Posts from May 2010

Budgeting In A Large Company

Last week we talked about budgeting in a growing company. I defined that as a company between 50 and 100 employees. Today we are going to wrap up the budgeting series by talking about what happens to the process when you get to be a "big company." The context for the whole of this MBA Mondays series of posts is the world of entrepreneurial startups so "big company" means 150 employees or more to me. The biggest companies that I actively work with are between 150 employees and 1000 employees. Once they get bigger than that, they are beyond my ability to comprehend them and help them.

The process of budgeting in a large company doesn't differ that much from a growing company. If you haven't read that post, please go back and read it.

The budgeting process is still led by the financial leader of the company (VP Finance or CFO but by this stage you are likely to have a CFO) and the CEO. But the team that runs the budgeting process now includes the entire senior team. That is because each senior team member has control over a meaningful team and piece of the business. So you have to get them all involved in the budgeting process.

It's also increasingly likely that your revenues are coming from a number of lines of business so you will want to do a more detailed revenue forecast with attention to each segment of revenue. Your sales leader will still be responsible for the revenue forecast, but he or she will need help from the finance leader and often from other senior team members to put the revenue forecast together.

You will continue to use KPIs as a bridge between the revenue budget and the cost budget, but the creation of the KPIs and the forecast of them is now driven by the entire senior team. As I said in last week's post, this is the most important part of the budgeting process so make sure to give the senior team ample time to get the KPIs right.

Cost budgeting in a large company is a much more exhaustive process. The cost budget has a lot more detail and input into it. It is an iterative process where each senior team member brings a cost budget from his or her team and the finance leader integrates it all together and then negotiates with the senior team members to get the numbers where they need to be. This is where entrepreneurial budgeting starts to feel like big company budgeting.

One thing that many companies start doing at this stage is benchmarking their budget numbers versus others in their industry sector. This is mostly done with public company numbers since getting detailed financials on privately held companies is difficult. It is helpful to look at what your competitors or similar companies are spending as a percent of revenues on the various parts of the business. And it is helpful to look at how profitable their businesses are versus yours.

As you can see, the primary difference between the budgeting process in a growing company and a large company is the amount of involvement, interaction, and iteration among the senior team. This all takes time. So start the budgeting process by labor day, if not a bit sooner. It will take three months to do this right. You'll want your budget ready for a board review in mid to late November so there is time to do one more iteration before year end if that is necessary.

The budgeting process is really critical in a large company. It forces the company to make highly informed decisions about investments and resource allocation and it creates company wide discipline around hitting goals. I have never seen a company of 150 employees or more operate functionally without a strong budget process.

I'd like to again thank Matt Blumberg and Jack Sinclair of our portfolio company Return Path for their help with these budgeting posts. I have watched them go through all of the various stages over the years and their planning and budgeting has been stellar. Their insights were invaluable to me in putting the "how to" parts of these posts together.

Next week we'll talk about what happens when the reality starts diverging from the budget – forecasting.

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I Prefer Safari to Content Apps On The iPad

I've tried a few content apps on the iPad, including the much discussed Wired app. But I don't like reading content via apps on the iPad and I gravitate to the Safari browser.

There are a bunch of reasons I feel this way and I thought I'd articulate them:

1) many of the apps treat pages as monolithic objects. you can't cut and paste text, you can't engage with the content. it is just like reading a magazine or a newspaper. if i wanted to read a magazine or newspaper in physical form, i'd do that.

2) as Bijan points out this morning, there are no links to other content apps in mobile apps.

3) i can keep multiple pages open in the browser, just like i do on my laptop. it's what i've gotten used to. you can't currently multi-task apps although i suspect apple will change that soon.

4) i don't like the various different user interfaces i have to get to know. i am used to the web browser interface. i know where everything is. if there was one standard magazine app UI and one standard newspaper app UI, i might feel differently. but for now, i can't be bothered learning a new UI for every piece of content i want to consume.

5) web is free, apps are often paid. it's not really about the actual money to me. it is about the transactional overhead and the principal of it. why would i pay for something i can get for free?

6) most of the content apps don't connect to social media. i get most of my news from social media. i can click from twitter or facebook or digg to the web, but not to content apps. and many apps don't let me share content with social media.

7) you can't search content apps for what you are looking for with google. 

8) content apps are the anti-aggregator. i've come to rely on smart aggregators like techmeme, hacker news, etc to show me what i need to be reading. content apps are dedicated destinations that don't allow for aggregation. 

I understand why content companies are so interested in iPad apps. It is a familiar model to them. But as currently configured most content apps do not take advantage of the power of the digital medium. And so they are mostly useless to me.

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Why Taxing Carried Interest As Ordinary Income Is Good Policy

The House has passed a bill this past week that would change the taxation of carried interest from capital gains treatment to ordinary income treatment. The Senate has not weighed in on the debate but it is expected to do so soon. The New York Times has a story about it in today's business section. I've written about this issue in the past, roughly three years ago when it first surfaced as an issue. I am in favor of taxing carried interest as ordinary income and I'd like to explain why I think it is good policy.

I agree with Victor Fleischer's basic premise that carried interest is a fee for managing other people's money. It is a fee based on performance, but it is a fee nonetheless. It is not fair or equitable to other recipients of fee income to give a special tax break to certain kinds of fees and not to others. 

But even beyond the basic argument of equity and fairness, there are some other important factors to consider.

We have witnessed financial services (think asset management, hedge funds, buyout funds, private equity, and venture capital) grow as a percentage of GNP for the past thirty years. The best and brightest don't go into engineering, science, manufacturing, general management, or entrepreneurship, they go to wall street where they will get paid more. And on top of that, we have been giving these jobs a tax break. That seems like bad policy. If we force hedge funds and the like to compete for talent on a more level playing field, then maybe we'll see our best and brightest minds go to more productive activities than moving money around and taking a cut of the action.

Changing the taxation of the managers will not reduce the amount of capital going to productive areas. The sources of the capital; wealthy families, endowments, pension funds, and the like, will still put the capital in the places where they will get the highest after tax return. And these sources of capital, if they are tax payers, will still get capital gains treatment on their investments in hedge funds, buyouts, and venture capital. And the fund managers will still have to compete with each other to get access to that capital and their incentives will still be to produce the highest returns they can produce, regardless of whether they are paying capital gains or ordinary income on their fees.

We may see the best managers investing more of their own capital and less of other people's money with these changes to the tax law. When I invest my own capital in a company (either directly or through my funds) and that investment generates a capital gain, I will still get to pay a lower tax rate. So at the margin, I might prefer to invest my own capital over someone else's with the new tax rules. I believe that is good policy. I have seen a correlation between a manager having significant "skin in the game" and long term performance. So if these tax changes produce more "skin in the game" that will be a good thing.

Finally, we need to balance the federal budget and we need both revenue increases and expense reductions to do that. Think about the hedge fund manager who is investing a $10bn fund. Let's say that manager produces an annual return of 8%. That's not an amazing year, but the manager will make $160mm in carried interest anyway. Under current law, the manager will only pay roughly 25% of that as taxes between federal, state, and local taxes. Under the new law, the manager will pay double that. That's a difference of $40mm for one fund manager. And there are a lot of fund managers out there. 

It's time for asset managers to start paying their fair share of taxes. We are among the most highly compensated people in the world. And we've been getting a huge tax break for years. It's not right and I am happy to see our government finally do something about it.

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A New Look For AVC

Nathan and I started thinking about a new design for AVC a few months ago and I blogged about it. We got a ton of great comments from all of you which we read through carefully. We also used a heatmap to determine where all of you actually engage on this blog. Not surprising, you engage with the content and the comments and not a lot else.

We were inspired by the experience of reading blogs on iPhones, Androids, and iPads. We like the clean, crisp experience of a single column of text and not much else.

We are launching it today. So welcome to minimalist AVC. I love Nathan's work and I love the new design. I hope you all do too.

A few things to note:

1) We've got "like" buttons on each post. You'll see them if you look at a permalink page or open up the comments. They are below the post and above the comments. Please use them to give me feedback on the posts. These like buttons are not from Faceboook, they are from Disqus.

2) Most of the widgets are gone. We've kept the ad unit which produces tens of thousands of dollars for charity every year. It will take a little while for FM to get decent ads into the new rectangular ad unit and for a little bit we'll have remnant stuff.  And we've kept the Meetups Everywhwere widget. I see that as a feature of this community, not a widget.

3) We've added a video page. You can get to it via the nav bar at the top of the blog. We are using Magnify to power this and we are piggy backing on the Union Square Ventures video page. The AVC video page is a little thin right now but I will work to fill it out over time.

4) The link to traffic/audience stats is still available but we've moved it to the footer of the page in keeping with our desire for minimalism.

Let us know what you think.

I’ve Changed My Mind About The iPad

I got an iPad for our home when the wifi version first came out. I used it for a day and then wrote a post about the iPad on the iPad. I was not very enthusiastic about the device. At the end of the review I said:

Over time it may turn into a mainstream computing platform but I don't think it is there yet and I don't think Apple has the kind of hit on its hands that it had with the iPhone.

Over the past week, I have fallen in love with the thing. And so I am telling you why.

It may be the best email device I have ever owned. It took me a while to warm up the way Gmail is rendered on the iPad and I really miss my Google Labs hacks, but I prefer doing email on the iPad to my two phones and my laptop right now.

Part of it is the fact that I can go out on my terrace with a cup of coffee, a glass of lemonade, or a glass of wine and do email in a relaxed mood. If my wife or kids interrupt me, it's easy to put the thing down and engage in a conversation. The iPad makes using a computer less of a commitment and that has important implications for the way I compute. I like how I feel when I am using the thing.

I also like the way it sits on our kitchen counter and gets used for all sorts of little things. I came home last night and my oldest daughter Jessica was making guacamole and using the iPad to display the recipe. She was getting lemon juice on it and I thought that was so cool. A baptism of sorts.

We use it for our sonos remote, to do crossword puzzles, play games, pull up menus to order in, read techmeme and hacker news, and watch the occasional youtube video. It's replaced our kitchen computer on our kitchen countertop. It's become a member of our family. And when visitors come over, they love to use it. It's great at a party.

Our iPhones, Androids, and Blackberries are our personal devices. We wear them and they are with us everywhere. Our iPad is our family computer in way that the kitchen macbook never was.

I realized that I had become smitten with it yesterday when I was headed to a place I like to grab a cup of coffee and a bite to eat and read alone before work. When I go to this place, I take out my Google phone and read blogs and occasionally do some email. I wanted to take the iPad with me but decided not to so it could stay at home on the kitchen counter. Then I thought seriously about getting another iPad just for me. I'm not going to do that just yet, but the urge is there. I'll probably wait for the first Android tablet and get that for my personal use.

So I've changed my mind about the iPad and tablet computers. In my initial review, I focused on capabilities. And tablets are stuck between the power and utility of the notebook and the size and features of a smartphone. But they also create a middle place in terms of usability. And that is what I missed in my first day with the iPad. It feels less like a computer than any computing device I've owned. It's easy on me in a way that the other devices are not. So I'm now convinced that tablets will have an important place in our homes and our lives.

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The Fat Vs Lean Debate

Ben Horowitz and I debated Fat Vs Lean on stage at TechCrunch Disrupt yesterday morning. At the end, Erick Schonfeld asked for a show of hands and there was overwhelming support for my argument in favor of lean.

But to be honest, I had the easy task. Arguing for lean startups in front of a web crowd is like arguing for smaller government in front of a bunch of republicans. Not much argument there.

I think Ben did a great job making the contrarian argument in front of a dubious crowd. And he got in the best one liner for sure when he accused my math heavy argument of taking “all the joy out of being an entrepreneur.”

I know the Kid likes to see blog beefs, but there really isn’t one between me and Ben. He’s such a smart person and very easy to get along with. No wonder he was a great CEO before becoming a VC. I am sure he’ll be a great one.

So, all that said, here is the debate.

disrupt on livestream.com. Broadcast Live Free

I’m Looking For A VP Marketing

I'm looking for a VP Marketing for a NYC-based company in the online advertising business. If you are or know of a person who has significant experience in marketing to online agencies and their clients, please get in touch with me.

You can do that by sending me an email to me here.

I'd love a link to a linkedin in the email if possible.

Thanks!

Announcing AVC Meetups Everywhere

This is my 5,000th blog post here at AVC. In celebration of this fact, I am announcing a new feature for this community. We are going to host AVC Meetups everywhere that you would like to do them.

To kick this off, I have created a Meetup Everywhere page for this community and populated it with the 50 most active cities worldwide (38 in the US, 12 outside the US). I have scheduled a Meetup in each city for June 6th at 3pm.

If you want to do a Meetup in your community at anytime or anyplace, you can click on the red button on the left sidebar of the Meetup Everywhere page or just go here. You don't have to do your Meetup on June 6th at 3pm, you can do it anytime you want. I just wanted to get things started with a bunch of Meetups around the world on June 6th.

If you want to organize one of the 50 Meetups I've scheduled, click on the link to that Meetup and then click on the "organize this Meetup" link and go. We need organizers for these Meetups so please think about doing that.

Just to be clear, a Meetup does not have to be a big fancy event. It is often just a few people (three or four) getting together over a cup of coffee to chat. So don't think you have to run a big party to organize a Meetup.

By now, it is probably not lost on you that Meetups Everywhere is a new feature being launched today by our portfolio company Meetup. This community is one of many that are using this new feature to bring all the relationships that are getting built online into the real world. I am very excited about Meetup Everywhere and what it can do to facilitate even more Meetups and real world relationships. As Scott Heiferman, founder of Meetup, is fond of saying, "the internet is a great tool to get people off the internet."

If you are developer and want to build something on top of Meetup Everywhere, here is the api. I'm told it is pretty powerful.

So let's get to it and start creating AVC Meetups.

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Budgeting In A Growing Company

I failed to post a MBA Mondays post last monday. Sorry about that. I had something else on my mind when I woke up, wrote about that, and didn't realize that it was monday and I was supposed to do an MBA Mondays post until late in the afternoon.

So we are now picking up from where we left off two weeks ago. Which is in the middle of a four to six post series on projections, budgeting, and forecasting. We covered budgeting in a small company two weeks ago. We are now going to talk about what happens to the budgeting process once revenues start coming in, headcount gets to between 50 and 100 employees, and you are now a full fledged high growth business.

Once you have real revenues, 50+ employees, and a real business, you should have a full time finance person on your team. It could be a CFO or it could be a VP Finance. There are tradeoffs between the two. If you think you are going to be an independent company for a long time that will go public or do a large number of private financings and M&A transactions, then you will want a CFO. If you plan to keep the business simple and head for the exits within a few years, a VP Finance should be fine. I should do a post on the difference between a CFO and a VP Finance and I will, but this is not the time for it.

So your budgeting process should start with your lead finance person. He or she should run the process with you as their partner. Your budgeting team should also include the leader of your sales or revenue operation and your head of engineering or tech ops if you have one. The way I like to think of these two people is the person who "owns" revenues and the person who "owns" capex. This group is sufficient to run a budgeting process in a 50 to 100 employee company.

There are three inputs to the budgeting process in a company of this size; a detailed revenue plan/model, a comprehensive cost model including headcount, and a set of key performance indicators (KPIs). 

Start with the revenue plan/model and do it bottoms up (meaning identify where the revenue is going to come from and how much of it you are going to be able to pull in during the year). The sales leader will give you a plan that he or she thinks they can hit. Dial it back. As much as I love sales leaders, they are optimists. Very few of them can properly estimate revenue in a high growth relatively early stage company. I believe they generally do a good job of identifying where the revenue will come from but a poor job of estimating how much of it will come in during your time frame. Things always take longer. So dial the sales leader's numbers back.

Then once you have a set of revenue numbers, lay out all the KPIs that it will take to hit them. What is needed from the product team? What is needed from the engineering team? What is needed from the bus dev team? What is needed from marketing, customer service, HR, etc? The KPIs are the glue between the top line model and the cost model. Spend a lot of time on this part of the process.

Going from KPIs to a comprehensive cost model is not that hard, especially for a seasoned finance person. The key is being comprehensive. If you are growing headcount aggressively, will your current space be sufficient? If not, you'll need numbers for more space. Things like legal and recruiting costs really start to pile up at this stage. They may not be very large in your historical financials. Plan for them and budge them.

And make sure to budget for capex costs. Some companies rent their capex via leases or managed hosting. If you do this, your capex will show up in your operating costs. Some companies acquire their capex with cash. If you do this, your capex will show up on your balance sheet. Either way, capex can eat up a lot of cash. So budget for it correctly and make sure your engineering or tech ops leader is held accountable to the capex budget.

In my last post on this topic, I said that budgeting time is October and November so that the board can approve it in December. That is generally true for a 10 person company but not for a 50 to 100 person company. I like to see budgeting start in September for a company of this size and I like to see the Board look at the budget in November. That way if there is a disconnect between management and the Board, another revision to the process can occur before the year starts on Jan 1st.

The budget is not just for the Board. It is first and foremost for the team. So make sure to share the budget with the team and make sure they are all bought into it. If they are uneasy about it, listen to them and don't force a plan on the team that they do not think they can hit.

A company at this stage will have a senior team and they should be accountable to the budget. They may even have incentive comp associated with the budget goals. I like to see the entire senior team participate in the budget presentation to the Board. I like all of them to talk to their parts of the budget. That shows they understand it, they have bought into it, and they are behind it.

To be brutally honest, very few budgets are met in companies of this size. These businesses are still very much in flux and things change a lot during a year. But I still believe in the value of doing budgets. The process is incredibly helpful in establishing what can be done and what can't be done. It focuses the mind and the company. And if you realize half way through the year that you are not going to meet your budget, you can and should do a forecast. We'll talk about that in a few weeks.

Next up is budgeting in a 150+ person company. We'll do that next Monday assuming I don't have another brain fade.

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