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BayBio Entrepreneur & Investor Roundtables event puts industry changes into relief

Last night, as a BayBio partner, I attended the Ninth Annual Entrepreneur & Investor Roundtables event in Palo Alto. This BayBio event gives entrepreneurs in start-up life sciences companies an opportunity to meet and present to investors, both VCs and angel groups. The format is a speed dating arrangement that gives them about eight minutes to pitch.

I’ve attended this event for the last six years, and it’s an interesting reflection of how the industry has changed over time. In the early days, there was more interest in funding and more resources. Now the sources of funding are fewer, the dollars are more scarce—and the bar of approval is higher.

Investors, both VCs and angels, are more specific in their focus and they need to see higher levels of meeting milestones before approving additional or initial funding. There is more emphasis on demonstrating proof of concept before they fund the next level.

Also, the funding requirements to grow these companies are always going to be higher than many of their entrepreneurial counterparts in the tech industry. This is also different from entrepreneurs in the social media or software space, where an investment of $500K can keep you going for more than a year.

Although the funding climate is difficult and takes patience, the passion among entrepreneurs is still strong. Also, I’ve noticed over the last few years that these scientist-entrepreneurs are more business savvy than in the early years, and they have practiced and refined their presentations and their understanding of business forecasting and strategy.

The virtual company approach is almost universal in one form or another, with everything outsourced except for core competencies. Hiring fewer employees but using more consultants and developing collaborations is the norm. And overseas clinical trials are growing more common, in part because of the difficulty and expense of dealing with the FDA.

I have to say that I am always very impressed with the courage, stamina and determination of the entrepreneurs that I have met in life sciences. They are definitely not doing this for the money, but rather they truly believe that their efforts are helping humankind and/or the environment.

The other recurring fact is that I continue to meet people from all over the world at these events, which demonstrates that the Bay Area is still the global magnet for this type of talent and passion.

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Tips for talent management that drives performance, reduces risks

With unemployment figures hovering in the 8 percent range and headline news of a slow economic recovery, it is hard to imagine there is a shortage of qualified accounting talent. And yet, in a recent survey by Robert Half reported in CGMA Magazine, 69 percent of CFOs surveyed reported challenges in finding skilled accounting and finance professionals. We’re seeing this too: many of our clients are struggling to find the right fit for open finance department positions.

I think there are several factors at work here. Companies reacted to the economic downturn by cutting costs significantly, and workforce reductions left the remaining employees in the position of doing more with less. This “temporary condition” has lasted a lot longer than most people anticipated and resulted in burned-out employees, projects on hold, no time or resources devoted to process improvements and little to no talent management or career development.

Top talent drives top performance. When an organization is focused on cost cutting, not growth, it can be challenging to provide sufficient opportunities for building skill sets and providing career advancement. Many organizations claim “people are our most important asset” and yet often fail to act in a way that supports that statement. Although talent isn’t captured on a balance sheet, it is a valuable asset and oftentimes provides the most important competitive advantage.

Here are my suggestions for bridging this talent gap:

Employers

Make employee development a priority. Acknowledge that talent management is important and integrate that into your corporate culture. Make this a priority in bad times as well as in good times.

Come up with a plan. Formulate a strategy for developing and retaining talent. (And execute it.)

Talk to employees on a regular basis. Making time for focused 1:1 conversations is not easy, but it is critical to your own success—and theirs.

  • Conversations should focus on what the employee wants in the context of what the organization needs. Help employees clarify what they want, build on strengths, address career liabilities and identify development opportunities for future roles.
  • Determine how engaged your employee is with the organization. What are their drivers for job satisfaction? What makes them feel valued?

Augment in-house talent with outside help. Burning out your people is not in anyone’s best interest. Are there skill-set gaps that can be filled with a consultant? Rather than trying to hire an employee who meets a detailed set of requirements, can you hire a professional who can adapt and learn quickly while augmenting missing skills with consulting help? For instance, it may be more cost-effective to hire an employee who can fill 80 percent of the requirements and use independent expertise on an as-needed basis.

Employees

Show interest and initiative. Be engaged with your organization and contribute to its growth and success—and don’t wait to be asked. Employers have little interest in developing or retaining people who show little initiative or interest in the organization’s future.

Grow with the company. Organizations evolve, new tools come to market and regulations keep coming (and changing!). Keep pace with the changes and stay ahead of the curve.

Be proactive about your career. Talk to your manager about what you would like to learn and how you would like to contribute to the organization. Gain agreement about priorities and discuss how to carve out some time to work on new areas while keeping mission-critical tasks on target. What deadlines can slide out a little? What new tools can add operational efficiency?

Take the long view. You may need to put in some extra hours in order to develop new skills. Your payoff is down the road, either in becoming more valuable to your organization (increased pay, bonus potential) or in landing your next job.

Not having the right talent at the right time can cause serious harm to strategic initiatives with delayed projects, missed market opportunities or botched strategic execution. Losing a key resource can derail day-to-day operations until a suitable replacement can be found and can get up to speed. Talent management should be considered part of an enterprise risk management (ERM) program. Don’t have one? Get a good overview in our report, ERM: Not Just for the Big Guys.

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New consultants power up the brain trust

We’re welcoming a new crowd of consultants to the RoseRyan brain trust. Our newest gurus are technical, SEC and compliance powerhouses, with deep and broad experience across a range of industries large, small and international.

Dan Belong: Dan is a controller’s controller. He was most recently at Exar as assistant controller and then corporate controller, responsible for SEC reporting, technical accounting, revenue recognition and SOX compliance; his resume also includes work with Ernst & Young and serving as international controller and director of accounting at Novellus. Dan has M&A battlefield experience, having completed several acquisitions and performed due diligence and integration work in other transactions.

Rosa Cheung: Rosa’s a fire-tested pro who’s covered a lot of bases, particularly in SOX (from soup to nuts) and risk management. She’s also well-versed in SEC reporting and M&A, plus general ledger, AP and AR. She’s served high tech companies as assistant controller and director of internal audit, and she’s jumping right into SOX work for us.

Janet Lawson: Janet is an East Coast transplant who keeps a sharp eye on processes to make sure they’re efficient and running smoothly. Her specialties include FP&A, financial modeling and planning, with experience in health care, financial services and transportation at companies from small to Fortune 500. She’ll be part of our XBRL team, and her first RoseRyan field job is with a large tech company.

Jack Mohalley: Jack is a seasoned consultant who’s held a variety of corporate roles on both U.S. coasts and in the Middle East, with significant stints in high tech, manufacturing, transportation and life sciences, among others, plus a stretch as audit manager for Ernst & Young. Like Dan, he’s got controllerships down cold, with sweet spots that include SOX PM, technical accounting, SEC reporting, M&A work and stock-based comp, from plain vanilla to complex. His first RoseRyan gig is controller for a global services company.

Neela Naik: Neela has been in the consulting world for more than 15 years, so she’s got broad experience in a variety of industries, particularly health care. What we love is that she can do financial systems implementations and has the chops to handle SEC reporting, technical research, due diligence and IPO projects. What’s more, she stays on top of rule developments (and really likes it). Her past posts include controller at St. Luke’s and assistant controller at Itel. Her first RoseRyan post is controller at a life sciences company.

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Saved by the cloud: the unbreakable small company

RoseRyan was recently the victim of a bizarre crime: thieves stole the main circuit breaker for the entire building. We lost all power for almost an entire week while the repairs were made.

Ask yourself: if my building lost power for a week, what would the impact be?

If this had happened to us three years ago, we would have been dead in the water—no email, no file sharing, no telephones, no web presence. We would have been reduced to phone trees to tell our employees about the disaster.

As it turned out, we lost only landline phone service and a scheduling system. Not that this wasn’t painful—it was. But it could have been much worse. How were we able to sustain most of our critical business applications without power? We had outsourced most of them already.

No small company can afford the redundancy that larger companies can. Having geographically separated backup systems just isn’t in the picture. But Google has them. So does Box.com. By outsourcing to companies like these, small businesses can pool resources and enjoy economies of scale that give them access to services that once only larger companies could afford.

Enterprise Gmail is one such big win for us. If we had still been using our own Microsoft Exchange server, we would have been dead—business would have stopped for the week. Not only did Gmail save the day in an emergency, but also all the day-to-day headaches that accompany email management have gone away because we let the experts handle it. If you run a small company and you’re still hosting your own email server, you’re making a huge mistake. You’re paying too much in staff time, equipment and licensing while getting too little in return.

Admittedly, outsourcing is not a panacea. You have to do your homework. Outsourcing to a poorly run company can be worse than doing it yourself. Part of the reason we still have our own phone system is that I haven’t found an outsourcing vendor that I am happy with. But think of it this way: by prioritizing outsourcing you make it a strategic problem to be solved instead of an ongoing tactical issue. As a rule of thumb, the more strategic you can be, the better off you are. Make the big decisions and stick to your core competencies. We aren’t an email hosting company, so we shouldn’t be doing it if at all possible.

The hard part is letting go of some control, but you have to get over it. Google does our email, and we have to trust them with a critical business system. Knowing we had email even when our office had no power was much more comforting than a false feeling of control.

The bottom line is this: find companies you can trust and outsource as much as you can.

You don’t cut your own hair, do you?

Author Matt Lentzner is RoseRyan’s IT guru (as you may have guessed).

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Team leadership: a key ingredient in the CFO sauce

I’ve read a number of articles lately regarding what makes a great CFO. They list key attributes, such as business acumen and the ability to lead the business with the management team, but one attribute that’s consistently missed is that a great CFO needs to be a strong leader of her team.

At Ernst & Young’s Northern California Entrepreneur of the Year Award gala event, each award nominee said that the honor would not have been possible without the dedication and support of his or her team. The same applies to a CFO: in today’s world, a CFO’s responsibilities go beyond the debits and credits to include oversight, regulatory filings, HR and IT, as well as being a key member of the management team. Obviously, a CFO needs to hire and retain top-notch performers in order to meet all of her responsibilities.

So how does a CFO build an outstanding team?

First, understand—and acknowledge—your strengths and weaknesses, and hire people whose skills complement yours. In fact, hire people who are more talented than you. We recently worked with a CFO whose strengths lay in M&A and business operations, so he hired a VP of finance with strong technical accounting and operations experience. He also brought in others to handle work that his team was either too stretched to handle or lacked the skill set to complete.

Second, be a mentor. Sharing your knowledge and experience can give valuable insights to key players on your team and increase productivity. In my business, I know where the landmines are. Sharing this knowledge with my team helps them be more productive and make better decisions, which is a win-win for everyone. In addition, don’t underestimate the insight you can gain from those working for you. Younger employees can teach us old-timers how to operate effectively in today’s social media environment, for instance—and though their work styles can be quite different, we could learn a lot from them about teamwork.

As your company grows, it’s important for you and your team to keep learning. Keeping up on today’s ever-changing rules is a no-brainer, but it’s also critically important to stay on top of the context for business operations, like the changing global economy, market shifts and technology advances. This is key: increasingly, CFOs and their accounting teams are moving away from being mere gatekeepers and scorekeepers. Ongoing learning is essential for taking on a more strategic role in a company. And applying critical thinking to decisions and their impact on the business—not just the impact to the financial statements—can be both challenging and rewarding.

Third, remember that communication is important. Everyone says this, but I’m amazed at how often CFOs don’t practice it. Keeping everyone in the know about where the business is heading, your vision for the finance function and how the team can add value helps build a stronger team, among other things.

Last but not least, give credit where credit is due. I’ve seen great teams fall apart largely because they felt undervalued. Openly rewarding top performers not only gives recognition to the person or team, but also sets standards by example and inspires loyalty and a desire to go the extra mile (or miles) when required.

A great CFO needs a great team supporting her. Creating a learning environment, encouraging team members to stretch and grow, recognizing success and communicating your vision will go a long way in helping you be a great CFO.

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Stock compensation rules mask true operating performance

The other day a client asked which current accounting requirement is the worst from a U.S. GAAP standpoint. There are a few poor standards out there, but to me the answer is easy: FAS123R, now known as ASC 718, accounting for stock compensation. It’s been around eight years, and it’s not getting any better with age!

The idea of FAS123R, which replaced stock compensation rules under APB 25, is that all stock grants have a value to the employee, and that should be accounted for as compensation. Consequently, on each stock option grant, there’s a charge to expenses over the vesting period of the grant. Under APB 25, a charge arose only when the fair value of the grant was greater than the grant price, so most grants did not give rise to a charge. Under FAS123R, the expense varies depending on a number of factors, the two most important of which are the fair value of the stock at the time of grant and the volatility of the stock.

Here’s why I think the FAS123R is a bad accounting standard:

Inconsistent and arbitrary outcomes. Take two similar companies: Company A’s stock price is $10 and Company B’s is $5. Both grant an employee 1,000 stock options vesting over 4 years. All else being equal (stock price volatility, expected life of the stock, dividend yield and risk aspects), under the current methods, Company A’s amortized stock charge is double the charge for Company B. That makes no sense. Why does a higher stock price at the time of grant give rise to a bigger charge? If anything, the grant in Company B should result in a bigger gain, as any gain will be a higher percentage of its stock price than for Company A.

The bottom line: the charge is misleading and arbitrary no matter how you look at it. If the stock price rises, that is the real compensation, but the true gain is not reflected anywhere.

In the same vein, if the stock price stays flat or decreases, the employee would have no gain and would not exercise the option. In effect, the grant recipient is not receiving any compensation, so there shouldn’t be a charge to the accounts as FAS123R requires.

Sticker shock. The inclusion of the charge can make a good operating performance look average or poor, and the charge can vary a lot from period to period based on what is happening with the company’s stock price.

Doesn’t reflect reality. You have to ignore the charge to get a good view of the underlying business. Analysts back the actual and expected charges out of their models so they can look at them on a cash basis. If they don’t need to see the charges, why do we? More and more companies are presenting adjusted EBITDA in their earnings press releases. These calculations back out the FAS123R charge for exactly the same reason analysts do—it’s a meaningless charge that mathematicians like but that users of accounts don’t need.

Most private companies ignore it. Who can blame them? There is no value added in accounting for it, and all it does is cost money in systems, review of the numbers and so on. An audit adds even more expense.

It makes budgeting hard. Have you ever put together an annual plan with FAS123R charges in it and then tried to hold people accountable to their budgets? It’s not easy, and most people won’t do it.

If you do want to do it (and it makes sense to have budgets that align to your financial accounts), to estimate the charge you need a crystal ball to estimate your future stock price at the time of the future grant, which you then need to combine with your estimated stock grants and headcount changes, as well as the residual charge from previous grants that are still vesting.

As a CFO, if someone asked you what your stock price will be in 6 months’ time you’d never answer (unless you enjoy SEC investigations), so why make this prediction internally to calculate the expected charge? And it’s impossible to hold managers accountable for their actual charges against the budgets for that expense. It’s also not wise to tie compensation to managing budgets if you have FAS123R in the compensation—at the end of the year the manager will be very happy or very unhappy, depending on which way the variance goes based on events totally out of their control.

So what’s the solution?

I believe FAS123R in its current form should be scrapped, and that only real gains, at the time of exercise, should be accounted for, and only in the notes to the accounts. By removing that expense from the accounts, you can then analyze, assess and compare companies based on their true operating performance, not some arbitrary performance.

Unfortunately, I don’t see any changes taking place soon—but the fact that more and more companies produce numbers that exclude FAS123R charges says that the FASB has gone too far in the accounting requirements, and that accounts are becoming more meaningless when presented under GAAP. Getting rid of FAS123R charges from the income statement would be a good first step to more meaningful accounts.

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RoseRyan keeps on growing with new gurus

If our experience is any indication, the recession may be waning (knock on wood). We’re excited to announce the arrival of new consultants, all ace finance and accounting gurus whose experience ranges from top-level IPO and M&A work to deep technical accounting and compliance, plus a good dose of nuts-and-bolts accounting.

Susan Alves: Susan really knows how to roll up her sleeves and get down to business in areas like general accounting, payroll, year-end close, revenue and SOX. She thrives in a start-up environment, and is diving right in with three clients in our emerging growth practice.

Stephen Ambler: Stephen has deep technical and compliance experience, and he knows the business of cleantech, high tech, medical, manufacturing and e-commerce inside and out. Formerly a chartered accountant with PwC and a large regional UK firm, Stephen’s strengths include SEC, FAS123R, IFRS, rev rec and M&A work, plus he’s lived through and helped engineer two IPOs.

Amy Lockyer: Amy recently spent a year in London working on IFRS F1 registration statements, and technical, complex accounting is what makes her get up in the morning. She’s been a CPA with PwC, and her expertise includes 10-K/10-Q, audit, SOX, debt restructuring and M&A work. And industries? Technology, health care, retail and entertainment, for starters. Her first RoseRyan gig is with a life sciences company.

Sandy White: Sandy, a finance pro with deep experience at technology companies, joins RoseRyan to focus on our rapidly growing XBRL practice. Her expertise includes fixed assets, payroll, corporate accounting, accounts receivable and treasury for companies such as NetApp and Sun. Sandy also gets into systems work: she has rolled up her sleeves with Oracle and is an Excel super user, so watch your step.

Sophie Yu: Sophie, an alum of EY in San Jose, most recently was a senior financial analyst at NetApp and a manager for SEC and revenue with PDF Solutions. She also has experience in SOX, rev rec, stock-based compensation and purchase accounting, among other areas. Sophie’s first RoseRyan gigs were in FAS123R and warrant work.

Meet the rest of the RoseRyan dream team.

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Entrepreneurs: success comes with teamwork and taking risks

Congratulations to the 2012 Northern California Entrepreneur of the Year® Award winners!

The nine honorees were announced Saturday in San Francisco, and I was fortunate to join some of my RoseRyan colleagues at the awards gala at the Fairmont. The Ernst & Young program, now in its 26th year, celebrates the belief that “a community of entrepreneurs is a powerful force that can transform economies, address large, complex problems, drive innovation and improve our communities.”

The winners’ companies are diverse, from those that seem like they’ve been with us forever, such as Wyse Technology (founded in 1981) and Sleep Train (founded in 1985), to relatively young companies like GoPro, which brings us the GoPro camera.

While they all differ, over the years that RoseRyan has been involved with this program I’ve noticed that these people of vision share elements critical to their success. Some years the focus is on finding disruptive technologies; others, company culture takes the stage as the essential element of success. Here are a few themes from this year:

Embrace risk. Believe in yourself enough to take a risk. If you aren’t failing, you aren’t stretching enough or challenging yourself to take a big enough risk.

Be driven to make things better. When you walk into a room, look around and ask how you can make things better. Focus on things that are really inefficient.

Teamwork leads to success. Many CEOs said they are part of a team and the dedication, hard work, energy and passion of their employees was key to making the company successful. And a number of the CEOs spoke about the strong support from their family that enables them to take the risks, put in the hours and devote their talents to their business.

During the celebration, it was said that that an entrepreneur is someone who asks a simple question and changes the world. Entrepreneurs are visionaries, innovators and leaders. They are imbued with inspiration, imagination and vision.

RoseRyan has been a proud sponsor of this program for a number of years, and it is a privilege to be able to participate in nominating, selecting and celebrating these entrepreneurs. We share their spirit.

The 2012 Northern California winners are Geoffrey Barker, RPX; Tom Bedecarre, AKQA; Lawrence Blatt, Alios BioPharma; Dale Carlsen, Sleep Train; Lisa Im, Performant Financial; Tarkan Maner, Wyse Technology; Matthew Monahan and Brian Monahan, Inflection; and Nicholas Woodman, GoPro. The national winner will be announced in November.

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Don’t let the cloud rain on your parade

I hear a lot about the many virtues of moving to the cloud. There are a lot of reasons this makes sense—among other things, the cloud can provide greater efficiencies, reduce costs, enhance productivity, remove geographic barriers and improve disaster recovery. And with so many cloud-based applications available and more hitting the market constantly, it definitely is the way of the future (if not the present).

But the articles I’ve read tend to focus on the benefits, and working in the cloud is not without risks. You don’t control the platform, and your company’s critical data (about employees, finances, customers, etc.) is being stored outside your premises with a third party. Even though someone else is managing your data, you are still responsible for what happens to it. Here are a few risks to consider:

Data location. Where is your data being hosted? Data protection and privacy regulations in many countries specify where certain employee data can be physically located. Also, different countries provide different legal protections, so if your provider moves its data center to another country there could be serious consequences for you.

Data ownership and migration. What happens to your data if you switch vendors or if a vendor goes out of business? Will it disappear? Will it be deleted securely? Will it cost to transfer your data from the vendor at the end of the contract?

Security. What controls are in place for transmitting data to your cloud provider and storing data securely? Is customer access secure? How are security breaches handled, and how soon are customers notified? (Ask for a SOC2 report to help assess data protection and security.)

Reliability. Industry standard uptime is greater than 99 percent. Does your provider meet that? How often is maintenance performed? How are customers notified of scheduled down time? What is the disaster recovery plan? Are full backups taken at least daily? Are there redundant sites and systems?

Integration. Evaluate how well the application integrates with existing applications (both in the cloud and at your location).

If you’re moving to the cloud, be smart—weigh costs and benefits, and evaluate options carefully. If you have an enterprise risk management (ERM) program in place, make sure the cloud is part of your strategy. Know what your risks are and address them up front; if something goes wrong you may be looking at business disruptions, damage to your reputation, lost customers and more. You don’t want to be surprised.

Don’t have an ERM program? Learn more about ERM for midsize companies in our latest report, ERM: Not Just for the Big Guys.

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ERM isn’t just for the big guys

Enterprise risk management (ERM) tends to be thought of as something only big companies need (or can afford). But it’s not just a megacorp thing—it can protect assets; rescue your company from unforeseen catastrophes, like a supplier going out of business or an epic PR crisis; guard against weak links in your supply chain; and more. Done right, an ERM program can also make decision making smarter, more strategic and more sharply focused on key success factors.

And it doesn’t have to be a major undertaking. Our new report, ERM: Not Just for the Big Guys, shows how midsize businesses can benefit from ERM and how to implement a program cost effectively with a plan that’s right-sized for your company.

How can you get the right fit? The report covers this checklist:

  • Give the CFO the lead
  • Get support from the top
  • Take a step-by-step approach
  • Provide the right tools and frameworks
  • Integrate ERM into decision making
  • Identify key performance indicators

The thought of yet another program when you’re already running lean may make you want to run the other way. You’re not alone: in a recent CFO magazine survey, participants said a commitment of time and resources was the single biggest impediment to implementing ERM.

Think about what you could gain—and what you might lose if unseen risks arise and you don’t have a plan. ERM: Not Just for the Big Guys shows how you can get started sensibly, one step at a time.

Other RoseRyan intelligence reports are available on topics such as M&A due diligence, acing your IPO filing, debt financing and revenue recognition.

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