If you want to be successful in business, it is crucial to determine when, where, and how to obtain the funds you need. Whether you need $1,000 or $1 million to start or expand your business, if you can't raise this money, you can't build the business you want.
Before You Look For Funding
Before you look for funding, you need to create your business plan. In addition to explaining your business and your strategy for success, your plan must determine how much money you need and for what it will be used.
Also, it's very important for you to understand the timing of the funding. For example, do you need all the funding now (e.g., to build out a location), or can you receive your funding in stages or "tranches."
The amount of funding you seek will effect the source of funding you approach. For example, if you require $250,000 in funding, angel investors are more applicable then venture capitalists. If you need $5 million, the opposite is true.
While I have identified 41 sources of funding for your business, below are the 5 most common.
The 5 Most Common Types of Funding
1. Funding from Personal Savings
Funding from personal savings is the most common type of funding for businesses. The two issues with this type of funding are 1) how much personal savings you have and 2) how much personal savings are you willing to risk.
In many cases, entrepreneurs and business owners prefer OPM, or "other people's money." The four funding sources below are all OPM sources.
2. Debt Financing
Debt financing is a fancy way of saying "loan." In debt financing, the lender (often a bank) gives you funding that you must repay over time with interest.
You must prove to the lender that the likelihood of you paying back the loan is high, and meet any requirements they have (e.g., having collateral in some cases). With debt financing, you do not need to give up equity. However, once again, you will have to pay back the principal and interest.
3. Friends & Family
A big source of funding for entrepreneurs is friends and family. Friends and family members can provide funding in the form of debt (you must pay it back), equity (they get shares in your company), or even a hybrid (e.g., a royalty whereby they get paid back via a percentage of your sales).
Friends and family are a great source of funding since they generally trust you and are easier to convince than strangers. However, there is the risk of losing their money. And you must consider how your relationship with them might suffer if this happens.
4. Angel Investors
Angel Investors are individuals like friends and family members; you just don't know them (yet). At present, there are about 250,000 private angel investors in the United States that fund more than 30,000 small businesses each year.
Most of these angel investors are not members of angel groups. Rather they are business owners, executives and/or other successful individuals that have the means and ability to fund deals that are presented to them and which they find interesting.
Networking is a great way to find these angel investors.
5. Venture Capitalists (VCs)
VC funding is a suitable option for businesses that are beyond the startup period, as well as those who need a larger amount of capital for expansion and increasing market share. Venture capitalists are usually more involved with business management, and they play a significant role in setting milestones, targets, and giving advice on how to ensure greater success.
Venture capitalists invest in companies and businesses they believe are likely to go public or be sold for a massive profit in the future. Specifically, they want to fund companies that have the ability to be valued at $100 million or more within five years. They also go through an expensive and lengthy process of deciding on the best business to invest their money. Hence, the approval process usually takes several months.
As you search for the best funding source for your business, you will discover that some financing options are complicated while others may offer a very small amount.
Choosing an inappropriate type of funding can lead to unfavorable outcomes such as feuds between the lender and business owner, shift of control, waste of resources and other negative consequences.
With this in mind, you should study the benefits and drawbacks of each financing option and select the ideal one that will help you meet your business goals. Because with the right source(s) of money, the sky is the limit for your business.
For many businesses, in these pre-Labor Day workdays and the unofficial “End of Summer” things slow painfully down.
Projects and deals take twice as long and sometimes feel twice as hard.
This year, compounding the challenge has been the rollicking Market Gyrations of these past few weeks, amplified by "The Sky is Falling" financial and political media blaring forebodings of doom and demise.
So how does our ambitious and goal-oriented executive block out the negative noise and focus on the Mission Critical Business Tasks and Projects at hand?
How does he or she be cognizant of / sensitive to current events, while remaining ever undistracted and undeterred by them?
Well, the most Effective Executives I know do this: They reframe everything as an opportunity, and everything as a positive.
Markets going up? These are boom times so let’s get on the bus and go for the ride.
Markets going down? What a buying opportunity! If I liked it at 50, I love it at 30!
Summer doldrums: As a buyer, a great time to press sellers for discounts. As a seller, with my competition loafing on the beach, I make hay.
Now, this can’t just be Hot Air / Pollyanna Self-Talk.
No, it has to be real and serious and buttressed by what famed Indiana basketball coach Bobby Knight calls in his best-selling book The Power of Negative Thinking.
In it, Coach Knight makes the simple but powerful point that in any competitive pursuit, everyone wants to win, so just thinking positively about it rarely yields competitive advantage.
Far more relevant is the willingness to sacrifice to Prepare to Win: to learn how to stop making the mistakes that losers make in abundance and that winners have trained themselves through hard work to avoid.
For athletes, this means practice, practice, practice to stop Missing Free Throws, or Three Foot Putts, or Second Serves, or The Cutoff Man.
For business people, this means the daily discipline to prepare for meetings, to start critical projects far before their due date, and consistently doing the Quantitative and Data Analysis to determine what is actually working in our business versus going by gut and feel.
Combine these two philosophies, the Power of Positive Thinking and of everyone and everything no matter what being good and an opportunity...
...With the Power of Negative Thinking and the daily, weekly, monthly, yearly, on a career basis of making of the sacrifices and of taking the time to do things right.
Of such combined mindsets and disciplines are legends and fortunes made.
The word "crux" is an interesting word. It's a noun that can be defined as: (1) the decisive or most important point at issue, or (2) a particular point of difficulty.
In either case, the word aptly applies to raising funding for your business, because in doing so, most entrepreneurs and business owners encounter difficulties.
I believe the crux to successfully raising money for your business lies initially in understanding that investors are essentially professional risk managers.
Let me explain. Most sources of money, like banks and institutional equity investors (defined as institutions like venture capital firms, private equity firms and corporations that invest), are essentially professional risk managers. That is, they successfully invest or lend money by managing the risk that the money will be repaid or not.
So, your job as the entrepreneur seeking capital is to reduce your investor or lender's risk.
Let me give you a simple example. Let's say that both you and your worst enemy both wished to open a new restaurant.
In this scenario, which is the riskier investment?
Clearly investing in your worst enemy is less risky, because they have already accomplished some of their "risk mitigating milestones."
Establishing Your Risk Mitigating Milestones
A "risk mitigating milestone" is an event that when completed, makes your company more likely to succeed. For example, for a restaurant, some of the "risk mitigating milestones" would include:
As you can see, each time the restaurant achieves a milestone, the risk to the investor or lender decreases significantly. There are fewer things that can go wrong. And by the time the business reaches its last milestone, it has virtually no risk of failure.
Let me give you another example. For a new software company the risk mitigating milestones might be:
The key point when it comes to raising money is this: you generally do NOT raise ALL the money you need for your venture upfront. You merely raise enough money to achieve your initial milestones. Then, you raise
more money later to accomplish more milestones.
Yes, you are always raising money to get your company to the next level. Even Fortune 100 companies do this - they raise money by issuing more stock in order to launch new initiatives. It's an ongoing process-not something you do just once.
Creating Your Milestone Chart & Funding Requirements
The key is to first create your detailed risk mitigating milestone chart. Not only is this helpful for funding, but it will serve as a great "To Do" list for you and make sure you continue to achieve goals each day, week and month that progress your business.
Shoot for listing approximately six big milestones to achieve in the next year, five milestones to achieve next year, and so on for up to 5 years (so include two milestones to achieve in year 5). And alongside the milestones, include the time (expected completion date) and the amount of funding you will need to attain them.
After you create your milestone chart, you need to prioritize. Determine the milestones that you absolutely must accomplish with the initial funding. Ideally, these milestones will get you to point where you are generating revenues (if you are not already generating revenues). This is because the ability to generate revenues significantly reduces the risk of your venture; as it proves to lenders and investors that customers want what you are offering.
By setting up your milestones, you will figure out what you can accomplish for less money. And the fact is, the less money you need to raise, the easier it generally is to raise it (mainly because the easiest to raise money sources offer lower dollar amounts).
The other good news is that if you raise less money now, you will give up less equity and incur less debt, which will eventually lead to more dollars in your pocket.
Finally, when you eventually raise more money later (in a future funding round), because you have already achieved numerous milestones, you will raise it easier and secure better terms (e.g., higher valuation, lower interest rate, etc.).
It might surprise you what you can accomplish with less money! So write up your list of risk mitigating milestones and determine which must be done now and which can wait for later, focusing first on what is most likely to generate revenues.
Suggested Resource: Want funding for your business? Then check out our Truth About Funding program to learn how you can access the 41 sources of funding available to entrepreneurs like you. Click here to learn more.
Last week, I wrote about all of the amazing lessons of the world and science of Sports Metrics has to offer business.
Well, with the 2016 Presidential Campaign heating up, let's talk how just as in sports the use of metrics in politics has jumped a full generation ahead of business.
First, a little history and how perhaps the most famous use of metrics in politics is the one where the experts clearly got it wrong.
The 1948 Presidential Election was famous for many reasons - for being the last pre-television election, for being the last election contested between candidates born in the 19th century, for President Harry “give ‘em hell!” Truman's whistle-stop campaign against the “Do-Nothing” 80th Republican Congress, and…
…for the Chicago Tribune's famous headline proclaiming "Dewey Beats Truman" the morning after the election when in fact New York governor Thomas Dewey had handily lost the race.
The problem was that way back then poorer Americans – the heart of Truman’s constituency – didn’t have telephones, thus greatly skewing the polling data to predict an overwhelming Dewey win.
Obviously, since 1948, political polling has come a long way, highlighted by famed “Big Data Nerd” Nate Silver and his “FiveThirtyEight” mathematical model correctly calling 50 out of 50 states in the 2012 Presidential Election (after correctly predicting 49 out of 50 states in the 2008 election!).
Because of the power of predictive models like these, politicians across the ideological spectrum now more than ever rely on polling to shape messaging while campaigning, and once elected governing priorities and principles.
Now I know many of you at that last sentence are saying “Wait a Second!”
Isn't this the whole problem with politics?
How pols rely on polling to measure what voters think, want, and fear, and then either work (or pretend to!) to give them, both convictions and what is good for The Nation be darned?
Golly, they say, did Thomas Jefferson and John Adams take polls before they signed the Declaration of Independence?
To which I say, give it a rest. Please.
I have found that those that are usually crying loudest about “principles and convictions" in politics are those that when they or their chosen candidate run for office, just get right on doing that most Un-American thing of all.
Sure, they give nice and flowery concession speeches where they drone on about virtue and about how they lost with “dignity ”and “honor” and ya-di-ya-di-ya.
A loss is a loss.
Now, the really nice thing about business when compared to politics is that there is general agreement on overall goals and values. Nicely, there isn't a “Left versus Right” divide with the majority of business people – i.e. most of us are striving for the same thing: More, more, and more.
More sales, more profits, more company value.
In business, these are the “elections” we seek to win, the “policies” to pass.
And just like in politics, we can strive to do so via standing high on our horses and saying silly things like “If the customer doesn't appreciate what a better product I to offer than my competitor, well shame on them."
Or as good, "If that great employee left my company to work someplace else, I don't need or want them anyway."
Sure, statements and testaments like these sound good and noble, but really when you reflect on it (and not wanting to be too harsh) is just Loser Talk.
No, the winners in business, like those in politics, are truly “In the Arena.”
And, in this Internet of Things, SaaS, and Big Data World of Ours, being “In the Business Arena” means above all else being elbow deep in the numbers and in the conversion metrics in all of their intricacy, subtlety, detail and glory.
And just like politicians win by measuring what the people really want and giving it to them, so do business people win by measuring what the market is really saying and what customers really want.
And figuring it out above all else through our data and through our metrics.
Yes, as Harry Truman would say, The Buck Does Stops Here, with and in the numbers.
The lessons and inspirations of sports and the sporting life have always had a deep hold on the business psyche.
Some of my favorites here include the joy of competition, the virtues of teamwork, and of reaching Peak Performance through overcoming adversity and then sharing our “Best Stuff” with the world.
And these days the “Hot Lesson” that sports has to offer business is the power of measurement and data - driven decision making.
Some of this is obviously not new. Sports like running, swimming, and lifting has always been fundamentally defined and accomplished via tracking data - by how fast we go, how much weight we lift - and then from these data points developing specific training and improvement plans.
What is new is how data has come to permeate and dominate the world of team sports - baseball, basketball, soccer, et al. - and how now the most successful teams are managed not by pep talks and gut but by and through data and metrics.
FIFA. Germany's 2014 National Soccer Team found that one of the highest correlated data points with wins and losses was how much the players on the field ran and moved per minute of game time.
So they placed chips in all of the player’s shoes to measure and maximize this number. The German Team averaged so much more movement than any of their World Cup competitors that it ended up being equivalent to one half an extra player on the field. And to the country’s fourth World Cup.
The NBA. In professional basketball, the explosion of readily available digital video has allowed for detailed tracking of how every player in the league fares against every other player, on a play-by-play "Plus/Minus" basis.
Teams like the San Antonio Spurs that most effectively harvest and use this data are able to both identify under-valued players (critical in a Salary Cap league) and empower their coaching staffs with key insights as to the best game lineups and player substitution patterns.
Building on this long-term attention to detail and metrics, last year the Spurs became the winningest team in NBA history (to go along with their five league championships in 16 years).
Major League Baseball. Baseball, with its extended season and its fundamental “One-on-One Matchups” game structure has long been the most advanced team sport when it comes to metrics driving player values, roster composition, and in-game tactics and strategies.
While its most famous proponent - Billy Beane - is rightly lauded for making his Oakland A's team a consistent contender in spite of having a player’s salary budget sometimes only one quarter that of big market competitors like the Yankees and the Dodgers, in recent years “Sabermetrics” has leaped to a whole new level of intricacy and sophistication.
Key competitive innovations run from metrics like Fielding Shifts on a pitch-by-pitch basis, lineup changes based on time of day (and even time zone!), and the statistical value of "good outs."
Now, this is where some folks say "enough is enough" and that they long for baseball as it was played and managed in the good old days, by the Tommy Lasordas and Casey Stengels of the world.
Yes – a harkening back to a simple and more “human” time.
This is a noble, but naïve, sentiment.
Because being able to work with great people and on great teams and at great places, well all of that wonderful and simpler time stuff in this year 2015 of ours can only be had via leading and managing by data…
Because doing so gets us that one magical thing that in both sports and business makes everything else possible:
Years ago I served on a funding panel with Tom Clancy. At the time, Tom was a partner at Enterprise Partners Venture Capital in San Diego.
At the time (around 2003), many venture capital firms were licking their wounds. They had funded a ton of companies during the tech bubble phase, and most of them had failed.
This led Clancy to make an important decision. He said that going forward, Enterprise Partners would wait at least six months before funding any new company they met.
The rationale was solid. During the six months, he would see what the entrepreneur was able to accomplish. If the entrepreneur accomplished the milestones set forth in their business plan, than they were deemed worthy and would receive funding. If not, they would not.
So what is the entrepreneur to do during the six months in order to get the investor to write them a check?
Obviously they need to achieve milestones... But what else?
Before I give you an answer, I want you to know how crucially important this is, not only in raising capital, but in securing key partnership and gaining key customers.
Let me give you an example of an entrepreneur who successfully used this technique in order to get a key partner. This entrepreneur’s name was Chet Holmes. And one of the key reasons that Mr. Holmes achieved success was through his partnership with marketing guru Jay Abraham.
How did Holmes get the partnership with Abraham? Like many people, he tried to reach him by phone, fax and mail. But Holmes did it every other week...
...FOR TWO YEARS!!!
Then, he finally got a call from Abraham's business manager for a lunch appointment, flew to Los Angeles for lunch, and established a very profitable partnership.
So, what's the answer to the question of how to woo investors, customers, partners, advisors, key hires, and more over six months?
Effective and persistent communications. In other words...
You must consistently, over a period of time, hammer home your message to investors, key customers and others.
What exactly does this mean? For investors, once you meet them, you should follow-up with them at least twice per month to update them on your progress. For prospective customers, you should contact them on an ongoing basis to continually give them value and convince them of the benefits of working with you. And of course, don't forget to follow-up with your existing customers.
And a key here is that this follow-up should NEVER END unless or until the costs of the follow-up clearly outweigh the benefits.
Remember that people invest in, buy from, and partner with other people. So, who would you rather work with? Someone who has been contacting you for two years with quality messages regarding why you should partner with them, buy their product or invest in them? Or someone who you just met yesterday and tells you how great they are?
The answer is clear.
Don't stop at the first contact. Choose the appropriate frequency (i.e., you don't want to be perceived as too obnoxious or pushy to potential investors), craft quality messages, achieve your milestones, and convince investors and others to work with you over time.
A venture capital firm is a financial institution that focuses on providing capital, in the form of equity, to companies who offer them the prospects of significant growth.
The partners and associates at venture capital firms are known as venture capitalists. The term "VC" or "VCs" applies to both venture capital firms and venture capitalists.
Unlike angel investors, who invest their own money, VCs are professional institutions that invest other people's money. VC firms raise capital for their own funds from sources which primarily include pension funds, financial and insurance companies, endowments and foundations, individuals and families, and corporations.
The VCs are then charged with providing a solid return on investment on this money. This is the one thing that every VC wants. By providing a solid ROI to their investors, VCs earn bonuses and raise more funds so they can stay in business.
VCs earn returns for their investors by finding high growth companies, making investments in them at favorable terms, guiding and nurturing them, and enacting a liquidity event (e.g., selling the company or having it complete an initial public offering).
Because they are utilizing other people's money, and are judged and compensated by the performance of their investments, venture capitalists are extremely rigorous in their investment decision-making process.
Importantly, VCs tend to only invest in companies with significant market potential of $50 million, $100 million or more. This is because even with all their relevant experience, the average venture capital firm will lose money on half the companies they invest in and only break even on a third.
Where VCs make their money is on the approximately 20% of companies they invest in that see explosive growth and provide remarkable returns of 10 times to 100 times or more on their investment.
Industry insiders sometimes refer to the 2:6:2 rule. This rule is that an average portfolio of ten VC investments will include two losses (e.g., companies go bankrupt), six moderately performing companies (may break-even on the investment or lose a little) and two very successful returns.
In fact, an analysis by Bygrave and Timmons of VC funding found that just 6.8% of investments returned ten times or more on the invested capital (these "home runs" are what give VCs high overall returns). Conversely over 60% of investments lost money or failed to exceed the amount of money earned if the capital had been put in an interest-bearing bank account.
The result of this analysis is that typically a venture capitalist will want to see the ability to get 10X their money back or more from investing in your company (they are seeking "home run" investments which compensate for the 60% of their investments that don't pan out) . As such, for every $1 million you are seeking from VCs, you must show them a realistic scenario where you can turn it into $10 million.
So, importantly, when approaching venture capitalists, remember 1) their primary goal is to make significant money from investing in you; and 2) you need to show them how they can earn a 10X return.
Now, if your company can potentially give VCs a 10X return, then seeking venture capital might be right for you. However, raising it is virtually impossible if you don't know what you're doing and haven't done it before. So follow this plan:
1. Develop a list of VC firms.
Start by creating a list of venture capital firms.
2. Narrow your list.
Each venture capital firm invests based on particular characteristics (e.g., some only invest in software firms), so you need to make sure your list only includes VCs that are interested in your type of venture.
3. Make sure the VC is active.
Many VC firms that have websites aren't active. That is, they aren't making new investments. You don't want to waste your time contacting and talking with these firms.
4. Find the appropriate person to contact.
This is critical. Venture capital firms are comprised of individual partners and associates. If you contact the wrong one, you'll be dead in the water.
5. Send the VC partner or associate a "teaser" email.
You don't want to send the VC a full business plan or executive summary initially. Rather, you need to send them a "teaser" email to see if they are interested. You don't want to "over shop" your deal.
Once the VC "bites" on your teaser email, the next step is generally to send them your business plan. Following that you'll do an in-person presentation(s), receive and negotiate a term sheet, and then sign a formal agreement and receive your funding check.
The process is a lot of work, but once you receive their multi-million check with which you can dramatically grow your company, you'll agree it's worth the effort.
Suggested Resource: In Venture Capital Pitch Formula, you'll learn exactly how to find and contact venture capitalists, exactly what information to include in your presentations, and how to secure your financing. This video explains more.
Dave Allen, author of the great productivity best seller "Getting Things Done," has developed an almost cult-like following for his ideas, structures, and best practices around to-do list management, prioritization, and metrics and schematics that define what an effective and productive day should be.
Without question, there are great benefits to his methods, and I especially like his best practice of always ending a meeting, conversation, or work on an open-ended project with the simple question of "What is the Next Action?"
This discipline alone can greatly improve daily and meeting productivity, and perhaps more importantly reduce that sometimes suffocating sense of anxiety common to knowledge and entrepreneurial work that there is always way more that must be done than there are hours in the day.
But a focus on simple to do list management is far from sufficient.
You see, the dirty little secret that all of the self-help masters, all of the highly paid management consultants fail to tell you is that in our incredibly fast-moving, changing, competition from everywhere modern economy it is virtually impossible to design a plan or strategy that is in any way close to being assured of success.
The reason why is simple. Plans and strategies, by their nature, are speculative and assumptive.
They require the planner to survey the current market and competitive landscape along with assessing the current strengths and assets of their enterprise.
And then, from those assessments, forecast how a course of specific decisions or investments will be received by the market, by current or perspective customers, and responded to by the competition.
When stated this way, it becomes obvious that there is a very high likelihood that a plan as designed will not work.
It really doesn't matter if that plan is to introduce a new product or service offering, a new marketing or advertising campaign, a website re-launch, or an internal re-organization.
So, does this mean that planning is worthless? Of course not!
But it does point to a pair of strategic best practices:
1. Before commencing any planning process, first reflect deeply and document extensively what is working now.
These could be the practices and habits of a top sales person, a pay-per-click advertising campaign with positive ROI, an invoice collections best practice, a particularly profitable partner or affiliate.
Now to do more of these things that work, productivity and accountability best practices as outlined by the Dave Allens of the world are incredibly valuable and should be incorporated aggressively into the daily work habits and disciplines of the modern professional.
2. But for everything else that falls outside of this realm, the right mindset is one of testing and exploration, of brainstorming, of speculation and possibility. Of open-ended questions.
AND it should be noted extremely well that it is usually in this mode that the big outlier, “black swan” ideas and strategies and relationships are usually discovered.
As for the question as to how much of #1, or playing more of the existing game better, we should do, versus #2, playing a new game…
…well that is a decision that the best managers, the best consultants and the most renowned self-help masters are paid a lot of money to answer.
My answer is - no surprise here if you've ever met me at a party - is to have my cake and eat it too!
Schedule time for to-dos and accountabilities to accomplish more of the stuff that you know works and leave plenty of open space to step out of the safe harbor and into the big sea and dream!
And when you balance doing and dreaming like this - and sprinkle in a little luck, you will very soon find yourself every day getting more of the Right Things Done.
How do the best dealmakers and investors make go / no decisions? How do they handicap the probability of a company or project’s return projections actually coming to pass?
And once they do, how do they determine fair terms and pricing upon which to do a deal?
It is upon these “Due Diligence” matters where the real - as opposed to the theoretical - money on deals is made.
Now, due diligence - as it is done by serious, professional dealmakers and investors - is an enormous undertaking.
It often requires hundreds and sometimes thousands of hours of accounting, legal and background reviews and checks, along with third party validation and research as to claims regarding market opportunity, competitive landscape and customer pipeline, traction, and satisfaction.
It can be as time and energy intense as any business process or project one could possibly imagine.
And because it is so, for those without very significant analytical resources and expertise, it is often also unrealistic to do it thoroughly and right.
Luckily, there are some shortcuts that can yield impressive similar insight and results.
I call them the “Who, Why, and When” 15 minute Modern Due Diligence Checklist.
Who. Easily the most important question to ask of any endeavor of importance: Who is involved? What are their personal and professional histories and backgrounds? Of leadership, business, investment and life success? Who are the professional partners (Law, Accounting, Banking, etc.)? Who is on the Board? (Is there a Board at all)? Who are the Customers? The Partners? The Employees?
When it comes to whether a deal is good or not, the answers to these “Who” questions is as often as not all you need to know.
Why. Why is a deal happening? Why are who are involved in fact…involved? Why is the deal being offered to you? Start with Why.
When. The old adage that “Time kills all deals” is also a great harbinger into the likelihood of a successful investment outcome.
How long has the deal been shopped? How urgent/desperate are those involved to get the deal done?
Now, these question cuts both ways. I as much want to see principals that need to get a deal get done versus those that perhaps just want it to be so.
Need, in its best sense, drives urgency and action.
Want is often lighter, less substantial, and thus more prone to delays and “almosts” versus results and return.
Who. Why. When.
Mediocre answers to any of these and almost certainly the deal is not right.
But as they are all spot on, well then the next question to ask is often “What are you waiting for?”
As any venture capitalist worth his salt will tell you, there is a chasm of difference between the mostly grounded-in-reality financial forecasts offered by public companies, and the almost never to come true "rosy scenario" projections offered as a matter of course by startups and small businesses.
And while large public company CEOs and CFOs are judged as a matter of the highest honor on their ability to deliver on projections, exceedingly rare is the entrepreneurial executive that comes anywhere close to meeting forecasted results.
For a sense of the extent of how bad this problem is, a partner I know at a prominent venture capital firm estimates that of the 30+ companies that his firm has invested in, only two have consistently met or exceeded their financial projections.
And let me add that it isn’t like the inmates are running the asylum at my friend’s fund - as a prerequisite of having them as an investor, each of their portfolio company CEOs are required to undertake and report on a vigorous, quarterly budgeting and forecasting cycle.
And also let’s not assume that my friend is just a lousy investor. Lack of consistent financial performance is pretty much par for the course for startups and small businesses.
So what is going on?
Are the entrepreneurs just not ready for prime time? Are their managerial skill levels that many levels below their big company brethren?
I’ll say this - it is certainly not for lack of trying.
Most small technology company executives work longer hours than businesspeople have at any time in history.
If you doubt this, pick up Ron Chernow’s masterful biography of John Rockefeller.
In it, we read enviously of Mr. Rockefeller's daily 9:15am visits to his barber, his afternoon naps, and his unwavering commitment to always leave the office each day, no matter the season, so he could be home before dark.
And it is not for a lack of know how.
Modern entrepreneurs - with their always-on, “click of a button” best practice knowledge and connections base - are a better informed and more globally networked lot than at any time in history.
So if they aren’t the problem, is it modern business itself?
Has it just become - with all of its technological bells and whistles, all its globalization and pricing pressures, all of its customer unpredictability and fickleness - just too unwieldy a beast for any small company to ever consistently ride?
And concurrently, has accurate financial forecasting become equivalent to throwing dice?
Or more disturbingly - is it not even worth doing as even when they do turn out to be accurate it just falls into the category of the blind mouse getting some cheese every now and then?
For better or for worse, modern business demands that we take a more “Balanced Scorecard” approach in judging managerial effectiveness and entrepreneurial progress.
Factors like intellectual property development speed, organizational design, and client satisfaction as measured by a companies’ Net Promoter Score are proving to be just as important predictors of a business’ value creation as is its forecasted-to-plan accuracy.
Please let me clear: On their own these factors do NOT make a business valuable.
Rather, the right matrix of them, properly prioritized, IS highly correlated with businesses that attain high profit exit and investment outcomes.
As an added bonus, these non-financial key performance indicators (KPIs) can be designed to be far more consistently predictable than traditional projections.
As such, they are usually far better measures of executive effectiveness than budgeting and forecasting “gap analysis.”
You just have to have the guts to forget about the numbers for a quarter or two.
Or, if you are really get good at defining, tracking, and accomplishing the right non-financial KPIs, to forget about them permanently as they will just take care of themselves.
To Your Success,