Mapping the Path to Profitability with Kristian Marquez, CEO of FinStrat Management

Joe Michalowski: [00:00:00] Hello and welcome to another episode of the Role Forward Podcast. My name is Joe Michalowski. And this episode is brought to you by Mosaic, a strategic finance platform that transforms the way business gets done today. My guest is Christian Marquez, founder of Outsourced Financial Operations firm, FinStrat Management.

Christian, thank you so much for joining me today.

Kristian Marquez: Joe, thank you for having me.

Joe Michalowski: Amazing. Uh, before we get going, do you mind just giving everyone a quick background about yourself, who you are, the work you’re doing now, uh, how you got there, things like that.

Kristian Marquez Introduction

Kristian Marquez: Uh, my pleasure. Uh, so, uh, today I serve as founder and CEO of, um, on paper, Annapolis, Maryland based, uh, Finstrap Management, though myself and the rest of the team are remote. Uh, we’re coming up on our seventh anniversary, uh, this, uh, this January. As you mentioned, we provide outsource accounting, finance and reporting services to early stage businesses, majority of which are venture backed as well as investors, angels and venture capital and very fortunate had a I’ve had a great professional [00:01:00] career leading up.

Uh, to Finstrad’s inception, uh, prior to this, um, was an inaugural employee, um, for a, for a company that subsequently IPO for 4. 4 billion, uh, within, uh, within the tail end of my tenure, uh, also co founded a telemedicine startup, um, with, uh, two physicians, uh, learned what Not to do, uh, with, with an early stage business, unfortunately had to close those doors.

Um, but, uh, very grateful. I’ve had the opportunity to work with some amazing people and clients, uh, over the years and happy to be here today and share, uh, share what I’ve learned along the way.

Joe Michalowski: Amazing. Uh, I love the deep like operator background because we’re going to talk a lot about, uh, kind of the path to profitability today. And so I mentioned kind of both sides of that perspective, uh, the big IPO and also the, the early stage startup that, that didn’t work out, which is unfortunately. Case for many of them.

[00:02:00] So I want to just start off by sort of setting the stage. And I want to ask you, like, what, what do you think the expectations are for profitability for like a VC backed startup right now? Cause we obviously had pre 2022 growth at all costs mindset, like cash was abundantly available. And then over the last year or so, like super cash preservation mode, things like that.

So I’m curious, like, where do you think we’re going now? What are expectations, um, for a VC backed startup as far as profitability goes?

Profitability Expectations for VC-Backed Startups

Kristian Marquez: A great question. I would say that for a very, for a while there, everyone had turned their attention exclusively to becoming profitable. I. And I do not think that’s, uh, continues to be the case. I think expectations are bifurcated. I

Joe Michalowski: Hm,

Kristian Marquez: think the exception now is venture capital institutions will make an exception for a breakeven or a loss if the top line revenue growth is there.

Joe Michalowski: hm,

Kristian Marquez: And so said [00:03:00] another way, um, you know, if, if, if there’s a very promising story and you can back it up. Um, with some phenomenal actuals and a pipeline at the, you still have the old story on your hands, but that said, if, if growth is tepid, um, uh, yeah, absolutely. You know, my sense is that VCs are looking for, uh, founders who have a better sense of their financials and can, uh, point to a path to profitability that, you know, and I think it’s important to draw a distinction is that not every single VC thinks the same.

Right. Depending on the size of their fund, whether it’s, I’m going to pick two numbers. If it’s a hundred million or a billion, you know, in order to generate a three X, at least a three X return for their investors, you know, they have different exit expectations.

Joe Michalowski: hm.

Kristian Marquez: an acquisition.

That’s a hundred million. Uh, plus, uh, where’s the, uh, [00:04:00] Andreessen Horowitz is the world are looking for IPOs. Um, and so, um, long way of saying it’s, um, uh, it is binary. And you really got to consider whose lens you’re looking through.

Joe Michalowski: It makes a lot of sense and I, I want to dig in a little bit deeper. So I think that was a good, that was really what I was getting at. It was like, to me, I was curious if we were just heading back toward kind of the growth at all costs. And obviously, you know, there’s, there’s nuance there and I want to, I want to dig into that nuance.

And I think to me, probably easiest to think about it like stage by stage. And so you’re talking about like, what are those growth, uh, numbers versus. Yeah. Uh, kind of what the story is in the background. And so let’s talk like early stage. We’re, we’re like a series A company, so we’re like a long way off of that exit hopefully, unless there there’s an issue.

So how at se series A, are you thinking about growth expectations? How do you kind of put yourself on that path to the right expectations that you sort of set for us a second ago?

Kristian Marquez: Yeah, I [00:05:00] mean, I’ll oversimplify it. There’s a lot of ways you can look at it. Um, but a way that probably is not too controversial is something called the rule of 40. Um, and so I didn’t create this. You can Google it, but effectively, it’s the sum of, uh, your growth percentage plus EBITDA margin. And so, um, the idea is that the sum of the two need to be equal to or greater than 40%.

And so you can see, depending on, um, uh, the ratio. You’re either growing, and in which case, uh, significantly, in which case someone will take, um, pressure off your, your bottom line. But if you’re not, then you, you better be, you better be profitable. And so, um, that’s consideration number 1, you know, the 2nd part of that is consistently achieving 40 percent or more, uh, in the sum of growth plus EBITDA, right?

Versus just a blip. Um, but I, I think it’s a, it’s a good [00:06:00] benchmark. Um, you know, are there better ones perhaps, but. You know, one of the things I would tell you is if you’re, especially if you’re looking to raise outside equity. If everyone knows the metric, your job’s a little bit easier because you don’t have to convince them. It’s a good metric.

Joe Michalowski: Totally. Uh, makes a lot of sense. I. So, so we, we have an article on, on our side about rule of 40. We talk about it a lot. And I actually have a question that I want to ask later on. Cause I’m, I have a whole like, uh, run I want to do on, on metric focused things, mostly like building dashboards for this thing.

And, um, personally, uh, spoiler for later. I, I am not a fan of the rule of 40, some without a finance background. So, you know, my opinion doesn’t really matter that much, but everything I see, I’m like, I need to dig in on this one. So I want to get back to rule 40 a little bit, but. Off this point, that metric work at like early stage versus like growth stage?

So we’re talking like series B, series [00:07:00] C, you’re kind of getting closer to that exit stage where maybe you’re looking more even at, like, is a series a really like, are you looking at even, are you even tracking even at that stage? Like you’re so early. So I’m curious, like what your perspective is, uh, just given all the work you do with these companies.

Kristian Marquez: Yeah, the answer is today. Yes, absolutely. Um, and, um, you know, I don’t know if it’s for better for worse. I would say it’s for better. Um, yeah, I, my sense is that interest rates were artificially low. And subsequently created, um. I don’t think a mindset that’s conducive for the long run, and I say that because the consequences is we have this inflation today, which, which is a silent tax. It very much is. And there are apps, you know, not to go off a social tang tangent, but, um, you know, I think it’s fair to ask questions like, well, if [00:08:00] you’re a retiree on a fixed income. You know, is this fair? I, I’d argue it’s not. Um, you know, my mom is a great case in point. She’s in her early 80s and she’s dependent on a social security and a pension check. And so, um, it’s kind of like what’s good for the goose is good for the gander. I do think there is a normal interest rate. Um, I think it’s yeah.

Better for society in the long run, and if it’s closer to where we are today than 1 percent or zero, and that means that businesses have to be a little bit more, uh, conservative, uh, or disciplined. I think it’s a good thing. I think everyone benefits in the long run.

Joe Michalowski: It makes a lot of sense because I, a question I was going to ask as a follow up was like what the inflection point is and growth. And so I guess it’s less about like where you are in your journey as a company. And it sounds like more about kind of external forces. Like, uh, obviously, like the VC market hasn’t been very hot for the last year or so.

So like the [00:09:00] money’s just not abundantly available. And is You know, you’d focus more on profitability in those phases than you would otherwise. Um, but I think it’s really interesting point. So it’s less about an inflection point to me. It sounds like in summary, more like

Kristian Marquez: Well, I, so, um, I’d say there’s, there’s always caveats, you know, so one of the big caveat right now is every day I can tell you there’s no shortage of price equity rounds that are taking place, not only in the U. S., but around the world, and there are themes. You know, and one of the big ones right now is artificial intelligence, and so we should ask ourselves, you know, is this hype or or other?

I’m in the other camp, and so I’ll I’ll use a parallel to the dot com boom, which I had. I was around for had the opportunity to witness. And so, um, early stages of the Internet. And, uh, obviously a lot of question marks as to the true nature of it. And, um, a lot of companies ended up going out of business.[00:10:00] 

And so you have a lot of pundits who would, who, um, poo pooed, you know, the amount of money that was lost. But there’s a difference between a dot com bubble and, say, a gold bubble, right? At the end of a gold bubble, what are you left with? Same amount of gold. At the end of a dot com bubble, what are you left with?

An entire telecom infrastructure from which you can now launch productivity that at the turn of the century helped create a tremendous amount of more wealth. And so I do think there’s a parallel. Um, do I think there’s going to be a lot of AI related companies who are raising money at perhaps unrealistic valuations today?

Yes. Will they go out of business? Yes. But is it throwaway? I don’t. I don’t think so. And I think this is important because when you look at GDP, um, you know, I’ll oversimplify it, but, you know, effectively it’s your, your population and, and how much they produce. However, there, there is the asterisk there is, um, [00:11:00] uh, how product, how productive are they?

And one of the things I think a lot of people underappreciate is that the United States, as compared to the rest of the world, is the epicenter of productivity. And when you look at something like artificial intelligence, which can save 50 to 75 percent of a professional’s time, that’s significant. We’re not even, we’re, we’re coming up on year one, you know, and so, um, a long way of saying that I am, I am more, I’m, I’m in the bull camp today as to our outlook, regardless of where interest rates are and where the treasury’s been closing, I don’t think it’s been this high, or I don’t think, uh, was it the 10 year hasn’t been this high in the open market since 96?

Joe Michalowski: Oh, my gosh.

Kristian Marquez: Um, and so while it’s having absolutely having an impact on real estate, right. Thank you. I think we have to look underneath the surface to really get a sense as to what the state of the US is [00:12:00] and I don’t see artificial intelligence getting regulated away. I mean, I think there’ll be guardrails, but. In the long run, it’s good for business.

Joe Michalowski: Yeah, I mean, it’s a really interesting point. I think, uh, you know, probably, I mean, a lot of forces to discuss that are probably way too big for this podcast. So, uh, I won’t get too into the weeds of asking you, like, follow up questions there, but it’s a really interesting point. Just about the, the nuance there is depending on what industry you’re in and like where, where you’re building and kind of how that impacts the money that’s available and what’s expected of you as a company.

Uh, but to your point, it does seem to be, you know, good for everybody. What was it? Uh, it’s good for the goose. Good for the gander. It’s kind of a rising tide lifts all boats, whatever, whatever cliche you’d like to throw out there. Uh, seems to make sense. But I want to, I want to talk a little bit about like, uh, You know, uh, I think on the headline of your website, it’s like, operate financial operations firm.

I think, uh, we should get into sort of the, the practicality of this path to profitability. [00:13:00] Uh, we’ve talked a lot at mosaic, uh, on this podcast on content. We do just about like the value of getting financial find foundations in place as early as possible. It’s a thing that startups tend to kind of put off.

I’m sure you see that as well. And so I want to talk about, like, what, what should leaders, uh, think about putting in place? How, what guardrails, what structures, what processes do you get in place as early as possible to put yourself on a path to profitability?

Establishing the Path to Profitability

Kristian Marquez: So, let me start by acknowledging I’m unbiased.

Joe Michalowski: Just little bit, just only, slightly. It’s What

Kristian Marquez: You know, so. If you, if you think about really what is a representation of a set of financials, you know, effectively, it’s reporting the news. It’s letting you know what the outcome of decisions. Were and why is that valuable? Well, it’s valuable because if you’re bleeding cash at some point, you’re going to run out and [00:14:00] all, you know, businesses that go out of business all go out for the same reason they run out of cash. And so, at a minimum, very practically, you need to know, you know, your, your lifeblood position. So that you can make payroll, pay your vendors, um, and keep the lights on. So that’s, that’s number one, you know, where, when you start to graduate from financial, financial analysis, 101 to 201 are budgets. And so, you know, the simplest way that I think everyone would agree is, you know, Joe, if I tasked you with building a house, what you’re gonna, what are you gonna do first?

You’re gonna hire an architect. You know, you’re not going to go straight to your builder. The builder is just going to look at you and say, well, uh, what am I going to do?

Joe Michalowski: am I building?

Kristian Marquez: Yeah. And so, said another way, it’s a plan. And, um, it’s not to say that the plan can’t change. Um, if you’re, any of your expectations, whether they’re, you know, predominantly revenue, but expense change. Well, then at least you want to know and then make [00:15:00] changes accordingly. Uh, and then the last part of that would be a forecast. Uh, well, I take that back. Second to last part of that would be a forecast. And, you know, in this case it’s to say, all right, I’m building on the concept of as the year unfolds and you compare what your revenue and expenses are to what you budgeted, maybe there is good reason.

To change your expectations for the remainder of the year, i. e. update a forecast and why is that significant? Well, for whatever the reason you strike a line of gold and all of a sudden you have to start hiring a lot more people than you anticipated in a quarter. You know, that has a consequence, you know, is this a blip, is this, is this real, um, whole host of questions that you can ask that ultimately influence, you know, what, what does the, what does the future have in store so that I can better prepare.

And then I’d say the last part of that is metrics.

Joe Michalowski: Yeah.

Kristian Marquez: So, um, you know, for [00:16:00] sake of example, if you’re looking at a set of financials, um, all oversimplified and say a profit and loss is revenue and expense. However, we did an entire sub segment of, uh, within Accounting and Finance at FP& A that starts to answer questions that go very well.

Yes, our revenue is growing and so are our expenses, but is this good or bad? And so an example would be, you know, what’s your customer acquisition cost? Is it growing or shrinking relative to your revenue? Um, what’s your average revenue per account, uh, what’s your customer acquisition cost payback period?

What’s your return on, on CAC? And so, taking it a step further, if you know the answers to those questions, uh, you can then make decisions about how to better run your business. Now, for anyone who’s on this call, you know, they say, okay, well, I’m not accounting and finance. Here’s how I would think about it.

All of those metrics I just [00:17:00] mentioned, it’s just algebra. And like any algebraic equation, it’s made up of a bunch of variables. And so really the questions we should be asking are, well, okay, fine, that makes sense, but can you over, can you oversimplify how I should think about these variables? And the answer is very good news, yes.

Joe Michalowski: Yeah.

Kristian Marquez: If, if I were to put on my math teacher hat and you know, pull up the whiteboard and we start looking at these variables, almost everything comes back to the average size. Of an individual client revenue wise. And so questions should become is all right, well, is there a way for us to maximize that? And so, you know, if you’ve ever had conversations with friends about being a real estate agent, and if you had a choice, would you rather go sell five, 200, 000 homes or 1 million? Most people will tell you a million, cause it’s going to take you a fraction amount of the effort to do that. [00:18:00] And so if we continue with that line of thought, we should be asking ourselves, how do I. How do I maximize that? And so it’s either going after larger customers or increasing pricing, um, or selling more into an existing client.

Joe Michalowski: Yep.

Kristian Marquez: And so, I mean, I don’t want to say it’s that simple,

Joe Michalowski: Kinda

Kristian Marquez: but, but really those are your main levers. And so once you understand that, you can see that, Oh my gosh, you know, if I increase my pricing, I can reduce the amount of time it takes for me to spend money on acquiring a new client. Or if I make the decision to go after enterprise versus small, medium business, um, I can reduce the amount of time it takes for me.

Um, uh, to reduce, uh, my customer acquisition payback period, presuming your sales cycle didn’t increase, which is another conversation. Um, but, you know, [00:19:00] between base financials, budget forecast and metrics, I mean, you’re, you’re effectively looking at the menu of what we do, what we you know, I think about it’s anything else. I forget his first name, but there was an economist who came, Ricardo was his last name, who came up with the concept of comparative advantage. And basically the gist says you maximize your ROI when you, when you limit what you do to that thing that you’re the best at. And so Joe, I have a lot of bad analogies and the one I, I like to use is, you know, let’s imagine you were a surgeon, but you can type faster than your secretary.

Joe Michalowski: Okay.

Kristian Marquez: It still makes most sense for you to be in, uh, the OR with a scalp in your hand versus typing memos, because you’re going to make more money that way. And so I would say to most founders is, well, what’s, what’s, what’s your. Your core competency. Generally, it’s going to be product development, [00:20:00] industrial selling, professional services.

And then number two on that would be sales and marketing, um, you know, or at least this concept of founder led sales, especially in the beginning as compared to accounting, human resources. You know, business, um, uh, uh, business support that I mean, while valuable is not your core company. And so that’s why we get hired, um, uh, our services are fractional.

And so effectively you get the 18, um, for a fraction of the cost.

Joe Michalowski: Love that. I have a lot of follow up questions. Uh, the one that I want to focus on is so that there’s at least what I’m noticing in, in mosaic customers and even like what we’re doing as business. It’s. Exactly what you said, it says push up market because, you know, that’s, you know, you sell bigger contracts and you can kind of safeguard yourself against some of these market forces that we’re [00:21:00] dealing with right now.

Let’s say that we are strictly like a small, like, we’re selling to small, medium sized businesses. Like, we don’t have the option to just say, like, oh, we’ll just start selling to bigger companies. there’s plenty of those. If that’s the case, our lever, I guess, like, Going by what you said, it would be to increase our prices.

How do you, as like a finance leader, like, think about what do we increase it by? Like, how do you go through the thought process of actually executing this when you don’t just get to say, oh, we’ll just go after companies that are, you know, twice as big as, as the ones we had today.

Kristian Marquez: Sure. So, um, I think it, I think it boils down to understanding there are two types of buyers, price sensitive and value sensitive. And Bryce price sensitive, regardless of how good a job we’re always going to ask for. a discount and for you to lower your prices. Value sensitive people say you have solved my problem. You’re doing a great job. I will [00:22:00] pay up for this. And so I would tell you fundamentally, it’s important to distinguish between the two types of buyers because most successful businesses are focusing on value sensitive buyers. And so what does that mean? It means that when you get requests for discounts, you respectfully decline.

And say no, because there are consequences to my quality, my employee retention, uh, and my outlook and my ability to run this business. If I make a concessions when I shouldn’t have to, if I’m genuinely focused, I’m doing a great job. So if we focus on value sensitive buyers, the next thing I would ask is, okay, well, how do you find what’s your, how do you do price discovery?

Um, there are no shortage of articles that people have written, uh, not a price services, but I will make it super simple, start by charging. A lot and even more than you think that you would buy and see whether or not someone will purchase from you because there’s no, you know, all the theory in the world is great.

If no one gives you money. [00:23:00] Uh, and so psychologically, it’s always easier to start higher and come down than it is vice versa.

Joe Michalowski: Boy.

Kristian Marquez: um, is there, is there analysis that you can do to inform that? Absolutely. Um, you know, probably the most, uh, consistent way that people are doing that is bottoms up analysis. So, you know, effectively asking what are your cost of sales?

What’s your OPEX? You know, how many, you know, what’s your TAM? What do you think you can genuinely sell? Um, and where do you want to go? You know, effectively it walks back. Walking, walking numbers backwards within a budget, um, based on the and you can always change later on. But based on those inputs, you can then like the algebraic equation I said before, you can hone in on the variable of what I’m going.

To charge. Um, but it’s because speed is [00:24:00] so important and you can spend so much time. Um, uh, thinking about what do I do?

Joe Michalowski: Right.

Kristian Marquez: I say, go high and go out there and see what happens and everyone, you know, and here’s the other big thing too. It’s I’ve definitely met people who are really good at asking questions and listening.

And, um, you know, I think it gets under underrated just to saying, okay, if you’re not going to buy from me, how come? No, I’m too expensive. Okay. Well, what price would I have to sell this to you for in order to get me in order to get you to buy?

Joe Michalowski: right,

Kristian Marquez: We’re, we’re allowed to have those conversations and we’re allowed to say, Hey, you know what?

I’m, I’m a founder and I’m new and I’m, and I, and I hypersensitive to driving value, but I’m also a bit of discovery, your customer. So why don’t you engage me? If you genuinely are telling me this is a problem you’d like solved,

Joe Michalowski: totally. I love that. And yeah, to that point, it’s not, it’s not just, oh, well, competitor X is selling for this much. Like it has to be that it’s not [00:25:00] like, it’s not this transactional back and forth. It’s really like, to your point, really listening and understanding like what value they got out of it, how they price that value themselves in their head.

And kind of moving on from there. I love, I love the explanation. Uh, yeah, I love it.

Kristian Marquez: um, I’d offer up for your listeners. Um, I just got done reading Alex Hormozy’s a hundred million dollar offers. Great book. Um, he did a really great job of, uh, covering this, this subject. He, you know, I give you a, you know, a fraction of a cliff notes, but it’s basically what we’re talking about is when you’re, when you’re really focused on doing a phenomenal job, um, people will pay. And so as long as that’s your mindset and, and you’re really thinking about there’s value to be had, that’s a great approach.

Joe Michalowski: I love it. I, the, the other follow up I want to get to and, you know, you mentioned, uh, first of all, uh, love. [00:26:00] The simplicity of the explanations, like, it’s not, not simple in a way, like, oh, like, we’re not getting to the meat of it. I just think it’s a really clear way of thinking about some of these problems we’re discussing, but simple does not mean easy.

So, like, obviously, if everybody could do this, like 1, like, they wouldn’t have to hire you and they wouldn’t need a whole bunch of things that people are selling them services for. And so I’m curious, like, what. Do you see in clients or maybe, like, just anecdotally some of the biggest challenges or overlooked processes when trying to get on this path to profitability?

You mentioned kind of those 4 pillars. Like, is there 1 that stands out more? Uh, curious what you’ve seen.

Challenges of Hitting Profitability

Kristian Marquez: Yeah. I say there’s two parts. Well, there’s a bunch of parts, but two that that really come to mind. Um, I, I don’t think enough people acknowledge the fact that there are many elements of building a business that are boring, [00:27:00] but they still need to be done. And so as a species, I, my sense is that many people will default to doing what they know. Versus what they’re supposed to do. And the reason being is those things you’re supposed to be doing are boring. So, it requires a degree. So I think you just knowing that’s the case is valuable. Like, okay, I got something boring but it needs to be done. Well, you know, okay, I know this is part of it. It is.

And so you then have to have the discipline to follow through and get it done. Um, and then the faster the better. There’s always value in speed because you learn more quickly. Better, better Intel. Um, the other part of that is just how do, how do you think about lead generation? How do you think about closing deals? Um, it is a, it is a very, I [00:28:00] think it’s a very, very important subject. And I don’t, again, I’m sure there’s, there are professionals out there who talk about it all the time. Um, but Jason Lemkin, the founder of SaaStr, uh, said something great. Thank you. Uh, that really, I think, gets to the heart of the incorrect mindset that many founders have.

And that’s just a quote. Let me hire a VP of sales and they can sprinkle some sales on it. I’m paraphrasing. But I, I have seen this many, many times before, and I don’t know if it’s out of ignorance or, um, uh, you know, not a desire to have to go sell, but my very strong counsel is any founder should start their company with founder led sales, you know, your product, the best, you’re going to be the most passionate and while there are a lot of things to do, I understand, I acknowledge that.

Um, in the beginning, and I’m not going to time back beginning, but let’s just say in the beginning, [00:29:00] you’re a significant portion of your time to be should be devoted towards, um, uh, selling, you know, so lead gen, um, uh, you know, looking at the emails that may be in your sequences, um, tweaking them. Engaging, uh, prospective clients, current clients, really ensuring that you understand what’s going on so you can hone your messaging

Joe Michalowski: Yep.

Kristian Marquez: and only until that point where you’re consistently closing deals, do I then say, go out and hire two,

Joe Michalowski: Two.

Kristian Marquez: let’s call sales reps. And teach them what you’ve learned prior to hiring a VP of sales.

Joe Michalowski: Yep.

Kristian Marquez: And only until which time you have two sales reps who can consistently close, do you then consider going out and hiring your VP who can then take them off your hands and manage them. Cause I, I think the part that. A [00:30:00] lot of founders don’t understand is that really a VP of sales intend is intended to manage a process and occasionally close a deal.

Joe Michalowski: Yeah,

Kristian Marquez: Because they understand human psychology, and they, they know how to pull the levers to get someone to say, yay. BP sales are not generally not picking up, you know, preferably speaking, picking up the phone, um, or, you know, they’re making sure the reps are keeping the pipeline. Accurate, and that that they’re giving feedback on the way to hitting the budget and numbers.

And so I’d say those are the 2 really, if any, if, you know, if you focus on any 2 things, those would be.

Joe Michalowski: I love it. I think it’s a great, a great way to kind of answer that question. And I want to, I want to ask 1 more sort of tactical question. I kind of on this vein of processes and things people should put in place. I want to talk about tools for a 2nd. So, like, when you work with a client, like, are there certain tools or [00:31:00] systems that you’re saying, like, hey, we need to get this in.

Sooner rather than later, uh, curious what your take is on tech stack and anything else related to this topic.

Kristian Marquez: So, um, uh, if I want to go out to our website, uh, fin strat MGMT dot com, we actually publish our stack. Um, so you can see it. Um, that said, um, you know, for purposes of our firm, we only use QuickBooks online, uh, into it owns over 70 percent of the market. They have a marketplace where third party developers can sell their apps, includes reviews.

So it’s a phenomenal asset, uh, for purposes of running a business, not just accounting and finance. After that, we’re, you know, it’s funny. We generally, so we’re a bit unique in the space. I [00:32:00] try to make a habit show to only say nice things, but let me say this. We represent, uh, fix it. What I like to describe is fix it once. 99 out of 100 sets of financials that we inherit when we onboard a new client are a mess. It’s just a degree,

Joe Michalowski: Oh, no.

Kristian Marquez: and I’m just going to say it. I’m going to stop my comment there. Uh, so we’ve actually developed a reputation for cleaning up the messes and making financials investor friendly, GAAP compliant, uh, which is very important, uh, because it sets the foundation for, you know, debt facility, a price equity round, or a sale.

But, you know, Perhaps more importantly, the second part, second part answer your question and that’s dashboards and models. And so, um, the other reason in addition to fix it, one that we get hired as business intelligence and in support of monetizing the business. So we, we have fractional CFOs who lead our client [00:33:00] implementations.

Uh, these are accounting and finance professionals who spent decades. In the role, but every single founder and C suite member says the same exact thing. Show me my dashboards. Um, I want to, I want to break down. And so we understand that’s the case. We benchmark, uh, individual components of financials.

We’re publishing ratios. We’re publishing SAS metrics. Um, and that’s really where, you know, the magic. If you will, why is everyone just loves seeing, you know, what their performance looks like and then, you know, saying, okay, well, help me interpret the tea leaves, fractional CFO. Um, and so, yeah, in our case, the iron is all this lifting takes place in the background, a significant amount of lifting, but it’s all kind of unsung because no one really cares about debits or credits or ensuring invoices, you know, get paid on time.

But it just so happens, all of that is necessary in order to. You know, make a business run officially.[00:34:00] 

Joe Michalowski: I, uh, this is great. First of all, uh, going to link, uh, the tech stack you mentioned on the website. So that’ll be in the show notes. So anyone that wants to see it, uh, can click through and go to the website and see that. But you gave me the perfect segue into like, kind of the last chunk of a conversation I I told you I was going to get back to rule of 40 and metrics.

And the question I had was about tracking, like, your progress on, Kind of like path to profitability. And so if you were building out a dashboard, as you obviously do, because you just mentioned that it’s what everybody wants to see, uh, if you’re building out a dashboard to track this conversation that we’re talking about, this path to profitability thing, what are the metrics you’re putting on it?

Uh, we already talked about rule of 40 and I will get that followup question in there, but other than the rule of 40, like, what are you looking at, whether it’s day to day, week to week, month to month, quarter to quarter.

Kristian Marquez: Yeah. So, um, in, in our, so, um, uh, let me give some shout out to some [00:35:00] vendor partners out there who we’re big fans of. So we use visible for our dashboards, uh, based out of Chicago. Um, great, great tech. They really get it. Uh, they build dashboards, not only for founders, but for VCs as well. Uh, and then we use giraffe, uh, J I R A V, uh, for our modeling.

And, um, I am a big fan of Excel, but Excel has limitations. That giraffe assists eliminate. Um, and so to answer your question, you know, on the path to profitability, it really boils down to forecast. And so what are the inputs? So, you know, if you think about a forecast, it’s where your actuals pick up. So, for sake of example, we just close September.

So Q3. And if we want to see the rest of the year or the 1st half of next year, we now just need to start estimating what revenue is going to look like. And so that’s going to be a function depends on the business, but it’s going to be a function of, hey, where did revenue close? [00:36:00] You know, what, what is my trailing 6 month new percentage expansion percentage growth?

I mean, that churn percentage because all that’s going to influence October the rest of the quarter next year. I now also need to go do an extract from my CRM. You know, the sales team should be keeping HubSpot, Salesforce, Copper up to date, you know, when do they anticipate deals closing? What’s the actual, uh, ACV extract that probability, adjust it, and then use that to marry it up against what your, your current revenue is.

All right. So now we have a revenue forecast, uh, same concept on expense side. We know what the preceding expenses are. Question is, is do we have any new ones coming up, whether it’s new vendors, hires, uh, what have you, and all of that information should be incorporated in your expense. And what do you get?

You ended up getting, um, uh, bottom line, which you can then start to take a look and say, well, what’s happening [00:37:00] in my cash? Now, where it gets a tiny bit, uh, complicated is depending on what the business is selling. And so for sake of example, if a business is selling, uh, prepaid 12 month subscriptions. That has a different cash profile than someone who’s selling monthly subscriptions.

Joe Michalowski: Totally.

Kristian Marquez: And so, you know, here’s again, I, I admitted I was biased, but here, you know, here’s where software programs and accounting and finance providers start to separate themselves because it’s not, if you’re, especially if you’re preparing your financials on an accrual basis, which as a SAS company who’s selling subscriptions more than a month, you have to do if you’re going to have metrics to let her, um, Coherent, um, you now need a forecasting platform that includes unearned revenue, prepaid expenses, um, if your, your cash profile doesn’t match match your [00:38:00] piano on.

And so draft does, um, it has a cash flow statement, um, and which is looking at effectively changes on your balance sheet. Uh, which is a derivative of your piano, uh, in order to better understand, um, what your, um, your cash looks like, um,

Joe Michalowski: Lost you, Christian. Uh

Kristian Marquez: uh, over the coming months.

Joe Michalowski: oh. Christian, you there? Okay. I, uh, froze for a second. Sorry about that. Um. They’ll, uh, they’ll edit this at the end, but no, so that the, the system conversation, dashboard conversation, I appreciate all the, the insight there. Um, I want to get to, so I’m running out of time with you and I want to get to this, uh, this rule of 40 question I’ve been asking or thinking about.

We’ve done work with, uh, I don’t know if you know, uh, Ray Reich, uh, he runs formerly RevOpSquared, now Benchmarkit, but he does these like, [00:39:00] um, Annual SAS metric surveys and benchmarks. And so his big stick for, I don’t know, it seems like the last year or so has been that rule of 40 is now like the primary driver of like a SAS company, like a VC backed SAS company’s valuation.

Like, that’s what we should be looking at to see whether or not, um, you will be valued highly in the market. And it seems like such an oversimplification of a metric to me. And I, I want you to either whether it’s disagree or like, agree, I make the case for me to believe that rule of 40 is like a critical metric on path to profitability.

Because to me, it just, it seems so it seems to lack nuance to me. And I, I’m curious how you think about that.

Kristian Marquez: um, so I’ll start by saying I offered up rule of 40 as a potential benchmark. But by no means does it drive my decision [00:40:00] making. I’ll tell you. So today I serve as the CEO. But when I started the business, I had a fractional CFO hat on. Um, I’ve been in a variety of accounting and financial roles for the previous 20 years.

Next year will mark two decades as a CFA charterholder. Um, and so very fortunate, um, uh, to understand that, Kind of going back to what I said about the plan, you know, if you’re going to get, if you’re going to build a home, let’s call that your, let’s call it when your home is finished and you’re ready to move in the sale of your company.

Joe Michalowski: Yep.

Kristian Marquez: We should be asking questions. Well, how do we get from here to there? And what I’ve learned was maybe something you did. We both did as a kid. And that was, remember when you went to McDonald’s and you looked at your Happy Meal and they had a maze on the back and you know, you try to figure it out. Well, I don’t know about you, but I ended up looking starting at the end

Joe Michalowski: Ooh.

Kristian Marquez: and I went backwards

Joe Michalowski: Yep. Yeah.

Kristian Marquez: and I was like, Hey, I figured it out.

And it’s, it’s an identical concept that we employ with our clients. [00:41:00] We ask them first, well, what’s your end goal? know, because if you tell me you want to sell this company next year for 50 million versus, you know, IPO and as a unicorn, those are two different sets of plans, uh, time horizon impacts that as well.

Um, and so before I would start a conversation around growth or profitability, it first and foremost is, you know, what’s our destination, where are we going and, and what amount of time. You know, how much, how much gas do you think you have in the tank founder? And from there, we’ll actually create a model that works backwards.

Now, um, I’m going to exaggerate to make my point. If we hire a client that’s in year one, and he’s like, I want to sell next year for a billion dollars. I’ll say, here’s the plan, but guess what? You know, this growth percentage is, is not realistic. So said another way, if you think about my analogy, we’re really just using something like the rule of 40 is an overlay to test whether or not our assumptions [00:42:00] are within the realm of reason, as it say, it’s absolute by no means, um, you know, there’s been no shortage of businesses who’ve, um, have had, you know, hockey stick growth, um, but I’d also say that the exception, um, and so that’s where I think a real fractional CFO’s value lies. Is common sense and saying, okay, yeah, I hear you loud and clear that, you know, you want to retire next year, but let’s talk about reality.

Joe Michalowski: Yep. Okay. Uh, I feel better about to be honest. Thank you. I appreciate you indulging my, my Rule of Forty, uh, shtick that I’ve been on. Uh, in the background, honestly, I’ve never brought this up to anyone, so you’re the first person I’ve actually asked. Uh, but it felt appropriate to me, so I wanted to run with it, so I appreciate

Kristian Marquez: My pleasure.

Key Takeaways and Career Lessons

Joe Michalowski: Um, all right, Christian, I have, I have to like, sort of zoom out questions for you. They be quicker. Um, 1 is like, very, uh, you know, we’ll call it fluffy, but the 1st, 1 is a little bit more real. Uh, I want to, I want to ask what 1 piece of [00:43:00] advice you have for so. For companies that raised really big rounds in those years of, like, peak activity, like, they were all in on the growth at all costs sort of phase and now, like, have this jarring sort of.

Transition to where we are now, which is like, Hey, it’s time to get a little bit more cautious with that capital. What’s, uh, your biggest piece of advice for shifting operations to a more. Let’s call it profitable or potentially profitable growth trajectory.

Kristian Marquez: Yeah. I mean, I think it’s an understanding that as circumstances change, it’s okay that we change. Um, and so loom recently got acquired, um, albeit effectively at the same valuation as they did prior to the previous round. See that whole host of institutional investors who didn’t make any money. While unfortunate, I hate to say that’s life, I mean, all things being equal, you know, if you can see a material liquidity event at this point, um, uh, in the [00:44:00] market, I tip my hat.

And so, I, I think it’s, you know, you think of founders are generally type A.

Joe Michalowski: Yep.

Kristian Marquez: hardwired to do really, really well. Um, but I don’t know. I think mental health, the real thing, you know, beating yourself up, you know, because you, you can’t three acts your last investor’s money. Um, I mean, of course I will. You want, you want to,

Joe Michalowski: Right.

Kristian Marquez: but if, but if things change, I think it’s okay to let yourself off the hook.

Obviously not ideal. I’m, I’m, I’m hardwired to win, you know, just as much of any other type a, uh, person, but I think there is tremendous value and understanding that, uh, things don’t always go as they plan. And it’s, there’s a tremendous amount of value and recognizing that and sometimes saying, you know, what doubles better than a home run sometimes.

Joe Michalowski: That’s a great way to put it, uh, especially with, [00:45:00] uh, you know, I think it’s tonight game seven of, uh, uh, ALC or NLCS. So great. Uh, baseball analogy to bring us toward the end here. Um, I have 1 last question for you. Christian. I ask everyone that comes on. Um, it’s not necessarily about what we, uh, just discussed, but very simply, uh, what’s something, you know, now that you wish you knew when you started your career.

Kristian Marquez: Oh, boy. Um, it’s a great question. There’s two parts, there’s, there’s, there’s a macro part and then I’ll, I’ll go very tactical, I’ll go strategic and I’ll go tactical. So strategic, um, any, any would be founders, I would tell you to, uh, start with something that broadly looks like professional services, i. e. something that can get you to [00:46:00] profitability as fast as possible before you roll out a product. And the reason being is it all oversimplified, but it gives you a tremendous amount of optionality. Uh, because you’re not in a position like, you know, the majority of BC back companies who are not profitable and now find themselves with less ability to make decisions because they have institutions on their cap table and you can and for a founder to give themselves more options. you’re cashflow positive, you’re in a better negotiating position should you decide to take money. So that’s number one. So that’s strategic. Tactically? Oh my gosh. There’s such a negative stigma around the trades and, um, you know, non MBA type jobs that I think young founders, especially in their 20s.[00:47:00] 

Do themselves such a disservice. Um, uh, so said another way, you know, if I was 20 again and I was starting all over, I guess start a plum plumbing company and not because I was going to be a plumber for the rest of my life. But, um, the world needs plumbers and if you can be a phenomenal plumber and you can create a profitable plumbing business, then you can go create your plumbing app or whatever it is that you’re going to go do next and.

It’s fun to unpack things like this. One of the things I, I, um, I love is talking about is just what are the ingredients to success. I think people discount competition, you know, so case in point. Um, you know, if everyone’s doing the same thing, there’s a tremendous amount of competition.

Joe Michalowski: Yep.

Kristian Marquez: And so where does the competition lie?

Well, just look at a normal distribution. If most people are in the middle, [00:48:00] right? Well, that’s where all the competition lies. So how does that affect us? Well, then we should go do the things that people aren’t doing. And what are the things, you know, and if you look at either tails, well, which one are you going to choose?

Well, I prefer riches over poverty. So I’m going to go big because that’s where the least amount of competition is. And so I think we should be asking ourselves how many 20 year olds are starting. Construction businesses or, you know, the first one to come to mind, you know, dry cleaning businesses or or or vending.

They’re not a lot. And when, you know, you have that amount of energy at your disposable and you don’t have kids because families absolutely. I don’t want to say complicate things. But it changes, it changes the dynamic.

Joe Michalowski: quite a bit.

Kristian Marquez: Yep. Um, it’s a great time. And so case in point, um, a shout out to my son, uh, John Marquez, um, who, um, is the founder of, uh, Franklin, Tennessee based Bridger, uh, design and build.

Uh, he graduated college last year and [00:49:00] decided to go start a roofing business and he’s 24 years old and, um, Let’s there are a lot of elements. I’ll oversimplify saying he’s hardwired to do a great job. Um, but knock on wood business is good. And, um, you know, does it does it mean he’s going to, you know, continue as a, as a contract with the rest of the life?

No. But he’s he’s accumulating a lot of experience. And so I’ll leave this as a last thought. I’ll give you, you know, we tend to hold people like Bill Gates and Mark Zuckerberg in high regard. There’s something really practical, a very practical benefit when you start in your early 20s versus your 30s, your 40s. Think about Mark competing with other people his age today. He’s got decades more. Experience under his belt, so in another way, the sooner you can start, [00:50:00] better.

Joe Michalowski: And, uh, so I, again, I think this is episode like 45 of the podcast. So I’ve been doing this for a while. It comes out like every other week, generally, unless I, you know, this week, which is. Uh, never had anyone mention, uh, plumbing construction. This is a very unique answer and a very good 1. so I appreciate it.

I always like that question because, uh, you know, it’s a, it’s a podcast for finance folks. I am not a finance person. Uh, and this question always kind of like, zooms us out a little bit and it’s always stuff that I can take away as well. So, uh, appreciate that. It was a good answer. But, uh, that does take us, uh, to the end of my list of questions.

So, Christian, thank you so much for being here. Uh, I’m going to turn the floor over to you. Where can people go to learn more, or to connect with you to learn more about FinSTRAP management, the work you’re doing? Uh, the floor is yours, whatever you would like to promote, sir.

Kristian Marquez: Oh, well, thank you, Joe. Thank you again for having me. Um, glad we got this time together. Um, you know, as I mentioned the beginning of the call, we provide, [00:51:00] uh, accounting finance and reporting services for early stage businesses, predominantly B2B SAS, but investors as well, both angels and venture capital firms.

And if you go out to our website. Uh, the address is FIN, short for financial, STRAT, short for strategy, uh, MGMT, abbreviated for management. com. Uh, and you can find a contact us there. Someone on the team will circle back.

Joe Michalowski: Amazing. Uh, well, this is a great conversation. I love doing this podcast. I love meeting people like you. So I had a good time. Yeah. Maybe we can do it again sometime. Thanks man.

Kristian Marquez: Sounds good. Thank you, Joe.