Friday, April 07, 2006


Start-ups are by definition young, in constant motion, and experiencing massive change. The start-up environment and pressure to attract capital, talent, customers, and partners makes it challenging to take the time to plan carefully and wisely. I often notice post Series A close a sense of chaos amidst the hope and a need to quickly triangulate on key metrics to manage to and to report against.

Data-driven start-up management appears to be an oxymoron - there is by definition little data and hardly any trending possible. Despite the rapid changes, founders should move to quickly put in place templates, reports, and best-practices to manage with in order to reduce risk in the plan and unwise capital consumption.

Data can quickly overwhelm young companies and the real skill in management is to identify the key variables that drive value and progress. Every company is unique, however, a few useful first steps follow:

  • Develop an operating plan
    • I suggest the team develop, in concert with the BOD, a 18-36 month operating plan
    • At a high level, the operating plan defines the business model - what drives bookings, revenues, margins, headcount, and cash...
    • Develop a linked monthly income statement, cash flow, and balance sheet model that specifies, among other variables:
      • Key assumptions regarding bookings, revenue recognition, gross margin, op ex by department, headcount hires and cost per hire, rent, benefits, T&E, IT costs, programmatic marketing spending, cash, accounts receivable, payables, deferred revenue, capital expenditures, etc
  • Develop a compensation and incentive plan
    • Incentives drive behavior. Accordingly, it is important for young companies to think through sales compensation plans that drive desired results.
    • Similarly, senior management's compensation can be tied to critical corporate objectives, such as revenue, operating income, and period ending cash.
  • Develop an option budget that maps to the hires forecast in the operating plan
    • Post funding, start-ups typically reserve an unallocated option pool of ~20%.
    • Based on the hires in the operating plan, it is prudent to develop an option pool budget that allocates appropriate levels of budget grants to the forecast hires.
    • A cardinal sin is to blow through the option budget with key hires still TBD
  • Develop a reporting template
    • Data can overwhelm and distract. Accordingly, develop a one page tear sheet that summarizes the key financial performance indicators
    • A dashboard that compares actuals, for a given reporting period, to the operating plan (this is typically called variance analysis) along:
      • customer orders/bookings, average sales price, revenue, gross margin, op ex by department, operating income, total spending (net income plus capex), cash, accounts receivable, days sales outstanding, accounts payable, deferred revenue, and headcount
  • Develop a pipeline and forecasting methodology
    • Pick a sales forecasting methodology and build a sales pipeline that drives a forecast
  • Develop a sales rep performance review template
    • List sales reps, territories, months with the company, current quarter actual bookings per rep, year to date bookings per rep, current quarter quota per rep, total annual quota per rep and for whole team, and percentage of actual bookings to total quota for the given reporting period
    • Detail rep analysis helps to understand ramp times (how quickly a rep becomes effective), which reps are performing (which begs the question why), and which reps are not performing

While this list may be exhausting, it is by no means exhaustive and I am sure people can easily add to the list. If the team lacks the financial, planning, and analysis skills required to build the models and reports, one axiom of venture capital is that hiring a part-time CFO or FP&A analysis is rarely a bad investment. Rather, taking the time to build the right plans and reporting packages can save significant capital and help keep the team and BOD focused on the material strategy issues rather than using the BOD meeting attempting to discern the financial state of the business and if management is watching the store.

1 comment:

  1. Hi Will, This is a great, informative post. Thanks very much for taking the time to put it together. Regards, Jonathan.