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 be 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.
Now wouldn’t that be nice.
To Your Success,