Budgeting Best Practices

Ahh December.  Between closing out the year, performance reviews, holiday parties and family activities, it is always a crazy time of the year.  And to top it all off, for most of our portfolio companies it also happens to be the time when annual budgets are prepared and presented to the Board for approval.  Having been through several such sessions in the last couple of days, I thought it would be worth sharing some of the best practices I have seen across our portfolio.

  1. Start early, but not too early.  In large companies, the budgeting process often starts in early October.  For earlier stage companies where much is in flux, this obviously does not work.  Conversely, starting the internal process in early December does not work either.  The best approach I have seen is to develop a high level forecast for the upcoming year in November and present that to the board for general reactions before refining and honing for final approval in late December.
  2. Use the budgeting process to drive alignment across your organization.  While it is easy to look at budgeting purely as a financial exercise, the most important part of the process is using the financial plan as a way to represent the organization's goals and priorities and to use the planning process to drive alignment across the company on these issues.
  3. Shoot for a confidence level of 80%.  There is always a debate in budgeting as to whether the plan should represent a stretch goal or something that is easily achievable.  While the stretch goal approach is often initially appealing under the theory that if you don't plan for greatness it may not happen, my experience has been that companies that have a history of hitting budget, tend over the long run to have more success.  While this is not necessarily a causal relationship, consistently hitting plans has a way of improving morale and developing a more accountable organization.  Conversely, letting the pendulum swing to far to "sandbagging" does indeed have the effect of not letting the dreams be realized, so in the end a plan that is a mixture of both and has a 70-80% confidence factor feels like the best middle ground.
  4. Explicitly identify upside opportunities.  Related to a plan that is 80% likely of being achieved, i think it is critical in the budgeting process to explicitly identify upside opportunities that could change the company's trajectory and what actions are being take to see some of these to fruition.
  5. Use a trigger based plan if you are operating in a highly dynamic environment.  For really early stage companies, or companies that are operating is a state of great flux, clearly identifying triggers that will move the company from the current plan to a new plan is a good way to ensure alignment.  For example, if you are running a company with an inside sales model, saying when leads reach a level of X or qualified opportunities of Y that will trigger hiring several more sales reps.  this allows you to this aggressively, but also realistically relative to resource constraints.

Finally, after all of this, remember your goal its blow through your objectives such that by mid-year it is back to the drawing board!


VCs and Recruiting

There is an old expression in the Venture Capital business, coined initially I believe by John Doerr, that VCs are really just glorified recruiters.  Given a number of portfolio company searches I have been involved with over the past few months, this is definitely feeling like the case.  

So while I think the entrepreneurs in our portfolio companies do the real leg work in recruiting, and being an excellent recruiter and team builder is a key skill of the executives we back, there are a few important contributions a strong venture capitalist can bring to an executive search at a portfolio company:

  1. A broader context.  If a founder of a company is looking, for example, to recruit a VP of Sales, depending on what they have done before this could be their first time doing so.  An experienced venture board member, on the other hand, might have helped recruit dozens of such executives which provides a broader context in which to assess the executive's skills and fit with the given company.
  2. An extended network from which to surface candidates.  This can result in the VC surfacing up a specific candidate, or knowing enough people who themselves can surface up candidates.
  3. An ability to more deeply reference check a given candidate.  As anyone who has recruited executives knows, reference checking the candidate's background is critical to understanding their skills and fit.  But being able to do so "off-list" is even more important as the key to references is not speaking to the people the candidate provides, but rather understanding who, and speaking with, the references they don't provide.  By the nature of having been involved with many companies over the years, a good VC will often be able to get to these off-list references more readily than the executive team.
  4. An ability to help provide a candidate a third party perspective on the business and why it may represent a good fit for the candidate.  Talented folks will always have other choices and the best candidates will want to do significant diligence on the opportunity.  While not completely unbiased, a venture investor can often provide this perspective and share diligence on what led to their investment decision.
  5. An ability to keep executive search firms honest.  Search firms, while often an important part of a successful recruiting process, need to be managed to avoid them slacking off at the end of a long search or promoting candidates to finish the search regardless of whether the particular candidate is a good fit.  A recruiter is less likely to do this with the involvement of a venture firm given that the venture firm often represents a long-standing relationship and a steady stream of referrals.

So if you are an entrepreneur looking to build out your team, put your venture board members to work!