Ask Volition

Why I Hate Budgets

admin — Thu, 06 May 2010 17:14:28 +0000

It may seem strange to hear how little a Finance person like me cares for budgets. After all, how can you control spending without a budget? My response: did you ever consider that you might control spending more easily if you threw the traditional concept of a budget out the window?

I have three main reasons for hating traditional budgets.

The cost of preparing, monitoring, and reporting against the budget far exceeds its benefit to the company’s bottom line. Whether you’re a corporate senior executive, middle manager, or the financial analyst for one of these, the words “budget season” likely cause a chill to run up your spine. Think of the hours spent trying to work with the budget templates provided by Finance, followed by the hours in various meetings trying to justify that budget, only to be told you have to haircut everything by 10%.
The quantitative aspects of budgeting drive out the focus on the qualitative ones. When was the last time “budget season” was preceded by a thorough, qualitative assessment of the company’s short- and long-term goals, followed by the strategic planning necessary to meet those goals? Put differently, when was the last time you were given the information inputs that you needed in order to develop a useful budget? I’m betting that, if your bonus is partly based on coming in below budget, there’s some strategic padding going on.
The very existence of a budget can drive bad spending decisions. I wish I had a nickel for every time someone has asked me “how much do we have in the budget for [fill in the blank]” with the goal of assessing whether the business can afford to purchase something. I’d say that nine times out of ten such a question is not the most salient factor for assessing the value of the purchase to the business. And the last thing any Finance person wants to hear near fiscal year end is “I still have some budget money available, so I’d better use it before I lose it.” Now there’s a great rationale for a purchasing decision.

In lieu of a traditional budgeting process, here’s what works better for small, fast-growing companies:

Goal-setting and strategic planning come first. Corral all the senior executives into a room and force some conversations about where the business should be going and what it’ll take to get there. Goals should be both qualitative (expand into new markets, reduce turnover) and quantitative (profitability, top line growth) and need to be communicated broadly to anyone with spending authority. How to distinguish strategy from tactics? Tactics are about what you’re going to do, whereas strategy is more about what path you’re consciously choosing (or not). This helps to avoid bad spending decisions down the road, because the manager can refer back to those conscious decisions to inform the spending decision to determine if the cost is consistent with the outlined strategy . You know your “strategy” is really just a tactical move if you can easily estimate its cost. Hiring a General Manager in Tokyo is not the same as expanding into Asia. A new hire is never a strategy; it’s a tactic. First, get your goals and strategies in order, and then spell out the top one or two tactics each department needs to do to execute on the plan.
Align any incentive compensation plan to the qualitative plan. Instead of measuring people against their budgets (see above re: padding), put effort into designing incentive compensation targets that reward meeting the goals defined in the qualitative plan and let everyone know that’s how they’re being measured.
Once there’s consensus on the path forward, let Finance prepare a spending forecast. Not having a traditional budget is no excuse for not forecasting what your financial results should be. There’s a still a value to estimating what those top tactics will cost and then monitoring so that necessary course corrections can be made. A good Finance department will have detailed historical data to inform how future spending is likely to unfold. For tactics for which there’s no internal historical data, you can solicit input from relevant internal subject matter experts or get feedback from your network.
Establish a process for making spending decisions that’s based on balancing the ROI of the purchase against the financial goals of the business. The first question should not be “is this in the budget?” but “will this help us meet our business goals in the most cost-effective manner?” So what if the original forecast had $10,000 for a market research study in November? Some more routine operational areas, like travel and entertainment, will benefit from a strict policy governing decisions like when business-class airfare is permissible.

In short, qualitative budgets are more dynamic, less time consuming and empower the broader team to make decisions that are consistent with the company’s strategy.

At Volition, one of our core values is “substance over form,” and one aspect of this is careful consideration of whether an activity is the best means to its stated end. In my opinion, traditional budgeting for small companies is more about form than substance.

Marie

Prosper Marketplace Raises $14.7M Financing

admin — Fri, 16 Apr 2010 14:55:14 +0000

We wanted to take a moment to congratulate Prosper Marketplace on its Series D round of financing. We also are pleased to welcome Tomorrow Ventures and CompuCredit to the investor team. This financing comes at a time when Prosper is building strong momentum since the re-launch over the summer. We’re excited to be working together to build the peer-to-peer lending industry. Here’s the original press release. Congratulations to everyone at Prosper!

Business Development Team at Volition Capital

admin — Thu, 18 Mar 2010 13:20:13 +0000

I’m often asked the question “why does Volition have a dedicated business development team? Isn’t business development typically part of everyone’s job at a private equity firm?”

The answer is an easy one. We truly believe having a dedicated BD team, or ‘biz dev’ as we call it, gives us a competitive advantage over other firms. We’re very proud of our network, which runs the gambit from C-level execs at Fortune 100 companies to entrepreneurs at seed stage start-ups. We like to think of it as our own ‘secret sauce’.

Here’s a bit of history as to how our BD team came about. As Fidelity Ventures we had many opportunities to get to know people across Fidelity. But as a traditional, returns-based VC, we also knew that Fidelity might not always be representative of the market and that financial services were only one of the targeted markets of our portfolio companies. So six years ago, we made a conscious decision to expand our network to outside firms. A year after I joined the company, Don Haile, Fidelity’s then retiring CIO, joined us as a Venture Partner. We were off and running.

So what do we do exactly? Everything we believe to be beneficial to our investors, our portfolio companies and our business partners. We participate in the entire investment life-cycle; sourcing of new deals, pre-deal due diligence and introductions for our portfolio companies to customers, channel partners and acquirers. All of these efforts are aimed at helping our portfolio companies maximize their value. And in doing so, we’re very mindful of giving back to the relationships we’ve developed over the years. Knowing how difficult it is to gain the mindshare of the people in our network, Don and I share the philosophy to always ‘give more than we get’.

How do we keep our network ‘current’? Several times a year we host forums to educate our audiences and broaden our relationships. In January we hosted a standing-room only CIO Roundtable in Boston, MA. The event ‘Are the Corporate Giants still buying’ was sponsored by the New England Venture Capital Association (NEVCA) and Invest Northern Ireland. Don Haile hosted (or better said, roasted) a panel of renown technologists, which included Chief Technology Officers and senior technology execs from State Street, IBM and JP Morgan Chase. Our guests, who included VCs across New England, as well as C-level executives of local firms and Volition’s local portfolio companies, were treated to an evening of the current thinking of several of the tech industry’s most influential senior execs.

From my point of view, it’s been a terrific six years. I’m personally very excited to continue to work with the Volition team and Don, and to have helped launch Volition Capital earlier this year. I hope this has piqued your curiosity about Volition Capital, our BD team and gives a bit of a lens into how Volition Capital tries to add value to its portfolio.

Jill

Interacting with Associates: A Growth Equity Perspective

admin — Thu, 25 Feb 2010 15:22:13 +0000

There have been a lot of recent conversations in the blogosphere around whether or not it is productive to pitch to associates when raising venture capital. Most of the views have focused on early stage investing so I wanted to provide a perspective on interacting with early growth equity firms such as Volition.

Let me start with my conclusion: Entrepreneurs and founders looking to raise growth equity shouldn’t hesitate for a minute to engage with associates.

Now let me explain why I believe this to be true:

The interest level of a growth equity deal is not measured by its deal source. Great companies and contacts come from many sources and we respect and encourage all of them. Clearly some mediums are more effective than others (e.g. bankers who understand our investment focus versus mass emails) but who within our firm actually spoke to the company first never enters into the equation.

Every investment professional within our firm is responsible for interacting with founders and entrepreneurs. The entire team meets on Mondays to discuss interesting companies/ people we interacted with that fit our investment focus. The discussion revolves around the company’s value proposition, brainstorming around how Volition can best add value and what actionable next steps are appropriate. “Non-partners” are involved in these discussions as much as partners. In fact, in many cases, it is thanks to the efforts and insights from the “non-partners” that these companies become known.

Associates are very aware of – and have a great appreciation for – what deal team would be the best to explore a potential partnership. Because they interact with the partners on a daily basis, they appreciate particular areas of passion and can provide invaluable advice on how best to present to the partner. As they taught me in consulting, “knowing your audience” is a key ingredient of a successful presentation. Associates “know the audience” cold.

Associates have a network of contacts at other firms. And they are social. It is not uncommon for the following conversation to occur:

Associate at Firm A: “So what areas are you looking at these days?”

Associate at Firm B: “I’ve been spending a lot of time looking at data services businesses.”

Associate at Firm A: “Cool – that’s a great space. You should check out Company X. It doesn’t fit in our investment profile, but it’s a great company.”

My opinion is clearly colored by the way we are structured at Volition. We are a small, cohesive and collaborative team aligned around the common goal of identifying and partnering with great founders to build market leaders. As such, before entrepreneurs categorically dismiss interacting with associates, I would encourage them to dig a little deeper on the culture and structure of the firm.

Geraldine

Venture Capital (VC) Firm Directory – Ranked By Website Traffic (Q409)

admin — Tue, 02 Feb 2010 15:54:23 +0000

When we launched Volition Capital in January 2010, we also launched the Ask Volition blog aimed at opening a dialogue with entrepreneurs and founders around some of their key questions. As many entrepreneurs have noted, Volition Capital is focused on high growth, founder-owned technology companies with $5M-$50M in revenue. Volition is a growth equity firm, rather than a traditional early-stage VC firm. We think there’s tremendous value to being focused, but one byproduct of that is there will always be companies that don’t fit our focus area. Hence, one question we have often received from entrepreneurs whose companies may not be the perfect fit for us is: Can you recommend any other firms that might be a better fit?

We get that question enough that we thought it’d be useful to create a resource that we can easily point entrepreneurs towards. Given the amazing feedback we’ve received on the Global VC Blog Directory, we have pulled together a similar directory of technology venture capital firms. Though we call this a “venture capital” firm directory, there are several seed investors, many traditional VC firms, a few growth equity firms (like Volition) and some large diversified funds. We have ranked the firms by the traffic they get to their corporate websites (based on average Q4 monthly uniques according to Compete). We caution folks from reading too much into traffic stats as there are fantastic firms up and down the list, many of whom we know well. But, we believe readers appreciate some organization rather than none at all. In order to make the list, the firm’s website had to have monthly unique data from Compete for October, November, and December 2009, which we then averaged. Of course, given that threshold, Volition Capital itself didn’t make the list because we just launched in January. But, we aim to make quarterly updates where we can add new firms or firms that we have missed. Please leave any suggestions in the comment field.

Venture Capital Firm Directory (Avg. Monthly Uniques – Q409)

(Prepared by Larry Cheng and Dave Gordon of Volition Capital – with the help of several friends in the industry.)

Q: Why Focus on Founder Owned Businesses?

admin — Wed, 20 Jan 2010 13:00:53 +0000

A: At Volition Capital, we’ve built a firm on the belief that founder-owned businesses possess unique traits that ultimately lead to successful outcomes. This belief is based on our long history of working with founders who display extraordinary dedication and resourcefulness in order to achieve great results.

Below is a list of 5 reasons why we choose to partner with founders:

Commitment. We believe there is a commitment and passion that is unique to founders. Founders were there when the light bulb went off . They took the leap to start the company from nothing more than an idea. They breathed life and capital into the company by any means possible. Founders are the ones who will put the company on their back if necessary and carry it forward. The commitment of the founder to success of their business is unparalleled.

Resourcefulness. Founder ownership implies that minimal outside capital has been raised to date. In order to achieve Volition’s minimum revenue target of $5 million without raising outside capital, the company must have a business model that works and a management team that knows how to efficiently invest money in order to generate a return. These characteristics provide us with a high level of confidence in management and a belief that additional capital will be spent wisely and lead the company to even greater heights.

Meaningful Ownership. We believe that management teams, not investors, are responsible for building great companies and driving shareholder value. As such, we like to invest in businesses where founders retain a meaningful ownership stake in the business post-investment. We are more than comfortable providing founders with liquidity as part of a transaction but in all cases we like management to retain meaningful ownership. We want management to be properly motivated and ultimately rewarded for all their hard work and dedication and believe the best way to accomplish this is through meaningful equity ownership.

Alignment. Companies that raise large sums of capital from multiple investors over multiple rounds of financing sometimes result in conflicting interests among shareholders. This dynamic can create scenarios where certain outcomes are good for some shareholders but not all shareholders. We like the dynamic in founder-owned businesses where simple ownership structures leads to 100% alignment among all shareholders to maximize value.

Opportunity to Add Value. Founder-owned businesses that achieve $5 million in revenue without the aid of outside capital have displayed the ability to achieve a lot with very little. These companies have achieved results without large sums of capital and in many cases without a formal board of directors. We believe these businesses can benefit greatly from our network and our expertise in building strong boards, entering new geographies, evaluating strategies, and preparing for IPO or merger. We focus on more than just investing and believe we can provide great value to our portfolio companies. We call this “Capital +”.

Sean

Q: Why did you choose the name Volition Capital?

admin — Mon, 11 Jan 2010 14:18:57 +0000

A: We are excited to launch the Ask Volition blog alongside launching Volition Capital as a firm (press release). We hope that this Q&A blog will serve as a means to engage with the Volition community in a rich conversation on different questions of interest. This blog will be jointly written by different members of the Volition team, so if you have a question, please feel free to submit it here.

It seems only appropriate that for this inaugural post, we answer the question of why we chose the name Volition Capital. After sorting through hundreds of names, we chose the word “volition” because it represents to us one of the key ingredients for success we find in the founders and entrepreneurs we work with.

Volition literally means to make a decision of one’s own will. In any entrepreneurial endeavor, we believe volition is expressed as a certain tenacity, persistence, and never give up attitude. This entrepreneurial volition also connotes a sense of striving in the face of adversity and an unwavering will to win. It’s this volition that we admire most in the people we work with – so we chose this name in honor of the management teams of our portfolio companies who bring life to this word every day through their commitment and dedication to success.

The decision to go with “Capital” was a much easier decision. Despite coming from a heritage of being called “Ventures”, this team has increasingly focused on growth equity investments for many years. As Volition Capital, we expect to continue that trend and principally focus on growth equity investments in high potential, founder-owned technology businesses. Given our investment focus, Capital was the obvious and more accurate choice.

So there you have it – Volition Capital.

Roger