Patricof’s Law of Expectations

This post first appeared on Business Insider.

For some time now I have informally guided my team at Greycroft and others in the venture capital business to base their expectations for monthly performance of portfolio companies using a certain predictability factor based on many years of exultations and disappointments.

Herewith, what I have been encouraged to call “Patricof’s Law of Expectations: ”The timeliness with which a company sends its monthly results is directly correlated with the positive content of those results. (Or, said another way: The later in the month a company’s results are distributed, the greater the likelihood that those results will disappoint.)

If you receive an email from a company anywhere between the first or the fifth day of the month, you can rest assured, without even opening it, that the month had better-than-positive performance. Often, if the new month starts on a Saturday or Sunday you may very well get an email over the weekend. And if it is a particularly good month, frequently the email will come in even before the proverbial ink is dry. That is to say, management is so eager to disseminate results that they may even distribute them on the last day of the previous month. Along these lines, it is quite safe to say that almost never will bad news arrive before the 10th or 15thcalendar day.

But after the middle of the month, all bets are off. If you have to call, or send an email inquiry, to get the figures, be forewarned that the results will likely be disappointing. In my experience there are a host of euphemistic terms you will hear when people don’t want to just give the bad news. These phrases are often preceded with “Before we send out results….” Then you may hear any of the following “reasons”: “We are waiting to consolidate our subsidiaries;” or “we need to make sure revenue recognition was handled properly;” or even, “I think there may be an error in the figures. I want to check them again before I distribute the numbers.” Here’s another: “We had several big orders that we expected to come in at the end of the month and they didn’t materialize, so I wanted to wait till they came in to report on this with an explanation…“

This is certainly not an exhaustive list and I’m sure that each of the venture capitalists reading this blog post can provide comments they have heard when seeking a portfolio company’s results. (Or, conversely, entrepreneurs could provide other creative explanations that they have given to investors.)

I wish it weren’t so, but in my experience, the correlation between time of reporting and the results attained follow closely on this rule of thumb.

While I throw these comments out somewhat tongue and cheek, there is a more serious take away, which is this: No matter what, it is best for entrepreneurs to be consistent in their reporting cycle – good news or bad. The axiom that VCs don’t like to get surprises is a valid one. Keeping a board totally in the loop and guiding expectations helps to co-op investors into solving problems where possible, even before they arise. These are good strategies to employ that will pay big dividends in shareholder relations.

And to the entrepreneurs who may be reading this, I’m not letting VCs off the hook here, either. VCs, in order to encourage entrepreneurs to provide results like clockwork, no matter the results, must respond to bad news constructively. One should never punish a portfolio company for disseminating bad news as quickly as good. If anything, you should be glad to have the information, for the reasons stated above—to try and help fix any problems, if possible. If we follow this pattern, my rule will be permanently made irrelevant.

I hope you enjoyed reading this post, even though you received it at the end of the month.

Alan Patricof

Co-Founder & Managing Director • New York, NY

Alan Patricof is the founder and managing director of Greycroft LLC. A longtime innovator and advocate for venture capital, Alan entered the industry in its formative days with the creation of Patricof & Co. Ventures Inc., a predecessor to Apax Partners – today, one of the world’s leading private equity firms with $41 billion under management. He stepped back from the daily administration and operational aspects of Apax Partners, LP in 2004 to concentrate on a group of small venture deals on its behalf.  In 2006, he founded Greycroft Partners, a venture capital firm, to invest in leading early and expansion stage investments in digital media.  With offices in New York and Los Angeles, Greycroft is currently investing from its fourth Fund as well as its Growth Fund, and has $800MM under management.

With a 40-plus year career in venture capital, Alan has been instrumental in growing the venture capital field from a base of high net-worth individuals to its position today with broad institutional backing, as well as playing a key role in the essential legislative initiatives that have guided its evolution. He has helped build and foster the growth of numerous major global companies, including, among others, America Online, Office Depot, Cadence Systems, Cellular Communications, Inc., Apple Computer, FORE Systems, NTL, IntraLinks, and Audible. He was also a founder and chairman of the board of New York magazine, which later acquired the Village Voice and New West magazine.

Alan is active in the New York and Washington communities.  He is a board member of the Finance Committee of Northside Center for Child Development in Harlem and the Board of Overseers of Columbia School of Business.  He is also a member of the Council on Foreign Relations.  In October 2013, he was appointed as a Member of the President’s Global Development Council by Barack Obama.  From 2007 to 2012, he served two terms on the board of Millennium Challenge Corporation, having been appointed by Presidents Bush and Obama respectively.  From 1993 to 1995, he served as Chairman of the White House Conference on Small Business Commission in The Clinton Administration.  In addition, he is a former board member of TechnoServe, Trickle Up Program, Global Advisory Board of Endeavor, Applied Sciences NYC Advisory Board, and the Initiative for Global Development (IGD) Leadership Council. He is currently an advisor to Disney’s Accelerator Program.

Alan holds a BS in Finance from Ohio State University and an MBA from Columbia University Graduate School of Business. He is married to his wife Susan for over forty years; he has three children and seven grandchildren.

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