Can Anyone Break the “Expectations” Treadmill?

I want to point out this fascinating blog post by Albert Wenger, a partner at  Union Square Ventures, who has invested in such early-stage companies as Twitter, Tumblr, Foursquare, Etsy and Kickstarter.

Wenger questions the status quo of companies feeding Wall Street with projections and expectations. He asks whether or not the early-stage tech community can resist the demands of Wall Street upon coming public, for the benefit of investors and management alike…

Earlier this week I was talking to a group of investment bankers about the process of going public. In particular I was drilling in on the much vaunted need for revenue visibility as a basis for giving quarterly guidance. Every company that is thinking about going public hears this and it becomes an obsession for the team and the board.

Why do you need revenue predictability? Because you need to give guidance. Why do you need to give guidance? Because the market expects it. Why does the market expect it? Because everyone else is giving guidance. This is a great example of how rational expectations by all players involved can land you in a bad equilibrium, not unlike theprisoner’s dilemma. Everyone is on a short term, quarter-by-quarter treadmill and nobody can get off, because the first one to get off will get punished. But collectively we would all be better off if companies were focused on the long run.

Keep reading:

Going Public: Rational Expectations and Bad Equilibria (Continuations)