Numbers don’t lie by Megan Lisa Jones

Joey Tamer’s Blog April 2011

I’m a number geek. Give me spreadsheets and I’m thrilled. I hear entrepreneurs and company execs spin their stories all of the time. And I’m a sucker for a good story (I write novels and consider Don Quixote my favorite book)!

But the numbers don’t lie. Within historical financials I can learn the actual (meaning unembellished) history of a company. Are they growing? Is their business model or product working and catching on?

I can learn just as much digging through projections. Do they understand their industry and the hazards (and competition) they face? Are you realistic? For example, no one can maintain super high margins outside a few select industry groups or with a monopoly. If I can duplicate you and you’re margins are insanely high than I can undercut you.

What I look for in a company’s numbers:

1. The trends. Are you selling more or less? Flat? Have you figured out how to increase profitability over time? Is your audience/page views/etc growing? Can you scale?

2. Profitability and revenues. The basics but somehow they don’t always seem to matter to an entrepreneur focused on more positive metrics. If you can’t figure out how to make money you won’t survive long term.

3. Inconsistencies. I recently saw two sets of company projections prepared a month a part and they were very different. Please be able to explain such inconsistencies. I even, years ago, worked on a deal in which the historical, AUDITED financials kept changing. That latter company ended up in court fighting a shareholder lawsuit. Historical numbers that change better be explainable (and if they change too often you aren’t doing something right).

4. Odd labels. “Other” over a nominal amount. Transportation cost that indicate Ferrarri or private plane. Too much spent, in an early stage company, on gifts or entertainment. If the revenues or business model support lots of parties (think Playboy or Disney) ok. But otherwise try to keep the costs within reason.

5. Outsize executive salaries in an early stage company. I won’t explain this one. Shouldn’t have to.

6. Too many senior executives in a development stage company (unless they have other jobs elsewhere and will join once a product exist). I’ll exempt public bio-tech companies here.

7. Numbers I can’t understand. I’ve dealt with multiple currencies, international co-shared branches, tax free zones and multiple tax jurisdictions. I’m not talking about those complicated (but legitimate) accounting realities. But if I can’t understand the numbers and the company executives can’t explain them to me we have a problem. I’ve seen this in public companies too…cross ownerships and foreign entities and no clear explanation for what it all means.

8. Projections that show revenues going from zero this year to $50 or $100 million within a few years. Yes, it does happen – occasionally. Why you? Do you really understand the market challenges and competition you’re facing?

9. Years of losses that turn profitable next year.

10. Many, many acquisitions. Not that they won’t work but I’ll probe you on the whys and hows of choosing and making them work.

11. Number of customers, repeat customers and returns. Are your customers staying with you over time (and happy?).

12. Write-downs. Please explain.

13. R&D, marketing and employee expenses. How are you allocating your funds?

14. Cash and burn rate (getting desperate; if so, your strategy is dependent on capital sources).

15. Valuation; past and then also future expectations. I blew a deal once over not being clear enough in advance with my client regarding reasonable valuation levels. With a great investor lined up my client asked for the moon, thus didn’t raise money and I didn’t get paid for my time.

16. How long you’ve been around. This tells me how quickly you can get something accomplished. Sometimes it takes time to find the right strategy; other times, you may not know what you’re doing.

17. Number of patents, copyrights or trademarks.

18. And my favorite, the oddball numbers. I walked into Alteon (later sold for around $5 billion to Cisco) when it was a baby start up. The number posted on a wall was 58. They kept track of how many days had passed – including weekends – since someone in the company had taken a day off. Now that’s intense.

I’m sure I missed some. Like eye color, facial features and hair color, all companies numbers vary somewhat but they ultimately define the company (good and bad). Talk is cheap but the numbers never lie.