How Was Your Q3?

With all the focus and discussion around stuff like the Google – YouTube deal it’s easy to forget that there are lots of entrepreneurs out there working really hard to grow their businesses.  The culture of the tech industry has caused us to think in “monthly” and “quarterly” performance and – whether you think it’s good or bad – it is.  Q3 just ended so it’s a convenient time to look at some other macro indicators (e.g. how did private companies perform in Q3) to see how healthy the tech business is.

While I don’t struggle too much with the absolute quarterly performance of private companies, I’m very interested in quarterly performance relative to the company’s plan.  Q1 is usually pretty easy to make since the forecasts are brand new – if a company misses their Q1, something is fundamentally wrong.  Q2 is harder – but as long as there is some positive activity – it’s usually achievable.

Q3 is the tough one.  Most annual plans assume a solid revenue ramp that becomes difficult “to fake” by Q3.  You’ve either got it, or you don’t. 

Now – making a quarter isn’t necessarily just about the top line. Among other things, I measure companies on revenue, gross margin, opex, EBITDA, net income, and cash.  You can underperform on the top line, but deliver better gross margins than expected, manage your opex, and beat your EBITDA / NI number.  This will qualify – in my book – as “making plan.”  I know way too many people that only focus on revenue – when a company makes its revenue number, blows everything else, they think it’s doing well (sometimes it is, usually it isn’t.)  The converse happens more frequently – a company misses their top line but – in my book – “makes plan” yet other investors around the table freak out.

I went through my direct portfolio (companies I sit on the board of) and several other companies that I’m close to (and used to be on the board of) to see how they did for the quarter based on my definition.  For companies with $500k / quarter or greater or revenue, 9 of 11 made the quarter.  This is significantly better than any Q3 that I can remember which is both a positive indicator of the leadership teams’ forecasting ability as well as the general health of the areas I invest in.  In addition, several of these companies are having a strong October, which means they didn’t drain their pipeline to “make Q3.”  For now, I’m optimistic about the balance of the year.