Quantitative Entrepreneur Accountability

I received the following question last week:

I’ve been thinking a lot lately about the manner in which VCs should hold their entrepreneurs accountable – what should be the proper measures.  Most VCs with which I have experience rightly, I think, avoid making this a numbers-only analysis, as that’s a better measure for larger and more steady-state organizations but not for young and growing companies.  Wondering what your thoughts are here and if you’ve seen anything out there which addresses these points – entrepreneurs should be held accountable, they shouldn’t get a pass simply because “it’s too early” “we’re building value that’s not yet measurable” “numbers don’t matter” etc., but then again, applying ready-to-wear and traditional metrics probably doesn’t work well either.

I’ve always found that quantitative accountability – while difficult in a young company – is critical.  However, I’d add a simple thought – the quantitative accountability must be flexible and the time units used for measurement should be both short and long.

Flexible is a key word here.  Every early stage company I’ve ever invested in had some sort of a budget.  When companies are pre-revenue, they are often very proud of making their budget – which usually means “I have no revenue and I spent less then I said I would spend.”  While this is good, it can be myopic as there are times when it makes sense to spend more then you said you would spend.  Here’s where short and long come into play.  Imagine that you had an annual budget.  On day 1, you’ve got a pretty good idea of how much you are going to spend in the first month.  However, it’s unlikely that you really know how much you should (not are going to – “should”) spend in the eleventh month.  A twelve month expense budget for a raw startup company is too long – too many things will change.  Hence the notion of “short.”

However, many (almost all) companies take longer to develop than expected.  For many companies that I’ve funded, in the “good case”, the revenue curve in year three looks like what they expected the revenue curve in year two to look like.  In a number of these companies, the year three revenue ramp was still very satisfying.  However, if I’d taken a two year view, I would have said the company was failing.  Hence the notion of “long.”

I think if you mix these ideas together – keeping flexible while recognizing that your perspective should often be shortened or lengthened – you can actually use many traditional quantitative measures to hold entrepreneurs accountable.  Of course, the magic is in the application of the modifiers – namely flexibility, longness, and shortness.

  • Dave Jilk

    You have always emphasized tracking other metrics, such as number of demos, number of leads, number of calls, number of downloads, etc. It can be hard to develop good metrics but they are very helpful and can be used for entrepreneur evaluation before there is significant revenue.

  • In my last job as VP -Engg, I thought John Shoch of Alloy Ventures used a combination of Qualitative and a complete set of Quantitative Measures that I thought covered all aspects of evaluating how a portfolio company was doing. He used this in every board meeting. They had developed a set of Stagger Charts that visually gave you an quick idea of how each quantitative measure was doing each month. You can see it in http://www.alloyventures.com/entreprenuers.html

    I had a lot of respect for John since he clearly understood that at least for the technical side of things, qualitative things like cleaning up and adding the right people to the technical team, cleaning up and rationalizing the development process were all important things you do initially. However the results showed up in the quantitative stagger charts for development that showed accurate planning and never missing dates set for releases. 16 releases in 20 Months!

    Quantitative measures – yes – They make sense only after making sure the right qualitative things are done first! There may not be any quantitative measurements at that time except a sense of being on the right track with fundamentals! I am sure the same things apply to Sales, Marketing, Finance and other functions in a startup.

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