Keeping Score: Secrets To Helping Your Portfolio Companies Grow
Most angels and investors are quite comfortable using metrics to measure return on investment, or rebalance their portfolios. By the same token, angels need to teach the CEOs of their portfolio companies to use metrics to measure whether their companies are achieving their growth goals.
Entrepreneurs seldom ask their angels which metrics to use or how often to measure. They would rather work on the product or meet with customers than take the time to measure and report progress. But measuring is one of the disciplines CEOs need to develop as they grow their companies.
Dr. Jana Matthews is an expert on this topic. ANZ Chair in Business Growth, Matthews is Professor and Director of the Centre for Business Growth at the University of South Australia’s Business School. US-born Matthews is a global thought leader, speaker, writer, and growth consultant who teaches founders and CEOs all over the world the secrets to unlocking growth potential. Matthews says, “Every angel wants to invest in a winner, and teaching entrepreneurs what to measure and how to keep score is one way to increase the probability of success.”
Her programs helped the first group of companies grow revenues by an average of 24 percent and profitability by 29 percent in nine months. “It’s very important that both the CEO and investor agree on how they are going to measure the health and growth of the company, then do regular measurements and course corrections,” she notes.
An Angel Approach To Setting up Startup Metrics
The first step is for the angel investor to talk with the company leaders about why it’s important to measure and which metrics are important to track in their company. Remind them that you are not just a financial investor; you, like them, want the company to grow and be successful. The reason they should collect and report on the data is because it’s critically important for them – not just you – to know how things are going, with enough time to make changes and mid-course corrections if things are not going as planned. Work with the entrepreneur to help him or her understand what metrics to use to construct an accurate picture of company performance, and then ask why things are working or not working, and where changes are needed in order to get the outcomes you both want. Interestingly, Matthews has found that once this conversation takes place and a dashboard is created, fear of being measured is replaced by excitement about achieving or beating the numbers.
Angels can influence company performance by simply asking the right questions. One of the roles that angels play is to hold the CEO and team accountable for achieving the stated goals and help them think through changes that will enable the company to build value. Matthews says this is key because “The questions angels ask can re-shape how the CEO thinks about the business. Putting in the systems that enable CEOs to answer those questions also helps build the muscle of execution.”
Later this month Matthews will lead a webinar for angels and entrepreneurs on metrics and measures for growth companies. In the meantime, she suggests angels begin with a simple dashboard of four metrics for each company you mentor or invest in:
- Revenue, month-on-month: Increasing revenue indicates that customers want what the startup is selling. If customers are buying more, ask why; if customers are not buying – or are not buying as often or as much as expected, ask why. Graph the data for the past 12 months.
- Profitability, month-on-month: Although it’s important to understand how many products or services you are selling, it’s even more important to know if you’re selling enough, at the right price, to cover all your costs and generate a profit. If not, you need to think hard whether to reduce costs, increase the price, or sell more?
- Most important customers: Often a small number of customers (15 – 20%) generate a large share (75 – 80%) of a company’s revenue. So it’s important to identify who those customers are and service them accordingly. Sometimes it pays to fire customers. One company did that and made twice as much profit on one-third fewer customers. They first listed customers in order of revenue, then profitability, then identified those who were strategically important, and finally those with whom they enjoyed working. When they found they had several pages of customers who were actually costing them money, they analyzed the 12 customers who were “most important,” and figured out how to find more customers like them.
- 6-month sales pipeline: Technology entrepreneurs are often more comfortable with product development than selling, but angels need to help all CEOs get focused on marketing and sales. Matthews recommends asking the CEO questions that will help them qualify prospects, clarify the decision-making process, determine how much budget is available, and when it needs to be spent. If the pipeline does not contain enough prospects, or if the prospects won’t be able to purchase anything this year, you still have time to develop new sales strategies and find new prospects.
Once you’ve helped the CEO to develop a basic dashboard, over time you can add other metrics that you both agree are useful, such as:
- Sales cycle: How much time does it take to close a sale?
- Inventory management: Where do we have excess inventory and why?
- Customer stickiness: Do we have recurring sales, or all they all “one-offs?”
- Cash flow: How fast is the company burning cash? Aging receivables? Payables?
Angels play an important role in guiding startups to success. Begin your meetings or calls by asking the CEO to use the dashboard, summarize results, then explain why they achieved those results and what changes are needed in the future. Sometimes minor changes (1 or 2 percent), overtime, can compound into significant changes. So implement, measure, modify as needed, measure, and don’t forget to celebrate your successes.
This article was first published by Forbes and was written by Marianne Hudson.
"I am an angel investor and Executive Director of the Angel Capital Association (ACA), the world’s leading professional association for angel investors. ACA is focused on fuelling the success of accredited angel investors who support high-growth, early-stage ventures, and has more than 12,000 member angels across North America. I know one thing for sure: there is a method to the madness. In shaping ACA professional development programs and public policy advocacy, I have the opportunity to hear firsthand from experienced angels and the ecosystem at large—what works, what doesn’t work, and strategies to consider for everything from getting started as an investor, to finding great deals, to supporting the companies you invest in to growth and exit. I know about trends and impacts of angels and innovative startups too. Earlier in my career I ran the angel initiative at the Kauffman Foundation, which led to ACA and the Angel Resource Institute, and where I also oversaw entrepreneurial education and mentoring progra designed to ensure that more entrepreneurs develop sustainable, innovative businesses. I love entrepreneurship and have worked in supporting fields for more years than I will admit. I am a member of two angel groups in Kansas City and also connect with several accredited platforms."