This is one post/chapter in a serialized book called Startup 101. For the introduction and table of contents, please click here.
The language of business is numbers, not concepts. All kinds of numbers exist, profit being the most obvious. Some are forward-looking: proxies and drivers of revenue and profit. As CEO, you will be held accountable for "hitting your numbers." If you hit them, your life will be easy and your business valuable. If you don't, expect the opposite. It's that simple.
You have to hit your numbers. But how do you do that?
Six Tips to Help You Hit Your Numbers
Avoid Hockey Stick-Like Projections in Your Early Planning
VCs expect to get to $X million in revenue within Y years. So, do you have to build a plan that meets those expectations? If your end goal is raising money, yes. If your end goal is building a great business, no. Those hockey stick-like projections (i.e. revenue that suddenly spikes) will haunt you for a long time and ruin your credibility with investors.
The reality is that forecasting anything is really, really hard. There are multiple layers of uncertainty:
Layer 1: an existing product in an existing market. This is what mature, established companies do. You forecast based on known customers already working with your product. External conditions, such as a recession, can have an impact, but most managers know how to model and manage this. Competitor moves can have an impact, but that is also part of the basic "blocking and tackling" of business.
Layer 2: a new product in an existing market. You need to plan for minor variations in customer behavior. You can do a lot of research and testing to validate your assumptions.
Layer 3: launching an existing product in a new market. You don't know what the market's behavior will be, so you have more uncertainty.
Layer 4: launching a new product in a new market by an unknown company, but a company with a conventional value proposition.
Layer 5: a disruptive proposition that creates a new market or totally changes the economics of an existing market. This is what new ventures do. At this level, almost any planning assumptions are deeply flawed.
This is a hugely uncertain environment for forecasting. That is why a common rule of investors is, "Invest in teams first, markets second, and ideas third," the assumption being that in the right market (i.e. one that has a lot of growth), a good team can make mistakes, regroup, and try again.
In this environment, you need to build relationships with investors that enable you to build plans over time that you can realistically fulfill. This means:
- Being totally transparent about what you know and what you are guessing. It is okay to guess: you often need working assumptions. Just make sure that everyone knows it is a guess, merely a working hypothesis.
- Find and work with the experts who understand your market's behavior. Work with people who understand how to hit numbers. Involve them deeply in the planning process. Good investors will help you find these people.
- Build a model, one that includes all assumptions as variables. When assumptions change, and they will, re-forecasting will be easy.
Deeply Understand the Numbers That Matter to Your Business
Obsess about forward-looking metrics, and record backward-looking metrics. Mature, established companies record revenues, profits, and other financial data on a quarterly basis. If a CEO or investor works only with these, they are driving with their eyes in the rear-view mirror; in other words, dangerously. Of course, you have to record your finances, but that is easy. Any competent bean counter can do that for you.
The numbers that really matter are the predictors of your future financial results. These are the metrics you have some control over. These are the metrics around which you can align everyone in your company.
For example, for a website service that monetizes through advertising, forward-looking metrics would be things like page views, unique visitors, time spent on site, and click-through rates on ads. Find the levers that drive those metrics, and then you will be able to predict your revenue with some accuracy.
You need to deeply understand these forward-looking numbers and obsess about them.
Another term for this is key performance indicators (KPIs).
Hire people who have a track record of hitting their numbers
This is totally obvious advice, yet often overlooked.
Align Everyone in Your Company Around These Numbers
Once you really understand your KPIs, you can build these into how everyone -- yes, everyone -- in the company is evaluated. Daily, weekly, and monthly numbers should be available on online dashboards. Make these numbers visible to everyone internally. This moves you towards the hallmark of a high-performance culture, which is:
No Excuses. No Blame.
This means that no one can say, "I couldn't do X because Y was not available!" If Y is critical, it must be a KPI, and someone must be responsible for it. If all of these are transparent, you avoid the toxic personality- and politics-driven culture that destroys companies. You create internal peer pressure. If someone is not performing, everyone on your team will want them to shape up, and if that does not happen, they will want that person fired.
Sandbag Your Investors
This means keeping something in reserve. If your team says it can achieve X, divide that by a certain percentage. Once your team has shown that it can hit its numbers, lower the percentage that you use as contingency.
Investors expect and like this. They don't like bad surprises.
Re-Plan Transparently When Needed
Stuff happens. You and your team could screw up. Or you could be blind-sided by a market change. But know the difference between these two, because the cause will point to the remedy. Own up to it quickly, do a deep-dive analysis to come up with a new plan, and then hit those numbers.
This prevents the gradual erosion of your credibility and your investor's confidence in you as your numbers decline.
(Photo credit: psmithy.)