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.