It’s currently that time of year when startups are holding board meetings to go over their Q4 results and look ahead to the next twelve months of the new year. The tricky thing is that for a lot of startups, Q4 numbers are an anomaly.
Seasonality isn’t just determined by the weather. It’s derived from the natural flow of the business. Sometimes the fourth quarter performance figures are inordinately great. Media-related companies sometimes have up to half their entire year’s revenue generated in the last three months of the year. Similarly, e-commerce companies can trend towards the same situation depending on how applicable their product is to gifting. On the other hand, many businesses struggle towards the end of the year because buyers (businesses or consumers) are distracted, corporate budgets are depleted until the following year, or yes, just plain seasonality. And it’s not just top line revenue metric which can be affected by Q4 atypicality. We have one company in our NextView Ventures portfolio which intentionally always pulls back on paid acquisition marketing in this quarter (because it’s too expensive to compete for consumers’ mindshare vis-à-vis other quarters), so they become “accidentally” profitable for one quarter every single year.
What is a Founder/CEO to do if this situation reflects her business? Three thoughts which I’ve been proactively sharing with those in our NextView portfolio:
- Set expectations all around. Often a seasonal slowdown can be a morale suck. It’s hard for board members, let alone employees, to directly feel the depressed volumes of whatever is being sold without being affected by it. On the flip side, the (good) craziness of a spectacular-feeling year-end season can tee those same people up for a proverbial whack in the face the following Q1 when things return to “normal.” The key for a leader is to proactively set expectations that this situation is coming, continually remind everyone when it’s happening, and then revisit the business dynamics after the fact. Most people realize what’s happening intellectually, but deliberately over-communicating before, during, and after helps people internalize it in the gut, not just the head.
- Put it in context. Did the company really doing well that quarter? Clearly, the easiest and best comparison is to stack up Q4 this year against the previous year’s Q4 rather than the recent Q3. But I think it’s best to take this comparison one step further. How does that year-over-year growth compare to the rest of the year’s YoY growth ratio? Did this Q4 meet our previous earlier (budgeted?) expectations even if it was up/down on an absolute basis? The more extensively you can frame the results with respect to the rest of the year, the more comforted and understanding all constituents will be to deviations.
- Eyes wide open to reality. It’s possible for a company with surging Q4 revenue to actually be struggling underneath. Conversely, ho-hum Q4 results can actually reflect a company at the starting block for an explosive next year. Founder/CEOs with developing startup businesses should be honestly self-reflective with a critical eye about what’s actually happening with the foundation of the business absent seasonal factors. Most importantly, there should be a goal to avoid a Q1 hangover due to neglecting to recognize underlying shifts in the business that happened over the past few months.
Startups timing and runway is short and so three months’ time really matters. The challenge is that the operational history reflecting seasonal factors isn’t always apparent. And a seed stage startup that’s been in business for less than a year might not even realize that Q4 will be dramatically different! The good news is that (most) venture investors have seen this pattern within their portfolio before, so it’s not surprising. And more importantly, venture investors look towards building value in a company over the long term, not measuring the yard-stick on a quarterly basis like the public markets’ investors operate. Regardless of which way metrics diverge, Q4 results often look inherently different than Q3 and Q1’s, and should be recognized as such.