Halloween is the time for scary stories, and let me tell you – startups make some terrifying financial mistakes.
Founders often treat QuickBooks like a haunted house: the ghosts of bad decisions and bookkeeping negligence linger behind that login screen, so they stay away at all costs. Unfortunately the IRS, like Michael Myers, will not stop chasing you until they get their vengeance.
In the spirit of Halloween (and with advance apologies for the horrible puns and analogies littered throughout this piece), I decided to share five horror stories I’ve encountered running OpStart. If you have a weak stomach, maybe skip this edition. Otherwise, read on at your own risk.
1. Are you afraid of the dark accountant?
Years ago, a VC in my network kept promising to introduce me to one of their portfolio companies. This company was “killing it” and seemed like a perfect candidate for OpStart’s services – they were struggling to deliver clean financials to investors, and they had the budget to afford outside help. Yet for some reason, the founder dodged these intros like a vampire would dodge a crucifix.
We later discovered this founder was defrauding investors. He would use the company’s money to order the company’s products, which made their sales metrics look stellar while their bank balance decomposed like a corpse. The shopify and stripe reports he shared in lieu of financial statements were nothing more than a costume cloaking a bad business.
Hiring a bookkeeper is like turning on the lights, and malicious founders like to hide in darkness. The investor from this story (and many others, including a16z) now mandate that all portfolio companies sign-up with an approved accounting partner like OpStart as soon as they sign a term sheet.
2. I see dead customers.
Some SaaS founders will dress up their metrics like pets on Halloween. They find tricks to temporarily boost ARR and retention, but their financial statements serve as the Tell-Tale Heart that eventually can’t be ignored. Some real-life examples I’ve encountered:
- Failing to invoice customers for renewals, because “they’ll probably churn if I ask them to pay”. Bad news: customers who aren’t paying are not, in fact, customers.
- Making quid-pro-quo arrangements with other founders, where each party buys the other’s software (at equal prices) without ever intending to use it. This tactic boosts ARR for both companies, but creates zero economic benefit for anyone (except the IRS).
- Creating invoices that are never sent, or will never be collected. Your revenue may look good, but your Accounts Receivable tells the horrifying truth – and eventually, you’ll need to write-off these uncollectible balances.
Artificially inflating metrics is like drinking unicorn blood: a short-term fix with disastrous long-term consequences. A disturbing number of startups got away with this in the boom of 2021, but VCs learned their lesson and now focus heavily on customer behavior during diligence.
3. The $16 cask of Amontillado.
The year was 2019 when a fledgling startup made a seemingly wise financial decision: opening a savings account. They deposited some extra cash and earned a whopping $16 of interest income before the clock struck midnight and the calendar flipped to 2020.
Five years later, this same startup was spending millions on R&D. They employed full-time developers, designers, and PMs, all based in the US. We were excited to help them claim a sizable R&D tax credit, as we had done in prior years – then suddenly, we noticed something terrifying.
The measly $16 of interest income this company reported on its 2019 tax return started the clock on their qualification for R&D payroll tax credits. This company, like most venture-backed startups, was not profitable yet. In prior years, they used R&D tax credits to offset payroll taxes and save five-to-six figures annually. Unfortunately, you only have this option for 5 years once you report your first dollar of revenue on an income tax return. With an uncertain path to profitability ahead, the company elected not to pursue a tax credit they wouldn’t be able to use for years to come.
The $16 of interest income this company generated in 2019 probably felt like free candy at the time. In reality, they were tricked rather than treated – that $16 cost them at least $50,000 in payroll taxes they could have otherwise avoided.
4. A potion of metrics, brewed with the wrong recipe.
I once met a founder who had begun pitching VCs the previous week. His deck had already been sent to dozens of potential investors, who were wildly impressed by how quickly they reached $1M ARR.
A chill ran down my spine as he walked me through the math behind this claim. Our conversation went something like this:
- Founder: “we sold like $80k of SaaS deals last month, so I multiplied that by 12 and got $1M ARR”
- Me: “that’s awesome, but were these annual deals?”
- Founder: “yes, 12 month contracts paid upfront”
- Me: “so the customers who paid you $80k last month won’t pay you again for like a year”
- Founder: “yes”
- Me: “… so you have $80k of ARR”
- Founder: [appears to have just seen a ghost]
This founder never intended to mislead investors; he just didn’t understand the recipe for ARR. His sloppy math led to grossly overstated metrics and killed early fundraising momentum.
5. Trapped in a haunted bank.
If you want to survive in a horror movie, don’t go in the allegedly-haunted house. If you want to survive a bank run, don’t keep all your cash with one institution.
In March of 2022, founders everywhere got spooked. The spring wind carried whispers of a coming shock to the startup ecosystem: “I hear SVB is in trouble – you should get your cash out of there immediately”. Founders who had a second bank account (with a different institution) were mostly able to get out in time. Others had a chilling realization: it takes several days to open an account with a new bank, so their money was stuck in SVB through the weekend.
This horror story had a (relatively) happy ending, of course, but psychological consequences linger to this day. Many founders learned a crucial lesson the hard way: always keep accounts open at two different banks.
If you have skeletons in your QuickBooks, we can help!
👉 Learn more about OpStart’s Finance Function as-a-Service. Schedule a call today.
