Accounting for Startups - an interview with Danail Koev

Post by 
Viktor Dessov
Published 
November 26, 2020
D

anail Koev is the CEO of a Veda Accounting - a company that has specialized in bookkeeping and accounting for startups over the course of almost a decade. As a part of the BattlePass team, he can help founders avoid the grim mistakes that many of them usually make.


1. Can you introduce yourself and what you do?


My name is Danail Koev and my main focus is on providing accounting services for startups - some of the most notable ones include Gtmhub, Dronamics, and Payhawk. In fact, we are the only company in Bulgaria that is working exclusively with IT startups. I’m also one of the Comrade Cooperative’s founders, the first Bulgarian Decentralized Autonomous Organization, and I’m an active member of BESCO - the Bulgarian Startup Association.

2. How did you decide to start working with startups?

This happened naturally. When we were first starting to get into accounting 9 years ago, we were primarily working with online retailers, a few hundred of them at least. The market gradually changed though - the online retail industry consolidated as some bigger players emerged which lead to a decrease in the number of online stores. However, at the same time, the startup boom happened and bit by bit these new enterprises became our principal clients.

3. What are the main difficulties to work with a startup compared to a ‘regular company’?


It’s very different because they are extremely dynamic and in a matter of year they either scale at an incredible rate or they fail. Therefore we have to be as flexible as the businesses we are serving. Also, since most startups are developing innovative products and services, accounting and tax solutions often need to be innovative as well.

4. Do you recommend startups to hire their own accountants?


No, most companies that have less than 100 employees do not need their own accounting teams. First of all, it’s more expensive, second - they don’t have that much control. You need to rely on someone you can fully trust or you need to be proficient in accounting yourself - while the good accounting firms have a reputation you can count on and they have already accumulated significant ‘know-how’.


5. Why is accounting so important for startups?

The truth is that when a startup kicks off, naturally, the founders aim to be lean. At this moment nobody wants to spend on accounting, they prefer to concentrate on development, marketing, research, at some point even sales, but accounting always stays in the background - which is quite normal and logical as most people find it tedious and boring.

The issue comes when a startup begins to raise money and to scale cause most big investors want to verify the that venture’s financial foundations are solid, that it won’t have any issues with the Law or with the audit firms later on. At some point, the investors themselves push the founders to change their accountants for professional ones, because they don’t want their investments to be spent on fines imposed for some accountant mistakes. Also, at a later stage, if the accounting is poor, then the CFO cannot collect well-structured data that he can use in his reports.


6. Why is it necessary for a startup to have a CFO and what is his relationship with the accounting firm?


At some point, as a company scales, both the management team and the investors start requiring more sophisticated quarterly financial reports. Founders often find themselves not knowing how much money they have, nor what their burn rate is. This is when they turn towards the accounting team, demanding all of this well-structured information - and this is also when they actually need to hire a CFO. Unfortunately, CFOs are not that popular in Bulgaria, because most founders do not fully comprehend the role of such an individual. The CFO’s role is to collect data from the accounting department, analyze it, and propose strategies based on this data. Accountants do not predict future trends based on the cashflow - the Chief Financial Officer performs this task. Therefore, this person works closely with the accounting firm and verifies the high quality of the data he receives.

7. What are the most common mistakes that a startup makes from an accounting point of view?


The most prevalent mistake that startups make is using bookkeepers as accountants - and there’s a significant difference between the two. Bookkeepers cannot see the big picture, the subtle business processes. At the end of the year, when they prepare the balance sheet, they tend to consider all of the money spent so-far as ‘expenses’ - and when all of these expenses are put together they accumulate to a great loss. At the same time, according to the balance sheet, the company doesn’t have any new assets, which may lead outsiders to the conclusion that the team has done nothing but spend money. 


The truth is, however, that according to IFRS (The International Financial Reporting Standards) if you are truly creating a product, no matter if it’s an intangible one, you need to include it as an asset - even if it’s at a pre-MVP stage. This is important, first, because it’s illegal to hide such information from the Law and second - because it may actually hinder future fundraisings. We’ve witnessed ourselves the devastating effect this has had on several major deals. Even though the VCs liked the product they had to back off after their financial departments warned them about the startup’s unappealing financial state. IFRS itself has provided us with a framework on how to evaluate such assets in the making and founders in Europe need to stick to it.

Another mistake I need to mention is continuing to work with the ‘cheap’ accountants most startups have begun with once the latter scale. As they start to become more profitable, they need to let go of all the low-quality services they had to rely on at first. Otherwise, this may shake the very foundation on which the company is being built. One of the worst things about poor accounting services is that you may not feel their negative impact immediately, but rather 4 or 5 years down the line when you have a tax inspection for example - and then it could easily ruin your entire business. The issues may have piled so much that resolving them would be simply impossible.


8. In your opinion, what would BattlePass change when it comes to the services that accounting firms, such as yours, provide to startups?

For me, a startup studio’s greatest value that it offers startups is premium quality services at a lower cost. Furthermore, when startups are being supported by experienced entrepreneurs, that should lead to a greater success rate among them. At the end of the day, we are interested in long-term partnerships with our clients so if a company is profitable and growing, everyone wins.


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