Best practices from mature technology businesses have stable recurring Rolling Forecasts based on momentum, executive buy-in and a solid understanding of the drivers in both revenues and costs. And those forecasts have defined processes to ensure the right level of risk is mitigated with the right action plans to drive success.      

However, start-ups have a different focus: getting their product to market and ensuring there is a fit, or there is no business. Having history to guide the future is often non-existent, and reality is often decoupled from the expectations of the leaders and investors. Planning and the tools to support the business are often an afterthought, even at all.  And the data to support decision-making is usually a mess which inhibits good planning practices.

Shifting from the risk-taking, shoot-for-the-stars mentality of a start-up's founders to a measured and targeted approach to profitable growth requires a change in culture for the leaders across the organisation.  Let's explore a few tactics to ensure how this shift can be enabled.

Some best practices in a strategy and planning lifecycle for a marketplaces business

A best practice planning lifecycle from my career includes quarterly forecasts on the last month of each quarter, strategic planning in the summer, with the last two forecasts of the year setting up the plan for the following year. This lifecycle ensures the following objectives:

• A continually refined momentum-based view of top-line volumes which models consumer behaviour based on its history in markets, products, and rates across the platform

• Regular executives buy in at each step of the planning process so that everyone is aligned and committed, and

• Segmentation of the key drivers across the P&L such that each step has a proper set of relationships to the top-level volumes and rates across all the geographies, products, and suppliers

This planning lifecycle takes about 30 days for each forecast and provides the necessary rigour and structure to get a complete P&L. Because of the multiple stakeholders providing inputs, often the P&L is too conservative, and another short cycle (usually a week) will ensure that it is more risk-weighted.  

Why do these practices fall short in start-ups?

Well, there are five potential reasons for this:

1. Momentum is really hard to define.  In start-ups, their history is too short to understand customer behaviours (i.e. poor understanding of seasonality, multiple pivots to get the strategy right, etc…)  Or there could be new markets to be entered, products to be released and there isn't really a good set of projections to help understand what it will look like.

2. Reality isn't aligned with the direction of the leaders.  When you look at the pro-forma P&L, does it really pass the smell test? Or is it just a shot in the dark?  Is there pressure from the board/investors to hit targets that aren't really attainable? Setting a plan needs to be aspirational but within reason such that you're not setting up the teams for failure or creating a lack of ownership with the business teams because they know the targets are unreasonable. 

3. Rarely is there a financial planning system in a startup - even mature ones may not even have one. It often takes a year or longer just to get a system installed, something that many startups or maturing businesses don't have the patience or will to even begin, eventually, causing the business to not be able to plan at all. In all of the startups and maturing businesses, I have been a part of, there has been a significant lack of systems implementation causing an inability to produce relatively accurate projections.

4. Planning is an afterthought. A startup usually is focused on just building a product, getting it to market, or figuring out what works just to keep the company running.  Planning is the last thought on their minds and often only get to planning the current year once they are in it.

5. The infrastructure for data is really just a mess. Because startups are trying to make it work, teams are often working independently and there are different definitions of data, not all the data is captured, and data history is constantly changing.  This makes planning difficult since there isn't a single source of truth, with leaders saying that "my numbers are right, not yours”.

What are the root causes of these challenges?

These challenges boil down due to the cultural nature of the “make it work” mentality of a startup. The flexibility of pivoting and the ability to innovate in a startup gives it the agility and speed to outwork its entrenched legacy competitors. However, there are four drawbacks until the startup matures:

1. Stress and a lack of patience.  The startup's life is depending on figuring out the product and driving growth which creates an enormous amount of pressure.  However, an established business most likely has the ability to be more patient and structured in its approach.

2. Building processes instead of refining them.  Startups need to figure out what the processes should be and the amount of effort to build them is significant which requires documentation and effort that a lean startup doesn't often have. However, once processes are built, it is much easier to continually refine them.

3. Structure turning into spaghetti.  The structure of systems and processes is an afterthought. The “make it work” culture often creates a "just build it" approach which is hack upon hack to get it done such that re-engineering for ongoing maintenance is sometimes impossible.

4. A lack of understanding of what progress is. Often the startup is focused on shooting for the stars without any real understanding of tangible milestones. This is the hardest part to change because it goes against the fabric of the entrepreneur's mindset and often unfortunately requires a set of new leaders to help in the maturation process.

The key point where the culture starts to shift occurs when the startup feels that the risk of it “going under” subsides, and it requires education and change management to change that focus of managing risk.

What are some of the tactics to help change the culture towards planning?

Related to the original challenges, there are five tactics that can be employed to help shift the mindset of leaders across the organisation:

1. Momentum is really hard to define. Uncertainty in momentum can be mitigated with comps of other players in your space, shortening the annual plan to a quarterly or half-year plan, and even creating sensitivities to the plan. This was evident with COVID-19 which made planning really difficult when I was at Uber.

2. Reality isn't aligned with the direction of the leaders. Leaders must be aware of the consequences of not aligning to reality, such as overspending, increased inventories, and mistrust with vendors, partners & customers, which become more expensive as the company grows. Setting targets just above a comfortable threshold can help pressure the leaders to reach them while they still retain ownership. Educating the leaders and ensuring executive buy-in through constant communication is a hallmark of this tactic.

3. Rarely is there a financial planning system in a startup - even mature ones may not even have one. It's never too early to instil a system!  Despite the upfront investment, it provides automation of planning processes and gives the granularity needed to pinpoint problems with greater speed. There needs to be a commitment from top finance and business leaders to make this investment such that a framework for forecasting and iteration can begin sooner than later.

4. Planning is an afterthought. Often leaders have product, operations, and marketing goals through an "OKR" system.  Linking them to planning targets will help align the company.  Also, educating leaders on how planning can keep the business growing and/or afloat (i.e. future financing, IPO, sale, etc…) will help in alignment.

5. The infrastructure for data is really just a mess. By standardising definitions across the company and having Finance part of the decision making, ensure that finance and planning will be fully integrated with the business long-term.

Changing the culture of an organisation is never easy but applying a few key tactics will ensure the transition from a startup to a mature business to be less painful and have the business be better prepared to reach its future goals.