I saw that on a t-shirt worn by a bartender at the Milwaukee Irish Fest last night. I have no idea why. But I liked it and it got me thinking about entrepreneurs and investors. Who is responsible when investors encourage entrepreneurs to "manage" the data?
If my process of reviewing a business plan helps the entrepreneur to align the performance plan with my growth expectations and then to base the plan on a "reasonable" set of assumptions that subsequently prove to be optimistic, who is to blame? Said another way, how do we both avoid doing this again?
Can you think of the whole process of due diligence not primarily as a verification of high growth process but perhaps as a joint learning activity? Do we as investors owe an entrepreneur not only our courtesy and respect but also our active participation in the mutual discovery process about assumptions, markets, and so forth?
As the venture progresses from financing to revenue (whether financed by an investor or the entrepreneur) that first big, critical issue has to be the first miss on projections. Will it happen? Yes.
If the venture leaders keep rolling forward on the projection, without really determining what is going on, they have begun a process of convincingly telling themselves and their constituents that the projection and forecasting process is unimportant. Risk at this point increases - a lot.
So, I believe that the diligence process is really about learning together and developing not only projections that are reasonable, but also a way to stress test every one of our assumptions, paying real attention to the ones that, if wrong, will kill us.
The inevitably of rolling forward on projections is a given. What the entrepreneur needs to do is be able to be testing the underlying assumptions and reducing risk. This starts with the process of understanding and explaining the business plan.
If, at the end of this process, it is clear to the entrepreneur and the potential investor that the business will not support high risk capital and its expectation of high returns, both parties win. The entrepreneur has a better understanding of the business model and whether it really can be high growth. She may also find better ways to finance the venture to better meet her own goals.