Nobody Agrees What ARR Is

0:00 "I think every CFO needs to learn this technology. We are in a full seat change of tools and technology right now, and you do not want to get left behind."

0:10 My guest today is Luke McKinley, head of finance at Nuvo, the Sequoia and Spark-backed B2B trade network that raised a $34 million Series A,

0:20 and now sits underneath trade relationships for more than 200,000 businesses.

0:25 You know, sure, you can take that monthly revenue times 12 and say, "Oh, this is ARR."

0:31 The customer could say, "Hey, I'm turning this off. I found this other tool."

0:35 Almost every single startup is valued off of this number, yet there are so many arguments about what the number is.

0:44 Yeah. So, you know, again, I'd say RevOps, finance, like those two teams, if you have both of those teams inside your company, they need to be best friends.

0:52 I love that. And I've seen it work really, really well. When they're tight, everything's humming.

0:57 I think the best time to really build that relationship is during the planning process.

1:06 That you then go take to your CEO and the CEO is going to say, "Okay, that's great. Now let's increase that by 30 percent."

1:23 Luke, you said something in our prep call that I haven't been able to quite shake that at most early stage companies,

1:30 everybody is walking around with a different ARR number. Paint me that picture.

1:35 What does that actually look like inside a company that's otherwise doing pretty well?

1:40 Yeah, thanks, Anthony. And thanks for that kind intro and for having me on the podcast.

1:45 I'm really looking forward to this conversation. You've been a great partner to work with at Lean Scale.

1:51 And yeah, just shameless plug, he did not ask me to do this, but Lean Scale is awesome.

1:55 You guys should work with them. Anybody who's listening to this podcast, it's a great team, great products.

2:00 They've really helped us out over the last year. And I know they're going to be a great partner for the long haul.

2:07 ARR, yeah, it's an interesting one. Everybody has a different take on it.

2:12 Your sales leader says it's a bookings number. Your founder wants whatever the highest number is, you know, generally.

2:21 Your finance person is going to look at it and say, "No, the math says this. This is the math on it."

2:28 But even then, the math has made it... The math today is more challenging, I think, to do on ARR than it ever has been.

2:38 Because you have, especially in the AI world, you have this monthly recurring metered number that you're trying to track.

2:47 And you're trying to say, "Okay, well, what would that be as in the annualized figure? What about seasonality?"

2:52 Or what about if you're only doing a small piece of the customer's business, but it could grow into this other thing?

2:59 Or what if your customers are growing and your ARR is growing alongside it?

3:03 So, you know, it's one of those numbers that nobody has a very defined definition of across the board that's equal.

3:14 Everybody kind of has their different take on what ARR is.

3:17 And, you know, what I find is the best path is to get everybody in a room and align on what we're calling ARR.

3:26 And pull up some examples, pull up some contracts and say, "Okay, let's look at this one. How would we cut this one out? Let's look at this one. How would we cut this one out?"

3:35 How do we think about monthly recurring and get everybody on the same page? That's step one.

3:43 Step two is then actually producing that number every week. And that's also a hard one because, you know, your CRM, especially in an early company, is kind of a free-for-all.

3:58 Everybody's putting their sales reps have a number in mind that they think the ARR is.

4:03 Finance looks at it and they say, "I don't know. This is a totally different number. Like, where'd you get that from?"

4:08 And, you know, you don't have a single source of truth.

4:11 So, you know, really that, I think the value of putting together, you know, a dashboard of some sort or a tracking sheet as a single source of truth that everyone looks at and everyone trusts is like the ultimate.

4:26 That's the ultimate cheat code.

4:29 What we've done at Nuvo so far and where I've honestly been blown away is we put Relet in, which was one of the first things that I did when I started here.

4:40 And that tool actually has pretty solid ARR reporting. It aligns around, you know, how I think about ARR of a contract.

4:51 And if you need to, you can go in and adjust it on customers. And then that tool now feeds all of our internal dashboards and ARR calcs and GRR calcs and everything that you kind of derive off of what ARR is.

5:07 It's all driven by the same set of numbers, which has honestly been really great.

5:11 The worst thing is when you're in a metrics meeting and you spend the first 20 minutes arguing about the definition of the number or my number versus this and your number versus that. It's like a huge waste of time, huge waste of time.

5:24 Yeah, I've run into that too. And I think what's so interesting is almost every single startup is valued off of this number. Yet there are so many arguments about what the number is or you have, like you mentioned, different audiences for this.

5:38 Hey, are we fundraising? Are we managing it internally? Are we doing something else? What are some flavors of definitions? Maybe give some categories of like, hey, here's a couple of different ways ARR has been calculated.

5:55 And I think in particular where this is getting really difficult is a lot of companies are bolting on new AI capabilities that just for the sake of gross margin have to have some type of usage based component to it.

6:08 And you have a lot of companies that are used to seat and platform error, which stacks really clean and nice.

6:15 And now they're having a real tough time understanding how to handle this usage base, how to articulate error to a potential investor.

6:23 What guidance do you have and what options are there?

6:26 Yeah, so let's start with all great examples. Let's start with the easiest one, which is a nice standard 12 month contract for $20,000, right? Easy peasy 12 months auto renewal.

6:41 That's 20,000 bucks ARR. Easy, easy, easy. That's how software used to work. No longer. More complicated is you've got, let's say, a 3 year deal multi-year deal that has a first year discount.

6:55 But in the third year, that contract grows from 20 K to 70 K, your two is 50 K. So you got 20, 50, 70. What do you do with those?

7:05 You could say, oh, this is, you know, we could average it out and say, okay, we've got, you know, 50 K basically on that contract as ARR.

7:13 But then in year three, you're kind of undercutting yourself. It's also not necessarily indicative of the future growth potential of that of that customer as well.

7:23 So with, you know, with those, the other consideration to to think about is ARR versus cash flow, right? So ARR on that contract, if you call it 70, you're not seeing that 70 until the third year of the contract.

7:37 So if you're trying to model your cash flow, right? And how much how much actual cash you're going to get, you're going to end up short because you're not getting paid 70 K until the third year.

7:50 So that's a trickier one. You know, with those, you do need some sort of a clear guideline and principle for yourself and who your investor is.

8:01 That's why I like to present ARR as this kind of ethereal number. And then you have very clear, you know, gap financials, cash flow financials as part of your as part of your package that you're sending to investors.

8:13 Can I can I hang on that example? Because I feel like that's one I didn't even have in my head, and I've been doing this forever. So do you have a recommendation of how to handle that case where you have a ramping deal or is the recommendation you just need to align?

8:29 I think recommendation one is a line. Recommendation two would be from the finance lens, you know, make it as make it the conservative approach, which is call it 20 in year one, call it 50 in year two, call it 70 in year three, right, like kind of step up and show those step ups as expansion revenue in year, year two and three.

8:51 I think what a lot of companies do is they do the more aggressive approach, which is that's a 70K ARR contract. And you could make the argument, right, you could make the argument, I think, if you're going to do that, just disclose it and make it clear that that's what's happening.

9:08 So when when investors pick up that that information or you're, you know, you're reporting it to the internal team that you clarify like, hey, there's this, there's a gap here between the two, do you think it's worth needing to explain it, or does that start to raise a few red flags where they might

9:27 be poking a little bit deeper in the books? I don't think so. I think it's, I think it's expected in some ways to be pretty aggressive with, you know, how you're reporting error these days and I think honestly guiding guiding people towards, you know, hey, this is what's

9:42 going on. This is how we're reporting it. It actually helps build trust, if anything.

9:49 Makes sense. I just know some people are, I don't want anyone to, you know, hey, maybe it bumps up ARR a little bit, but then it raises all these questions and creates all these headaches.

10:00 So, but I think, again, guidance being be descriptive and just guide people to know exactly how you're coming up with the numbers.

10:09 Yeah, exactly. Now, let's pick another example that you brought up earlier, which is, you know, this monthly AI revenue monthly usage revenue. I think that's the most interesting one right now, especially because, you know, so many AI contracts

10:24 are not annual, they're, they're pay as you go, or they're consumption based and, you know, sure you can take that monthly revenue times 12 and say oh this is ARR. There's nothing legally forcing the customer to pay you for the next 11 months.

10:44 The customer could say hey I'm, I'm turning this off, I found this other tool, it's better, it's cheaper, it's faster, I'm going to go use that one instead, and there's nothing you can do about it.

10:54 And so that revenue just goes away. And, and that becomes a real problem, you know, for yourself when you're reporting out churn and downgrade it's like it makes the swings a lot more dramatic on both of those.

11:09 Overall, you know, hopefully you're still up and to the right, but you're going to have these big swings along the way it makes it a lot harder to predict where the business is headed as well, you know, when you're looking at, you know, long, like over the long term,

11:24 you know how, how customers expand how customers turn the bigger the swings it becomes much much harder to predict it, you know, my advice on those is is take as much data as you can about what actually happens in the product, and what patterns of, you know, develop

11:45 over time, I think, rule of large numbers, it really still holds, and that when you look at a large set of data, you can you can draw some conclusions around, you know, your, your businesses seasonality, and how customers are are operating with your product

12:02 and, and the usage expansion. And I would, I would really, you know, find what works for your business. You know, I think a good starting point if you're just starting from zero is last three months.

12:14 I think that's a good, it's a good starting point, and you take that use an average and and call that your, your MRR times 12. You know, that's how I would position it.

12:26 A little more conservative right that's the finance voice but, you know, I think, I think this is a new world where we're, we're all trying to understand like what is AI revenue, how does this stuff work, and, you know, what are, what are our investors valuing this in a

12:42 fund rate cycle in an exit situation. You know, there's there's a number of implications right on valuation that come out of this number, like you said earlier, so I think, you know, the more kind of clear and transparent you can be about it, the better for all

12:59 parties. Can I give you one, this is like a this really painful experience that I had. And I worked at a usage based tech company, the company's called email edge is in cybersecurity fraud prevention, and we were usage based before it was cool.

13:20 So, you know, nobody had any real frameworks or frame reference of how to do any of this stuff. And one of the things that happen is it was during a fundraising season two. So we were trying to close as much as we can tighten things up as much as we could.

13:38 And we closed JP Morgan and huge potential deal. I mean, the proof of concept we did on it and like what we're expecting to come from it was, was massive and it was a huge logo. I mean, we're popping champagne everywhere when we closed it.

13:56 But at the same time, the commitment was zero. And we didn't even have some usage to look at what should you do with those big logos that you close an enterprise deal.

14:12 Should you even include it do you need to wait, or should you start getting credit for it after you close.

14:17 That's a good question, especially during a fundraise cycle that is tough timing. So, yes, so look what I would say there is like look at your historical precedents, see if you've got.

14:29 See if you've got other customers that look and feel like JP Morgan and how they've rolled out the product over time, how long it took six months nine months 12 months.

14:38 The size of total prize that you estimated, you know, the total deal to be where you guys able to capture with those prior customers and use that as your guide and say okay.

14:50 It took us six months to roll out Bank of America to do the same thing.

14:55 And we captured 70% of what we thought the deal was going to be.

15:00 There you go. That's your number takes take that 70% six months, apply that to this deal. And then really what needs to happen is now you've got to hold the entire team accountable to delivering that number.

15:12 So, your deployments team yours your CS team, your engineering team, like, everyone needs to be fully bought in on. Alright, let's go, let's go deploy this product as much as we possibly can into JP Morgan, so that the revenue actually achieves what we said it was going to be.

15:29 Because then, you know, what you've got is a real problem on the other side if you've overestimated what that ARR is going to be because you have to either pull it back.

15:37 You have to go back and change historical financials, which you definitely don't want to do.

15:42 Or, or you've got to report a contraction, which is also not, not a great story to go around and then then then the questions come, well, what happened, why weren't you able to deploy this fully, like, what went wrong.

15:55 And you've got a whole nother set of problems to deal with on the other side of it.

16:00 100% and I think people are wanting to like, let's get the credit we deserve and not get like burned by not reporting it but not set ourselves up to look like we're being unethical or set it up to feel like, oh, we're operationally missing the mark here.

16:17 I think something in a similar vein, I know that was like, okay, we're in the middle of fundraising, so we're trying to figure out what to do. You're going to put your best foot forward. Yeah.

16:26 We'll figure it out after we close. I don't know. We'll blame the CRO. That tends to be the answer. I don't know. He didn't know what data forecasted. No, I wouldn't recommend doing that.

16:39 Moving forward though, let's assume, because a lot of the companies we work with, like the usage might be 50, 60% of the revenue because their customers just can't forecast and commit and it's so variable.

16:54 So I think what gets hairy is you're kind of running to that every month or quarter when you're, when you're saying, hey, we booked this much or even when you're reverse engineering a bookings plan.

17:07 How do you, how do you think about that or even like setting quotas to the team operationally? How do you handle the usage revenue in terms of goal setting and forecasting and everything else?

17:17 Yeah, that's a good question. You know, we're, we're now kind of taking our step into this, into this world as well at NUVO.

17:25 You know, we've been lucky enough to have great solid two, you know, two, three year contracts.

17:32 But now, yeah, we're introducing usage. We're introducing transaction revenue as well into the product where we built payment rails.

17:40 And so now we've got payments revenue that's coming through on credit cards and ACH deposits and all of those things.

17:49 And yeah, it's been interesting because both, you have to think about both the ARR reporting, but you also have to think about the comp side.

17:56 And, you know, how do you make sure that the team is incentivized to go out and like maximize these deals and get, you know, the change inside of the customer's organization happening the way it needs to happen in order for your product to succeed and grow and make an impact.

18:17 So, you know, with, with that, with those ones like I'm, I build out like a pretty complicated model on transaction revenue at least that, you know, forecasts out based on customers revenue and how much transactions they're running through us and how, you know, what we think it can grow to over time.

18:35 And, you know, we do generally kind of look at that and say, all right, this, in theory, once this all moves over to us, it's gonna, it's gonna grow to this, this, this amount.

18:47 And, you know, we're gonna pay the reps on that. But there's this catch up piece that that we've also introduced that says, okay, you know, at nine months into the contract 10 months into the contract, if we're not there yet, then we make some adjustments, right?

19:01 We make some adjustments on all those things. So you have a little downside protection in there too. But, you know, you don't want to get in the way of, of also, you know, making sure people are feeling, feeling really good and motivated.

19:17 Excuse me. On, you know, on the revenue side. Yeah, when you've got that much that's variable, it's really tough. It's really, really hard.

19:25 My advice, you know, to, to finance folks who are in that position where they've got 60% of their revenue coming from variable, be as conservative as possible.

19:37 And like, that's a hard place to be in, because everyone in the company is telling you that should be a lot that should be a higher number, isn't that a bigger number from us like they want the bigger number, of course, but your job is to protect the downside.

19:52 And so you've got to be there and say, actually, our patterns suggest that this is not going to get to that number, as much as we all want it to be or, you know, there's going to be some seasonal lumps here.

20:05 And when I'm thinking about cash flow, I need to make sure that we're not burning too much money.

20:12 And one side of equation of burn is expense, the other side is revenue. So, you know, you've got cash flow in. So you've got to, you've got to be a bit more conservative on that.

20:23 And it's really hard to do. It's really hard to do.

20:27 Well, and I'm hoping that discipline pays off though. I mean, it's okay. Maybe we could have gotten a little bit higher valuation during a fundraise potentially maybe, and maybe it doesn't even impact the ultimate exit or ultimately what ends up happening with the company.

20:44 But it would be pretty catastrophic if you were running the business as if you had that revenue committed and then it doesn't come in and then you've completely overspent or over invested over here.

20:58 The risk of that probably isn't worth the potential opportunity.

21:02 Yeah, that's exactly right. Because then you've got to, once you get to that point, then you've either got to raise more money to keep the thing going, or you have to make cuts and like, nobody wants to do that.

21:14 It sucks. It's painful for the culture. It's painful for, you know, the long term health of the business, being able to recruit again, like there's a lot of downstream implications that happen.

21:27 And so, you know, one of the key parts of this job is preventing that from happening, even when it's tough. So I'm glad you brought that up. It's never a fun topic. Nobody wants to talk about it, but it is true.

21:40 No, it's tough to recover from that for sure. Do you have an opinion on comp plans and commissions when it comes to, let's maybe use that straw man of a company where, hey, 50% is variable coming from the deals that we're closing.

22:00 Do you have any thoughts on how you should structure a compensation plan for a sales team?

22:05 Sure. On a straw man, 50% is variable.

22:11 You know, I think, I think the easy thing is to pay on commit, right? That's an easy one.

22:17 And you want it to be, you want that to be as, as simple as possible for the reps to understand.

22:23 On the variable piece, you know, if you have a lot of data, at least a couple of years on trends and performance.

22:33 I think you can, you can come up with a number that says, of this amount that the customer told us we were going to, they were going to spend with us, we get 75% of it.

22:44 And use that. I think you can use that to pay the reps on so that they feel whole, they feel like the company's taking care of them, they're putting their best foot forward, and they're highly motivated to continue to grow and go, go chase new business.

22:59 And then you have a catch up process that says if we went up above that 75% the rep gets gets made whole.

23:08 If it also needs to go the other way, if it says, you know, if we came in under that, hey, we're going to hold this back from a future payment or, or clawback.

23:16 Again, nobody likes doing that, but it's, it's, it's fair.

23:20 I think it also, you know, will, it'll help the rep push on the CS team and the deployments team to make sure that that account is really well taken care of.

23:32 So you kind of get this other benefit from from having that structure in place where the reps are also pushing to hold the rest of the company accountable.

23:44 It seems to be that balance like, Hey, we don't want to have to pay out in annuities to the team. And then it makes it less exciting to close something.

23:56 It also may make it less exciting to commit as much as they can.

24:01 But also you still want them tied in to make sure it's a success. So I think it's something I struggled with it at emailage coming up with comp plans.

24:09 I still don't feel like I know I've asked a lot of guests on how they do it because I still feel like it's such a complicated challenge and there's so much nuance to it.

24:20 So anyway, if anybody's listening and going through that process of coming up with a comp plan, just know there's probably not one right answer, but as long as you get close and protect some risk, you should be good.

24:31 I think if you get close and you put some downside protection in there for yourself, and when I say yourself, I mean the company, you want to have the comp plan aligned to the right behaviors.

24:47 We actually did something pretty fun this year though around like quota retirement. So one of the things we're really focused on is is rep participation and just getting more consistent, you know, month over month, quarter over quarter rep participation on quota.

25:05 It's harder with our enterprise deals, but for our mid market deals, like we generally have that motion working, working pretty well. So we introduced a couple of cool things like, like a three out of four quarters kicker.

25:17 And it's, it's pretty lucrative. You know, if a rep hits three out of four quarters of quota, they get an additional 5%.

25:25 Oh, wow. It's pretty, it's pretty solid, especially because that person's hitting their quota. So they've already banked up quite a bit.

25:34 They've already banked up they've already hit accelerators and hey if you do it three out of four quarters, you get an extra piece at the end of the year so we've got, we've got a few reps that are on track for that and I'm honestly really excited for them to hit that I really, I would

25:48 love to see it. It helps, it helps me tremendously on forecasting, you know, the mid market portion of our business.

25:57 And it, it helps the reps and it helps us recruit as well so you know to me I'm like that's money well spent.

26:05 I also think that's pretty aligned with.

26:09 Hey, let's, let's do everything we can to keep our top performing reps, because it is so much more I'll put my CFO hat on so much more affordable to get a little bit more performance out of one rep, and to just keep stacking reps where some of them

26:26 make it some of them don't one of them doesn't you're filling their spot up again and that person has to ramp now they don't have pipeline they're not trained on the product yet.

26:35 And it's just, I have been exhausted by these load up the sales team plans hire 100 people.

26:44 And I just feel like it's lighting money on fire, half the time. Absolutely lighting on money on fire, you are you are literally just throwing spaghetti at the wall and you're seeing how many strands of spaghetti stick.

26:57 And usually it's not that many, you know, no, it's like you're lucky it's usually 50% of them make it. Yeah. Yeah, exactly. And and what you've done there is you've created a culture problems because now you've, you've now gotten yourself the reputation

27:12 of a company who doesn't know what they're doing they're, they're hiring a ton of reps and then they're firing a ton of reps.

27:19 You know, other, other good reps aren't going to want to come there, because they're like, can I actually make money there, I'm not so sure I can.

27:27 You know, maybe, maybe these guys just got lucky like I'm not sure it seems seems pretty messy over there I don't think I want to do that.

27:33 And, you know, what's what I think is a better approach and I'm glad, you know, the Valley seems to be waking up to this event is is really going more in the direction of, let's have fewer reps, let's have higher participation rates.

27:49 Let's also get the best quality reps we can get and keep them really happy.

27:54 Keep them happy keep them making money. You know, the business honestly gets a lot of intangible benefits from that, because then you have reps who really know your product, really know the market.

28:05 And they can very quickly iterate their sales process, they can provide feedback to the product team on what needs to change, and it can be trusted it's not, it's not a new rep coming into a company and be like, oh, this thing.

28:18 This product sucks. It doesn't work. I'm not able to close any deals. Right. It's like somebody who actually knows what they're talking about but that takes time, it takes, it takes honestly a year for a rep to really figure out the market and the product.

28:32 You know, we, we always build out our capacity models with like a three month ramp, but it never is the case it is six months or more.

28:42 And then during those six months, you know you're like, is this rep gonna work I'm not so sure they're, you know, they're pipelines not quite there yet.

28:50 And, and then yeah exactly what you said it's, it's expensive to, to then go replace that person, you know, through recruiting fees and, you know, just the time spent hiring.

29:02 It's like, all right, build the team, get them in place, and then just have everybody run, have everybody run forward row in the same direction that leads to a better outcome.

29:14 Yeah, and I don't, I think you don't hire a rep until they don't have room on their calendar to handle any more prospects that you just have so much pipeline to be managing and handling.

29:25 I think a lot of people have this idea and I'm not saying reps shouldn't do their own outbound shouldn't do their own prospect. You absolutely should all the best ones will and do.

29:34 But you shouldn't count on that as the growth lever of, I'm going to hire a bunch of people and all of them are going to do amazing prospecting and amazing outreach, because to your point, they're not even going to really know at least a quarter.

29:47 They're not going to know how to do anything.

29:49 It's going to take six months, potentially 12 months before they have a reputation. They have some contacts. They've been to the shows that they need to go to and they have an idea of what messaging works and how what effective outbound would be.

30:03 So if you're going to try to rapidly expand it, just mentally think I'm not getting any pipeline from this team. This is just my harvesting team.

30:12 And I think if you wait for the pipeline, by the way, the reps that you have are going to be super happy. You're crushing quota. They will have great territories.

30:22 Very rarely have I ran into reps like, oh my gosh, I just don't even know how to click close one in Salesforce this much. Like, it's just too many deals for me to manage.

30:31 Too many deals. Yeah. No, that's never the case. It's always like, I need more deals. I need more pipeline. I need more. I need more of this. Or, hey, can somebody help me figure out this order for him? Like, that's always what it is.

30:44 Yeah. And, you know, look, it's an engine, right? It's an engine. And, you know, in my mind, the gas that goes in the tank is your marketing dollars and your SDR dollars, right?

30:55 So that is the fuel that keeps the thing running. Your engine has to also be able to handle the fuel that you're putting into it.

31:06 If you're pouring diesel fuel into an engine that wants gasoline, it's not going to work, right? So you have to have high quality leads at the top of the funnel as well to make the reps happy. It's like all the pieces need to work together. And I feel like so much of the time in RevOps and finances spent diagnosing check engine lights, you know, that come on.

31:28 It's like, it's like, okay, why? What's going on with this batch of leads? Like, why did these all go closed last? You know, where we spent $30,000 on LinkedIn trying to get these leads in the door and like none of them progress through the funnel.

31:42 Like, what's going on there? Is there a messaging? Is it our... Oh, actually, you know what it is? It's our lead funnel routing. None of those leads made it into the CRM and they're all gone now. That's a huge waste of money. Dang.

31:56 But, you know, that's so much of the job is like, all right, like what went wrong? And the faster you can see those and spot those and then diagnose them, you know, the more successful the team's going to be, the happier the reps are going to be, and the more revenue you're going to generate.

32:13 I really appreciate as a CFO how close you are to the RevOps team, how close you are to go to market.

32:21 I think it's really important for CFOs to be thinking that way. And I would love your take on just how finance teams should be interacting with RevOps and how RevOps should be interacting with finance.

32:39 And sometimes it feels like they're maybe saying the same words, but speaking a different language to each other. And I've seen a lot of times where they're not aligned very well.

32:49 Any recommendations to get those teams humming the way you've been able to do that?

32:54 Yeah, no, that's a good thing to bring up. And, you know, I've had experiences on both sides of that where you've got a great group of RevOps folks that talk to finance all the time and we're always really aligned and, you know, we're chatting once a week, twice a week.

33:11 And then I've had others where it's the exact opposite and it's like, can't get along. And it's, you know, that's a really unfortunate situation when that happens.

33:20 And, you know, you have to try to find ways to work together. But, you know, a lot of times finance is at the end of the process, at the end of the deal process.

33:30 And so, you know, if RevOps is approving deals that you're like, what the heck is this? Why did you do that? You're the one having to deal with it.

33:40 So, like, there's some frustration that can pop up.

33:44 So, you know, having also, I would say having a RevOps person who is also a little finance-minded helps to someone who understands...

33:53 I've seen some fantastic RevOps pros that have started at even in, like, accounting, maybe they did some accounting right after school or something like that.

34:04 But when a RevOps person has a finance background, I feel like they're an absolute weapon.

34:09 Yeah, they're a weapon because they understand the mechanics of how the business works, the revenue, the cash flow, like all the things that, you know, finance cares about.

34:18 And they also understand the sales piece and how to motivate the reps, also how to make the systems work, the deal flow, routing.

34:26 You know, finance in a lot of ways, it's a systems discipline, right?

34:32 It's your, you've got your payroll system, you've got your billing systems, you've got your ERP and your ledger. And so much of the job now is just making sure that all the systems work together and that you're automating as much of that as possible.

34:47 It's not that dissimilar from RevOps. It's just different widgets going through the system.

34:53 It's leads, it's opportunities, it's deals, it's renewals, it's, you know, marketing contacts. And then, you know, your output from that is hopefully revenue and happy salespeople.

35:05 So, like, I think there's a lot more overlap, especially now, more than there ever has been between the two.

35:13 And, you know, I put a lot of effort into aligning closely with our RevOps team here at Nuvo. You know, we talk twice a week, three times a week, at minimum.

35:25 He just brought a question to me actually earlier about like, hey, we've got a pilot deal. How do you think about this for ARR?

35:31 It was great. This is exactly what I want. Yes, let's do it.

35:37 Oh, and also like, yeah, we're getting into fundraise mode. So we're going to call that what we decided on this one.

35:44 And it's, you know, again, I don't know if I would always do this, but because we're in fundraise mode, yeah, that's ARR, but we're going to footnote it.

35:50 We're going to say, okay, that's ARR, but this amount is pilot, not fully committed.

35:58 And that's, I'm good with that. I'm good with that. I think investors will be good with that as well. Puts our best foot forward and it's still truthful.

36:05 Yeah, it makes a ton of sense. I didn't even think about, yes, I've run into the pilots one, two, and what to do with them.

36:12 Fundraise mode makes sense because hopefully they'll still, maybe they'll at least just be in the pilot still.

36:19 But I know a lot of companies that they choose to book those as, yeah, it's a customer. If they're paying something, we'll call it a customer.

36:26 Like, that's fine, but then you're going to have a lot of churn and then your churn metrics are going to look really, really bad, which will hurt you worse in evaluation than having a little bit more revenue, but, you know, do it at your own risk.

36:43 Yeah. So, you know, again, I'd say RevOps Finance, like those two teams, if you have both of those teams inside your company, like they need to be best friends.

36:53 I love that. And I've seen it work really, really well. When they're tight, everything's humming. I think the best time to really build that relationship is during the planning process.

37:07 Yes, I'm glad you brought that up.

37:09 That is when I was an operator running RevOps, I was the CFO's best friend during planning because they had all the data that they wanted to do everything and all the explanations and everything they needed to build and run the plan for the next year.

37:28 I don't know. I felt like that's a good time.

37:30 I can, I can geek out on this for a second. You know, and you and I have even worked on a plan together, I think last year and, you know, the way, I think you have to approach it like philosophically like, alright, how are we going to get the best plan that we think is achievable,

37:46 but is, you know, the maximum amount of revenue we can get.

37:50 It's a startup right you're trying to grow as fast and as big as you can. What do we need in order to get there. And there's two schools, you can go bottoms up model like headcount driven units of calls at the top of the funnel marketing dollars all the way through.

38:06 And then you can also do the capacity model which is, you know, hey we think our reps are going to hit 65% of quota or 70% of quota, and you just kind of model it that way.

38:16 I think you get the best outcomes from a planning process when you have two parties that are each doing their own models.

38:25 One, one party is doing a bottoms up the other party is doing a tops down. And then you come together and you meet in the middle and you say okay where did your model get where did my model get.

38:34 Okay, actually we're pretty close. Great. I think we're, I think we're in, in, in range here, or hey we're really far off like why are we so far off.

38:43 Oh it's because I'm using this conversion rate or oh it's because you're using this for an achievement rate or oh you have like 30 more reps in your plan than I do.

38:52 We figure that out.

38:55 And, and, you know, with that you can then come together and say, and align on on a compromised plan that you then go take tears your CEO and the CEO is going to say okay that's great now let's increase that by 30%.

39:09 I've never seen that. You never seen that.

39:13 No, there was like wow you guys are trying to be too aggressive let's keep it conservative this year. Yeah, every time totally.

39:20 Every time that's actually the first time I put together a plan it came from that frustration, my CEO is like you guys aren't being aggressive enough, everything's, you know, too conservative and everyone's like I don't think we can.

39:31 His name is Ray. I've told the story a few times but he's like, and I've even post on LinkedIn so he knows this is one of my stories on him.

39:38 Oh, you guys, you guys aren't being ambitious enough we have so much more to do and everybody thought he was crazy he wanted like double what everybody was putting on paper.

39:45 And I was like you know what fine I'm gonna I'm gonna show Ray exactly what it's gonna take to meet his crazy plan. You're gonna need all these reps are gonna need this much marketing budget you're gonna need to do it by this channel I'm gonna show I'm gonna put the

39:57 whole plan together just to show him how impossible it is. And he saw it he was like oh my gosh thank you this is everything I was looking for. I was like oh, okay, I just built my first growth model operating plan.

40:11 There you go. And how'd you guys do against it. That's really the question.

40:15 We actually, we got pretty close we were like 90% Yeah, it was. He was right. And we were thinking of it wrong. And it was, hey, let's figure out how to get to the goal. Let's set the goal and figure out how to get to reverse engineer from there, rather than

40:32 just think okay what can we incrementally do from where we're at. And that's why you have to do it from both sides. Because if you know your bottoms up is going to tell you here's what the team's capable of doing today.

40:42 Your tops down is going to say what's the goal, what are we trying to get.

40:46 And let's find a way to meet in the middle. So, you know, doing the, it's a lot more work to do it this way. But then you really stress test those two approaches. And I think you get you end up getting to a better quality number and a better

41:01 quality plan that says, Yeah, we do need 50% more marketing budget than we had last year, or we do need 30 more reps in order to hit this. You know, let's figure out how to do that. And, and it changes the conversation pretty dramatically.

41:16 Once you get there, and especially if your sales leader is bought in on the plan. I think that's the other key part. And so including your sales leader, plus rev ops plus finance, like get those three parties in a room together.

41:31 And you get, I think, with with that you get a really good outcome on on the plan and something that's really achievable.

41:40 I think so too, especially if you can get everyone aligned on the inputs. So let's segment it enterprise velocity. What are the conversion rates, what are the times and stage, and then what quota can someone manage like if you make all of the conversation

41:57 around the inputs, then the outputs just math. Okay, it's, do we agree on a 20% conversion rate or should it be 30 or what historical data do we have what new initiatives can we do to improve it okay let's all make a judgment and agree on it.

42:12 And then once you lock in alignment on that, and then just stack everything up, just click enter and see what the plan tells you to do.

42:20 That's exactly right. Exactly right. And, and, you know, you can only do that with rev ops, I think that's, that's, that's the key value I think that the discipline brings is really knowing those numbers cold.

42:34 I think I introduce you as told my friends and family I say Luke's the most modern CFO I know. And I think you've really exhibited that in previous roles, especially now, you're a finance team of one, you've done your own tech stack implementations your own

42:50 operations, really really getting a lot of leverage, it almost feels like finance is getting much more technical. And you have more tools at your fingertips to manage the function.

43:06 What do you think of modern startup finance team looks like today with access to all the leverage that you have.

43:16 Yeah, that's that's a good question. You know, when I joined nouveau last year. I think that was one that was my mission was to come here and build the finance discipline as lean as possible.

43:28 And as your future proof as possible, knowing that, hey, AI is, it's not at the time last year, it wasn't that good at finance yet right it hadn't quite figured out how to build models and, you know, it was good at coding, it was good at writing.

43:45 It wasn't quite there on the numbers yet and that has changed a lot this year.

43:49 I'm now using it all the time to build stuff it's it's pretty remarkable but the, you know, the starting point though, to leverage AI and to leverage all these new tools is, is, is your data.

44:03 And so you have to be highly confident in the data that's going into the system so that you can then take it and analyze it and know that like what you're getting on the other side of it is true.

44:14 So, one of the first things I did I put in real it.

44:19 We already had ramp we already had rippling. Thankfully, both of those systems are awesome.

44:24 So easy to use and have great, great integrations great tech stack good data that comes out of both systems. And they had really good integrations with real it too and so, you know, I put that in place we migrated from QuickBooks.

44:37 And real it's now doing everything from revenue sending invoices, recognizing revenue, calculating ARR, you know, all the way through like the full, the full objects and P&L outputs and casual outputs.

44:53 You know, really has some AI stuff inside of it like I can, it's pretty good at building like a 13 week casual forecast which is which is cool.

45:01 It's got some other automations that we use that that, you know, not to get too like accounting heavy but you know things like accruals and, you know, your month end.

45:12 And all that kind of stuff it's, it's done a really good job automating a ton of that work to the point where, you know, I can really operate this system with a little bit of outsourced help, and it's, you know, I'm still not to the point where it like makes sense to hire a full time person to come in and manage it because system plus some, some really high quality outsourced

45:35 help with a TiVo, you know, that it's, it's working really well. And, you know, the cool thing is now I can say okay I trust the numbers that are in real it.

45:45 I trust everything that's going through ramp because everything is there. All my departments are coded correctly all my expenses are coded correctly my revenue is right.

45:53 I spend a lot less time double checking that everything is right than I used to.

46:08 Pull that together. And, and Claude, you know, literally, like, just the other day was added to some benchmarking for me against, you know, other cloud spend providers I'm digging it on on cloud spend right now and AI spend and you know of course right it's that's that's the job.

46:24 But, you know, it pulled together like a plan and I'm now just kind of knocking things off the list. Alright, let's go talk to the engineers, how can we move this spend from render over to GCP or whatever it is we're doing.

46:38 So like that part's really amazing, and it's it's automated so much in the job. You know, things like a BVA analysis budget versus actual analysis used to take, you know, a whole day, you, you pull your budget up and you're looking at your actuals and you're like okay

46:55 none of these accounts match because I've changed the business has changed since I put this budget together. And now, you know, with Claude and an AI like I'm able to just put those reports together pretty quickly have it run some analysis do I do, you know, a little

47:11 bit of manual deep dive work, but it's so much faster than it used to be.

47:16 I basically always have Claude running a task for me in the background at all times pretty much like I'm now getting into those tasks that are like 30 minutes an hour like I wish Claude was faster.

47:29 I know right. I wish it was faster. It's like, but I'm basically doing two tasks. At the same time I'm doing whatever Claude is doing. And then I'm checking it and I'm saying hey go fix this again, like I just built a pricing model over the last three four days with

47:45 a model we went we've gone back and forth and we've, we've been able to cook up a pretty interesting pricing model for a new product that we're launching. And, you know, while it was doing that I'm also doing all this expense work, so I've been able to kind of double my productivity

48:00 output, just leveraging these these tools that have come online in the last year and I know I'm just scratching the surface. Like, I'm starting to think, okay, can I get my model out of Excel, can I vibe code a like custom Claude model that just sits in a warehouse

48:16 and like does all the calculations, pulls in all the data like that's I'm starting to think about it I know others have done it.

48:24 I want to tackle that by the end of the year I think it'd be really fun, or like a commission's tool. I really want to build a commission's tool.

48:31 Feel like those, there's no good commission's tools out there, they're all really rigid, they're all really tough to use. I'm like I could just five code something I know I can, like it's.

48:40 And then the refs log into it, like, do something in lovable.

48:45 You know, it's really fun, like I'm having fun building new stuff. It's really cool.

48:53 It's almost addicting. It's like, it is. Oh my gosh, I can, because it used to be okay I had this idea of something I wanted to build but immediately I just disqualify like I have to get a bunch of engineers to do it and I'm not going to do it.

49:06 Now it's like, you could do that.

49:09 You could do that right now, if you wanted to. It's like oh my gosh my to do list now is just infinite. That's the thing is like what do you pick.

49:18 Right now it's like oh I have to get really good at focusing on what I'm doing. Yeah, exactly. I think that opens up something though, like, what should.

49:30 Okay, I know you, you have some special operational powers and a real interest in technology and, and, and is that what a CFO should be now, or.

49:51 Yeah, that's a good question. I think, I think you've got to have, I think every CFO needs to understand AI, and they need to be able to, for their own sanity, leverage the tool and be able to ask it questions and be able to have it run analysis for you.

50:11 Now look, AI is not perfect. It still gets numbers wrong. You also have to then go audit the data and audit the numbers, like, it took me four days to build this pricing calculator because every single every single output I'm like oh no that's wrong.

50:27 I have to go fix that. Hey go update this. Oh, no, this is wrong. Let's go fix this. So there's there's there's this, you still have to know the discipline.

50:36 You have to know the numbers and you still have to have confidence in the data, so that you are when you are recommending a decision or an outcome like the CFO's job is to do those recommendations if you're just blindly trusting AI to make those decisions for you.

50:56 That's going to lead you down a very bad path. You know, one of the things I think we're talking about a lot too, and I know a number of other companies have talked about is, you know, hey, you're.

51:05 Even if you use AI to write your document for you or make your document for you, it's still your name on it. Like, you have to be the one to stand behind this, you can't blame Claude, because Claude's just a tool.

51:19 Right. It's, you're the one who's delivering this. Actually there's a Twitter over the last 24 hours like Stan Druckenmiller wrote a, you know, his normal quarterly letter and he said, Hey, I used AI to write this, and everyone was giving him a ton of Stan Druckenmiller

51:37 like a famous investor, kind of, you know, not at Warren Buffett's level but maybe like one level down, and everyone was giving him a ton of grief and like, I think it's fine, you know, it's like hey, use the tool and that's what he said he's like hey I'm, I'm, I'm not dumb

51:52 like I'm, I'm going to use the tool.

51:55 The best tool for the job it's still me saying this, like it's, it's still me saying this through this, this tools lens.

52:04 So that said, like I think every CFO needs to learn this technology it's we are in a full seat change of tools and technology right now and you, you do not want to get left behind.

52:16 That said, having people on your team who are really good at getting the most out of the tools is extremely valuable.

52:24 You know, we've got a couple people on the team today who are extraordinarily good at AI and have helped me a ton, just learn what all the things that I can do with it.

52:35 Also help me hook up systems and do you know API connections that maybe you're a little outside of my, my normal scope of technical ability.

52:45 And, you know, having, having folks on your team who can really help you and lean in there is extremely valuable.

52:54 And then third, you know, still the accounting, and the gap accounting like you have to.

52:59 You still have to verify it. You have to verify it so you have to have a controller, you know, double checking payments out and, you know, we're now kind of entering also that new phase of like AI is going to start making payments.

53:11 That's an interesting can of worms. That's a very interesting can of worms because it's like, okay, agent, you're going to, I'm going to give you a $10,000 credit card and you're going to go just burn it.

53:22 Like, you know, let's put some guardrails in place. Let's make sure you're, you're spending in the right place and we've kind of got a human in the loop overseeing it at least for now.

53:32 But over time, I think it's going to become more and more and more commonplace that agents are going to be spending money on behalf of customers of companies all the time and personal in your personal life too.

53:45 You know, I was just talking with the founder, the other day and it sounds like cloud flare is going to start introducing, you know, almost like a meter tax of sorts on agent traffic on the internet because it's, it's now at like 60% of the internet is agents going and checking

54:03 out websites and scraping websites and doing different work, work and research and agents are going to have to spark start spending money to do that work.

54:12 And so how do you trust that the agents going to do that the right way.

54:18 I don't know the answer yet. It's, it's something we're gonna we're all going to figure out together.

54:23 But, you know, I think, as a finance leader, you have to be thinking about this because it's coming.

54:30 Whether you like it or not. It's coming.

54:34 I think there's going to be a lot of monumental shifts and finance and payments and yes, I would love to be able to say, hey, Claude, can you book this trip for me, please.

54:43 Not thank you for the itinerary.

54:45 Now I have to go log in all these websites and plug in my credit card like it's horrible.

54:49 I don't I don't touch the laptop anymore.

54:52 I just do whisper flow.

54:53 Everything else should be taken care of for me, but I can't get it to do payments.

54:56 Do you do you think finance, because it is getting more technical, there are more tools to manage.

55:03 Do you think it's going to have a similar evolution as we've seen on go to market with the introduction of RevOps starting to become a real core part of that team.

55:13 Do you see like FinOps having a seat in that department now?

55:18 Absolutely, especially larger companies that have, you know, 10 or 15 different software tools that they're using or, you know, different agents that they're using.

55:28 You know, you're you're you're going to need a FinOps person to orchestrate, you know, the flow of data from each system into the other and be able to make it useful.

55:39 You know, for your finance team to bid to model to forecast to, you know, provide reporting and that FinOps, you know, to grease the wheels, so to speak, of making all the systems run correctly is so critical.

55:54 It's so, so critical.

55:57 Yeah, and I think some earlier stages sometimes like RevOps will sit in finance and stuff and they might take on something that I think it's a totally different discipline.

56:05 Like, hey, no, RevOps stay with sales, marketing, customer success.

56:12 We need someone who really understands accounting, who really understands FBA, who really understands the outcome that we're looking for.

56:19 And then is also technical enough to implement the tools and manage them and get the leverage out of them.

56:26 I don't think you can blend them.

56:28 No, I don't think so either. I think there's the tool stacks are different enough that, you know, and you want somebody you do kind of want to control like line there, you know, between finance and RevOps and, you know, they're two, they're opposite sides of the table.

56:45 It's in some ways, right? It's like finance says, here's the, you know, here's the plan. Like, what are we going to do to deliver it? You know, you do want, you do want some, some, some checks and balances there, I would say, too.

56:57 Makes a ton of sense.

56:59 Luke, this has been awesome. Literally can't wait to get this on YouTube, Spotify, Apple, and then also get the transcript on our MCP because I think it's full of gold.

57:11 I appreciate you walking through the toughest number to calculate at any startup ARR, even though every single company is valued on that number and pretty much your whole existence depends on that number.

57:21 It's the toughest one to get alignment on. And I also really appreciate your perspective on the direction that finance is going, where it's getting more technical.

57:31 There's a bigger tech stack to manage potentially, not potentially, but probably the opening up of FinOps roles. And then I really like the way that you framed bringing finance and RevOps together, especially around that planning process.

57:48 It's a really great way to have some checks and balances and work together. So, Luke, it's always a pleasure.

57:55 As I mentioned, I introduce you to my friends and family as the most modern CFO I know, and I appreciate you sharing everything today.

58:01 Thanks, Anthony. This was awesome, man. Had a blast. And yeah, looking forward to continuing to work with you, man.