VC Cliche of the Week

I have never felt that venture capital was a particularly quantitative business.

And that’s coming from a quantitative guy.

It’s my view that picking markets and people are the most important aspects of the venture business followed closely by an ability to work with the entrepreneurs as they weave and bob their way toward building a business.

But at some point, the company has to "meet their numbers."

Meeting the numbers can mean different things at different times in the Company’s life.

Early on, it means getting the product launched on time or getting the team built as planned.

Then it moves on to mean getting users or customers or partners signed up.

And eventually it turns into revenues, margins, and cash flow.

I’ve been in the venture business for almost 20 years now and I’ve heard people use many different metrics in talking about the value of businesses.  All of the metrics I’ve mentioned above have been talked about as a measure of value at one time or another.

But for me, there is only one real measure of value and that is cash flow.  The others come and go depending on the market and the flavor of the day, but cash flow is always there for you providing a foundation for the value of your business.

But this post isn’t about what numbers you need to measure.  It’s about how you meet them.

The first thing you must do is instill a culture of meeting the numbers in a Company and it has to start at the very top.  If the CEO/founder/entrepreneur doesn’t care about meeting the numbers, then nobody else will.

But that is not enough.

One of my most painful investment experiences was with a team where the two founders cared more about meeting the numbers than anything else, including honesty.

If you are not going to meet the numbers, then you have to fess up to it and reset expectations.  Mid year is the time when most venture backed companies do that with their boards.

Early on in a company’s development, its to be expected that the numbers are going to be reset.  When a business is moving so fast, when the strategy isn’t set in stone, when the market is still in its infancy, its not realistic to expect a company to meet the numbers.  The goals are just that – directional expectations.  When they are not met, you can’t just blow it off and move on to the reforecast, but you also can’t overreact and fire the entire management team.

When a company is still developing you must take the inevitable resettting of expectations as an important part of the feedback loop that the market provides an entrepreneur and the board.  You need to look at the reasons behing the miss, and you can’t blame it all on bad budgeting.  The numbers were set at the start of the year for a reason and you need to go through all of the assumptions, look at actuals versus plan, and figure out what went wrong and do something about it.

Then there is the reforecast. The tendency is to reforecast conservatively.  Once burned, twice shy.  And there is some good logic to that. You can’t create a culture of meeting the numbers if you never meet them.  Many CEOs feel that they need to "make the reforecast" if they’ve missed the original plan in order to keep everyone on the reservation. I support that thinking for the most part.

But I also encourage CEOs to find somewhere in the plan to push really hard. Maybe its a new product or line of business that you really want to energize.  Maybe its cost reductions in places you know you need to cut back.  Maybe its investing in a new area.

You can’t get different results by doing the same thing.

A reforecast needs to be a lot more than a dialing down of revenues to the level that the CEO feels comfortable making them and keeping the rest of the numbers where they were.  That’s punting in my view and I don’t like it.

Meeting the numbers is a critical part of running a business.  It starts with creating the numbers, then moves on to managing the business so that it can meet the numbers, followed by good reporting to allow the management team to see how they are doing, and then hopefully to that great year end board meeting where the CEO can announce that the company exceeded plan this year.  That’s a happy moment as anyone who’s been there can attest.

It’s also a moment that is at the heart of building value for the founders, the managers, and the investors.  So work on meeting the numbers.  It’s really important.