Represent Reality
The Permanent Equity Investing Team has a channel in Slack called investingteam where we mostly post snark and memes and occasionally talk about topics relevant to our investment process. That’s where I came across a memo our CEO Brent got his hands on from one Lead Edge Capital that he shared in that space because he thought the rest of us would enjoy it (and we did). Called “Types of Reported Information,” it, not inaccurately, lays out the “hierarchy of information included in company decks.”
To wit…
If companies have good cash profits they report those
If companies don’t have good cash profits, they report on adjusted profits
If companies don’t have good adjusted profits, they report on gross profits
If companies don’t have good gross profits, they report on revenue
If companies don’t have good revenue, they report on adjusted revenue indicators (like Gross Merchandise Value - GMV)
If companies don’t have good GMV, they report on Monthly Active Users
If companies don’t have good Monthly Active Users, they report on Subscribers
If companies don’t have good Subscribers, they report on Downloads
If companies don’t have good Downloads, they report on Pageviews
If companies don’t have good Pageviews, they report on that they were voted the “Best Place to Work in XYZ City”
And people call me cynical!
When I looked up Lead Edge Capital, I saw that they call themselves a “growth equity firm with substantial assets in software, internet, and tech-enabled businesses,” so I am sure they have seen their share of pitches that blurred the line between putting the best foot forward and taking liberties with reality. After all, if you’re raising capital for a business that’s not really yet a business, which many tech-enabled start-ups are, you have to report on something. But as we well know, start-ups aren’t the only ones in the investing world who blur the line between putting the best foot forward and taking liberties with reality.
That said, one of the pieces of advice our managing director Emily gives to businesses looking for investors is to “represent reality.” That’s because deals are thoroughly diligenced and if what is marketed upfront is not representative of reality, any deal negotiated on the back of that representation runs a very great risk of falling apart, which ends up costing everyone time and money. Further, sometimes it’s even better to lead with the challenges because many investors earn better returns by being helpful to the businesses in which they invest, so if they can see from the get-go how they might add value, they might be more excited to do a deal.
One question we get a lot is how many of the deals that we get under a letter of intent (LOI) actually close. The answer is most, but not all, but that 100% of the deals we had under LOI that didn’t close were the result of us being told upfront that something was true that turned out not quite to be the case (the most egregious example of which was a firm that said it had generated $4M in free cash flow but had actually burned $17K). So represent reality. Because we all have to be on the same page eventually.
– Tim
