VC Cliche of the Week
This is not a cliche but a great line that I heard several weeks ago that I have been using since (so it may become a cliche):
If you must forecast, do it often.
Forecasting is always a difficult proposition and loaded with risks for the person doing the forecasting.
We ask each of our companies to go through a budget process at year end (right now) and set the goals for the following year. That is essentially a forecasting exercise (on the top line at least).
And many of our companies have incentive comp plans (equity or cash) that depend on hitting the budget or somewhere very close to plan.
So the risk of missing the forecast is real and tangible to everyone in the senior management of the company.
When a company has no revenues, this isn’t a big deal. And when a company has $50mm in revenues and is growing at 20% per year, its not that big of a deal.
But when a company has a couple million in revenues and is trying to double or triple that (in the "launch stage" before "escape velocity"), there is a lot of risk in the budgeting process.
And you don’t want a team to miss the budget in the first half of the year and have no incentive to try for the rest of the year (like the NY Jets this year).
And then there is the issue of expense structure. That needs to ramp in advance of revenue growth but how much should it ramp? These are the kinds of decisions that are hard to make on an annual basis in a company in hypergrowth mode.
So a couple years ago Matt Blumberg and Jack Sinclair, CEO and CFO (now COO) of Return Path came to the Board with an interesting proposal. They suggested that they develop an annual budget and four quarterly budgets. And they suggested that at the end of each quarter, they develop a new quarterly budget for the next quarter and beyond, which is essentially a reforecast based on what happened in the current quarter. The net of this was that we went to a rolling budget processs where there was a big budgeting effort at year end and a shorter one at the end of each quarter.
If you must forecast, do it often.
That approach worked great and got Return Path through several years of hyper growth, multiple acquisitions, and a changing business model and mix. They have now moved to semi-annual rebudgeting and may get to annual this year. That’s the goal of this approach, to grow out of it.
Since then, we have tried this approach with several other portfolio companies and are encouraged by everyone’s receptiveness to it.
Forecasting is tricky business, if you must do it, do it often.
UPDATE: Matt Blumberg has posted his thoughts on this topic and his advice to entrepreneurs who want to give this approach a try is really solid. If you are interested in how to do this well, go read Matt’s post.