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Why Health Tech Doesn’t Operate Like SaaS | Manu Diwakar, CFO of Virta Health
00:54:17
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- [00:00]
A
There is a kernel of truth in here that the CFO job is easy in early stage tech, but Riot, which
- [00:07]
B
is a video game company I worked at 15 years ago. My joke was is that growth was viral and gross margins were 80 or 90%. And so by and large, as a finance team, all you're trying to do is hang on for dear life.
- [00:18]
A
Can you say more about the shape of the curve?
- [00:21]
B
The way I would describe this is we have something we say fondly internally. You can either be high profit, low growth or you can be high growth and low profit. What you can't be is neither.
- [00:31]
A
Do you think the requirement for expertise is it's something you can bucket by company size or something. When does that show up?
- [00:39]
B
One of the things I like to say is like most of the time any problem we encounter as a finance team has been solved somewhere in the world.
- [00:45]
A
I know you're a big proponent of looking at things through the lens of people, tech and process. Which of those three gets the least amount of love from CFOs people?
- [00:56]
B
By and far, many finance leaders haven't had to grow up in organizations where great leadership is really valued.
- [01:04]
A
Is this thing on? Yesterday's price is not today's price. Welcome back to Run the Numbers, the show where we talk with the world's top CFOs and finance leaders. I'm CJ at Tech CFO. My goal is to unpack the frameworks and operating principles that make you better at allocating capital and leading teams. On today's show, I'm joined by Manu Diwakar. Manu is the CFO of Virta Health, a healthcare company focused on reversing chronic conditions through a combination of clinical care, technology and behavioral change. In this episode, we go deep on how health tech breaks traditional SaaS thinking from Go to market and sales cycles to why there's a lot more going on here than code folks. We talk about operating a business where half the company are medical professionals and no idea how to fit that into your operating model and how to build efficiency without cutting corners. Manu's approach to scaling sustainably, avoiding bad habits early and thinking about reinvestment when outcomes matter, no matter the stage. We also get into the frameworks he uses to diagnose problems across people, tech and processes. What most CFOs get wrong when scaling teams and how to think about running a venture backed company for long term durability, not just the next round. If you like the show, please remember to like and subscribe. It helps us with the algorithmic overlords. And if you're looking to hire the best finance and accounting talent, I'd love to help. I run a recruiting service that pairs you with thoughtful qualified candidates from our community of finance leaders. People who, for better or worse, voluntarily research renewal rate calculations on weekends. If that's of interest, shoot me an email@talentmoscmetrics.com and we can talk on to today's episode with Manu. Manu, thank you so much for joining me on the podcast today.
- [02:49]
B
Thank you very much for having me. I'm excited about this.
- [02:52]
A
So a lot of the CFOs I interview, they come from like a pure SaaS background or even fintech background. I haven't talked to that many people in health tech. I guess the first question is, do you call it health tech? What's the sector you play in?
- [03:06]
B
I think healthcare technology is a good way to think about it. The challenge is, is that it can span everything from what I would describe as kind of back office automation to vertical SaaS to something which is more like who we are, which is a tech enabled remote provider. And so I think the category is, I think, correct. I think the kind of businesses that are there are incredibly different. And so I would always say, like if you looked at Virta compared to something like Epic, compared to something like Doximity or Open Evidence, these are all healthcare technology businesses, but they are all dramatically different enterprises from each other.
- [03:45]
A
I know of Doximity in Open Evidence pretty well and what I find fascinating is just the different ways that a company can monetize in this space. Like, I get it's heavily regulated, I get that you're providing healthcare services, but the monetization models can still be pretty creative.
- [03:59]
B
Yeah, it's 100% correct. I think monetization can be very different for us, it's a lot more straightforward, which is half of us is a technology company, the other half of us is a traditional healthcare provider. And so when I build clients, I actually just build them using the traditional healthcare system. It is one of the interesting challenges of being a technology company that's been suborned into this archaic payment model that's existed for decades between payers and providers and hospitals and all the like.
- [04:27]
A
So throughout the conversation we're going to touch on just things that a traditional SaaS operator may underestimate. I know that you've worked in varying industries and stuff, but how do you go to market as a health tech company?
- [04:37]
B
It's a good question. So if you're epic, right, you Sell software to big health systems. And that looks a lot like an enterprise sale. Does Virta. What we sell is actually the best way to think about it is a specialty metabolic health care clinic that lives in the cloud. And so what Virta does is we work with payers. And so these are the folks who pay for the health care for their employees or their plan members. So these are health plans, these are self insured employers. And in some case the government, they contract with us to provide healthcare for their covered lives. And what we do is we take care of their metabolic care. And so metabolic disease is this thing that ranges all the way from obesity all the way into things like cardiovascular disease, type 2 diabetes, high blood pressure, kidney disease, liver disease. And we take care of those patients and we take over their care, we take over their medications, we take over daily interactions. And our goal is to help them become metabolically healthy. Once that happens, which is a continuous engagement model, they end up consuming less healthcare. Which is why you work with people who pay for healthcare, because that's where the incentive is. Virta makes patients healthy. Healthier patients cost their employers or their plans less money. Therefore their plan or their employer will want to pay Virta to do this. And it's a virtuous cycle.
- [05:59]
A
I think what breaks my brain, and this is where I have SaaS brain a bit, there aren't sales reps, right? You can't build a sales capacity model for this.
- [06:06]
B
No, there are sales reps. Oh, okay. Yeah, yeah. No, it's a B2. B2C business model. We worked for a long time with a large financial institution. For them, we have a sales rep who went and talked to their benefits team and said, you should really cover Virta. So they go through the intense diligence process of figuring out if Virta is the right vendor, whether they ought to pick other vendors, and how much they estimate spending on Virta. Once that happens, any employee at that company is eligible for Virta if they have metabolic disease. Typically, it's defined as a BMI of higher than 25, which is normal BMI, or you know, they have type 2 diabetes or some other condition. So now any employee can access Virta, but we only charge the employer for people who are actively engaged in our care. And that's when the B2C model starts, which is you have to partner with that employer in order to build awareness and market to their employees, who then sign up for you, you treat them, and then you build their employer.
- [07:02]
A
Okay, I think I get it. So it's B2B and then B2C after somebody opts into it, that that's a really cool way to go to market. Are there certain on ramps that, that are helpful there? I think you had mentioned that they don't have to pay for it unless somebody opts in. Does that kind of make it a different type of sale? It's not necessarily free, but it is somewhat easier than saying put your credit card down and pay for everybody at your company.
- [07:25]
B
I think the way I would describe this, and if we want to use kind of a SaaS analogy is this would be like Microsoft saying, you know, you got to pay me X dollars per employee regardless of who use the software. Thirty years ago you could have gotten away with that, but today it's like, well actually like I want to only pay per license. And even more than that, now you have all of these demand based models where you're like, actually like I don't want to pay you the same for somebody who opened the software like once a week versus somebody who's in there every day using it. Right? Like I really want to pay for what I'm getting. It's not too dissimilar, right? Which is to say no employer or no health plan wants to pay for health care. For somebody who is not actively using health care, that seems like you're wasting money. That's the first piece of it. The second piece of it is much of health care often comes down to hard dollars. And I think this is it is the hardest of hard dollars of business because in general margins are so thin and people spend so much money on this stuff that anytime you add somebody to the system, there's always a question of I am now spending more money on healthcare. What did I get in return for it? Ideally, number one, you get healthier employees. But number two, let's be real. A business cares about healthier employees if it helps their bottom line. Otherwise it doesn't matter to them as much. The incentives aren't aligned. So that's the second question they ask. And so for example, if we work with an employer where we cover all of their type 2 diabetes members, not only are they only paying us for members we treat, but we also have to guarantee that A1C will come down, that their weight will come down and that they use less meds, right? Otherwise we have to refund money back. And so in many ways the ROI has to be locked in, apparent, immediate and confident for people to buy you in the space.
- [09:07]
A
It does sound like there's no such thing as shelfware. Really?
- [09:11]
B
No, that stuff all got washed out quickly.
- [09:14]
A
I heard that more than half the people who work at your company are medical professionals. Did I get that?
- [09:19]
B
Right now they are. We have about a thousand employees and 500 of them are what I would describe as healthcare providers. They range all the way from endocrinologists all the way to health coach and everything in between, which is docs, RPs, RNs, dietitians, so on and so forth.
- [09:34]
A
How the hell do you contemplate that in an annual planning model?
- [09:37]
B
It's difficult. And so all of these folks we would think of as being in cost of service or cost of sale. It shows up in a lower gross margin because you are a human LED business. Right? As a tech enabled healthcare provider is GUI are. So I'd say that's the first piece of it. The second piece of it is we have to do a lot of work with demand and supply planning that most folks don't have to. Right. I would say one of the first software businesses that I worked in was a company called Riot Games in Los Angeles a decade ago. And this was even pre aws. And so we had to do a lot of capacity planning because we needed to know how many servers I'm getting, how much to rack and stack the data center. Right. There are some similar strains at Virta because when we're forecasting our number of members we have, we have to use that to then back into hiring and management of our healthcare provider workforce. And so as you can imagine, the more rapidly you grow, the harder it is to scale this effectively and efficiently.
- [10:36]
A
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- [10:58]
B
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- [10:59]
A
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- [14:25]
B
There you go. That's it.
- [14:26]
A
What is your annual planning process look like? How long does it usually take? Are there any intricacies of this?
- [14:31]
B
We wrap our annual planning in the first or second week of December, typically. And so we go into the first of the new year with a new plan. My team is usually really happy about this because I think we're one of the few finance teams that doesn't spend all of the holidays doing annual planning. And so we take probably about two months to go through it. The way we started is myself, our CEO and our president sit down with our VP of strategic finance. And we largely talk about what the shape of the curve we'd like to drive is next year. And then he works with all of our department leaders to try to build that up, bottoms up. And I think the core part of this is we want to make sure that the shape of the curve we want to create on the financials next year matches the reality of planning, planning and what is possible. So that's when you inherently have to make a bunch of trade offs. You make a bunch of changes, like you build sort of variability because some of it is deterministic, some of it is probabilistic, and you kind of get a range that you're comfortable with and you sort of meet in the middle. And we try to bless that internally right before Thanksgiving and then we ship it to the board right after Thanksgiving. We talk about it in early December. That's generally our plan. Our business is really predictable. CJ in general, client launches for healthcare tend to happen on 1:1 with the benefit season that roll. So because of that, you'd largely know what clients you've got going live on, you know, for the following year, probably by the end of Q3, the year before something trickles in. But by and large, by September 30th, you're wrapped October 30th, 31st at the latest. So you know that if you have good forecasting internally, you understand kind of what the ins and outs of all the members are right, which then drives the rest of the model for yourself. And so you can be in pretty good shape with that stuff and you can get to it early. And of course, you got to get a jump on hiring, right? Because if a bunch of new patients are showing up on, you know, the first week of January, those coaches and those docs got to be in and trained and licensed before then.
- [16:25]
A
Can you say more about the shape of the curve? I love that phrase. I haven't heard that before in annual planning and I'm going to steal it. Is that like what the executive team is hoping is possible, but then you have to figure out if, if it actually does foot.
- [16:37]
B
The way I would describe this is we, we have something we say fondly, internally, you can either be high profit, low growth, or you can be high growth and low profit. What you can't be is neither. What we try to do is make sure that we understand the balance of what both of those things will look like. And then we try to work backwards into there. You know, I think the way we do planning these days is we generally have a baseline level of expectation we need to hit. You know, we are a pre IPO company. And so I think about this a lot in terms of what would I need to guide Wall street to in order for the street to feel good about the execution. And then I have above there, which is what I hope to do internally. And then I have upside up and beyond there if things break the right way. But in general, what I try to do is we try to have a street guidance. We try to have an internal plan for the company. The expectation is that we land somewhere in the middle. And if we do so, it is something that is attractive to our investors and our board. That's the way I think about it.
- [17:34]
A
How do you think about TAM or Total Addressable Market? You seem to be a really analytical guy, America. I won't mentor it. It does have a weight problem. It does have an obesity crisis. Do you think about it at like the US Level? Do you think about it at the company level? Is it, is it one of those things where it sounds like a narrow audience you're going after, but it, it's, it affects every single type of company.
- [17:58]
B
I think the number is 11 or 12% of US adults have type 2 diabetes. CJ I think the numbers in that range maybe 9%, maybe 10%. Another 40ish percent of US adults are overweight or obese. And then I think McKinsey put out a study recently and if you look at metabolic health, which can then be described by things like kidney disease and liver disease and high blood pressure and cardiovascular disease. You end up in a 80 to 90% of US adults are metabolically unhealthy kind of range. I'm not joking when I say the care Virta provides is broadly applicable to most U.S. adults. Most U.S. adults will find some health benefit in working with Virta. If you're really unhealthy, you'll find a lot of health benefit. You lose 10 pounds for swimsuit season, less benefit, Right. But it's still there. And so because of that, from a B2C perspective, our care model is one to one with our consumer, right? Imagine if all healthcare was free. Anybody who is metabolically unhealthy could interact with Virta and they would experience health benefit for it. But health care is not free. And so then you have to go and sell each employer and each health plan and you have to work with the government so that the people who pay for health care can pay for you on behalf of the people that they cover.
- [19:12]
A
So then to tie it back to the annual planning process, is the atomic unit the individual or are you doing it first on like a company level? And then you have to say, well, within that company we can make some sort of assumption.
- [19:23]
B
The atomic unit is always the individual baseline. Way to think about our revenue model is the number of members we're trading times the amount we charge. If you want to decompose members, the way to think about decomposing members is how many eligible people are you covering and what percent of them are enrolled in Virta.
- [19:42]
A
This is give me flashbacks of conversations I would have with my dad growing up at the dinner table. Because he was a physical therapist, he ended up having a chain of physical therapy clinics. And there was always one day per month that he would stay late at the office to do the billing. And the way that he would explain it to me is like, CJ, I'm running a services business where 70% of my costs are tied up in the cost to serve the people who are seeing people every day, making sure that you do your rehab for your torn acl. And on a very good month, maybe I can get to a 20% profit margin. Maybe. But like, that can be impacted by all sorts of variables. There could be a huge snowstorm. He used to hate snowstorms because people don't come in to get seen if there's a snowstorm that, that hits you in revenue. And so essentially he'd be outrunning his overhead throughout the month. But what he would also explain to me is that, and you alluded to this at the top of the pod, he would bill based on whatever the rates were for each provider. So you want to treat all patients equal, but the way that you bill them may not be equal.
- [20:42]
B
In healthcare, there are generally two distinct billing models today. One is fee for service billing. Fee for service billing says you get your employer or your health plan gets billed by the hospital or the doctor based on the work that they did. Right. So you CJ show up and you stay in the hospital five days. They ordered so many tests and so many doctors came and saw you. You take all of that stuff and decompose it into a series of claims, which you then send over to the health plan. And then the health plan then has to go through it and sort out whether they want to pay on the stuff or not and what rates they're going to pay. The same doc for a different health plan and two different health systems for the same service can cost different things. Right. The other model, which is newer, which is what Virta is, is called a value based care model. And that says that for everybody. You send us with type 2 diabetes, we charge you the same, we guarantee the results on a population level. But how little care or how much care we provide is totally our call. As long as we're hitting your results for you, this is actually really, really important for innovation. Right. Because all of a sudden, if my costs are my problem and I've guaranteed my results, then it is on me to figure out how to get more efficient. Right. Whenever you're any kind of cost plus model, which is what your dad was running, there is no desire to become efficient because the more cost you run up, the more money you make.
- [22:04]
A
Yeah. It's like you poke around in the operating model and you say, where does this have leverage to get better over time? Do you always have to add linearly? And that was, I think, one of the frustrations that he saw with his business. Like, he's like, I don't know how to get a PT to see more than 15 patients in a day or to bill at a different rate than I'm prescribed by Blue Cross Blue Shield of Massachusetts.
- [22:23]
B
People often refer to the US health system as sick care, but this is it, right? Like, if providers and hospitals can make more money from treating sick people, there is natural incentive. Because I think doctors take an oath. And I think in general they are good actors. They want people to be healthier. But how do you balance that against the very real financial incentive that says if people don't use your services, you don't make any money.
- [22:47]
A
So you do think there is a way to use technology to find leverage. And I know I'm asking a pretty overarching question about the industry, but you can find operating leverage within the model.
- [22:57]
B
If you go to paying on results, then you make it the business of the private enterprise to figure out how to deliver care more efficiently. Because if they figure out how to deliver care more efficiently and effectively, the for profit model works really well because then they get to keep the benefits of that. Right. If you're in an innovation cycle, you want the private companies to keep all of the profit. But if you're not in an innovation cycle and they're just toll collecting or taxing, then you actually don't want them to do that. Then you wanted to give them the share the money back and cost savings with their clients. Right. The way I think about it is to say I charge, you know, base price roughly $250 per month for a type 2 diabetes patient if you're an employer. And when I increase my prices every year, I increase it at less than the rate of the stuff I'm saving money on. So you're banking incremental savings every year. What I try to do is for those patients that I'm treating, I'm trying to make sure that they use fewer drugs and less healthcare services than the patients I'm not treating. So you build the ROI in that way. And then to the extent that I can figure out how to get more effective or more efficient, we are creating a pie in the middle that we can both share. And so the system works really well in order to encourage constant innovation. Because again, like with most things in a for profit sort of world, if there's no money to be made, nobody wants to innovate.
- [24:16]
A
Hey, thanks for listening. We'll be right back after a word from our sponsors. So here's a pattern I keep running into when I talk to finance leaders at fast growing companies. You've outgrown the spreadsheets, you've probably outgrown your billing tools built in revrec. But you're not quite at the point where you can throw a 20 person team at the problem either. That's exactly the danger zone, right? Rev owns right. Rev is revenue recognition done right. It handles the messy style stuff like high volume subscriptions, usage based contracts and mid contract upgrades, the things that break your ERP and the billing platform bolt ons. Here's the thing though, your sales team isn't slowing down for you. They're closing ramp deals, usage commitments and mid quarter upgrades. And the longer you wait to fix the engine, the further behind you fall. So stop scrambling at month end and stitching together allocations across 3, 4, 5 spreadsheets to just have the numbers ready. Well, that's it. That, that's the whole pitch. CFO is telling me it's like a glow up for the revenue books. That sounds like where you are right now, right? Rev is worth the look. Head to write rev.comcj that's right rev.comcj check them out. Being a CFO, you know how much I love tools that actually make the lives of accounting and finance folks easier. One of my favorite tools right now is really the AI native ERP Going head to head with netsuite. Yes, someone is finally doing it. I met Rylit two years ago when they were still in stealth. Since then, they've absolutely taken the finance world by storm. Their mission is to make the zero day close a reality. And they're actually doing it. Customers are literally closing their books at 1:35pm on the first day of the month. They've got everything you need to scale your business. Complex revenue recognition, native integrations, customer porting, multi entity close management and much more. They're only a few years in and are already supporting NASDAQ Publicly listed companies. Yes. Seriously, if you want to scale your business on an ERP that wasn't built in the 90s, you need to check out Rilit. Book a demo@rillet.com CJ oh cool, that's me. That's R-I l l e t.com CJ R I l l-l l e t.com CJ Tell him I sent you there. Scalia Tech Company is thrilling. It's also really, really messy. Just ask anyone who's done it or anyone who's tried. Better yet, ask ey. They've seen startups at their best and in their most fragile moments. EY knows you don't start a company to burn cycles on, regulatory hoops, discounted cash flows, or the fine print of SEC Form S1. Although you probably do know I love myself a good S1. If you've listened to or read my stuff long enough, you can't ignore these things. That's how risk compounds kind of like negative interest. What you can do is work with EY from day one. They'll help you get it right early and often so you can stay in builder mode and keep the trains running on time. EY shape the future with confidence. Learn more at ey.com/tech startups. That is ey.com tech startups. Is there anything else you've had to either build or budget for, whether it be your team systems or processes that a normal SaaS company just wouldn't need?
- [27:32]
B
I mean, look, we have a very, very different HR and recruiting operation than most as businesses do. Right? That's a very real thing. You know, we have coaches and nurses that are two largest employee populations. It is a higher turnover population. They require different things and different benefits. And so that is something that we have to think very actively about. Compliance and regulatory regime is very, very different in this business. We have tons and tons of personal health information that, you know, we have to keep under lock and key and our patients and clients trust us with. And so we have to be very careful about that. And so in general, one of the big differences in this business is when revenue goes up, headcount goes up. When headcount goes up, it drags a ton of other cost up. Right. And so it's not a set it and forget it. Like again, when I worked in video games, sure, if we, you know, 10x the number of players we had playing, I'd have to go buy more servers, but that was it. You have a bunch of other stuff that sort of moves up. Right. And so scaling businesses like these is incredibly, incredibly hard and complex. And like the surface area is massive. So to build a good business, there's way more you have to get right doing this than a traditional SaaS business.
- [28:45]
A
It sounds like you have to think about the gna bucket a little bit differently because the infrastructure to scale the company is more complex, very different.
- [28:53]
B
Do you know what my single largest line item in G and A is?
- [28:56]
A
No.
- [28:56]
B
It is my billing team.
- [28:58]
A
Seriously, say more.
- [28:59]
B
When you bill claims, what you have to do is, and this is even worse for fee for service, right? Patient, I basically have to fill out a web form that says, here's this patient, here's a bunch of information on them, here's kind of who treated them, here's where they came from. And then you have to send it to the right pair. So like this employer, and then it has to go to Cigna, for example, because that's who cover them, or this employer. And it has to go to like Blue Cross Blue Shield of North Carolina, for example, because that's who covers them. So you have to do all of that and you have to do all that routing and then on the other side, payers often will just reject claims and then you have to go through a approving process to show them that actually this thing that happened is something that you actually have to build. And so it is this massive enterprise because again, in a best case, SaaS company world invoices are generally flowing automatically and you only have to handle exceptions. I have more exceptions and I have more manual handling I need to do.
- [29:57]
A
Is there an industry average and you can be as specific as you want as to what percentage of revenue turns into to good revenue in the SaaS world, there's, there's not a ton of bad debt.
- [30:08]
B
I don't know the industry average because it's wide. Right. But I will tell you it is not atypical for a provider to spend between 5 and 7% of revenues on billing alone. In big healthcare systems, the person who runs billing is a very senior person in the CFO organization and typically has the largest, one of the largest teams at the hospital. And then the second thing is, and this, this will blow your mind. My bad debts, I don't get to put in G and A. It counts as contra revenue because when payers reject care from providers, it's considered a revenue concession. It's that common. And so I have to put it in contra revenue actually.
- [30:43]
A
Are there any other quirks, whether it be on your P and L or metrics that you track to stay on top of the rhythm of the business?
- [30:49]
B
Oh, I forgot one to tell you there's another great one. So there is. There are state laws against corporate practice of medicine. Do you know what this is, C.J.
- [30:59]
A
no, I don't.
- [31:00]
B
I as a C corp from Delaware, I'm not actually allowed to be a medical practice. So what you have to do, again it's pretty common, is I have an entity that is physician owned that is actually providing the care services. We have no equity ownership in that entity and we actually have an arm's length agreement with that entity. Now I consolidate them for financials, I consolidate them from tax, but legally it's organized separately because of corporate practice of medicine. Every single health care digital health care company you know of does this.
- [31:32]
A
And where do you bill out of which entity?
- [31:34]
B
You bill out of the provider entity.
- [31:36]
A
Okay, so the medical professionals are at your company, but not at your company.
- [31:41]
B
Correct.
- [31:41]
A
Wow, this is a whole different bag of burritos here. What's your North Star metric?
- [31:46]
B
Members under management? How many people are actively under our care every month?
- [31:50]
A
This is where you talk about what splitting the value. Do you want to get more out of each member each month. Do you want to be more efficient on like a unit economic basis?
- [31:59]
B
I want to deliver the best possible care for each member at the lowest cost possible. Like, that's how the business works.
- [32:06]
A
Maybe you can talk about the flywheel here because it reminds me in some ways about Sam Walton. He's like, I don't want to be low price. I want to be high value for what you're getting.
- [32:15]
B
Remember, the way to think about our clients is that they're like, okay, virta charges me $250 per member per month for type 2 diabetes. But if they're not on Virta, they cost me 500 bucks, right? What our clients are very interested in is, okay, virta cost me 250, I'm saving 500, maybe I save 600, maybe I save 700 per month, right? That's the value for the client. And for Virta, we continue to charge 250 and deliver results. Number one we have. The way we think about it with our client is every $2 we save you, we'll keep $1, right? So I charge you 250 because I save you 500. But if I save you 600, you know, you should be willing to pay me 300. You know, we're both better off, right? Secondarily, to the extent that I can figure out how to deliver that cost savings more cheaply as a provider, that benefit accrues to me. And so that's kind of the way we think about the Flywheel. And that's why it works for Virta, and that's why it works for the client.
- [33:12]
A
And I'm assuming on your end, as a cfo, you also think about what the reinvestment loop is as patients are more successful, right?
- [33:19]
B
I'm not paying dividends, I'm not doing share buybacks. Like, more profit I generate, the more I can reinvest into basically making care better and making care more efficient.
- [33:29]
A
That's a great segue, man, because I wanted to talk to you about early stage CFOs versus later stage CFOs. I don't know if it was a joke, but I think there is a kernel of truth in here that the CFO job is easy in early stage tech. What are people getting away with during that phase?
- [33:46]
B
In general, if you look at how tech businesses are running since the start of the Internet, you raise money, you have headcount, you put software on the Internet, or you sell software to folks and you charge for it and everything starts working. And furthermore, In a lot of B2C Internet business, like, you know, at least in SaaS businesses, you actually have to hire a sales or marketing team. They have to go out and sell and they have to figure out how to do stuff. You know, if you're Instagram, like in your early days, you launched and it grew and it made tons of money and nobody had to do a thing, right? My old CFO at Riot, which is the video game company I worked at back, you know, 15 years ago, my joke was, is that growth was viral and gross margins were 80 or 90%. And so by and large, as a finance team, all you're trying to do is hang on for dear life. Are you getting entities opened enough? You know, are you, are you making sure that the cash is sort of being managed carefully? Are you thinking through capital markets decisions properly? Like, are you going out and raising money? Like, how are you thinking about all this stuff? Right? But in terms of actually managing a P and L very tightly, which is, I think, a large part of what a CFO's job is, there's not a whole lot to do. Revenue is coming down at 80, 90% and all of your costs is headcount. That's it. But if you think about manufacturing company or a global shipping company, or any of these companies that are large, complicated, live in the real world and have tight margins, man, you are squeezing pennies out of every dollar and it's hard to find nickels. And you gotta be really, really good and efficient to make sure those companies are actually turning a profit. Right? That's, I think all I was saying, you know, growth and high margin business covers up a lot of sin. And that is, I think, in many ways why it's easier to be an early stage cfo.
- [35:29]
A
What bad habits do you think get baked in during high growth that that will come back to bite later? Because even if it is software, I do think you hit this point eventually where you're like, oh, wow, we, we can't do that anymore.
- [35:41]
B
Discipline is really hard to build. And so what ends up happening is getting very clear about productivity metrics and then holding an organization accountable to productivity metrics is very, very hard to do. After you've had a run of awesome success. Let's say you've continued scaling, you've continued financing, you know, off of crazy multiples, off of the scaling that you've done. Sooner or later, all businesses revert to a present value or future cash flows. And when you hit that point, if you're not clear about how you're going to generate that cash flow and you can't get confidence behind it. It's a big change for the company because all of a sudden you've gone from people running around with crazy ideas who just want to make stuff work at any cost, to all of a sudden being thoughtful about it and saying like, okay, I can't unconstrained my budget. Like, how do I get the most out of it? C.J. when you give stuff away below cost, it's always easy to make a business work. Like that's not hard. And I think when you can't and you have to turn a profit, I think that's when things get real.
- [36:39]
A
That is when it gets real. And I think it attracts a different type of person. Sometimes when it's hard, it's not fun, Right?
- [36:45]
B
Uber is a ultra, ultra successful company today by any standard, of any imagination. But the I imagine at some point for an organization that scaled that much, for him to come in and reset the culture, reset expectations and build towards something that is now generating a ton of cash flow on a sustainable basis, that is really hard to do. Cj it's really hard to do. When I was at Riot, we were in this hyper growth mode, right? Like we went from 50 million to over a billion dollars of revenue, 80, 90% gross margin over a four year period. We used to say on the finance team, like, we really didn't have much to do besides sit back and count the money. Money. And you couldn't even hold anybody's feet to the fire because all the software developers would come to you and say, like, really, you're giving me a hard time over this? Like, look what's going on with the P and L. Like everything I touch is gold. Like, leave me alone.
- [37:33]
A
You know, Was there ever an inflection point where you had to make that shift at Riot?
- [37:37]
B
No. They've since made that change and the culture has changed a lot because they've had to get responsible because growth load. But I left well before that.
- [37:46]
A
If we think about companies getting responsible and scaling without burning cash and in your mind, Manu, is there like an 8020 when it comes to where you look to get the most efficiency, or does it just have to be pervasive? Everything we do has to be efficient.
- [38:00]
B
Here's the thing that I've been saying a lot, which is there's a difference between choosing to not be profitable because you're reinvesting cash and not being profitable because you're not turning a profit, right? And so I think about this a lot at Virta, which says everywhere where I can be efficient, I want to be as efficient as possible. Because if I do that, I can then generate the cash that again, we don't have to stick in our pockets. I can turn around and reinvest it back into product, hire engineers, hire salespeople. Right, but that's a Choice I'm making versus a lot of businesses at 80, 90% gross margin, they are choosing to not be as efficient as possible because they don't have to be. I have to be. My gross margins are in the 50s.
- [38:40]
A
I wonder if that constraint is a good thing though, because it drives focus on everything. In opex.
- [38:46]
B
I met a founder one time. He had exited a business and you know, I was talking to him about a CFO job a few years ago and he said something that will stick with me. He's like, one of the things that is true in the Valley is when VCs underwrite product based companies, they're fundamentally underwriting the product and if the product works, everything else generally works. They're not underwriting execution. Right. If you're underwriting execution, how could you give a first time founder in their 20s the keys to the car? It's a lot harder. And there's a lot more that has to go right and a lot more that you have to do right in order for a business like that to fly. Whereas if it's just a product based business and this founder is a visionary, you can get the product exactly right. Once you get that, everything else is gravy.
- [39:27]
A
It's fine. It's like you're right. Games, if the game is amazing, if we're talking about Call of Duty or something, or like EA made Madden, like people just play the game. How do you think about execution risk versus technical risk from, from your standpoint as a cfo?
- [39:42]
B
I think a lot about execution risk. Yeah, a lot about execution risk. Because our surface area in execution is so high, you know, we have people's health in our hands. And so to the extent that we're not executing properly, like either Healthcare is slipping, Healthcare is unsafe, you know, we're not being very efficient with cash. It ends up becoming a problem.
- [40:00]
A
I find the execution based businesses so fascinating. You brought up Uber and since you said that, I've been thinking about Airbnb. I mean that's another company that I think their free cash was like over 30, approaching 40%, something like that. And the company wasn't always run that way either. And you have to like go out and I don't think they were reinventing the product over and over again. It's kind of still a one product company, no matter what you call it. That's just by sheer force of will and focus.
- [40:26]
B
It's different. Right? I'd say like, look, when you're in hyperscale mode and everything is working, you don't have to worry about cash. All you have to do is worry about growth, worry about fundraising, kind of keeping up and making sure everything is okay. I think it's when you hit that inflection point, when you start thinking about whether or not I'm getting return on cash, the difficult trade offs I'm making, how to hold account people accountable, how to get efficiency. I think that's when rubber hits the road. I joke with my team all the time. If we do a bad job, our company doesn't succeed. I am not convinced at some of these other places, if your finance team does a bad job, whether that even matters for the company's success. And so for me, I want to be in a place where my contribution matters a lot of to the company's success because that's what I'm here for. I'm not, I'm not trying to hitch a ride on the rocket ship. Like I want to build it and I want to fly it.
- [41:12]
A
When you think about exits, you've said before that you have to run a business for itself and for its own sustainability. What's that mean though in the context of running a VC backed business?
- [41:23]
B
If your cash flow is sustainable, you can stay private. If you need to access the public markets for whatever reason, you can go public. But the entire future of the company doesn't hinge on a set of stars aligning and you getting bot. I think what we are trying to do is build a business that has a clear mission, has a clear vision and is going to stand on its own. That's the base case. And I think to the extent that somebody shows up and says, wow, I really like this thing and I think it would be better with us, that's nice, upside you can plan for and that's a decent landing spot. But you know, for me you can't rely on that as a way to build a business. Otherwise like you got into a North Star, you're constantly pivoting and reorienting based on what's going on in the market.
- [42:03]
A
Let's talk a bit about frameworks because I know you're a big proponent of looking at things through the lens of people, tech and process. I gotta Ask you, which of those three do you think gets the least amount of love from CFOs people by and far?
- [42:17]
B
I think in general that many finance leaders haven't had to grow up in organizations where great leadership is really valued and is critical. Right. Take financial services for example. A lot of financial services is really around what I would describe as high performers, managing high performers. Everybody's kind of self motivated and so you don't really have to do a whole lot of stuff. I think when you are responsible for somebody for the full arc of their career, you don't get to staff them on a different project or you don't get to send them off somewhere else. It makes it so that you have to think very critically about bringing people on who have the propensity to grow and learn. And you also have to invest in them to create those things. You can't just throw them out in the eater and help them figure that out on their own. Right. And so that's, I think, why CFOs in general underinvest in it. I also think another thing happens in finance, which is there are times at which people overvalue technical skill and undervalue somebody's ability to figure something out. Technical skill is, I think, really important. But like book learning is book learning. If you ask somebody to go study and they apply themselves to it, they will figure it out. You know, I think one of the fascinating things about AI in general is that I think there's a lot of finance professions where historically you would have had to spend 15, 20 years in that specific vertical in order to have enough knowledge to effectively answer problems. I think you can hack a lot of that now because I think AI will actually help deskill it and make it so that you can be more of an expert if you ask the right questions, even if you don't know the answers.
- [43:48]
A
I launched a recruiting arm because I have the podcast and the newsletter, which is a great way to get CFOs to look at people that I have in my candidate pool and link them up for jobs. But something I've been reflecting on lately is a lot of the hiring managers, especially the younger ones, some of the first people they've managed before, they're asking for like this very specific skill set that's like a unicorn. And sometimes I want to step back and be like, you're a smart person. Do you think someone let you kind of figure some of this out on the fly? Maybe sometimes we over optimize for like technical skills A, B and C. And also someone who's done like a B, 2C consumer IPO. There's only been like two of those in the last 10 years. So at some point you just have to index on smart people.
- [44:30]
B
There are three things I think that I care a lot about. I care that you work hard. I don't think anybody can teach you how to do that. At some point, either you're a person who works hard or you're a person who doesn't. The second thing I would say is you want somebody who has some intellectual horsepower, which means are they good at learning? That's the question I ask myself. Are they good at learning things? Right. And then the third question I always ask myself is, are they curious? Which is fundamentally, are they really interested in how things work around them? When I've managed to hit on all three of those, I think I have 100% hit rate on candidates. And so that's. I think those are the things I generally look for. Everything else I think you can teach somebody.
- [45:11]
A
How far do you think you can get? Men who just indexing on high motor people?
- [45:15]
B
Pretty far. Because I think if you need expertise, you can always borrow it if you need to.
- [45:19]
A
Do you think the requirement for expertise is. It's something you can, I don't know, bucket by company size or something. When does that show up?
- [45:28]
B
Niche industries? I think there's some. It's sometimes expertise is kind of cordoned off there. One of the things I like to say is like most of the time, any problem we encounter as a finance team has been solved somewhere in the world.
- [45:39]
A
Great quote. Just to go back to the people, systems and processes, do you think finance people over index on just buying more software to throw out the problem, or do you see it more hiring more people to throw at the problem? Which one's more of a pervasive issue?
- [45:57]
B
I think hiring more people to throw out a problem. Sometimes it's hard to take a step back with a white sheet of paper and say like, if I could wave away all constraints, this is how it would work. And I think often you need to do that. And I think the buying too much software thing, my CFO at Riot, when we were building the finance organization, one of the things he made me do was he's like, you know, I want you to go build a procurement team. So okay, cool, I can go do that. And a thing he made me do that I'll always remember is he actually had me do and run a procurement function on paper first before he let me buy new software and the reason he did that is because he's like, I want you to know and understand exactly what your flows are, exactly what information you need to go from point A to point B and how it's going to get there. He's like, once you have that sorted out, then you can go by software because you know exactly what you're trying to make more efficient and automate. Right. But if before, but if you don't run this on paper first, he's like, you have no idea what you actually need. I thought about that a lot. And, you know, whether Dylan's a brilliant guy, is CEO of Riot now, but, you know, it's. It's a thing that's always stuck with me. And so I'm like, look, before you go by tech, like actually go set or sort out your process and your documentation, because you may find that you're solving problems. Wrong problem.
- [47:13]
A
Have you had your team do something similar? It doesn't have to be in procurement, but like, you gotta map this out before we try to buy something in
- [47:20]
B
a number of different areas. Yeah.
- [47:21]
A
Can you talk about the importance of the sequencing of hiring for finance?
- [47:25]
B
Sequencing, number one is, I would say you gotta hire folks who are hungry for the problems that you have at hand. And you can't hire too far in advance of that.
- [47:36]
A
The problems today, you're saying, not the problems. You anticipate problems today.
- [47:40]
B
Because one thing I know about the future is that it can change and it's pretty uncertain. Right. And so if somebody shows up and say, says, like, not really excited about what we're working on today, but when we hit this mythical milestone, I'll be super pumped about it. That's like a recipe for having somebody who's unhappy. I also have this kind of core thesis which is to say people do better work when they're more excited about what they're doing. Right. It's common sense. But you'd be surprised how many organizations overlook this. This. Right. It's actually really important. I want to hire somebody who's jazzed about the work that we're doing today. I have confidence, can crush it. And I know with reasonable suspicion that they're going to do a good job on the next set of work that's coming up. Right. Beyond there is incredibly hard to predict, but I think a lot about that. I also think a lot about sequencing athletes and experts. Right. Which is I always try to hire athletes first. And when I hire an expert, it has to be blindingly and glaringly obvious that we need to actually hire an expert, because that's the only way we're going to level up what we're doing.
- [48:40]
A
How do you think about hiring with what people have seen in terms of company size? So something that I run into a lot is, hey, C.J. you know, we're a 100 million revenue company today for this director of FP and a role they have to have seen 500 million or more in revenue. Do you think that's important?
- [48:57]
B
Told my boss this maybe two or three years ago. If you add a zero next to every number that we have, it doesn't actually make the finance team's job more complicated or hard. It's like if you're doing an operation on 50 rows on a spreadsheet, making it 500 rows makes no difference whatsoever. Right. The concepts are still the same. The complications are still the same. Like you're just doing bigger numbers, and that's fine. I don't think a lot about that. I actually think about complexity and whether or not that person can handle or see complexity. Complexity.
- [49:27]
A
How do you test for complexity, you think?
- [49:29]
B
A lot of my interview questions actually resemble more of, like, the McKinsey and Bain case interviews than they do traditional kind of interviews. Like, I love to see how people solve problems. I love to see how people think on their feet. I really enjoy when posed an intractable problem. If you leave bread problems, whether somebody, like, picks up on it, whether they smile and they sort of engage or whether they kind of. They're standoffish and they're like, why are we talking about this? So I do a lot of that kind of stuff.
- [49:57]
A
Can you give me an example of one of the questions that you like to ask?
- [50:01]
B
I think one of my favorites is like, what angle do clock hands make at 3? 15.
- [50:05]
A
Oh, man, now I'm on the spot. Is it 30 degrees?
- [50:10]
B
No, incorrect. The hour hand moves.
- [50:12]
A
See, I don't have a job. Averted health.
- [50:14]
B
Now, the way you do hour hands between the three and the four. Okay. How many degrees are between the three and the four? You take 360, divide by 12, that's 30. So then the hour hand is moved a quarter way down to the four. Right. So it's then 30 divided by four.
- [50:27]
A
Wow. Okay, that's a good one. I like these types of questions. These are fun.
- [50:32]
B
The reason I ask it is not you have to be an expert in geometry or a brain teaser. I actually want to see how you grapple with the problem. And then when I. When I start leaving you breadcrumbs, I want to see, like, Are they playing ball with me? Are they, you know, are they picking up what I'm putting down or are
- [50:46]
A
they just trying to get out of this question? Totally manual? I'm going to take you into what we call our long ass lightning round. So the first question I ask every, every successful person who comes on the show, what's something you've screwed up on the job before? Could be this role or any other.
- [50:59]
B
You know, the thing that I have screwed up before that I'm trying not to screw up anymore, but I'm sure I'm not 100% successful, is trusting myself to have the hard conversation sooner rather than later. And understanding that that is fundamentally part of my job, is to have the difficult conversation as far enough in chance so that not everybody has to pay the price for it.
- [51:22]
A
Do you think we as humans inherently know when there's a hard conversation to be had, but we just put it off?
- [51:28]
B
Yes.
- [51:29]
A
You've trained yourself to embrace that feeling and say, gotta talk to somebody now.
- [51:34]
B
Yeah, There have been enough times in my career where I ask myself what I could have done better, and it's almost always have the hard conversation earlier.
- [51:42]
A
What I've come to appreciate is the person on the other side. Clarity is kindness. In a lot of ways, it's actually doing them a disservice and you're not helping them by not telling them.
- [51:51]
B
Our president says that a lot. His name is Amit. Amit says, we aim to be kind, not nice.
- [51:58]
A
Next one I got for you. If you could give your younger self advice, knowing what you know today, what would you tell him?
- [52:03]
B
You never know the path. It's pretty windy and pretty twisty and can be uncertain at times. But don't worry, it's going to work out.
- [52:10]
A
I've heard a lot of variations of that from type A people. More of a technical one. Can you walk me through your finance software stack? What tools does your team use to get the job done?
- [52:19]
B
We use Netsuite for a general ledger. We use Airbase for all of our payables and invoices and all that good stuff. Carta for equity, Pigment for financial planning.
- [52:30]
A
What's the most recent tool you bought?
- [52:31]
B
The most recent tool we bought is a software that we are trying to implement called Candid for claims billing.
- [52:36]
A
Nice. So that's vertical specific.
- [52:39]
B
Yes.
- [52:40]
A
Last one I got for you. What's the craziest thing you've ever had someone try to expense?
- [52:44]
B
The expensing has been like the garden variety. I'd say the craziest thing is you know, I went out for drinks with my buddies and I, like, expensed it because I wanted to see if it would go through. I think that's the craziest thing I'd seen expense. But the craziest thing I've seen happen is a guy who sold something to his brother, which was not an actual commitment, but was a target purchase. Like, I will buy 100 grand of X from you, but I'm not committed to it. He sold it to his brother, and then he attempted to collect commission on the whole thing, and then his boss said that was okay. That's actually, from a business perspective, the craziest thing I've ever seen.
- [53:18]
A
Elon Musk does that with his brother all the time, though.
- [53:21]
B
Maybe. But, you know, I. I've not worked with Elon, and I've not built trillions
- [53:25]
A
of dollars in shareholder value circular finance within the family. That. That's the first time we've got that one on the podcast. Thanks for sharing that.
- [53:32]
B
When I saw the facts laid out that way, I'm like, I can't even believe we're having this conversation. Right.
- [53:36]
A
I sold 50k to my aunt too. She's good for it. Don't worry.
- [53:39]
B
Yeah. Can I have my commission, please?
- [53:41]
A
Manny, this has been an absolute blast. Thank you for joining me on the podcast.
- [53:44]
B
Thanks for having me, cj. It's been really fun. Questions were very different and I appreciate that.
- [53:48]
A
On the Numbers is a mostly media production. Yelling an intro by Fat Joe. Artwork by Meg Delesandro. Show is executive produced by Ben Hillman. Nothing said on this podcast is intended to be business or investment advice. It's the sole opinion of me. A guy who feeds his dog way too much ice cream and has a history of net operating losses. Lol. If you like this podcast, hit subscribe and give us five stars. It will take like two seconds and our algorithm overlords love it. Drink water, call your mom, and have a great day.
- [54:16]
B
Peace.