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Why Bitcoin’s demise could be good for Silicon Valley

It’s the end of Bitcoin as we know it, and I feel fine.

My apparent giddiness over this news is not about Bitcoin per se — although my RoseRyan colleagues had tracked its progress and discouraged CFOs from taking on the risk — I wouldn’t wish such big losses on anyone.

But it has created buzz in more ways than one. I don’t think I have had more e-mails and comments from my friends and colleagues in the last few years than I have over the past several weeks regarding the cryptocurrency. The heat was turned up with the recent announcement that Tokyo-based Mt. Gox, one of the largest Bitcoin exchanges, rapidly closed up shop amidst a potential loss of $473 million of its users’ money.

Now the buzz will shift toward the complete revolution happening in the payments business and its effect on Silicon Valley, and this is a change I’m excited about. PayPal, Square, Google, Apple and others are transforming the world of payments, by inserting themselves into a process that has been owned by the banks (full disclosure: I actively use PayPal). Gartner estimates that mobile payments alone will top $720 billion by the year 2017, up from $235 billion last year. The expansion of payment options will mean everyday Americans will hopefully no longer get so nickel-and-dimed on financial transactions.

In regard to the next “big thing” mantra of Silicon Valley, the payments business is already in full frenzy. It is your classic innovators dilemma: Venture capitalists are funding young, innovative startups; midsize players are adopting the changes; and banks — typically slow moving elephants — are running scared. Why? Those teeny-weeny payments add up. There were $15 trillion worth of retail transactions last year. The upside is huge not only because of transaction fees but also the ability to harvest large troves of consumer data. Security concerns will be an issue as players position themselves for the gold rush. This fast-moving train is a tough one for bureaucrats, who try to promote innovation but who must also put in place adequate consumer protections.

With Bitcoin, things did move too fast. The Bitcoin issue reminds me of Napster. Initially, Napster was a site to share music files and was frequented mostly by teenagers who were not willing (or couldn’t afford) to pay for digital music files. Napster caught a lot of heat for allowing a forum of users to access illegally obtained music, and it was subsequently shut down. A result of the Napster shutdown was that Apple came into the same space and built an incredible music delivery engine — iTunes on the iPod, then the iPhone and now the iPad — off the back of 25 billion–plus songs that have been downloaded since 2003.

How does the disruption to the music industry relate to Bitcoin? Stay with me here. Bitcoin’s ubiquitous network has allowed people throughout the world to anonymously transact commerce. It was envisioned to have tremendous ease of use, to be something as simple as email.  Although there are many differences with the PayPal network (and other networks), a key differentiator is that Bitcoin does not take a toll every time a payment is made. Once you have created a digital wallet, it is very simple for you to exchange money pretty much the same way that you would purchase something with cash.

So where is this leading? I expect there to be many issues that will continue to impact Bitcoin (lack of a governing owner, security concerns, and exchanges going out of business are among its many challenges). And I do expect innovative firms to emerge in this digital cryptocurrency space — and perhaps there will be multiple winners. Bitcoin “could, in the long run, give rise to one or several very robust currencies,” writes George Selgin, an economics professor at the University of Georgia in a paper on Bitcoin’s properties. “That’s how competition works generally, with winners and losers but with quality generally improving as the struggle goes on.”

And in an MIT Technology Review article, Tom Simonite notes that “even if interest in Bitcoin fades, it could still have a lasting legacy as an inspiration to better-designed forms of digital money.” It took Apple 10 years to get to 25 billion downloads — perhaps the next cryptocurrency will have 25 billion transactions in 5 years!

Chris Vane is a director at RoseRyan, where he leads the development of the finance and accounting firm’s cleantech and high tech practices. He can be reached at [email protected] or call him at 510.456.3056 x169.

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To stay relevant, finance pros must embrace change

For the past couple of years, emerging growth companies have been reaping the benefits of cloud computing. The momentum of small startup companies using innovative technology to make their business processes more efficient can be seen everywhere.

As a financial consultant specializing in emerging growth companies, I have been particularly amazed at the positive impacts that the “paperless” office and cloud computing are having on my clients every day. Gone are the gray stainless-steel filing cabinets packed with invoices, checks and receipts. My files are stored in the cloud and accessible from my computer wherever I go.

In an ever-constant quest for improvement, I’m continually changing and fine-tuning our accounting and finance processes. That includes turning to the myriad of cloud applications, such as Bill.com, Expensify and Right Networks, that provide high-speed, low-cost solutions. They make me, and my clients, more efficient and effective. Best of all, I can control and implement these applications myself—no need to rely on the IT department. And the tools can scale down to meet the needs of a startup company.

Having recently attended webinars and presentations by finance executives across a variety of industries, I think it’s clear that cloud technology is transforming the way accounting and finance must do business—but we seem to be the laggard adopters. Only 3 percent of our potential market is in the cloud, compared to a healthy 35 percent for sales and other services businesses, and about 20 percent in HR fields.

We cannot afford to ignore the time- and cost-saving benefits—not to mention the accuracy and convenience of, say, being able to compile original financial documents for financing due diligence or an audit at the click of a button.

It’s time for finance to embrace the change and deliver better, faster information to company executives. We need to take advantage of cloud technology if we are to shed the image of being the “work horse” department, and make full use of our analytical expertise and partner up with internal corporate functions to provide more meaningful and timely information that will impact the company’s bottom line.

We must be ready to re-educate, re-learn and re-invent the future.

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RoseRyan in action: smoothing steep growth with equity accounting

Here’s a situation that might sound familiar: your midsize tech startup is growing so fast that you’re scrambling to bring new people on board just to keep up with demand. Talent doesn’t come cheap, and you’ve lured the best with a wide variety of stock-based compensation deals. The trouble is, your lean finance team lacks the in-house resources needed to handle a high volume of complex equity transactions and doesn’t have time to set up automation.

The solution: a RoseRyan equity expert. We excel at helping innovative companies meet the challenges of explosive growth and position themselves for their next leap. See our latest project profile to learn more about how we implemented an efficient spreadsheet system that enabled our client to manually manage equity grants as their company grew from just four employees to nearly 700.

Also check out what else we can do on our startup and emerging growth services page.

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Booms, busts and finance upheavals: RoseRyan’s CEO looks back on 20 years

When I cofounded RoseRyan (then known as Macias & Ryan) in September 1993, the Internet was just taking off. The word “global” had a different connotation. Cell phones (if you even had one) were the size of bricks. The “cloud” was in the sky. In many ways, it was a simpler time for accounting and finance.

In the 20 years since, we have weathered two economic downturns and countless changes in accounting rules, governance and oversight. Corporate abuses gave us Sarbanes-Oxley, AS2 and AS5, the PCAOB and the Dodd-Frank Act. Business changed, and continues to change, at exponential rates of speed. We have a truly global economy, blazing technology advancements and exciting new ways of doing business.

This all means that the staid and boring world of accounting has become anything but. We have addressed changes with far-reaching implications in the areas of stock-based compensation, accounting for derivatives, business combinations, fair value measurements, codification and accounting for leases, and we’re now facing brand-new ways to look at recognizing revenue. (FASB promises it will be final any day now.…)

CFOs and their teams have had to step up their game. In addition to understanding and implementing new and complex accounting principles, they are rightfully taking on a more strategic role as leaders in the business. No longer are CFOs expected to be just the keepers of historical financial statements and budgets; they also need to understand their business and market trends, and strategically and systematically increase the value of their company. Not easy tasks, but certainly challenging and exciting in today’s dynamic market.

While the finance needs of Bay Area companies have changed, the fundamentals of RoseRyan’s business have not. As in 1993, in 2013 we are dedicated to attracting and retaining top-notch professionals, and to providing an environment where our consultants are challenged but also able to enjoy a personal life. This allows us to provide exceptional finance and accounting solutions to our clients, giving them the right people with the right skills at the right time.

No matter what the level of their assignment, every RoseRyan consultant rolls up their sleeves to get the job done—and they look beyond the cubicle to provide best practices, advice and objective opinions derived from their years of experience. We call ourselves “gurus” because we strive to be leaders and mentors for our clients and one another.

We’ve worked with more than 700 clients at RoseRyan, and they have made for an exciting 20 years. It has been a great time to work with companies in the technology and life sciences industries, participating in the myriad of changes that have taken place and watching companies go up and down—and sideways. What’s most exciting is that we are often with clients through their corporate life cycle. For example, I started with one client as CFO when they were in an incubator. We shepherded them through two-plus years of fast growth as their outsourced accounting department. We later helped them with revenue recognition issues, stock-based compensation and audit support. Finally, as they neared their exit, we helped with financial forecasting, due diligence and integration with the eventual acquirer. We were with the company for over eight years, and it was rewarding to understand their business, walk with them through the ups and downs, and celebrate their successes.

RoseRyan would not be where it is today without our amazing clients or our consultant gurus. I am very proud of all of them, and I am pleased that RoseRyan helps both clients and our employees thrive. They are a huge part of why I think the Bay Area is a great place to work, to learn, to live. I give heartfelt thanks to all who have made the past 20 years possible. We’re looking forward to the next two decades!

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Early workouts and muscle tone keep companies in shape

I have always been active in sports, but as I grow older, I’m starting to experience a few aches and pains. It has made me reflect on the need for an often-ignored element of exercise—muscle development. Without a strong foundation, I could be facing worse physical ailments down the road.

As an emerging growth accounting consultant, I have seen a similar phenomenon with my clients. Small businesses focus primarily on developing products and services and bringing them to market. With limited resources, it’s not surprising that they often neglect the development of their muscles—a solid accounting framework.

But that can lead to problems later on. In finance, as in exercise, future pain and messy (expensive) clean-ups are not that hard to avoid with a little forethought and discipline. Clean, accurate books provide a clear understanding of how your business is doing and support key decisions. If your company requires an audit, you’ll have all your ducks in a row. And you’ll be ready for the due diligence that comes with being acquired or going public.

It’s important to evaluate your infrastructure needs as you grow. A great resource is RoseRyan’s Scalable Financial Architecture, a model that shows what’s needed for all finance functions at every stage, from prefunding all the way through IPO and secondary offerings.

And you never know what’s coming down the pike. I had one promising client that simply ran out of money, and in the eleventh hour a potential acquirer appeared. Our finance team had to jump through hoops in a very short time frame, but the transaction got a green light. This was possible because the accounts, reconciliations and financials were very clean and well documented, all compliance filings were up to date, and no significant risks were identified.

No matter what stage you are in, it is critical to have the basics covered. Here are some fundamental but often ignored areas:

  • Policies and procedures. Travel expense, capital expenditures and revenue recognition are just a few areas that require well-documented policies and procedures. Without them, you get inconsistent practices and incoherent books—and possibly tax and legal issues. (And don’t even think about surviving an audit.)
  • Chart of accounts. Set up a scalable structure that will work for your business as you grow. This results in accurate financials and clean compliance reporting.
  • Reconciliations. Reconcile balance sheet accounts regularly. This is especially important with cash accounts, since cash management is critical for small businesses.
  • Agings. Review and clean up accounts payable and receivable periodically. An outdated picture can skew your financial outlook and result in inappropriate decisions.
  • Equity. Implement proper procedures as soon as you issue stock compensation and other equity instruments. Ensure tax compliance reporting is done regularly, and don’t forget 409A valuations. The risk is not only a big accounting mess to clean up, but also tax and legal issues.
  • Compliance. Make sure you are registered with all authorities and file as required. This includes not only the obvious, such as state and federal income tax, but also business licenses, property tax, sales/use tax and secretary of state filings. You’ll avoid penalties and interest, and even the suspension of your right to conduct business.

Developing a muscular, basic accounting structure should be a no-brainer, but many small companies push it off until the pain is too much to ignore. As Benjamin Franklin so profoundly stated, an ounce of prevention is worth a pound of cure.

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RoseRyan in action: helping a startup navigate growing pains

Imagine this: your company has just moved to a new locale, legal paperwork is stacking up—and so is the accounting, because your books aren’t set up. A big-picture business perspective? Not a chance without details like cash flow and expense tracking.

Helping young, fast-growing businesses with these—and many other—challenges so they can stay on top of hiring, product development, partnerships and other critical business moves is like breathing to us. Check out our latest project profile to see how we helped a high tech startup take accounting off its list of worries, recommended software to support an e-commerce initiative and reeled back some missed tax-benefit opportunities.

And see what else we can do on our startup and emerging growth services page.

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Will your equity compensation strategy take you from start-up to exit?

RoseRyan, along with the Melita Group, is presenting a free breakfast seminar, “Equity compensation: end-to-end strategies for private companies,” on October 30 in Palo Alto.

Your equity compensation plan’s design and execution affects your ability to retain employees, your readiness for exit and your market valuation, as well as other areas of the business. How do you set yourself up for success? If you don’t have an equity compensation plan for an M&A deal or IPO, now is the time to develop one.

“Equity compensation: end-to-end strategies for private companies,” will give you tips on:

  • Real-world (not pie-in-the-sky) equity comp strategies
  • Choosing the right equity comp vehicles
  • Avoiding common stock comp pitfalls
  • Preparing for—and making the most of—a liquidity event

For this seminar, we tapped some of the Bay Area’s savviest equity experts.

Alexander Cwirko-Godycki, senior manager, Radford: Alex supports Radford’s compensation consulting practice by creating new intellectual property and data-driven content. He is co-creator of Radford’s pre-IPO/venture-backed company online portal.

Kelley Wall, Technical Accounting Group, RoseRyan: Kelley leads RoseRyan’s Technical Accounting Group, advising clients on complex accounting matters and assisting with strategic business transactions such as IPOs, mergers and acquisitions, joint ventures and divestitures.

Ellen Sueda, senior counsel, Seyfarth Shaw LLP: Ellen works in Seyfarth Shaw’s Employee Benefits and Executive Compensation department, advising employers on tax, securities and employment law matters.

Carrie Kovac, director of finance, Symantec: Carrie is responsible for all company operations related to equity, including ASC 718, SOX, SEC reporting, global stock programs and the annual proxy statement.

The seminar takes place 8–10 a.m. at the Westin Palo Alto in Palo Alto. Get details and register here.

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New consultants beef up compliance, emerging growth services

RoseRyan has two new gurus to introduce: Cedric Armstrong and Sharon Knestrick.

Cedric is an IT compliance specialist who likes nothing better than to assess systems for risk and develop policies and procedures for IT security and computer operations; he’s also got SOX IT down. He has abbreviations like CISA, CISSP, CTGA and CFE following his name, so you’d think he’d be, well, geeky. He isn’t. Cedric has lived in eight countries, and he was with EY, then Deloitte, before he became a consultant some years back.

Sharon’s background is in accounting manager and controller roles at emerging growth companies, so she’s been instrumental in helping businesses get off the ground, she thrives on change and she understands how everything works together. She also has a strong systems background, so she can tackle just about any software known to accounting. The Financial Literacy Project for teenagers sponsored by the American Society of Women Accountants in San Francisco is near to her heart.

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The view from Mission Bay: the future of biotech looks pretty bright

I was fortunate to attend “Winning Strategies in Life Sciences: Pursuing Success in Today’s Changing Environment,” an all-day conference held October 5 at the University of California, San Francisco’s beautiful new Mission Bay campus. It was sponsored by Foley & Lardner LLP, Silicon Valley Bank, BayBio, QB3 and RoseRyan. The focus areas covered maximizing growth potential, designing models for the wireless health care industry, ensuring global intellectual property and big-pharma mergers and acquisitions. Part of my quest was to answer a burning question: why isn’t biotech doing better, since the baby boomers’ demographic trends indicate that people are living longer, with a higher quality of life?

The sessions were a little more upbeat than the biotech news has been over the past two years—the industry has taken a beating as venture capitalists have focused on hot new social media and technology start-ups at the expense of the sometimes-capital-intensive biotech industry. One area of intense pride is the new QB3 incubator on UCSF’s Mission Bay campus. It is now full of start-ups (more than 40) that are given access to tools, money and networking opportunities, and find it easier to get from start-up mode to their first and second round of funding. Housed on the Mission Bay campus with other aspiring entrepreneurs, they can share ideas and contacts that can help accelerate their progress. Also, the QB3 center provides a concentrated area of experts that venture capitalists and other companies find attractive. QB3 has partnerships with outside venture partners (as well as service providers) that have poured more than $10M into the start-ups and is in the middle of raising an additional $10M to put into new companies. This is a little known success story outside of the biotech industry!

Some insights from the sessions included:

  • The FDA has gotten better with providing clearer direction, but still has a ways to go.
  • Angel investors like health care IT, because there are fewer regulatory hurdles to jump over.
  • The health care IT sector has had rapid growth due to ARRA’s funding for electronic health records, which provides $45,000 for providers who are “meaningful users” of the technology. This is a clear edict that should provide rapid automation (and hoped-for cost savings) over the next five to 10 years.
  • Investors are frightened by the large numbers of patents that are expiring over the next three to five years, because generics radically drive down the cost of pharmaceuticals.
  • Capital efficiency is key for companies that must deal with a difficult regulatory environment.
  • Many companies continue to go outside of the U.S. to accelerate their testing requirements.
  • The JOBS Act will not have a great influence on whether companies file to go public or not.
  • Wireless is a booming area of biotech growth, as companies are rushing to build applications that focus on personalized medicine and the improving relationships between doctors and health care providers. One wireless private network provider has analyzed more than 25,000 applications.
  • Mergers and acquisitions continue to far outweigh IPO exits. It is imperative for companies to plan for potential exits one to two years in advance.
  • More M&A events are focused on changing the landscape of drug/device combinations, building infrastructure in noncore areas and growing holistic end-to-end solutions.

Although the economy is still muddling along, biotech is holding its own in the Bay Area. I didn’t get my answer to why biotech isn’t booming now, but with the baby boomers aging, Obamacare coming and the pace of innovation increasing, the future looks pretty bright.

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Credit risk: a few easy steps can prevent major headaches, even extinction

Entrepreneurs are constantly setting up companies as new business opportunities arise. It’s called innovation, and that’s what Silicon Valley is all about. VCs put their money into these companies to help them grow with the expectation that they will make a great return on investment themselves—and they perform significant due diligence and risk assessment before investing.

So it always surprises me when many of these innovative companies that have been assessed for investment risk by their backers act cavalier when it comes to managing the financial risks within their fledgling businesses. Even more surprising is that many of the venture funds that have invested their money never question the company’s approach to financial risk management.

Many companies, particularly start-ups, sell on terms without checking out their customers for credit risk or taking steps to reduce risk. They are so intent on making the sale to show they have a real business (maybe even desperate) that the quality of the sale doesn’t matter. Many have been burnt when they don’t get paid, and others have gone out of business.

Make sure a customer’s credit is good

All of this is avoidable with a few basic steps—and the most basic of all is to check the credit worthiness of a new customer. It takes a minimal amount of time to do, yet in many cases it’s seen as an unnecessary hassle. (This is rarely a problem in public companies, as a basic SOX control on revenue recognition is a requirement to assess collectability. That is one area where SOX has added a lot of value.)

If it is not possible to establish a customer’s credit competence, get them to prepay, use a credit card or provide some sort of guaranteed financial instrument. I have rarely seen a sale cancelled because appropriate terms cannot be agreed upon, yet I have seen companies suffer a lot of pain when they realize, too late, that they have made a poor sale. It’s not only the loss of the receivable that hurts. The cost in time, effort and third-party services to chase the money can be exorbitant, too.

Make sure that credit stays good—and take basic precautions

In addition, companies need to reassess credit terms on a regular basis. Often I see companies check out credit risk and give terms for an initial sale, but they never reassess the customer’s credit risk thereafter, not even when the customer deviates from the agreed terms on that sale or a subsequent sale. Sooner or later that approach comes back to haunt them.

The same is true of credit concentration. Having most of your eggs in one basket is not a good idea, yet many companies do it. Whenever possible, take basic precautions to limit credit concentration, such as selling through multiple channels, or enforcing and continually reassessing credit limits on larger accounts.

Companies that sell overseas also take on significant risk with currency exposure when they sell on inappropriate terms or when the currency risk is not hedged properly. Given the constant headlines about the euro crisis and the considerable downside risk with little upside potential, why do so few companies spend no time considering and minimizing their risk? Beats me.

What I do know is that a small amount of time invested in managing credit and currency risk can save a lot of headaches down the road. It could mean the difference between being in business and becoming extinct.

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