How to Ruin Your Company with One Bad Process. “Real quick, whole squad on that real sh*t0 to 100, n***a, real quick”—Drake, "0 to 100/The Catch Up"For the audio version of this post click here. Drake - 0 To 100 / The Catch Up | Listen for free at bop.fm I am a giant advocate for technical founders running their own companies, but one consistent way that technical founders deeply harm their businesses is by screwing up the budgeting process. Yes, the budgeting process. How ridiculous is that? How does it happen and why is it particularly problematic for engineers? I'll begin by describing how I screwed it up in my company.
Here’s the basic process: Set goals that will enable us to growBreak the goals down so that there is clear ownership and accountability for each goal by a specific teamRefine goals into measurable targetsFigure out how many new people are required to hit the targetsEstimate the cost of the effortBenchmark against the industryMake global optimizationsExecute. Startup Best Practices #7: How to Use Andy Grove's Stagger Chart to Build Predictability into a Startup. Predictability is sexy. Startups that have tuned their growth engines well enough to accurately forecast their growth, presuming these growth rates are attractive, will command much higher valuations in the market, simply because there is less risk in the company. As a result, investors prize these companies disproportionately. The challenge with predictability is predictability isn't an end state. A business doesn't become predictable one day and remain in that state in perpetuity. Rather, predictability is a discipline that must be practiced by managers and management teams within startups.
Further complicating things, predictability is a product of many different teams' efforts. As Peter Drucker said, "you can't manage what you can't measure. " Andy Grove, the former President of Intel, and author of one of my favorite management books, wrote about a technique for measuring predictability in his book, High Output Management, called the Stagger Chart. Burn Rates: How Much? In the comments to last week's Burn Rate post, I was asked to share some burn rates from our portfolio. I can't do that. But an alternative suggestion was to write a post suggesting some reasonable burn rates at different stages. I can do that and so that's the topic of today's post. The following applies to software based businesses, and most particularly web and mobile software businesses. Building Product Stage – I would strongly recommend keeping the monthly burn below $50k per month at this stage.
Building Usage Stage – I would recommend keeping the monthly burn below $100k per month at this stage. Building The Business Stage – This is when you've determined that your product market fit has been obtained and you now want to build a business around the product or service. A good rule of thumb is multiply the number of people on the team by $10k to get the monthly burn. Once you get the business profitable, you can scale the team larger and larger to meet the needs of the business. Projections, Budgeting and Forecasting.
MBA Mondays is starting a new topic this week. It's a big one and I think we'll end up doing at least four and maybe even five posts on this topic in the coming weeks. I said the following in one of my first MBA Mondays posts: companies are worth the "present value" of "future cash flows" The point being that the past doesn't matter too much when it comes to valuing companies. There is another big reason why projections matter. And finally, projections matter because they tell you what your financing needs are. There are three important kinds of projections. 1) Projections – These are a set of numbers, both financial and operational, that you make about your business for various purposes, including raising capital. 2) Budgets – These are a set of numbers, both financial and operational, that the management team prepares each year, usually in the fall, that outline what the company plans to achieve in the coming year.
I've been working with Return Path for ten years now. Scenarios. In last week's MBA Mondays, I introduced the topic that we'll be focused on for the next month or so; projections, budgeting, and forecasting. In that post, I described projecting as a "what if" exercise that is done at a higher level of abstraction than the budgeting and forecasting exercises. I said this about projections: These are a set of numbers, both financial and operational, that you make about your business for various purposes, including raising capital. They are aspirational and are often done with a "what could be" perspective. Since projections are not budgets and are much more "big picture" exercises, it is important to use a scenario driven approach to them.
If you build your projections with a detailed set of assumptions and if you can assign probabilities to each assumption, you could easily do a monte carlo simulation in which literally thousands, or tens of thousands, of scenarios are run and the outcomes are charted on a bell curve. Let's get specific here. Budgeting In A Growing Company. I failed to post a MBA Mondays post last monday. Sorry about that. I had something else on my mind when I woke up, wrote about that, and didn't realize that it was monday and I was supposed to do an MBA Mondays post until late in the afternoon. So we are now picking up from where we left off two weeks ago. Which is in the middle of a four to six post series on projections, budgeting, and forecasting.
We covered budgeting in a small company two weeks ago. Once you have real revenues, 50+ employees, and a real business, you should have a full time finance person on your team. So your budgeting process should start with your lead finance person. There are three inputs to the budgeting process in a company of this size; a detailed revenue plan/model, a comprehensive cost model including headcount, and a set of key performance indicators (KPIs).
Then once you have a set of revenue numbers, lay out all the KPIs that it will take to hit them. And make sure to budget for capex costs. Budgeting In A Large Company. Last week we talked about budgeting in a growing company. I defined that as a company between 50 and 100 employees. Today we are going to wrap up the budgeting series by talking about what happens to the process when you get to be a "big company. " The context for the whole of this MBA Mondays series of posts is the world of entrepreneurial startups so "big company" means 150 employees or more to me. The biggest companies that I actively work with are between 150 employees and 1000 employees. Once they get bigger than that, they are beyond my ability to comprehend them and help them. The process of budgeting in a large company doesn't differ that much from a growing company.
The budgeting process is still led by the financial leader of the company (VP Finance or CFO but by this stage you are likely to have a CFO) and the CEO. Cost budgeting in a large company is a much more exhaustive process. The budgeting process is really critical in a large company. Forecasting. This is the final post in a long MBA Mondays series on projections, budgets, and forecasts. Today we will talk about what happens when reality starts to differ from what you've budgeted – you re-forecast. Let's go back to the framework I laid out at the start of this series. Projections are long-term high level efforts to establish the scope of the opportunity. Budgets are an effort to establish an operating framework for the coming year.
And forecasts are done intra-year to establish what is likely to happen. As someone said in the comments, it's "long term, short term, and real-time. " Forecasts are typically done mid-year but they can and should be done whenever the actual performance differs significantly from what was budgeted. Forecasts are important for a variety of reasons but first and foremost you want to know where your cash balances will actually be.
The process of doing a forecast is not very hard. As you get into the fall, you will start budgeting for the next year. Financial planning for startups. Over lunch last week, I asked a Redpoint entrepreneur, who had recently sold his company, how his board could have been more helpful to him. His answer surprised me. He wished the company had built a financial/operational plan sooner. Building an financial plan is challenging and it is often perceived as a waste of time because the plan can be so inaccurate. Lots of entrepreneurs tell me their plans are just WAGs - wild assed guesses. And to some degree they are. But, in the words of this entrepreneur, financial planning helped him sleep better at night - even if the plan was a guess. Reverse engineer the next round - For most of the life of a startup, the company is targeting a subsequent round of financing and working towards a milestone to underpin the financing.
The financial plan may never be accurate. Balancing predictability and ambition in startups. Last week I wrote about the importance of a financial plan for startups at every stage. It’s a challenge to balance the predictability the board requests and the ambition the company wants. Often, as startups grow, they adopt two plans: a board plan and a company plan. By creating two plans and presenting each to the right audience, founders can communicate and motivate their teams effectively.
The board plan is the more conservative of the two. Typically, the founding/management team has a high degree of confidence in the board plan, something like 90% confidence. The board plan’s audience is the board. It’s often viewed as the commitment the management team makes to the board, so it can be used as a framework for evaluating the team’s performance at quarter or year end. The company plan is the stretch plan, a 70% confidence plan.
In practice, having two plans instead of one or none at all may seem like an additional complication. End of the year startup checklist. I call the last working week in December Board Week because it’s packed with board meetings. These board meetings are often the most important of the year. By virtue of their place on the calendar, everyone in the room is thinking more strategically, less tactically. These meetings set the tone and strategy for the company for the upcoming year. I’ve assembled a checklist below of top 5 things I’ve seen founders do in and around the end of the year that position their companies for success in the next year. An annual post-mortem. For startups, founders and VCs, the end of the year is a good time for introspection, evaluation and communication. Building financial plans - tops down or bottoms up?