Where Do Accountants Fit in With Startups?
Everyone dreams of getting in on the ground floor of a startup, but how do they engage accounting services and, moreover, how do startups, start up?
Let’s address the question both from a numbers and an on the ground experience perspective.
By the Numbers
Palo Alto Software, who run a business planning website www.bplans.com and are the creators of the business planning software LivePlan, recently released a report “What Small Businesses Want From Accountants and Advisors.” Based on survey data, they analyzed early-stage small businesses and the overall small business market in general.
Here are some highlights:
What services do early stage small businesses want from their accountants?
• 71% Tax planning
• 71% Cash planning and forecasting
• 61% Bookkeeping
• 61% Monthly management reporting and Key Performance Indicators (KPI)
• 61% Business planning and strategy
• 38% IT and software
• 35% Business Coaching
• 34% Human resources
Overall, do small businesses have an accountant?
• 48% No accountant at all
• 20% Yes, but meet quarterly or less
• 18% No, but have one on staff
• 14% Yes, meet monthly
Overall, what accounting solutions are small businesses using?
• 64% MS EXCEL
• 14% QuickBooks Desktop
• 14% QuickBooks Online
• 8% Other cloud-based solution
Overall, how will small businesses decide who to work with?
• 60% Referrals and cost of service
• 70% If they offer advisory services
• 57% Specific industry expertise/niche services
On the Ground Experience Perspective
I spoke with Patricia Williams, Co-Founder of Silicon Private Wealth who provided great insight into the life cycle of Silicon Valley startups and where accountants come into the picture. You don’t live in Silicon Valley? No worries, many states have their own startup hotspots such as:
- Silicon Bayou (Louisiana)
- Silicon Alley (New York/Manhattan)
- Silicon Hills (Texas)
- Silicon Sandbar (Massachusetts/Greater Boston area)
- Silicon Slopes (Utah/Salt Lake City area)
- Silicon Forest (Oregon)
If someone with a bright idea for a software app forms a company, the startup period can be as short as 18 months. On the other end of the spectrum, a drug company can take 12-18 years before they have a product ready to bring to market.
When these companies are in the clinical stage, they start in Phase 1, often including things like safety and testing, eventually reaching Phase 3 when they are very close to bringing a product to market.
Another form of Silicon Valley startup in a different industry, is the Registered Investment Advisor or RIA firm, which takes 6-12 months to get up and running. This is because a large amount of the back-office trade processing and compliance work can be outsourced to plug and play providers.
Where Do Startups Start up?
Hewlett Packard famously started in a garage, today it’s a museum. Some tech startups germinate in dorm rooms, but many initially operate from the founder’s home.
Surprisingly, the virtual nature of business today means the business is located wherever the founder is standing. Some use space in on demand office space providers.
They aren’t maintaining an office, but that’s where they meet when a potential client or backer wants to talk business. It seems the business address on the business card (still popular in Silicon Valley) is a thing of the past. Startups in the drug industry are able to rent on demand lab space as necessary.
As one New York CPA explained to me, business entity formation is the first step for a startup. In Silicon Valley, most startups begin as Sole Proprietor LLCs, often with no actual employees. Everyone on staff is classified as a general contractor. Most of the incorporation paperwork is done online, including the 10 minutes spent getting an EIN number. Lawyers aren’t needed at this stage.
You might assume someone with a great idea and a startup company has a formal business plan, many don’t. They carry an idea in their head or are too busy to write up a business plan.
You might assume this makes it tough to get funding, but another characteristic of Silicon Valley emerges. Angel investors bet on people, not ideas.
Most only invest in known quantities, someone who has made a success of an idea previously. They want a name they know, a good idea and good management behind them. Beyond that, all they want to see is a slide deck with a few slides.
The world of startups is an environment that seriously needs accountants. They enter the picture in one of two ways: The startup finds them or vice versa.
Startups often connect with preferred provider networks, whereby the service providers contact the startups, intent on selling specific business services. Often they aren’t local, calling from Seattle to sell in Silicon Valley.
Why are Accountants Needed?
The fact is, many founders don’t know what they are doing when it comes to tax and accounting. The guy building a killer app is focused on getting users, subscribers or clicks. They are muddling through record keeping, often making mistakes along the way.
Startup founders don’t know what they don’t know. When they finally decide to bring in a real live accountant, one of their first tasks is undoing all the mistakes the founder has made with their bookkeeping.
As Pat Williams explained, “If someone came to us early and said we have expertise specific to your industry and were willing to price services based on the low initial volume of work, we would be on that in a heartbeat. It would have eliminated the frustration and time wasted organizing recordkeeping incorrectly. No one has ever approached us with that message.”
Why do startups fail? It’s usually either a lack of money up front or running out of money before they can monetize their idea. It may have been a good idea, but unfortunately, it was ahead of its time. This ties into the problem of bad management and not enough accounting oversight, which is why angel investors prefer to invest in known quantities.
What’s an Accountant to Do?
Start by identifying small business startups. For example, the website www.angel.co/companies lists over 37,000 startups. Investigate preferred provider networks as well.
This can be tedious work and in the end, many startups fail. However, it’s a universe of motivated people who need an accounting professional to help get their business to the next level.
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Bryce Sanders is president of Perceptive Business Solutions Inc. in New Hope, Pennsylvania. He provides high-net-worth client acquisition training for the financial services industry. His book, Captivating the Wealthy Investor, can be found on Amazon.com.