Study associates frequency, quality of monthly reports with startup success

“Despite a lot of publicity and social media, number of sign-ups were modest,” reads one of the last monthly reports I sent to my VCs before my startup ceased to exist. “After the initial wave, sign-ups have slowed right down to near pre-launch levels. User acquisition is our number-one priority and my biggest headache.”

Like, I suspect, many other early-stage founders, I hated the monthly chore of writing a short report for investors. We used the PPP format (progress, problems and plans) for these regular missives, but progress was almost always slow and most of the time, problems far outstripped plans.

On good months, I was far more motivated to file our monthly report — it is a very human thing to want to deliver good news — and on bad months I had a million other more important things I thought a CEO should be spending their time on.

However, according to a research conducted by Jan Luca Ernst, a masters student at The University of St. Gallen, I may have been misguided. In his thesis, supported by Prof. Dr. Elgar Fleisch (Professor of Technology Management at University of St. Gallen) and Florian Schweitzer (a partner at VC firm btov), he writes “startups that submit regular, high-quality reports are shown by the statistics to be better investments than other startups.”

The research was based on analysis of hundreds of monthly startup reports submitted to btov Partners by portfolio companies out of its first two funds, which ran between 2006 to 2014. Specifically, researchers looked at 64 startups, covering the performance of startups during the first two years after initial investment from the first fund, and the performance during a single year, 2015, for the second fund.

“Hypotheses on the positive effects of monthly startup reports were tested, using several multivariate regressions,” write the paper’s authors. “As a result, several initial assumptions were discarded.”

For example, the punctuality of startup reports did not appear to indicate whether a startup would be more successful. In contrast, the frequency of reporting (at a confidence level of 95%), as well as the quality of the reporting (at a confidence level of 99%), were identified as contributors to success.

“Overall, the findings emphasize the importance of the post-investment phase and the value added by venture capitalists beyond financial support,” say Ernst, Fleisch and Schweitzer. “One main implication of the findings has an impact on subsequent investment rounds. Startups that submit regular, high-quality reports are shown by the statistics to be better investments than other startups. This may be an indicator that justifies further investment, that, in turn, leads to better performance.”

The authors also suggest that, in the future, investors may ask for “full, unfiltered access” to all past reporting of a startup, including evidence on the quality of reports and regularity of submission. “This would increase transparency and therefore eventually lead to better investment decision making,” they write.

With that said, during a call with btov’s Florian Schweitzer, he conceded that correlation doesn’t necessarily mean cause, but argued that there are many softer, and sometimes hidden, positive outcomes from monthly reports — especially when a founder does them honestly and whole heartedly.

Extra Crunch: What should a monthly report contain?

Florian Schweitzer: We always define what we would like or what we think would be sensible, because for each startup, of course, it is different. In general, the idea is that the founders can do the report in half an hour. Usually, it contains something like eight KPIs, and then some bullet points reflecting on what went well, and what are the challenges right now. And those challenges are a superb opportunity to understand where the founder is struggling, and where we can support them. So it can be a very, very productive agenda for a discussion, which we usually have regularity.

I think it is very good that founders sit back and think for half an hour: what happened during the last 30 days? What did I want to achieve? What did I not achieve? And to be honest about the progress and challenges.

It could just be that the startups that had problems didn’t like the reports and the startups that were making good progress, they liked doing the reports, because they were positive. So how do you address that in the analysis?

This is of course an issue and you cannot know the cause and effect; it’s certainly in both directions. It’s very human. People really like to communicate things which are going well, and do not like to respond to today when it’s going bad. What you can see in the research is that if things turn negative, the delay gets longer; it’s an indicator per se: how fast the report comes in.

You mentioned honesty. Surely that requires trust on both sides?

It’s a two-way street. If the founders are honest about what’s going on, the investor side is emotionally leaned into the problem and takes it as its own problem as well. We try to find solutions together. In cases where a bad situation was not communicated for a long time and came out only with a long delay, the situation is different. There’s mistrust and question marks about why the investor side got informed so late, and often it is also too late to do something. And of course, many founders want to solve problems by themselves and are very proud to do that, but they do not help themselves by not asking for help.

In other words, regular reporting is a way of asking for help without having to actually ask for help.

The best learning is that investors and founders define a rhythm to regularly discuss the progress of the company in a systematic way beyond the weekly or bi-weekly talks that we have, or daily in a certain phases. So on this monthly or quarterly — but I think monthly basis — they should agree on what is important for the company to track on a regular basis… For a growing business there are something between four and eight KPIs which should be tracked, and of course challenges which have occurred during the last four weeks. Based on that regular rhythm, they should discuss it once a month very openly. And the more open on both sides, the better it is for sure.

I wonder if the correlation exists in part because sitting down and writing the report, rather than just hoping it gets raised during a call, doesn’t just force a founder to be open with the VCs or the investors or the shareholders, but it forces them to be more honest with themselves.

One hundred percent, Steve, and that’s the whole point. It’s realizing, as an entrepreneur, is my ship going in the right direction or do I have to correct a little bit or a lot.

I think the report is only the agenda for discussion, nothing more. And the discussion will then maybe work out that the three mentioned most pressing challenges are maybe the most pressing right now, but they are not the most important ones for the company on, let’s say, a three-month horizon or twelve months away. So maybe in the discussion we’ll also find out that it feels very bad right now but it’s not a real problem for the company. That also can help relax the founder.

But being being forced to take the time once a month is good. As to your question of is it better to have a call or write it down? I think first the entrepreneur has to think about it alone, because they are so much more in the company, and the investor never is in the company. They can guess around, but the truth is what the entrepreneur knows.

In addition, the research says that startup reports are a valuable information source for investors, “who use the reports to monitor and reduce information asymmetry.” In other words, they help the support network to scale, right?

If a company needs introductions to customers or multipliers or whatever, if you’re in a conversation, it is likely only with a partner involved who will think about it and maybe afterwards they will discuss it with the partners of the firm and the angel network etc. But if it’s written, it is much easier shared and multiplied.

In our case, we as a fund nearly always co-invest with a lot of angels and we share those those monthly reports with our angels who do not have the monthly discussions with the founders. So they can read all of this and see they are having a hard time, and do something [to help].