Seven words that changed the world: “make a plan that you can beat.”
This pithy piece of wisdom was first passed onto me by the sage of Sequoia Capital, Mike Moritz, on the first day of my six-year journey at MarkLogic, during which time we grew the company from effectively zero to $80M. Thanks to Mike’s advice, we made plan in about 90% of those 24 quarters.
What’s so important about making a plan that you can beat?
- For starters, it helps keep you employed. Few CEOs get axed when they are making plan. (It can be done, but takes real skill at board alienation.)
- It forces you to make a balanced plan: sufficiently realistic and sufficiently aggressive. (“Can beat” means neither “will certainly beat” nor “can achieve if a miracle occurs.”)
- It means you can predictably manage your cash – the oxygen of any startup. As another quotable Sequoia partner, Don Valentine, used to say: “all companies go out of business for the same reason; they run out of money.”
- It forces you to debate important issues up front. To the extent the board wants 80% growth next year and you believe that you can only deliver 30%, it is far better to have that uncomfortable conversation during the planning process in November (while you are still achieving this year’s plan) than in July, after you’ve missed Q1 and Q2. (In July, the uncomfortable conversation is more likely to be about your severance package than the aggressiveness of the approved plan.)
- It says that you are in control of your business. Whether or not the board loves the plan the eventually approve, the first step in running any business is to be in control of it. That means being able to predict with reasonable accuracy the results you can achieve.
- It reduces the tendency to sign up for too much bookings/revenue to “get” more expense. Often managers somewhat arbitrarily decide what expenses they need to be successful, anchor emotionally to that number, and then get “talked up” on the bookings/revenue side in order to hit a given cash flow or EBITDA goal. This is exactly backwards. You should put a huge amount of energy into your bookings/revenue plan and work from that to set expense targets. If you can’t find a workable solution, then argue you have the wrong EBITDA or cashflow goal. Don’t get talked up on revenue because it’s unpleasant to ask your passionate and anchor-biased managers to cut expenses.
- It is philosophically aligned with most executive compensation plans. Most boards like gated compensation plans where, for example, executives get 0% of their target bonus up to 80% of plan performance (the “gate”), payout 50% of target at 80% of plan, go linearly to 100% payout at 100% of plan, and then have accelerators beyond that. These plans reward above-plan performance and severely punish below-plan performance. As such, any executive who looks at his/her compensation plan should understand the not-so-subtle message it sends: beat plan [1] (which is, of course, most easily achieved by making a plan that you can beat).
- You can always speed up later. If you’re ahead of plan after Q1 and your leading indicators look solid for Q2, no board on Earth will not approve a revision to the plan that accelerates growth. Think of your plan growth rate not as what you aspire to achieve, but rather as what you are willing to be fired for not achieving. It takes real skill to grow a company at 100% and get fired for missing plan, but I’ve seen that done, too [2].
Some of you may be thinking: isn’t this all a fancy of way of saying “sandbag” [3]. I think not. Even if you reject every other argument above, you cannot deny that cash is oxygen to startups, that startups that run out of cash get crushed by dilution when they need to raise money when running on fumes, and thus making a plan that you can beat is critical to managing cash, and indirectly, to the eventual value of company’s common stock.
Make a plan that you can beat. Seven words to understand. Seven words to internalize. Seven words to live by.
# # #
Footnotes
[1] Whether boards should like this style of compensation plan is debatable because they arguably do not incent risk-taking. That debate aside, the fact remains that most board do like this style of plan so managers should listen to the message that is very clearly sent.
[2] The real way to know if 100% is good enough should be to look at the market. If you’re gaining share when growing 100% but missing plan of 120% then in my book you are planning poorly, but executing well. However, if you are losing share when growing at 100%, you are in a hot market but not executing aggressively enough to win it. Performance measures should always be normalized to the market, otherwise target-setting and plan-performance ratings are more about negotiating skills than actual performance in the market. (I’ve seen this one done wrong many times, too.)
[3] Aside: I believe there are two different types of sandbagging: (1) consistently under-forecasting – i.e., landing at a result significantly higher than you forecast early in the quarter, and (2) consistently overachieving plan – i.e., landing well above operating plan targets. Type 1 is bad because it leads to either to needlessly cutting quarterly expenses in response to a weak early-quarter forecast (if you believe it) or simply ignoring the forecast (if you don’t) – in which case what good is it? Type 2 means either the company is performing tremendously or they are too good at negotiating targets. Looking at whether you’re gaining or losing market share (or grabbing a greenfield opportunity fast enough) will tell you which.