused more on completing a workout or completing.
Blake Oliver: [00:18:56] Yes.
Graham Stanton: [00:18:57] Whatever they whatever we thought was a good proxy for those counts as a real workout. Yeah. And the connected bikes are you take a class on it and say to your history or it's available to be aggregated in an anonymized way to the overall statistics. And yeah, we'd be looking at, we'd be looking at that recurring revenue and, and trying to calculate lifetime value based on those early indicators.
Blake Oliver: [00:19:26] Lifetime value. So, you could anticipate churn on the subscriptions based on how much people were using the bikes, I imagine. Right. Because like was there a magic number where if they completed X number of workouts, you knew they weren't going to churn that sort of thing?
Graham Stanton: [00:19:44] Yeah, there was. Yeah, we did look at it along those lines and I know it would be something like, yeah, if they do six workouts, then we know they're in, but the vast majority of people would do that. And what we, what we'd really look for is and it was the vast majority of people would get started and we'd look for a sudden shift. And so, it would be a story, you know, someone got injured or something like that. And then we try to predict, okay, well, who's likely to churn? But the churn was thankfully very low, and we were able to start modeling out what our lifetime value is. And that was very important than going back on the acquisition side saying, well, if we know this lifetime value is really high, then we're willing to spend a lot on advertising to get new customers. But. Not beyond that. And we still need it to know at work. So, we still need to be very, very clear on what our ad spend really was, because 1500 dollars for one more might be good, but it'd be very easy to miss a few data points and it's actually $5,000.
Blake Oliver: [00:20:56] Were you making money on the bikes? Were you breaking even? Were you losing money on the bikes and then hoping to make it up on the subscriptions?
Graham Stanton: [00:21:03] It changed over the course of all Dan's history, and you know, we always looked in that in a holistic and a holistic view and, you know, whether it was. There were, whether it was in terms of the initial gross margin and. Or the or the acquisition cost to bring in a customer and then be a look at the subscription net of all additional costs. And we wanted to make sure we were never really underwater on that one. But yeah, exactly as, say, that subscription, thankfully, people stuck around. And so, we could be fairly confident we'd end up ahead.
Blake Oliver: [00:21:51] Were there any big financial disagreements at that stage of the business?
Graham Stanton: [00:21:57] I think in the first few years. And there are. I'll say in the time before we were really looking ahead to IPO, for sure, there were strategic questions and discussions that were informed by the financials, and it was questions like. What should how should we calculate lifetime value? What now? What discount rate should we use? And what long term churn assumptions should we make? Given that most people had only had a bike for about a year. Trying to extrapolate to what their churn rate is going to be in year five would be a little tricky. Then we could say, well, if this five-churn rate could be lower, if we could save all the five years older and they're like, we're saying maybe it should be higher. And so, there's some of that discussion. And also, on also on the acquisition that was. It's something scary to say we should spend this much on marketing because we have the confidence that the lifetime value is higher because you know that cash now and like once kind of a certain and the other is very uncertain. Yeah. And even the discount rate factors and yeah it's tough to.
Blake Oliver: [00:23:17] Know your lifetime value is when you've only had people on a subscription for a year. How can you possibly know that they're going to. It's a guess, right? You're making a lot of assumptions on that lifetime value. So, I imagine it could be a huge range depending on whether you were conservative or optimistic.
Graham Stanton: [00:23:36] Oh, absolutely it was. Yeah, we could yeah, we could say we should look at we should pretend it's two years’ worth of subscription. We could tweak a few assumptions very reasonably and say, Oh, well, actually we should think of it as ten years. And we actually had on, on our acquisition team and acquisitions of business intelligence because it was that important. We hired someone who had a PhD in math from MIT to help crunch through all of it and solved all sorts of problems. But even he had to throw his hands up on the LTB calculation to say this is really more of a philosophical question, but a math question.
Blake Oliver: [00:24:21] Well, you must have guessed pretty accurately, or at least good enough, because, you know, Peloton did go public and seems to have done fairly, fairly well. I'd say. I think most people would say, I don't know. How do you feel about it?
Graham Stanton: [00:24:37] I feel I mean, I feel great, but I feel like we set out. Yeah, we set out to introduce a product that we knew was great, that we ourselves loved, and we wanted to introduce it to as many people as possible. And that. Yeah, I think I think we're a fairly conservative along the way on acquisition where we. Yeah, we really held ourselves to high standards. And now we ran a World Series at one year and we had all sorts of metrics. Partly thanks to that MIT math ADHD, to show that it was a huge success. And then the next year we about six World Series ads. Wow. And our data showed that. Okay, well, then we overshot it. That wasn't that wasn't worth it. And so, then we pulled back from there. We were we were honest with ourselves whenever things weren't working. And so yeah. And we got to IPO and. We went from years of no one had no one having heard of Palestine to everyone having heard of Palatine.
Blake Oliver: [00:25:42] Well, and my friends who own Peloton are very vocal about it. They are big fans and I've always admired that about the company. It's that like the users are very passionate.
Graham Stanton: [00:25:53] Yeah, and that was that obviously is something we hoped would happen. We believed would happen. But the community still surprised us, and it was it was fantastic. And they the riders turned out to be great people. I think they genuinely are great people. It was also a very positive kind of environment where people feel good about themselves when they take a bus.
Blake Oliver: [00:26:19] So let's go back to the accounting system because we like to talk about accounting systems on this show. We like to nerd out about technology and apps. And so, I'd love to know more about that early app stack that you were using for accounting and finance at Peloton. What did you add on to QuickBooks or I guess tell me about the journey of where you went, because I don't imagine that Peloton stayed on QuickBooks all the way through the IPO. I imagine you had some systems changes and that can be quite dramatic. So, I'd love to hear that story.
Graham Stanton: [00:26:54] Yeah, it was definitely dramatic, but correct. The answer was we were not. We're not running on QuickBooks at the time of the IPO, though, I. I have since heard of at least one well-known public company that was running out of QuickBooks at the time of their IPO. That happens.
Blake Oliver: [00:27:12] Is that the Uber story you're talking about? Because I know they got they were on like QuickBooks desktop with, you know, hundreds of thousands of vendors in there for a really long time. I don't know if it was all the way to the IPO, though.
Graham Stanton: [00:27:24] Yeah, I don't I don't know the details on that one. I have I have heard that as well that they pushed it pretty far, but I believe they had made the transition by the time of IPO that I think it really speaks to the stories like that, speak to how these businesses aren't really operating on the general ledger and the numbers coming out of it. I can’t believe whoever was making all their critical business decisions when we're at tens of billions of dollars without any insight into their business. And my guess is, without knowing anyone over there that they were viewing. Their QuickBooks instance as an afterthought now. Well, we just have to get the books done. And like us, they were they were making business decisions on non-accounting systems. And yeah, that certainly was where we were at Palatine. We had, we had a home-grown e commerce system for better or for worse, and certainly felt like for worse for much of the time. And we had we had an AWS redshift data warehouse that could ingest all that data and all the usage data. And that was that was the domain of that MIT PhD. And we had various other external systems that would be aggregated via spreadsheets, but it would always. Yeah, it would go in different directions and the data would. Be pulled together by different groups of analysts bought maybe by f p and by business intelligence. And then it will go to where it needed to go for decisions to be made. And I'm not so great, you know, not really a trackable way. And then we'd also go into the accountants or at the end of the year really for getting the data and to we were running on QuickBooks desktop at the time, and that meant that no decisions were made really based on what the accountants did. And there were certain murky parts of the business where I would literally lose sleep at night. Worrying. What if we're missing something really big here and we don't have the safety of double entry bookkeeping and the audit and rigorous accounting practices? Right.
Blake Oliver: [00:30:00] Because you're making business decisions based on what's in that data warehouse. But that hasn't been reconciled.
Graham Stanton: [00:30:06] Correct. And. If we worked really hard, we could almost reconcile it. But most people, or most of the time the teams are too busy to even do that on a regular basis. And so, I had the genius idea that this thing called enterprise resource planning. Could solve all of that. And I'd say that sort of on me for not appreciating that an ERP is a tool to where you can put all that data once it's clean. And bad, at least in our case, it didn't it didn't clean the data. It didn't solve any of those underlying issues. And really moving to an ERP now, it just added one more thing that we had to contend with while running all the other somewhat messy processes.
Blake Oliver: [00:31:01] So you went from QuickBooks Desktop to what.
Graham Stanton: [00:31:04] We have embedded in that suite. It was a lengthy process, and the business was complicated. And so, the NetSuite team rightly told us, well, you're going to need to work with some good implementation consultants on this. And then that got a little complicated and we realized, well, we now need people to manage the implementation consultants and this process. So, we hired Enterprise IT and Enterprise it said, okay, well, this is this is fairly complicated. There's a lot of work to do here. We're going to need other consultants as well. And. It very quickly turned into this big hairy operation just to get us on to Med Sweden. Meanwhile, none of this really addressed the core underlying problems of clarity of getting the books closed in a timely manner. And I think it was necessary. We were going public at some point. We needed to be on a system that would satisfy the requirements of Sarbanes-Oxley for us. We couldn't stay on QuickBooks desktop to go public, but I had the learning experience of finding out that just implementing now one of these best-in-class ERP doesn't. Yeah, fix all the inputs or any of them.
Blake Oliver: [00:32:29] So my cohost of The Cloud Accounting Podcast, David and I have been too Sweet World for a few years now, and every year we go, and we get to talk to customers and partners and most of the people there love it. That's why they're there. They're very happy. But every single one of them says, Yeah, the implementation was a lot of work. And they don't skirt around that. That's like the biggest complaint I hear about ERP systems is, Oh yeah, our implementation took 12 months. And I'm thinking to myself, Oh, and a bunch of consultants to write. I'm thinking to myself, Wow, I don't have 12 months as a startup founder to deal with this. What makes it so difficult?
Graham Stanton: [00:33:16] It's a that's a really good question because, you know, just thinking about software, it shouldn't need to be so difficult. And that's ultimate and I get to it in a bit. I was ultimately I'm led to advise, you know, what would the software be that that wasn't so difficult that didn't you know, that didn't require this big implementation and migration and implementation. And I think that's yeah, I think that kind of gets to it. I mean the word migration is while yeah, to even get started, the data needs to be in a different format form than it exists within QuickBooks. So, there's all sorts of reworking of a chart of accounts and decisions to be made about it, to even migrate the data that exists in QuickBooks.
Blake Oliver: [00:34:08] Yeah, that's a nightmare. That's a nightmare. Yeah, right.
Graham Stanton: [00:34:13] It's absolutely a nightmare. And we talk to people all the time and we decide not to. Yeah, and I mean, at Belton we decided not to. Yeah, it, the implementation was, it was painful enough as it was without trying to shoehorn the historical QuickBooks data into it.
Blake Oliver: [00:34:30] Even going from one small business accounting system to another. Most of the people that I know that do lots of implementations have just gotten to the point of saying, you know, it would be nice to have the historical data in the system, but the odds that we're going to be able to do that and cut you over so that you're not running parallel systems for months and months is very low. So, let's just do a clean cut, right. And figure out a way for you to get your comparatives. I mean, I've heard stories about NetSuite implementations that just go on and on forever because they decide to try and get in the historical information. So, then you're catching up net sweet to what's in QuickBooks and you're simultaneously trying to import your last month's QuickBooks into Net Sweet and the cut over never really happens, right? Because it's very difficult to run two systems at once. So, I think you made a wise decision there. It sounds like, to not import the historical.
Graham Stanton: [00:35:22] Yeah, I think it wouldn't have been an option.
Blake Oliver: [00:35:25] And let me ask you something else about Can I ask you something else about the net sweet thing. So was the goal when you set up net sweet to try and bring in all of this management data that you were doing in separate systems into net sweet along with the accounting, so that you'd have like one system for running the business because that's the big pitch of net sweet, I think. Ah, the big idea behind it. Right. Or an ERP systems in general like Sage Intacct will tell you this too. Let's bring in your operational data with your financial data and now you've get dashboards and all that great stuff. Like was that what you were trying to do or were you just trying to do it for the Sox Compliance?
Graham Stanton: [00:36:07] I think we should. We started with the original goal and then we fell back to the second one. So, we started wanting to get all the operational data in and we ended up saying, okay, well let's at least get tax compliance and. Yeah, I think it's a very 1990s approach and I think about the history of that sort of, and I wasn't really working with accounting systems in 1998 when they were released and I, I can only imagine how revolutionary it was but. Now, I do think back to the nineties, and I was, you know, working a little bit in my business. And I remember that a lot of companies didn't even have much of their operations on computers.
Blake Oliver: [00:36:53] Yeah, Yeah, that's.
Graham Stanton: [00:36:55] True. Yeah. Yeah, of course you need an all-in-one system because you don't have a system for it. Yeah. For most, for most of what you're doing. And I hear good stories about how companies actually are getting their operations on. That's way too clearly still works for a number of people today. But in our case, to the complexity of our business and, you know, the newness of it and how fast we're moving it, it was just a mismatch to get all the operational stuff. In there, which had big implications kind of all the way through. So, it meant that these other systems that we thought would be in scope for SOX at all or where the burden would be light, you know, such as the e commerce that affects the e commerce system. Well, they take the order so that's it's go for Sox, but they don't need to maintain fully Sox compliant historical data because that's going to live in NetSuite And then we learn that well we couldn't really handle all of our data that way. And so now this system is in scope. The Sox and where I told the business intelligence team who manage the redshift data warehouse that had all sorts of data in it, that while our work is hard enough as it is, let's be thankful that we're not in the flow for Sox. And then as we're about a year out from IPO, we realized there are a number of metrics that we want to disclose publicly that can only come from the system that there's no chance we'll ever get at an end to it. And now this is in scope for Sox. But I think in our case, the NetSuite implementation still stay pretty hard and we're still doing a lot, but we just narrowed the scope to be the financials. And then that meant that everything else had to integrate.
Blake Oliver: [00:39:00] So you're just pulling everything in from a financial perspective in a net suite, generating the financials. So really it was SOX that motivated this shift then. What do you think about Sox like as somebody who has gone through it? Do you think it's good for businesses? Do you think it's good for markets or do you think it's a waste of people's time? Or is it something in between?
Graham Stanton: [00:39:25] Yeah, that's a really good question and I haven't never been through it.
Blake Oliver: [00:39:30] Did it make Peloton better?
Graham Stanton: [00:39:32] I think it, I think it did. You know, I think about I think the case of the case of Peloton, I don't know. I think a lot of what we did to support Fox was good, important work and. Would it have been possible to achieve most of those goals with a less stringent. Set of laws and regulations, probably. And I think that. No, it would degrees of materiality have helped if we'd narrowed the scope on what needs to be penny for the accurate to the penny and what can we just have some confidence in? Is this close enough? You have verses like the same set of requirements apply to the core financial systems as apply to really ancillary systems. Bad. I think the spirit behind it was very good. The idea of, well, in order to take the public's money and investment, we have to grow up in terms of controls and having some rigor to the internal systems and that. Yeah, that that was absolutely beneficial. I'll say it's above my pay grade to determine what level of mandates that there need to be around it. But it was important work.
Blake Oliver: [00:40:57] Well, you know, I feel like I wouldn't say it's above your pay grade because you're an investor yourself in Peloton, I imagine in other companies now. And like, what's the purpose of all this if it's not to protect investors? Right. Like, if it doesn't add value to investors, then why do we do this stuff as accountants? That's how I've started to approach a lot, and I feel like there's a lot in accounting that we do like, especially when it comes to audit that really creates no value to investors anymore. And it's just a suck on and a drain on the entire economy. If you think about it, the tax on the economy that we do this stuff that doesn't that people don't really seem to care about. And when was the last time you looked at an audit report for a company you invested in like nobody does, right?
Graham Stanton: [00:41:41] No, I don't dig too deep into it. I don't even dig too deep into the financials if I'm investing. But right now, it's helpful to see the story. And I think that is I think that is one I don't know the underlying the true underlying cause, but I agree that is one of the tragedies of modern accounting that so much of the work that accountants do. Doesn't inform business decisions, doesn't inform investment decisions. In a sort of rote busywork.
Blake Oliver: [00:42:17] A great example is those metrics you were talking about earlier in this episode where you said, you know, we looked very carefully at acquisition cost and lifetime value, and that ratio is this name for the ratio. I forget what it is, right? But it's like your cost to acquire a customer divided by your lifetime value. And you know you want that. You want your cost to be less than the lifetime value, right? If you're going to succeed as a company, otherwise you're going to lose money long, long term. And nowhere in GAAP or in the published financial statements do we have any of those metrics as like defined universal metrics where everyone's using the same methodology of computing them? And I just wonder why don't we have that in the accounting standards for subscription businesses that you're going to report on? You know, some sort of standard so that we can compare companies. But instead, here we are expensing all of our sales and marketing costs every single period. And there's no match between the revenue coming in and the sales and the marketing because we're spending money to get new customers. But that revenue is down the road in subscriptions, right? So, it's all mismatched and that's why. Subscription businesses look terrible in public financial statements generally because they're burning all this cash to acquire customers. They're nowhere on the balance sheet. But in the mind of an investor, those customers have a value, right? Like, it just seems kind of mind boggling that we you know, we're using industrial accounting for software businesses.
Graham Stanton: [00:43:58] It is. It is a funny. It is a funny situation. And. Yeah, I 100% agree. And I felt successful. Modern accountants. But hopefully understand this and we'll understand this and maybe it's not represented in the GAAP financials, but. For sure. Marketing spend should at least conceptually, it doesn't need to be written down this way anywhere, but it should be thought of as an investment. That means you can sit on a budget, right?
Blake Oliver: [00:44:33] But instead it's a period expense. But really, like if we think about it as founders, investors, it's an investment, it's cap, it's CapEx or it's some flavor of it. Right?
Graham Stanton: [00:44:46] Yeah, it really is. I mean, it's just so if it if it acquires customer, that's a very clear one. But these customers, that's a future revenue stream that. And I get that it's a very uncertain value. And gap is necessarily conservative. And so, you can't recognize something that you know very well might not happen. But probabilistically, it's going to happen, and especially across all your customers.
Blake Oliver: [00:45:12] And there's a range, right? Yeah.
Graham Stanton: [00:45:15] Yeah. It's got value. It's not zero. And even before that, even before people are customers, if the marketing team said we are doing we are buying these ads to increase brand awareness. Well, then brand awareness has a monetary value to it and should also sit on the balance sheet.
Blake Oliver: [00:45:36] I think the thing that illustrated this for me really poignantly was what happened with Netflix earlier this year, where the stock price cratered because they reported subscriber losses for the first time. And I went into the financials, and I downloaded them from I think it's called Edgar the SEC website, and I was one of like two dozen people to actually download the financials. I'm sure. Like, that's the that's the joke, right? So, I looked at it. I'm like, okay, their IPS is good, right? They've got good earnings, they've got good cash flow, they've got plenty of cash on hand, and yet their stock price is tanking. And it's because of this one number subscribers. And it's because I think that investors have figured out that subscribers are the most valuable part of a subscription business because they represent literally your future cash flows. But like, that's not that's only reported because Netflix chooses to disclose it like they don't have to. And I wonder why. Yeah, why, why don't we have every subscription business report their subscribers and make an estimate of their lifetime value of some sort? I'd love to have that as a as an investor.
Graham Stanton: [00:46:47] Yeah, I mean, for sure it's, I think every, every. Yeah. And so, then what happens is every subscription business does report to some degree because they have to, and they the investors expect. So even if it's not mandated that people aren't going to invest if they don't have some insight there.
Blake Oliver: [00:47:07] But yeah.
Graham Stanton: [00:47:09] You're right, everyone calculates it. Everyone calculates a different way. And now I'll say at Peloton, we you know, we made decisions on how to calculate the publicly released metrics, balancing the two sides of what we believe to be the most economically true representations of things and also what could be. Calculate it in the most straightforward way from all their numbers in the GAAP financials. And I think that that was a good balance for something that was defensible, digestible and that that people could chew through. But there. It did leave more to be done. So, know you know we'd say. If this is our turn and you extrapolate that out, then you can assume that people will be paying us for this many years. And therefore, they and then implying therefore the lifetime value is a subscription times 12, ten, 12/10 as there was the gross profit on the subscription times 12 times the number of years. It would make no, we wouldn't factor in the discount rate. Right. But we took the stance of, well, of course you got to factor in the discount rate, but every investor can do their own calculation for what I think the discount rate should be. Why would we as a company make that call? That doesn't make any sense. But it's kind of a you know, that's a key final step in the calculation. Right. And I'm sure, like every hedge fund out there down doing the investment and then some very sophisticated people doing it, at least that calculation for that. Yeah. And in the public filings, there's no attempt to come up with the true like economic present value subscription.
Blake Oliver: [00:49:11] So at what point did you hire a CFO?
Graham Stanton: [00:49:14] Yeah, we hired a CFO and, you know, we had in my time there, we had two CFOs and we had the CFO that helped us get our house in order and the CFO who took us. And we hired that that first CFO just as we were getting started with the NetSuite implementation. Well, you know, I almost had to apologize to her for and to the rest of the team because it meant that I could take a step back from the finances and no longer be directly in the critical path there, just as we had to get this implementation going.
Blake Oliver: [00:49:50] And what did you look for in that first CFO?
Graham Stanton: [00:49:54] On that one. It was. The business. Yeah. The business had gotten complicated and. They're part of the motivation for part of the same motivation for you for getting an ERP was that it was that we didn't have much insight into the business. And operationally, finance and accounting was starting to get away from us. We had a monthly close process and then it started stretching out to the point where it would almost take the month to close the books each month. And I believe at one point we actually did get to a spot where it's taken us more than a month. So, we're falling further and farther behind. And so, we looked for someone who had good operational finance experience, companies of similar size had, you know, had experience preparing a company for idea or getting ready. And those were the key requirements when looking for a CFO at that stage.
Blake Oliver: [00:51:01] So going back to the net suite implementation, the R.P implementation, it sounds like, well, if I could summarize, you had initially hoped that it would become the system for everything, both management purposes and financial reporting purposes, and you ended up scaling that back to just the financial reporting side of things. Was that challenge what led you to start advising?
Graham Stanton: [00:51:30] And that. Yeah, that is exactly it. It was it was, you know, reflecting on that, it was a thought of. Well. This was painful. And this was the end. This was the end result. What if there was a better approach and really thinking rather than what if there was an easier ERP out there or a better ERP was? Well, if the financials and the compliant financials with the right controls and they could house the data as the goal. What if there was an easy system that could check the box for the Sarbanes-Oxley requirements and that could help get the closed process wrangled and, you know, be a grown-up real repository that could pass the data, could support better reporting to actually support the business coming out of the deal, but didn't try to be the be all and end all operational system. And ultimately it wouldn't really require a migration of any sort could handle that automatically automatic migration.
Blake Oliver: [00:52:49] Tell me more about that because that is the thing that's the painful part, right? How do you so I want to switch from QuickBooks to a SOX compliant GL advise is that I love the headline on your website, by the way, Freedom from ERPs. That's a. That's. That's exciting. Yeah. So how does. How does that work?
Graham Stanton: [00:53:09] Yeah. And that's the that's the beauty of it. I mean, it makes it easier for us to and we, we integrate with QuickBooks. So, you know, our, our pitch to QuickBooks is that we're not looking to move anyone off. We think about that mover situation where they're using QuickBooks when they're worth however many billions of dollars where it's kind of sort of been working. But. You know, people are where we were at. Beldon and turns of the meeting, some more grown-up features, and I'm meeting clothes management at the rank of the clothes, the proper controls, and. Needing some automation and on schedules that exist today in spreadsheets. But. Otherwise, things have kind of been working with QuickBooks. So, what we do is we plug into QuickBooks via the API, and we maintain a full bidirectional sync. We can you can tell your auditors that advise is the system that has all the controls and has the record that that you need. Now for being a more grown up and more grown-up business with more grownup accounting needs. But the day-to-day operation in QuickBooks doesn't need to stop. There's no running to systems of parallel. It really ends up feeling like one. And where you can do some of the work in QuickBooks day to day, and then you can do your closing entries and your all-closed process, your reconciliations and reports out of event.
Blake Oliver: [00:54:50] So I see here you've got closed task management, you've got the prepaid accrual deferred revenue schedules, fixed assets in there. So, work papers, essentially, it sounds like. And then you've got consolidations as well. So is your goal to be able to. Like, could a company go public with their accounting data in QuickBooks and using advise as the as the layer on top of that? Is that the idea?
Graham Stanton: [00:55:22] Yeah that's pretty that's pretty much it. And that is the goal. And we we're working towards it. We, you know, we have our SOC one in which I believe Intuit could provide for QuickBooks, but they don't because there's not much demand for it. And so yeah, we can check the box and start on Sarbanes-Oxley for housing the data but. Yeah. It's not it’s not a new system. You know, we can. Yeah, we are just. We just have the controls on the side that don't exist on the that don't exist on the cookbook side. But, you know, we want to remodel our easy to use, you know, if we're, we're building this in 20, 22. You know, a lot of the features you see here are new this year.
Blake Oliver: [00:56:09] Yeah.
Graham Stanton: [00:56:09] And it's not out of the nineties. We care about the people using the software and yeah all that accounting busywork where we feel like that's the stuff accountants shouldn't be spending their time on.
Blake Oliver: [00:56:26] And I see there's an AICPA logo on here. What's your what's your relationship with CPA accom.
Graham Stanton: [00:56:34] Well, that's ours. Now. That's where we're going. Yeah, We have our stock certification. Oh, God. Fcpa SOC one. Now, we've been working with not a firm on that one, and we've got our SOC one type one where a couple of weeks away of that from getting our soccer tech to certification to actually be able to put up there.
Blake Oliver: [00:57:01] Well, this is really exciting. I mean, you know, it's sort of been taken for granted in the accounting technology world that you get to a certain size, and you've got to get off of QuickBooks or you've got to get off of Xero and you've got to go to an ERP system, and you don't really have a choice in the matter. And this is the first time I've heard about an alternative pathway that could allow you to stay compliant and deal with all this stuff and continue to grow. So that's really exciting. Thank you for, you know, creating this as an option for people.
Graham Stanton: [00:57:36] Well, I mean, it's been fun. Yeah. You asked at the beginning with your house what's the connection as the journey from Peloton. And there was the former Peloton CEO who said to me as we were getting started, Oh, it's just like Peloton. Yeah. Except yet. Whereas we chose Home Fitness, you chose an even more stodgy category of accounting software to go and apply a modern usability. And that holistic approach is there.
Blake Oliver: [00:58:08] Well, you know, the great thing about accounting software is that we don't have to ship bikes for thousands of dollars across the country and manufacture them. That's nice. And it's very sticky, right? I think that's one of the things about ERP systems, actually, is that once you're on it, you never want to have to switch again if you don't have to. Although it is net sweet, Is Peloton still on net sweet or have they gone even more upstream?
Graham Stanton: [00:58:39] Yeah, I know they were. What do you do it. I never I never got the full story on where that ended up or. And I won. I lost the company two and a half years ago at this point. And unfortunately, I don't let up on that.
Blake Oliver: [00:58:55] Got it. Well, I guess I just have one more question for you, which is, you know, you've been in the in the shoes of a founder who's responsible for accounting and finance. You've been a customer of a CPA firm, at least one. You've hired CFOs. You have hired accountants. Do you have any advice for accountants as to how they can increase their value to somebody like you? What should we be learning? What should we be trying to do? What can we do to be better accountants, in your view?
Graham Stanton: [00:59:34] Now? It's a really good question, and I think the answer is coming from both sides is to make business leadership and accounting more of a partnership. At advice, we talk probably too much about it. Luca Pacioli, who wrote the first book on double entry bookkeeping and dad in Renaissance Italy in the late 15th century. But that work really did revolutionize business at the time, and it enabled all sorts of more complicated businesses than were allowed before because of the power of accounting and for whatever underlying reasons we fall in at this point into this point where business decisions are being made based on systems that aren't the accounting system, the most important metrics are not GAAP financial metrics, but the correct calculation still rests on so much of the same work that accountants do or could do. And. Now, when I think about it, I think that. Accountants really should be back in that in that PC. Right. Helping to give insight into the business, helping drive those decisions. And so then to frame this as advice. And if you're an accountant, you know, working at a big company, but especially if you're working at a startup. Yet recognize that the job isn't to the job. It isn't just a completely closed checklist and deliver gap financial. The job is to deliver digestible insights. And the good news is the accountants know the business really well and are really well suited to do that.
Blake Oliver: [01:01:26] Well said. Graham Stanton, thank you so much for speaking with me today and for recording this episode of the Earmark podcast, which is available for CPE on the Earmarks CPE app. So, if you need continuing professional education, go download the app on the Apple App Store or the Google Play Store and take a quick five question quiz and get your CPA certificate. You have learned a lot. I have learned a lot. So, I hope you have learned a lot and you've earned it. Graham If people want to learn more about advise, get in touch with you. I think you're hiring advise as well. Where should they go?
Graham Stanton: [01:02:05] That way you can find all the information just like initially advised. But please reach out, get in touch and you can find me on LinkedIn. You can drop your email with their email address on the box and we'd love to chat.
Blake Oliver: [01:02:21] And that URL is avise.com advise. Graham, great chatting with you now.
Graham Stanton: [01:02:29] Great chat and thanks so much for having me. We really enjoyed it.