Earnings Beat
How angel network operators help their members benchmark performance
“Amazon reported quarterly earnings yesterday, beating analyst expectations by 3.2%. Shares are trading up 2.1% for the day.”
“Adobe’s latest earnings report came in at 1.3% below consensus estimates, and shares are down 1.1% this week.”
Thousands of business news reports around the United States feature quick updates like this every day.
“Quarterly Guidance”
Large publicly traded firms provide guidance to their investors regarding what kind of revenue and profits they expect for the given year. Then, each quarter, performance is benchmarked against these expectations, and estimates are revised as real data materializes.
Investors often rely on both the guidance and the company’s performance against that expectation as a factor in their ongoing decision-making processes. If companies beat expectations, they are typically rewarded by the market, and if they miss, they are punished.
In the same way, angel investors benefit from benchmarking expectations against reality, and by consolidating that information over time.
Unfortunately, there’s no formalized process for following an “earnings beat” or “earnings miss” as we see in the public markets. However, that’s something the angel network operator can help with, and is the focus for today.
The Observer Express
Don’t have time to read the entire post right now? No worries, here are the main points:
Benchmarking helps an investor connect optimism and vision to reality.
Performance benchmarks are broken into two broad categories: Company benchmarks and Portfolio benchmarks.
These comparative measurements have real implications for future investment decisions.
Put it All Together
Let’s assume our community regularly produces deal memos. They describe our expectations for the future on a deal-by-deal basis. We’ve established the processes and systems needed to collect the information we care about from the companies our community is most interested in. And, we’ve defined a consistent style for sharing that information with our members.
We’ve nearly walked through the entire Angel Ops framework together. What’s left?
The last step in Angel Ops Step 5 is to Benchmark Performance on both an individual deal and portfolio level.
Angel Ops Step 5: Monitor, Supporting Job #3: Benchmark Performance
As a quick refresher, Angel Ops, which I introduced in this post, seeks to map an answer to the following question: What does the process at a world-class angel network look like? Angel Ops is focused on the backend process of running deals and groups the workflow into five core steps. Last week, I introduced the second job within the final step: Monitor, which is focused on helping community members stay up to date with the status and performance of each deal, which often drives future opportunities for investment.
Step 5: Monitor
Job: Regularly consolidate and distribute investment status updates.
Progressive Outcome: Follow-On - Members consider investing in following rounds, driving re-engagement with the network at a future date.
Within each core step, there are 3 “supporting” jobs-to-be-done that contribute to the primary job. This week, we’ll explore the third and final supporting job within the fifth step: Benchmark Performance.
Expectations vs Reality
Startups, and many angel investors, tend to be fairly optimistic by nature.
Deals get done on the basis of potential, market opportunity, and a great team.
Over time, however, the reality of the company’s performance becomes more and more material, and network operators play a major role in helping their members keep up with that reality. Perhaps one startup is growing rapidly and successfully exits, while another struggles along and ultimately goes under. Regardless of the outcomes, the information collected must be mapped and compared to expectations in a way that is easy to digest and follow over time.
Which leads us to this question: which factors are important to follow?
Common Benchmarks
I generally think about performance monitoring in two broad categories:
Company Level
These factors are relevant to a specific deal and are generally captured in line with the community’s system design. For example, suppose we’ve chosen to invest in a SaaS startup, and our deal memo states that a core measure of success is based on the development of 4 new product features that should drive $400K in ARR growth over the next 18 months. In that case, we make a point to track ARR, and specifically benchmark if that target is achieved by the stated deadline. These metrics can and should often be tailored to the specific industry and business model applicable to that company. A few other examples of common “company level” benchmarks include (but are not limited to):
Revenue
Margins
Users or Clients
Team size
Average Contract Value
Funding
Product Development Milestones
Portfolio Level
At the portfolio level, we’re benchmarking the performance of our members’ actual investments made. This can be simpler than tracking company-level performance in the sense that we’re typically only monitoring deal activity and any additional company financing rounds (which usually don’t occur more than once every 12-18 months). On the flip side, benchmarking this activity can quickly become fairly complex due to the nuances of varying investment terms, cap table changes, valuation adjustments, and liquidity events taking place over time. Plus, aggregating this data to assess community-level and individual member portfolio performance can be quite cumbersome.
For small, emerging angel groups, a well-organized spreadsheet can be the perfect method for keeping organized records.
For mid-sized or larger communities, investing in some kind of portfolio management tool can be a great resource for keeping track of all this data over time.
Implications
Just as a public company earnings beat can motivate investors to make an investment decision, so too does a startup or investor community’s performance carry weight for an individual member’s investment decisions. For example, suppose a company-level benchmark reveals one firm is outperforming the others, or one Angel Network’s portfolio is found to be outperforming an investor’s expectations. These types of comparisons can be helpful insights for considering where to allocate future investment dollars.
Final Thoughts
Both startups and investors are often optimistic by nature. But capturing and tracking company and portfolio performance over time connects this optimism to reality. This job, if done well, enables a community of angel investors to accurately assess their performance, and to quickly make decisions about follow-up investments when an opportunity arises.
What do you think?
How does your community benchmark company and portfolio performance? Do you use any tools to help accomplish this job?
Weekly Observations: 3 Lessons Learned
Thoughtful analysis is difficult to produce.🧠
After almost a year of producing diligence material on a regular basis, I continue to be amazed at how much time and energy it takes to develop high-quality, thoughtful analysis. Distilling down what a startup is really trying to do, sorting through the overabundance of online data, identifying trusted sources and references, and then condensing and presenting the most important takeaways for an investor to consider always takes at least 30% longer than expected. In particular, I have developed a tremendous appreciation for solid, well-thought-out, and cleanly presented market analysis (especially since there is so much BAD analysis out there). Here’s a fantastic recent example focused on the Regional Air Mobility market from McKinsey I read this week while researching the market for an electric motor startup.
Effectively visualizing a process creates the foundation for change.🧱
After a month of observing a new client’s process, this week I took the next step and mapped what I saw into a detailed workflow using the Angel Ops Framework. We then reviewed it together, made adjustments where needed, and walked away with a mutually agreed-upon baseline for the current status. This exercise created the clarity we needed to move towards delivering effective recommendations for improvement (which I’ll be presenting in a few weeks). After all, how can we recommend a change without first fully understanding the current situation?
Basic training is a basic need.🏋️
This week we led a training for a client’s incoming team of student venture associates titled “Introduction to Early Stage Investing and Alternative Investments.” I was very pleased with how it went - they asked so many great questions that we only got through about half the content prepared, so we’ll meet again in a couple of weeks to finish things out. In contrast, earlier in the week I spoke to a new associate at another angel group who told me “I wish we had more training available; it’s really tough to get up to speed without it.” Something tells me I’ll be running this training again very soon.
Thanks for reading, have a great week.
-Andrew
If you enjoyed this post, please share it with a friend, colleague, or anyone else who may benefit.
P.S. - I recently finished creating The Angel Network Toolkit: 90 Resources for Cultivating a Thriving Community of Pre-Series B Investors, and I’m sharing it with anyone who refers a friend.
How did I do this week?
About Me
I cultivate flourishing.
I'm also the CEO of PitchFact, where we help angel networks conduct efficient and collaborative diligence. I'm a proud husband, aspiring father, and grateful friend. My love languages include brisket, bourbon, and espresso.