4 ms·

I understand business plans, but balance sheets? It seems like you'd want to know the financial picture of a company. What else to you look at to, even at the m

I understand business plans, but balance sheets? It seems like you'd want to know the financial picture of a company. What else to you look at to, even at the most basic level, determine if the startup is going to be able to pay it's AWS bill and payroll that month?

djbusby 5y ago
perhaps the P&L? That's the bestest report (imo) of the business.
shane_b 5y ago
Software businesses have one balance sheet item: cash.
- bgroat 5y ago
  That's not true. If my software company's treasury gains were realized it would make up almost a third of our revenue. Though I suppose a case could be made that this would make us a holding company with a cash-flowing SaaS, and not actually a "software company"
  - shane_b 5y ago
    Fair, investments too. That’s a recent trend.
- hncommenter13 5y ago
  I'm not sure what stage of company we're talking about here. I'd argue that for ALL companies, in any industry, working capital--measured on the balance sheet--is a critical data point. That is, you may be booking revenue but not collecting cash from your customers (in an extreme case, the "revenue" may be fictitious, if the software doesn't work and the customer refuses to pay). And while you might have $x of cash on the balance sheet, you could also have a huge and looming payables balance because you're waiting to pay your bills until you're N days past due. Also, revenue is just what you can actually book per the accounting standards, which has lots of specific tests for software companies. For most SaaS companies, a key number is also deferred revenue, a balance sheet item that records the difference between the cash you've collected (say, up-front for 12 months) and the remaining performance obligation to deliver software over the period. Or, if you have a big service component as part of your offering, a number to watch is the amount of revenue you've booked but not yet billed. As an investor, I'd also be curious about the future obligations of the company that will consume cash, such as big leases, debt, and other liabilities (eg, legal judgements against the company). Investors are free to ignore whatever information they'd like, I suppose. And a tiny two-person company probably has a very simple set of financial statements, if any. But those two founders have the ambition to build a big and successful company, I'd argue that understanding how to read financial statements with some mild degree of fluency just isn't that hard and is a very useful skill.
sjburt 5y ago
Why does it matter? You are changing the financial picture, probably by an order of magnitude or more. The question should be what the company will look like after the investment, not before.
- darksaints 5y ago
  Ummm...in order to know what the company looks like after the investment, you need to know what the company looks like before the investment.
  - ladon86 5y ago
    In PG’s era of YC, it generally looks like 2 guys with 2 laptops in the cheapest apartment in Mountain View.
    - darksaints 5y ago
      And that two guys with laptops in a cheap apartment in mountain view might be a majority of the cases they see, but how will they know unless they see it? I've seen plenty of fake-it-til-you-make-it startups that immediately go out an sign a lease for AAA office space because they think they need a cool office before anybody will take them seriously. And that is a massive red flag to a VC...one that shows up on a balance sheet. For an early stage company, nobody cares about your assets or your shit estimates of the value of your intellectual property or goodwill. But payables and receivables can definitely be a dealbreaker, and I've never known a single VC that would sign a check without an understanding of where the company, no matter how new, stands with them.
      - beambot 5y ago
        Financially, YC's decision made sense regardless of balance sheets or business plans: YC was investing at a $1.5M valuation (7% for $100k). By selecting a pair of smart engineers, the acquihire potential often exceeded the invested value. Furthermore, their interviews cut to the underlying cause (scrappiness & maker mentality), which inherently eliminated certain effects (AAA office spaces) without ever seeing a balance sheet.
jnwatson 5y ago
If he only invests in very small enterprises, the costs will always be small relative to his investment.
tomhoward 5y ago
We used to send lengthy, wordy updates to our investors, including YC/PG. Then one time he replied, frustratedly, imploring us to just tell him how much money we were making, how much money we were spending, and how much we had in the bank. He later put that concept into this essay http://www.paulgraham.com/aord.html http://www.paulgraham.com/aord.html
- darksaints 5y ago
  How much you were making: seen on income statements as revenues and on balance sheets as accounts receivable. How much you were spending: seen on income statements as expenses and on balance sheets in accounts payable. How much cash in the bank: seen on cash flow statements as starting/ending cash position and seen on balance sheets as cash assets. Paul graham didn't care about your poetry, he just wanted to see your income statement and balance sheet. He apparently just didn't want to call it that because then he couldn't get edgy contrarian soundbites in on Twitter.
  - tomhoward 5y ago
    You keep throwing barbs around but missing the important point. He specifically didn’t want to see balance sheets or income statements as he knows they can be full of bullshit (FWIW my only university qualification is in accountancy, so I know what he means). All he cared about the bank balance and whether it was going up or down, because that’s what indicates whether the company would survive or not. He still cared most about users and how excited they were and how fast their number was growing.
    - davidivadavid 5y ago
      Dude, everyone knows that. Seriously. Nobody's missing the "important point" because everybody who's been on Hacker News for five minutes has heard Paul Graham make that point. Indeed, people have made jokes about startup business plans for decades. Literally everyone knows that those things don't matter for super early stage startups. The tweet, however, and very much like many of Paul Graham's latest essays and tweets, seems to purposely elude any context, make a very generic a debatable statement, and assert it with complete aplomb. For someone who just wrote an essay about putting ideas into words, if he can't see that this tweet will be interpreted as "balance sheets are useless", he needs to put in a bit more work. That's what people react to, because the only conclusion is that since he doesn't want to tweet bromides, he must be trying to say something "controversial." It's really bordering on trolling, which for a man with his age and reputation is kind of cringy, embarrassing, and frankly disappointing to people who enjoyed his past stuff.
kypro 5y ago
Perhaps he asks how much debt the company has and what the operating expenses are during the interview? You don't necessarily need to look at the balance sheet if you ask the right questions, I guess.

djbusby 5y ago

perhaps the P&L? That's the bestest report (imo) of the business.

shane_b 5y ago

Software businesses have one balance sheet item: cash.

bgroat 5y ago
That's not true. If my software company's treasury gains were realized it would make up almost a third of our revenue. Though I suppose a case could be made that this would make us a holding company with a cash-flowing SaaS, and not actually a "software company"
- shane_b 5y ago
  Fair, investments too. That’s a recent trend.
hncommenter13 5y ago
I'm not sure what stage of company we're talking about here. I'd argue that for ALL companies, in any industry, working capital--measured on the balance sheet--is a critical data point. That is, you may be booking revenue but not collecting cash from your customers (in an extreme case, the "revenue" may be fictitious, if the software doesn't work and the customer refuses to pay). And while you might have $x of cash on the balance sheet, you could also have a huge and looming payables balance because you're waiting to pay your bills until you're N days past due. Also, revenue is just what you can actually book per the accounting standards, which has lots of specific tests for software companies. For most SaaS companies, a key number is also deferred revenue, a balance sheet item that records the difference between the cash you've collected (say, up-front for 12 months) and the remaining performance obligation to deliver software over the period. Or, if you have a big service component as part of your offering, a number to watch is the amount of revenue you've booked but not yet billed. As an investor, I'd also be curious about the future obligations of the company that will consume cash, such as big leases, debt, and other liabilities (eg, legal judgements against the company). Investors are free to ignore whatever information they'd like, I suppose. And a tiny two-person company probably has a very simple set of financial statements, if any. But those two founders have the ambition to build a big and successful company, I'd argue that understanding how to read financial statements with some mild degree of fluency just isn't that hard and is a very useful skill.

sjburt 5y ago

Why does it matter? You are changing the financial picture, probably by an order of magnitude or more. The question should be what the company will look like after the investment, not before.

darksaints 5y ago
Ummm...in order to know what the company looks like after the investment, you need to know what the company looks like before the investment.
- ladon86 5y ago
  In PG’s era of YC, it generally looks like 2 guys with 2 laptops in the cheapest apartment in Mountain View.
  - darksaints 5y ago
    And that two guys with laptops in a cheap apartment in mountain view might be a majority of the cases they see, but how will they know unless they see it? I've seen plenty of fake-it-til-you-make-it startups that immediately go out an sign a lease for AAA office space because they think they need a cool office before anybody will take them seriously. And that is a massive red flag to a VC...one that shows up on a balance sheet. For an early stage company, nobody cares about your assets or your shit estimates of the value of your intellectual property or goodwill. But payables and receivables can definitely be a dealbreaker, and I've never known a single VC that would sign a check without an understanding of where the company, no matter how new, stands with them.
    - beambot 5y ago
      Financially, YC's decision made sense regardless of balance sheets or business plans: YC was investing at a $1.5M valuation (7% for $100k). By selecting a pair of smart engineers, the acquihire potential often exceeded the invested value. Furthermore, their interviews cut to the underlying cause (scrappiness & maker mentality), which inherently eliminated certain effects (AAA office spaces) without ever seeing a balance sheet.

jnwatson 5y ago

If he only invests in very small enterprises, the costs will always be small relative to his investment.

tomhoward 5y ago

We used to send lengthy, wordy updates to our investors, including YC/PG. Then one time he replied, frustratedly, imploring us to just tell him how much money we were making, how much money we were spending, and how much we had in the bank. He later put that concept into this essay http://www.paulgraham.com/aord.html http://www.paulgraham.com/aord.html

darksaints 5y ago
How much you were making: seen on income statements as revenues and on balance sheets as accounts receivable. How much you were spending: seen on income statements as expenses and on balance sheets in accounts payable. How much cash in the bank: seen on cash flow statements as starting/ending cash position and seen on balance sheets as cash assets. Paul graham didn't care about your poetry, he just wanted to see your income statement and balance sheet. He apparently just didn't want to call it that because then he couldn't get edgy contrarian soundbites in on Twitter.
- tomhoward 5y ago
  You keep throwing barbs around but missing the important point. He specifically didn’t want to see balance sheets or income statements as he knows they can be full of bullshit (FWIW my only university qualification is in accountancy, so I know what he means). All he cared about the bank balance and whether it was going up or down, because that’s what indicates whether the company would survive or not. He still cared most about users and how excited they were and how fast their number was growing.
  - davidivadavid 5y ago
    Dude, everyone knows that. Seriously. Nobody's missing the "important point" because everybody who's been on Hacker News for five minutes has heard Paul Graham make that point. Indeed, people have made jokes about startup business plans for decades. Literally everyone knows that those things don't matter for super early stage startups. The tweet, however, and very much like many of Paul Graham's latest essays and tweets, seems to purposely elude any context, make a very generic a debatable statement, and assert it with complete aplomb. For someone who just wrote an essay about putting ideas into words, if he can't see that this tweet will be interpreted as "balance sheets are useless", he needs to put in a bit more work. That's what people react to, because the only conclusion is that since he doesn't want to tweet bromides, he must be trying to say something "controversial." It's really bordering on trolling, which for a man with his age and reputation is kind of cringy, embarrassing, and frankly disappointing to people who enjoyed his past stuff.

kypro 5y ago

Perhaps he asks how much debt the company has and what the operating expenses are during the interview? You don't necessarily need to look at the balance sheet if you ask the right questions, I guess.