One of the best ways for a public company to increase its share price is by beating quarterly earnings estimates and raising full year guidance. This is what is routinely referred to as the “beat and raise.” In simple English, beat-and-raise means that the past was better than expected and the future is going to be even better than anticipated. For public companies, the pressure to beat quarterly estimates is so intense that many of them “manipulate” estimates or do tricks to generate additional revenue at the end of the quarter through steep discounting or other weird mechanisms. It is tremendous pressure at the end of every quarter.
One of the biggest benefits of being a startup or a private company is not being constantly measured on your ability to meet quarterly targets. This lets private companies focus on long term goals instead of short term ones. However, there are a few occasions when a startup “interacts with the market” and gets an outside valuation. This mainly happens when raising a financing round. A typical financing round takes a few months to complete and during that time the company is constantly observed by outside investors who, among other things, are trying to gain confidence in management’s ability to execute. As a CEO, one of the best ways to gain investors’ trust is by achieving your existing monthly/quarterly/annual targets. Even better is demonstrating that you are not only exceeding your short term targets (e.g., monthly or quarterly revenue plan) but also increasing mid-term targets (e.g., annual revenue plan). This is the startup’s version of “beat and raise.”
Many inexperienced entrepreneurs fall into this trap – they overstate their short and mid-term targets to impress investors. The logic that guides them is that by presenting ambitious goals they will excite investors more. However, in most cases, fundraising takes some time and most likely the investor will use this window of time to closely track how the company performs against its targets. Failing to meet plans in this window of time sends a bad signal on management’s ability to execute.
More experienced entrepreneurs will have a few aces up their sleeves: They will slightly underestimate short-term goals so that they can beat them, keep some buffer for a potential lead in case it doesn’t convert in time, downplay the likelihood of an important strategic partnership to close, etc. This will help them ensure they over-deliver during that critical window of closing an investment round.
Yes, this is somewhat of a trick. But sometimes small tricks make all the difference in the world. Just ask any CFO of a public company.
4 thoughts on “The startup’s version of “Beat and Raise””
yes, short term view can damage you in the long term if you don’t play it out well.
Although I agree with the tactic of – “under promise, over deliver,” wouldn’t you say that it is more important for the entrepreneur seeking capital and investor approval to be more transparent with projections? One should never overestimate and get too haughty, but isn’t their value in displaying ambition and shooting for the stars?
Agree. There is a lot of value in shooting for the stars. Most investors would not invest in an entrepreneur who doesn’t seem ambitious enough. But for the short term plan, most often it is better to under-promise and over deliver. Most entrepreneurs are optimistic by nature so tend to over promise even for the short term. Things tend to take longer than most people think, so it is better to be more conservative with the plan you show investors.