The first week on my first job after college I came into work super early and left super late. At the end of the week my then boss called me into his office and said: “it’s great that you are so enthusiastic about this job, but you are setting a high bar for everyone’s expectation of you — what will they think when you come in a bit later next week?” I have never forgotten that because it embodies a critical lesson: what others expect of us is in no small part determined by our own behavior (and rhetoric).
That is especially true for the relationship between management and investors. There is a narrative out there today that expectations are all the fault of investors who tend to expect too much. This comes up for example when a public company has lower than expected earnings or in the aftermath of a CEO change, such as the one at Twitter. My own experience suggests that management has far more to do with these expectations than the coverage suggests.
In particular the failure mode that I see time and time again is that management wants to have its cake and eat it too: They want a high valuation in line with or even above everyone else’s while at the same time insisting that their company is different in some critical way (often around mission but could be the go-to-market approach or investment in research and development). This sets up an expectation mismatch as most investors will cue off the valuation. A gap emerges between the valuation and the strategy leading eventually to a correction (at which point generally investors will be blamed).
This is true not just in the public markets but also increasingly in the private markets with rounds getting done at super high prices. Investment bankers tend to play an unfortunate role here as they often contribute to the valuation based expectation both in private rounds and when companies go public (their incentives tend toward short term maximization). Almost every banker will say something like “you have to have predictable earnings to go public” — well once you get on that expectations treadmill you can’t get off! If you then ask the same banker as to why Amazon can get away with minimal or no guidance you get a reply along the lines of “well they are Amazon and you are no Amazon” which of course blatantly ignores that Amazon also wasn’t the Amazon we know today when it went public.
So bottom line for founders and management: you are much more in control of investor expectations than you may think or have been led to believe. You need to be careful about what expectations you create because that’s what you will be compared to. Trying to be different and yet insisting on valuations in line with everyone else is a sure fire way to create an expectation mismatch that will eventually come to bite you.
