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March 8, 2019
Your Portfolio Companies’ Forecasts Are Unbelievable, But Maybe Not In A Good Way
By: Mike Hoffman
Sample output of multi-method forecasting: Some say that forecasting is an art and others say it’s a science. The indecisive say that it is a combination, and many board members and PE deal teams say it’s a disaster. In some cases, portfolio company forecasts make astrology look credible. Why do we walk away so skeptical about the forecast? A lot of it probably has to do with history and conditioning. When the forecast is right, it is somewhat anti-climactic, but when it is wrong in a negative direction, the consequences are very memorable: RIFs, difficult discussions at the investment committee QBR, and in the worst case, a reset of valuation that will be exposed all the way to the LPs.
Download the Forecasting Criteria Worksheet. This worksheet takes the emotion out of forecasting, guides board, CEO, and CFO on types of questions to ask about each deal, and aligns everyone on what it really means when a deal is in a particular forecast category.
Forecasting Challenges:
As a PE firm, how do you address these challenges?
More Data Please…
In PE we like data. The more the better. Data tells stories we can relate to and understand. Looking at different sets of data that tell us a consistent story gives us confidence. Data that that tries to tell the same story, but diverges tells us where to look to solve for inconsistencies. So, the key to forecasting is to have enough data sources and methodologies for us to draw conclusions or confidence.
What are the different methods and data we can use to get convergence?
But My Companies Are Unique…
Everyone says that. Stop thinking it. Math is universal and it works as long as you lock some variables. Unless your portfolio companies operate inside a blanket of dark matter, the laws of math will work for them too.
This method of forecasting has proven effective for companies with small numbers of large deals, large numbers of small deals, long sales cycle businesses, short sales cycle business. It relies on mathematics and learns over time, so it recognizes and accounts for patterns in the business. The only dependencies that exist for this to be effective are:
All of this leads to consistency in forecast categorization. Everyone needs to forecast deals in exactly the same way for forecasting to be effective. See example of documented criteria below:
Sample output of multi-method forecasting:
Now take it one step further and imagine the opportunity if all your portfolio companies had consistent forecasting methodologies that you clearly understood and provided accuracy beyond doubt.
Take the diagnostic below and see some sample graphs of a multi-methodology forecast.
Rapid Diagnostic: Forecasting (Respond to each with Yes or No)
On a scale of 1-5, how important is this to you, your portfolio, and your firm?
Download the Forecasting Criteria Worksheet. This worksheet takes the emotion out of forecasting, guides board, CEO, and CFO on types of questions to ask about each deal, and aligns everyone on what it really means when a deal is in a particular forecast category.
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Mike is Managing Director of Private Equity for SBI. He helps lead value creation programs for PE firms and their portfolio companies. He also assists with strategy development and deal model development with PE firm deal teams and their respective companies and targets.
Mike has the unique ability to uncover the things that will drive real equity value within companies, and then help the SBI team and company management teams lead the execution necessary to unlock that value. Mike is comfortable in a board room, on a sales call, or in front of spreadsheets building operating models and compensation plans. One of Mike’s biggest strengths is taking very complicated concepts, and finding a way to communicate them in an incredibly effective manner.
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