June 2018

In this month’s issue of Toptal’s Finance Digest we explore just how much further WeWork has to grow, the double-edged sword of scaling an unprofitable business and examine an incredible think piece from an early Amazon employee on invisible asymptotes.

We also sit down with one of Toptal’s foremost Interim CFOs, Scott Brown, who shares his tips for a successful handover, what he prioritizes his first week and the key ingredient for a successful FinTech project.

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The Latest Financial News We Can’t Stop Thinking About

Five things everyone in finance can't stop thinking about this month.

Bad Blood - A New Book Out On Theranos is Making Everyone Think Thrice About Due Diligence

This story is fascinating for a couple of reasons. For one, there are a lot of juicy details about just how wildly a person could lie (for example, Holmes promised the company would make $100 million in revenue in 2014 when it was on track to make $100,000), but also, as we all drive by Theranos rubbernecking at the wreckage, we have to wonder “How can so many smart people be duped - could this happen to me?”

Some elements of the story actually stir up a few similarities to Elon Musk - another so-called genius who doesn’t like to explain himself, and when faced with too many questions, can have a mini breakdown. So how do we differentiate between the creative genius that will make us millions versus the plain and simple evil genius? Or if you’re in that founder role, how do you convey to your investors that you’re one of the good ones? There is no easy answer here but we can say for certain that there is an increased focus on due diligence in Silicon Valley.

Photo of the book, Bad Blood.

While these were once revolutionary, they have now become a bit more iterative. Nevertheless, some interesting trends were called out.

Technology is making freelance work far easier to find. The freelance workforce is up 8% since 2015 versus the total workforce up just 2.5% thanks to places like Toptal. By the way, if you are in need of an on-demand, wildly qualified finance professional you can do so here or learn more about the different types of projects we can help with here.

Graphs supporting the idea that technology is making freelance work far easier to find.

Technological disruption is happening far faster than it has in the past. While it took the dishwasher 80 years to become commonplace for Americans, the smartphone took just eight years and the consumer internet took less than a decade as well.

Meeker only had one slide on cryptocurrency. While Coinbase users have quadrupled since the beginning of 2017, the industry continues to lack the necessary infrastructure to de-risk the space. We have a bit more crypto fever than Meeker - check out our practical guide to investing, a primer and the bear case.

Invisible Asymptotes - How Companies Should Think About Growth and Addressable Markets from an Early Amazon Executive

This is a long read. But super important. As an analyst in strategic planning at Amazon back during its start, Eugene Wei explores the beginnings of Amazon and offers some insight into thinking about start-ups (or young-ish tech companies) and their market size. Toptal’s own Alex Graham shared his thoughts (and how common misunderstandings of TAM can be remedied) here.

Wei stresses that one of the best ways to identify your company’s potential barriers, or asymptotes, is to just ask your customers. Some will snarkily retort with Henry Ford’s objection, “If I had asked people what they wanted, they would have said faster horses.” The takeaway being: people don’t know what they need until you give it to them. However, Wei points out that the customer actually is telling you what they want - you just need to really listen. The customer wants to move faster. What product you give them to that end, is up to you.

MoviePass is Growing … But That’s Probably Not a Great Thing for the Company’s Bottom Line

MoviePass announced that it surpassed 3 million subscribers and expects to hit 5 million by the end of 2018. MoviePass is the classic example of a start-up offering ridiculously low prices to entice customers (usually subsidized by its funders) that is generally unsustainable. In MoviePass’ case, monthly losses are hovering around $40 million as of May. VC executive, M.G. Siegler joked that the 3 million subscriber update would be great news if the number was negative 3 million subscribers.

We have to agree with Siegler. Toptal Finance Expert Toby Clarence-Smith recently explored this issue in-depth in his gorgeously researched article, Don’t Scale an Unprofitable Business: Why Unit Economics (Still) Matter.

WeWork is on a $1.5 billion annual run-rate, +70% y/y, thanks to more enterprise clients (according to a not-so-secret company memo).

We calculated a SOM of $35 billion so, by our math, WeWork’s impressive growth still has quite a ways to go. It’s notable that the company is pitching a new investment round at a $35 billion valuation, double its mark from a year ago. Seems like it will be a testing negotiation process coming off the back of a junk bond offering and major investor, SoftBank, taking it upon itself to announce the round.

Graph depicting the proportionate representation of WeWork's TAM, SAM, and SOM.

Top Client Questions for an Interim CFO - Answered by a Top Toptal Finance Expert

Scott Brown, one of Toptal's most in-demand Interim CFOs

Scott Brown is one of Toptal’s most in-demand Interim CFOs. He has consulted with a number of different service and manufacturing businesses helping with capacity planning, incentive plans, business plan development, and developing driver-based rolling forecast processes.

When does a company start needing a CFO?

Much like Maslow’s Hierarchy of Needs, a business has a hierarchy of financial management needs—which are displayed in the chart below. Though the situation varies business by business, generally speaking, a company starts needing a CFO at the trusted reporting level and above. Up until that point, the principal requirements include accurate transaction recording and can be executed with in-house trained labor or part-time external labor.

A chart depicting a business' hierarchy of financial management needs.

What do you do when you first get hired to get up to speed quickly?

The first thing I do is pore over the financial statements. What do you owe and what do you own. So looking at the balance sheet first, not the income statement. That will usually point me towards finding out what I don’t know and what questions I need to ask.

I’ll do a deep dive into every single account but I also prioritize the client’s needs. So I try to focus on their primary goal first. I’ll identify what I can address at the earliest stage of learning. The worst thing an Interim CFO could do is re-engineer a process without understanding how that process came about.

You’ve worked on a lot of FinTech projects, what are some lessons you’ve learned from your work there?

Businesses think they’re very unique but if you can step back and identify certain truisms that businesses of certain sectors or sizes have, you can find a common denominator and save a lot of time and money that would otherwise go towards complicated customization.

One company I worked with had a specific product that they believed was wildly unique but once I classified their way of creating their product as a “project”, implementation became much easier.

A company I’m currently working with is looking for key performance indicators to get out of their FinTech systems. Once we boiled down their goal to “you want to deliver a product in the most effective way”, I could group them as a “manufacturer” and move forward from there (even though I doubt they would technically classify themselves as a manufacturer). If you can agree at that higher level, you can take away some of that uniqueness that can complicate an implementation.

How do you think about the hand-off process to the next CFO?

As an Interim CFO, you need to act as a permanent CFO, but you owe it to the client to have an exit strategy - you certainly don’t want to hold them hostage. As I build these processes, the team on the ground needs to be comfortable with documentation.

I’m always thinking about how I can hand this off. Generally, I think in terms of the lowest common denominator: “Could I give it to my mom who can’t turn on a computer?” So you don’t build VBA unless asked for it because it needs to be maintained. Try to look at the organization and gauge what will be the most effective, yet easiest to maintain practice to put into place.

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Thanks for reading this issue of Toptal’s Finance Digest. We’ll be back in July with another exciting installment, so don’t forget to subscribe to have the latest news on finance and trends dropped directly into your inbox.

With articles written by leading finance consultants from the Toptal network, the Toptal Finance Blog covers a diverse array of relevant design topics and serves as an informational and educational hub for finance industry experts from across the globe.

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About the author

Elizabeth J. Howell Hanano, CFA, United States
member since August 15, 2017
As an equity analyst, Elizabeth carried out stock selection for $1 billion of assets and was part of an equity research team that was awarded Wall Street Journal’s "Best on the Street". After a successful corporate career, she is thrilled to help companies achieve their strategic, operational, and financial goals in a more hands-on manner. [click to continue...]
Hiring? Meet the Top 10 Freelance Financial Analysts for Hire in July 2018

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About the author
Elizabeth J. Howell Hanano, CFA
Finance Expert
As an equity analyst, Elizabeth carried out stock selection for $1 billion of assets and was part of an equity research team that was awarded Wall Street Journal’s "Best on the Street". After a successful corporate career, she is thrilled to help companies achieve their strategic, operational, and financial goals in a more hands-on manner.