I have an entire section in my white paper about why the typical metrics of success used to evaluate entrepreneurship support organizations (ESOs) need to be changed and the damage that is being done by sticking with the status quo, which I encourage you to read, but here’s the SparkNotes version:
One of the principles of management is the concept that “you manage what you measure.” Thus, if the metrics of success that ESOs measure are not appropriate metrics, it is unlikely that they will be managed to most effectively serve the entrepreneurs they’re meant to help. A quick litmus test is to ask if a specific metric is one that a for-profit consulting firm would be asked to measure and deliver results on in order to get paid. If the metrics of success are not the same, the services provided will not be the same, and outcomes will not be the same.
That said, some of the most commonly utilized metrics of success to evaluate non-profit entrepreneurship support organizations’ performance include job creation, equity financings, debt financings, contracts won, clients served, and new business starts. The issue is that these are either economic development measures (jobs) or top line measures (contracts, financings) and don’t speak to the profitability or sustainability of the business. Let’s take just a couple as examples to illustrate.
As much of the funding attached to entrepreneurship support is economic development funding, job creation is a key measure of almost any ESO’s or CDFI’s (Community Development Financing Institutions) success. Unfortunately, job creation in and of itself doesn’t tell us much about the success or sustainability of a business.
Firstly, the goal of a business is not to create jobs, it’s to generate a profit. From a business perspective, jobs should only be added when they are necessary to increase productivity and profit; they should always add more to the bottom line than the expense of filling the position takes away from it. A highly-paid business consultant would not be brought into a company to help it figure out how to create more jobs for the sake of creating jobs.
Additionally, even if approaching the discussion through the lens of economic development as opposed to business strategy, if sustainable economic development is the goal, the rapid addition of jobs is likely not the answer. Quickly created jobs are often unstable and just as quickly eliminated.
Financings & Contracts:
Two other measures of success used by nearly every ESO are the number and dollar amount of various types of financing obtained by the businesses they serve (grants, equity investments, loans) and the number and dollar amount of contracts obtained by the businesses they serve. The problem with these measures is that they are top-line measures that do not account for the impact of the financing or the contract on the business and a loan or a contract can just as easily add next to nothing to the bottom line or even put a small company out of business as it can help it grow.
In my white paper, I provide the example of Melody, the owner of a small construction company that wins its largest contract to date with a property developer. The ESOs that Melody works with immediately count and publicize her success of winning the contract, logging the top line dollar amount in their records.
However, imagine Melody and her construction company six months later:
- Melody submitted a low bid because she really wanted to win this contract but, after performing the work, she realized that her costs were nearly as much as her revenue on the project.
- Additionally, the company performed all of the work for the contract but there was a delay in payment from the developer;
- Melody didn’t have enough cash reserves to cover the delay so she was unable to pay the company’s bills;
- the company couldn’t qualify for a bank loan so Melody turned to a micro-lender to cover payroll for the already completed project (this is recorded as another success for the ESOs and for the CDFI);
- there was another delay in payment so the micro-loan funds are gone and now Melody has that debt and her other liabilities to deal with;
- there is no cash to buy the materials for the next job so the start is delayed and the contract is dropped;
- even when the payment finally comes through, the margins are so slim on it that it’s not enough to save the sinking ship and the company is forced to close its doors while Melody is still responsible for the micro-loan, which likely has an interest rate of around 16%.
While that example sounds extreme, and it is, it’s also not terribly uncommon. Yet if you were to examine whether the ESOs were doing their jobs based on the success metrics set out, it would appear as though the ESOs had been tremendously effective helping this small business win a contract and secure financing. Given that the measurements used to evaluate ESO and CDFI performance could present what happened to Melody as a success, there are clearly issues with those measurements.
Let’s start having honest conversations about what metrics would accurately measure success in the entrepreneurship support arena so that we can begin to better serve the entrepreneurs who rely on the help of ESOs to build their businesses.