Wednesday, March 17, 2010

Its the P&L, stupid!

I hope that nobody gets offended by this blog! If they do I apologise in advance!

I picked this tweet up which was written by a very respected VC partner and recommended by another very respected VC partner.

I thought - great, I will get some insight from some people who have been in this business longer than me with great track record. What you will find if you read the article is a very basic look at the elements that make up a company's profit & loss account.

I, of course, accept that this is a very important part of any business. The surprising part about the article was the implied assumption that the readers are not very well versed in the various parts of the P&L.

There has been much debate recently about the VC industry and the its business model. I think that also what needs to be debated is the type of mind-set that VC's have created amongst management of the companies that they back.

At Goldrock, we have recently seen a number of companies that have made the initial sales breakthrough reaching several million $'s in sales. However in too many cases this has been at the expense of too much equity capital that has been invested over the previous years, leaving the company in what I call "cap-table trap"!

If managers are used to going back to their VC "sugar daddy" every year for more equity money then they have little or no incentive to worry about basic things like receivables and payables (for the un-initiated, the money a company is owed or owes its trading partners).

In the long term all of us on the investing side need to pay attention to the capital efficiency of our investing models, whether it is at the sharp end of the VC world or the less dramatic world of growth investing or private equity. If we do not, our LP's will not find the justification for supporting this type of investing.

The debate on the VC/PE model must continues, but must also drive everyone on the gravy train to be honest about the way they are achieving returns and the true risks taken in order to make them.


  1. Hi Daniel,
    Regarding AVC's post, I would go out on a limb and say that most business owners have no idea how to read a P/L statement.

    They use their accountants for one of two purposes. Either to tell them how much they owe in taxes or to create a set of financial statements so they can forward it on to their bank / lender or sugar daddy.

    I would also say that most accountants do not go the extra step, and offer ideas, or thoughts they had, when compiling the numbers. Countless of times after sharing an idea with an accountant, they will they say, Oh, I thought of that a couple of months ago when I was compiling your numbers.

    Controllers & CFO's, who are suppose to be the in house accountants end up being glorified bookkeepers and when they have an idea it is rejected as coming from a "bean counter".

    CEO's should be forced to review their P&L & BS in detail every month. I would say, that CEO's should be presented with a P&L that does not show “the bottom line” and a BS that does not show “net equity” and have them work though it line by line until they come up with the result. This should show them, how the details affect the bottom line. They will be amazed at the information contained in a detailed financial statement. CEO’s need to realize, the answer is not always to increase sales.

    Yoni Wagschal

  2. If you don't mind a stranger getting into your conversation: isn't it the result of money made available to venture-backed companies long before they start sales? I.e. doesn't the VC investment model itself create this attitude?

    I come from later stage PE, not VC, background, and of course every business that survived till that stage has the bottom line close to heart.

    Will the world have to revert to bootstrapping?

    Alexander Goshchitsky