Fred Wilson has a great weekly series called VC Cliche of the Week – this week’s post is on meeting the numbers. It’s worth a slow and thoughtful read.
I have one constructive thought to add. I’ve been involved in over 100 startups at this point and have seen many more. I can only remember a few instances where the company exceeded its revenue numbers in its first year of product ship. Many companies make their expense, EBITDA, and cash forecasts by adjusting spending, but that’s fundamentally different than making the top line and the bottom line numbers early in the life of the business (again – let’s focus on year 1 of product ship – not after the company has had several years of products in the market.) I’ve found that for year 1, the correlation between the sales plan and reality is completely random.
As a result, I generally take a different approach to year 1 of sales / revenue. Rather than hold a company to a revenue plan in year 1, I try to focus on the cash spend in year 1 (Fred highlights cash flow as the “ultimate measure” – and focusing on managing the negative cash flow is equally effective as managing the positive cash flow.) An early stage company needs to spend a certain amount to make progress, but managing the expense line should be straightforward. As revenue comes in (especially high gross margin revenue), it becomes easy to step up the spending, especially on variable cost (more demand generation) or highly leveraged items (more sales people) that impact future sales.
This tends to be a continual, iterative process – I’ve had cases where revenue starts accelerating later in the year, at which point the spending increase starts. If you use the fiscal year as the measurement, the annual revenue number is missed, but Q3 or Q4 revenue may be greater than plan. I’ve also had cases where the revenue mix results from various product “types” (or “editions”, or “versions”, or “vertical markets”) are radically different than the forecast (which often drives the allocation of variable spend.) Of course, if you wait too long to start investing incremental dollars you “might” miss an opportunity, although I rarely find that to be the case with an early stage company that is spending “pre-revenue” or “early revenue” at an appropriate level.
It’s a complicated dynamic and reinforces a couple of things. First, management and the board need to have similar expectations about what “making the numbers mean” in year 1 and have to deal effectively with any changes in the top line plan. This is especially true around expectations of the sales organization (and corresponding comp). Next, the CEO needs to have “controlled confidence” – there comes a point at which one can confidently say “let’s go for it.” Reporting and communication have to be timely (e.g. financials within 15 days of the end of the month, monthly board meetings/calls after the financials come out.) And finally – as Fred points out – management should be honest about the actual numbers at all times – there is never any value in lying or gaming things.
On Monday, Gold Systems announced the release of the Gold Systems Speech-Powered Password Reset product, based on Microsoft Speech Server 2004 R2. This is a product Gold Systems has been working on for a while, building on their experience with speech, password reset, and call center applications. Microsoft has been putting plenty of energy behind their new Speech Server products with a recent unveiling at SpeechTEK this week.
The idea of automated password reset has been around for a while as the cost of staffing a help desk to deal with password reset issues within a company can grow to be silly pretty fast. Speech-based password reset is a highly secure and inexpensive way to address this issue. I’ve been close to the development of Gold Systems’ product and I think it’s awesome, especially given the tight integration with Microsoft Active Directory and LDAP.
Gold Systems has run an early adopter program for the past few months (deeper than a traditional beta) and the product has been received very well. One of the developers – Jason Groshart – has been blogging about the development of this product and the use of Rally Software’s Agile development tools (Rally – like Gold Systems – is one of my portfolio companies).
Some fun nerd facts for you on this gloomy Wednesday morning in Homer, Alaska (where is the fucking sun?)
Which does Brad care most about: 1, 2, or 3? I wonder if Jack is going to use the cool bluetooth car hack in the upcoming season.
Dave Sifry – the CEO of Technorati – has published his latest State of the Blogosphere in two posts: Part 1: Blog Growth and Part 2: Posting Volume – that looks at the growth of the Blogosphere over the past six months. Some fun facts (as of July 30, 2005) follow:
Dave has more coming this week (Part 3 – coming tomorrow – includes the growth of tagging).
I’m fascinated with a Google Maps mashups (I prefer “mashup” to “hack”). Having recently read 109 East Palace (yet another very good history of the Manhattan Project), pondering nuclear (and other) holocaust in the brilliant Extremely Loud and Incredibly Close, and listening to Amy talk about “the great concavity” (the result of a nuclear explosion that is a central part of the geography on the eastern United States in Infinite Jest) – I’ve had explosions on my mind recently. I can’t say the Google Maps High-Yield Detonation Effects Simulator is particularly comforting, but it is enlightening.