Mika Kasumov is the founder of Abacus & Pencil. Previously he was VP of Finance at MasterClass, and held roles at Pantheon.io, and Upwork.

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EC: Everyone is talking about Silicon Valley Bank and it now seems that most may get their money back. Crisis over? How will this impact the tech startup ecosystem?

MK: For years the standard playbook for scaling up a startup once you had product-market fit went roughly like this:

1. Get to $15-20M in ARR.

2. Raise a $40-70M Series C.

3. Get a $20-30M credit line at ~5% interest to extend your runway.

There were only 3 banks willing to lend to unprofitable startups. SVB was by far the biggest. They single-handedly created the category.

SVB was willing to lend on the strength of your VC's brand. They were willing to charge Prime + 1% rates where most financial institutions would be charging 15-20%.

Often, your next best option after SVB were predatory lenders who wouldn't think twice about selling you for parts.

The implicit understanding was that:

1. SVB would fund startups at unreasonably low interest rates despite the risk inherent to high burn / high growth companies.

2. VCs would make sure SVB got paid first and fast if things didn't go as planned (e.g. encouraging a sale of the startup instead of running it down to the last $1.)

3. Both sides would avoid trying to make money at the expense of the other's loss.

Startups would use the SVB credit line as an insurance policy:

In case they needed an extra ~6 months before their next fundraise to hit some kind of KPI milestone.
To give themselves the flexibility to keep operating business as usual even if a large enterprise customer happened to be late on an annual payment.
To make sure they would have time to adjust and course correct if there was an economic shock.

I've personally used a bank credit line for all of the three reasons above. Without a bank credit line, not a single startup I worked at would've made it to where they are today.

But now -- this insurance policy is gone!

Even if all the money currently trapped in SVB is recovered — signs are pointing to yes — the market for statup debt financing essentially got cut in half or worse.

Here are real situations CFOs I am talking to are working through during the last 72 hours:

a. We opened up a credit line with SVB last year as an insurance against an economic downturn. We now need to find a new lender, likely with a much higher interest rate.

b. We need to refinance our debt next year, if we can't do it on the right terms, we may be forced into a down round. Or we may not be able to raise money at all.

c. We didn't use SVB but we had a credit line with their competitor. We can't be sure if that bank is stable either. We don't have enough cash to make it to profitability without relying on that credit line.

A lot of startups will need to raise again much sooner than they planned. They won't have the cash to make it through the recession.

They won't be able to raise on the terms they wanted. Down rounds will become more common.

Of course, there are other impacts and this may snowball to have all kinds of knockout effects.

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EC: How important is it for CFOs to be fluent in product and customer outcomes?

MK: Whenever I interview candidates for finance roles my first question is asking them to pitch their current startup’s product. Some people think that’s not a fair question to ask, but the reality is that most outcomes CFOs need to drive are either informed or constrained by the product.

Furthermore, every 18-24 months the CFO’s fluency with the product can make or break the success of the company.

Specifically, for startups, I’m thinking about fundraising. Here’s why…

The Head of Product is rarely in the room during the investor pitch but the CFO almost always is.

Heads of Product and CTOs typically get brought in for the post-term sheet diligence.

While investors will look to the CEO to define the vision, outline the market opportunity, and show how the product creates customer value, a CFO needs to be able to fluently take over the conversation and demonstrate how the product value is captured in the financial projections.

Financial projections that stand in a vacuum do not create the investor confidence necessary to get to a term sheet.

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EC: How can pricing accelerate growth?

MK: In my experience, getting pricing right can add anywhere from 5 to 20% to your annual growth. That’s not a major growth driver when you’re at the Seed or Series A stage and growing 200-300% YoY, but as growth slows down companies increasingly turn to pricing to maintain their trajectory.

As you approach and cross the magical $100M ARR mark, having the right pricing in place can make the difference between mediocre and best-in-class Net Dollar Retention.

What I have in mind here is not simply raising prices to get more revenue from your current customers - that’s a simplistic view that considers pricing to be a one-dimensional value-capture mechanism.

Instead, a well-designed pricing approach should recognize that:

The choice of pricing structure and level is a bet on long-term growth drivers e.g. grass-roots PLG adoption vs. Enterprise Sales. ← Pricing acts as the forcing function to align finance, product, and sales teams around the user value.
Pricing is the de-facto guide your customers will use to understand the relative value of the different feature/functions in your product. ← Pricing will influence how the product is adopted and used.
Pricing should be leveraged as a signal that helps customers reveal hidden preferences (by self-selecting into a pricing tier) and guide them into use-cases. ← When pricing is aligned to value drivers, revenue beats any kind of NPS metric for measuring customer impact.

By necessity and given the different nature of their training, finance, product, and sales leaders will have complementary viewpoints on pricing within this framework. No function on its own will have the data and toolkit to single-handedly solve for these priorities.

As an example… Amazon is my go-to company for best-in-class pricing structure. I don’t mean the consumer-facing pricing you get shopping for books or TVs, but the way they price the Amazon platform itself.

Take their 3rd party seller marketplace. A recent article by Marketplace Pulse revealed that Amazon takes up to a 50% cut of sellers’ revenue through three sets of fees: 8-15% commission on sales, 20-35% in fulfillment fees, and up to 15% in advertising fees.

Here’s what I love about this pricing model:

You get a low 8-15% headline number that reduces barriers to entry for new sellers. Amazon comes across as cheaper than trying to run your own ecommerce store and find your own customers. ← This has marketing fingerprints all over it.
But the fees add up so that the largest and most successful merchants on the marketplace pay higher fees (it’s extremely hard to get big on Amazon without having access to Prime, which in turn requires Fulfillment by Amazon). ← This is likely something that was designed in the finance org.
The pricing levers are aligned to individual platform capabilities and all lead to the same outcome that sellers care about: more eyeballs, higher conversion, more sales. ← This reflects customer-outcome oriented thinking coming out product.
It is easy to fine-tune for each customer: some pricing levers reflect category-specific willingness to pay, others reflect velocity of demand or degree of competitiveness among the supply. ← Likely a cross-functional effort to design this well: spans product, finance, and sales teams.

Alternatively, take AWS as an even more powerful example. They’ve mastered the art of using pricing to co-opt customers into solving their core scaling challenges. Within compute alone:

Savings Plans allow them to lock-in revenue without constraining the customer’s future use-cases.
Reserved Instances allow AWS to plan for future capacity needs.
Spot Instances allow AWS to manage and prioritize workload and capacity in real-time.

…and all of this is accomplished while creating more ways to meet the customer’s needs.

That’s the power of pricing!

As you approach and cross the magical $100M ARR mark, having the right pricing in place can make the difference between mediocre and best-in-class Net Dollar Retention.

- Mike Kasumov

Product State

Mika Kasumov on what SVB’s implosion means…