A New Financial Lens for Tech startups

Professor Alnoor Bhimani’s new book Financial  Management for Technology Start-Ups (Kogan Page, 2017) brings together scholarly research, cases studies, digital business thinking, techinvestor documentation and all the accounting knowledge available today to enable tech startups to be equipped with a new form of financial intelligence.

What motivated writing the book is that we find ourselves today at the start of an industrial revolution. There have been others of course. The first revolution happened 250 years ago with the rise of mechanisation. Another, about a hundred years ago, was ushered in by electrification and mass production. Then 50 years ago, electronics and automation started a third revolution. Right now, our physical and virtual worlds are converging. This is revolutionary because the ways in which we produce, consume, move, communicate and interact are being transformed. What’s different is that whilst the first three revolutions were ongoing, few people understood the scale of changes taking place. But today, we know we inhabit a period of epochal change. This means we can influence the direction of the revolution that has begun. And of course, seeing new ways of coupling digital technologies with economic exchanges implies ommercial opportunities – and some start-ups doing this right now will become the tech titans of tomorrow.

Creating value out of tech ideas does not have to be complex or resource intensive. For instance, one could combine Google’s capacity to unleash information with accessing one fifth of the globe’s population via Facebook. This, complemented with the ready availability of cheap web services, coding input and the many possibilities for developing ad content, puts into position all that is required to create one techbased business form. Many other models exist of course. But, what is not always understood is that tech business success rests on a particular approach to financial management. Successful tech entrepreneurs home in on accounting and financial strategies that underpin enterprise cost structures and business objectives. Tech startups also need financial and other performance metrics to be communicated to investors.

But why is it that tech-businesses require a different form of accounting input? The book argues that experience over the past two decades has made it evident that in the tech world there is no set way of doing things. At the heart of technological change lies disruption. Bhimani illustrates for instance the focus of tech firms on demand. Some technological innovations create and then expand networks. The growth of networks can become self-reinforcing, because users get value out of connections and so connections grow. The larger user base in the network increases demand for the product, which in turn fuels more network expansion and demand. Sometimes, networks connect with other networks creating even more value. If business transactions grow because networks expand in many directions and defy linear pathways, then there’s no point using financial intelligence that only focuses on supply and on linear paths of value creation as do traditional accounting systems. Bhimani also shows in the book that tech start-ups need to continuously experiment to innovate. They are not like traditional business ventures, where resources needed to serve a market segment for a product are pre-planned and budgeted for. There is no such certainty because the tech product-market fit evolves continuously. A tech firm may want to test out an altered product angle, toy with a new website feature, explore building relationships with influencers, try out a differentiated pricing scheme, play around with a mobile-responsive template, assess novel organic tactics to increase online traffic, and so on. Some experiments will have tiny business repercussions, while others could unleash strategic-level changes. From a financial viewpoint, specific ways to track activities that help determine what actions to take, and when to do so are required. What’s essential is that accounting information must help start-ups engage specific manoeuvres through close tracking and monitoring of experimental business activities.

Bhimani investigates and outlines many other ways in which tech start-ups differ from traditional firms and why digital business models today make essential a more focused financial management lens. His new book has analysed prior research, tech business experiences and practical case studies to bring together the fundamentals of this new lens.