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Enterprise Performance: Relevant Metrics for Growth-Oriented Entrepreneurial Ventures ('GOEVs')

This article possibly represents one of the most significant contributions derived from thinking underlying my PhD research. It has both practical and theoretical implications. Practical implications should serve the management teams of growth-oriented entrepreneurial ventures (‘GOEVs’) – to keep them focused on achieving performance measures most likely to sustain engaging financial capital providers such as venture capitalists. Therefore, the practical recommendations will be especially important to those teams’ financial managers (such as eCFOs (see article #4C7)) who will be accountable for setting realistic financial goals, reporting on performance in relevant dimensions, interpreting that performance meaningfully - in an MD&A-style respected by VCs, and enabling other team members to make relevant contributions to value creation. Theoretical implications derive from my critical review of extant literature in both entrepreneurship and venture investing research using my financial management lens perspective (which incorporates both practical and research experience (see APPENDIX to article #5R9). This review revealed confusion (possibly inaccurate assumptions) and inconsistencies among researchers regarding what constitutes valued enterprise performance in a GOEV context and how performance factors relate to investment outcomes, or don’t. My recommendations should provide guidance and clarity for future research.

A critical review of entrepreneurship and venture investing literature suggests (from my financial management lens perspective), that there is considerable confusion and inconsistency among researchers about what constitutes relevant performance for a growth-oriented entrepreneurial ventures (‘GOEV’). This article attempts to clarify this issue for both researchers and practitioners (e.g. CFOs & CEOs of GOEVs) and suggests relevant performance metrics for both GOEVs (enterprise perspective) and VCs (investor perspective).

Firstly, it defines performance as the result, accomplishment, or progress achieved by the entity’s actions with respect to its chosen objective(s) intended to impact selected dimensions of its environment. Let’s emphasize that, for GOEVs, progress along a path of value creation (towards value realization) is especially important to equity capital providers. So tracking towards contributing milestone markers in a variety of contributing activities is highly relevant to stakeholders in assessing not just the expected/forecast magnitude of the result, but its likelihood and timing.

My main criticisms of extant literature are an emphasis on irrelevant metrics combined with an omission of relevant metrics. For example, GOEV performance metrics emphasize growth & profitability. In my view, growth is the most important dimension of performance relevant to predicting economic success for GOEVs. But, profitability is not. That surely seems unusual coming from a CPA – but I learned this from VCs during my executive career. VCs are interested in significant ROIs. These are achieved through significant increases in the valuation of the GOEVs they invest in. From their perspective, valuation is the ultimate metric and (theoretically) enterprise valuation is the present value of expected future cash flows. Growth is the main driver of those expectations. Many GOEVs can be unprofitable for many years during the time they are developing technologies, products, services, and markets. But getting sales traction offers the promise that expected future growth will eventually lead to profits and associated cash flows through the principle of operating leverage. However, there is an important caveat: these measures of economic success are not even accessible without persistently achieving the antecedent goal of survival. Survival is about sustaining liquidity, cash balances, and cash flow … at least to the extent of getting the enterprise to its next significant financing (the ‘cash runway’). This is important because the management of liquidity involves different KSAs than the management of growth, which is one of the reasons I advocate strongly for the involvement of a entrepreneurially-minded CFO in GOEVs’ management teams as soon as possible. So, in my opinion, three key performance metrics for GOEVs are liquidity, growth, and valuation – not profitability. There are several crucial activities that contribute to the growth & valuation metrics because they influence expectations (e.g. growth in tech talent, innovation progress and patent filings, proving technological feasibility & developing a minimum viable product, capturing the first 3 significant customers, etc.). These are relevant metrics for tracking performance during certain stages of development while the GOEV may be pre-profit and even pre-revenue, but still increasing its expected value. For a complete list, see Table 1 in the article.

Similar criticisms exist about performance measures used is evaluating VC success. A common metric is whether a deal achieves the proverbial 10x target – i.e. at the time of exit, the VC-fund realizes 10 times the amount invested. This is a rare occurrence, happening on only 3-5% of deals. Further, the VC industry loses money on over half of their deals. So, in my opinion, the most relevant measure of VC success should be from the perspective of its capital providers – the Limited Partners (‘LPs’), and that should be the total fund return on a portfolio basis (expect where LPs can cherry-pick deals). But, very little extant literature acknowledges this. Instead, they focus on completed deals and overlook the fact that VCs track changes in the value of each investment (see preceding paragraph) annually in their financial reporting.

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