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If you’re an agile or fast-moving company, a budget is like a shackle — you’ll be held prisoner to the assumptions you make for the next year. Learn how Chili Piper made the shift to an ROI mindset and our four main principles for success.
If you’re an agile or fast-moving company, a budget is like a shackle — you’ll be held prisoner to the assumptions you make for the next year. Learn how Chili Piper made the shift to an ROI mindset and our four main principles for success.
Are you starting to think about your budget for the next year?
Stop right now.
If you’re an agile or fast-moving company, a budget is like a shackle — you’ll be held prisoner to the assumptions you make for the next year.
Thinking you need to build a budget to be successful is dangerous and, quite frankly, irresponsible. Especially in a fast-paced company where things can change on a dime.
Inspired by Peter Thiel's famous lecture and WSJ article, Competition Is for Losers, I will argue that budgets are a game of slow death.
To create a thriving business, we cannot limit ourselves to only assessing the cost side of the business — managers need to take ownership of a balanced cost vs. return function.
My antithesis to budgets?
The ROI mindset: Resources are always available for positive return efforts.
To make the best of the ROI approach, operators need to:
At its core, finance is about capital allocation.
There are opportunities in the wild, and managers choose where to allocate their capital to generate the best return possible. These can include:
There is always a cost associated with capital, even if you’re just holding cash (inflation anyone?) or doing nothing with your time — AKA, the cost of passing on investment opportunities.
Portfolio managers like VCs evaluate investments against other opportunities to create the optimal portfolio. The ideal portfolio generates the best return for the amount of risk being taken.
More on the Capital Asset Pricing Model.
Finance has portfolio allocation down to a T with a ton of academic theory and practical calculations. But every operational manager is also a portfolio manager. They manage a portfolio of allocated resources where they delegate tasks to people, deploy company money, and so on.
Portfolio managers wrangle these resources in any way they can to generate the best return for the company. Each manager is in a unique position because they have an exclusive set of investment opportunities available to them — the opposite of stocks that are open to everyone.
Private markets like VCs and private equity funds are not available to everyone, yet they often generate the best returns. In short, this is how the rich get richer — by gaining access to the investment opportunities others don’t have.
Good managers (a16z, Sequoia) often get bigger and bigger funds because other investors believe they have a special “Midas touch.”
Here’s a scenario:
Imagine a portfolio manager has access to dozens of incredible opportunities…
Would you give them money to capture the opportunities?
Your initial reaction would likely be yes. But if your budget is already allocated elsewhere, you will have to say no. You are saying no because other opportunities came along first, not based on their merits.
The same goes for a manager that keeps losing money: It would be silly to continue giving them more just because you've already budgeted for it.
The best operators act like portfolio managers — deploying their resources wisely to generate the best returns.
In this framework, borrowed from Matt Robinson, there are two distinct types of (good) managers:
Powder kegs are extremely enthusiastic managers — once you light their fuse, they explode in every direction.
Within the first few days of assuming their role, they've already scheduled weekly meetings with other leaders, figured out where the problems are, and started deploying resources to fix them. Before you know it, they’ve purchased tools for at least five figures, processes (I mean, umm… best practices) are popping up like mushrooms, and new hires are joining ASAP.
Great, right? NO!
While powder kegs are admired for their enthusiasm and domain knowledge, they have no regard for wider company priorities. They tend to create distractions for top leadership thanks to their excitement and never-ending ideas.
Powder keg managers are always picking a new hill to die on (over things like perceived gaps in company practices) and tend to “solve” problems by creating new levels of reporting.
However, there are good things about these kinds of managers. First and foremost, they know exactly where they’re going.
So, how do you get the best performance out of a powder keg? By putting in a limited amount of gunpowder — AKA, a controlled explosion.
And voila, you've just witnessed the birth of a budget.
Snipers, on the other hand, are similarly enthusiastic, but they keep an eye on the company’s broader priorities and initiatives.
Snipers still figure out where the gaps are and identify how to fix them, but they hold back on firing in every direction by adjusting the scope of their actions. For example, they might decide to let some small fires burn to prioritize the highest leverage activities.
Should we move over to a modern financial ERP tool built before Y2K like NetSuite? Yes, please! But is the deployment the best use of time today? Maybe yes, maybe in 12+ months.
While it might look like snipers aren't doing the busy work we're all accustomed to seeing, it's precisely this proactive decision not to do something which allows other managers the space to excel.
The approach requires trust and aligns much better with the ROI mindset.
In short, “powder kegs” manage input and activities while “snipers” manage scope and output.
Despite their shortcomings, budgets are popular. Here are my thoughts on why that is:
The ROI approach assumes there is no fixed budget constraint but that resources can be obtained for any project that delivers a positive ROI.
However, the creativity of finding these projects lies with each employee, meaning the approach is inherently bottom-up. If nobody comes up with good ROI actions, then the company sits idle.
The budget approach assumes a return on investment by saying, “I will give you no more than X, and you have to deliver at least Y.” Employees are incentivized to spend as much of their budget as possible because their only job is to limit downside.
Essentially, if an employee asks for a $10K budget, they would need to spend it all so they can get the same or higher budget next year.
If they don’t spend it all, the company will see it as a surplus and cut the budget for the following year — leading to reckless spending simply for the sake of spending.
Still confused?
Watch an explanation here.
Eventually, the method creates an org that dances to the tune finance plays — which is a centralized approach.
In companies that rely on budgets, getting more resources is a task for top management via capital markets and own cash.
What does this mean?
In most companies, the CEO and CFO receive and distribute resources from investors. There’s no way for employees to get more resources without going through them.
In an ROI mindset, anyone is eligible to get resources. For example, suppose Nicolas (our CEO) told Dan (our director of community) that we don’t have the budget for community dinners. In that case, Dan could get sponsors to pay for the dinners and continue fostering relationships — which is exactly what's happening.
In a budget org, it would simply be outside of the budget, and you'd drop the idea.
On the other hand, the ROI approach is decentralized and empowers each person to create new avenues for return and growth.
For example, we recently deprecated a small Chili Piper product. We had high hopes for it, but the market didn’t agree. We ran a number of experiments and very quickly understood that it was unlikely we'd generate the necessary return.
If we had a budget attached, we would have looked to spend it all before coming to the same decision. And if we had a budget owner attached, they would probably fight tooth and nail to prove that the budget was well spent and requires more money for the next period.
Another example: People at Chili Piper asked for a fixed team development stipend. I pushed back, saying that if a manager believes additional training will significantly increase their team’s performance, but it's outside of the stipend budget, I still want them to do the training.
And if there’s no relevant training, I don't want the team to do some course just for the sake of spending the budget. We settled on a smaller amount that requires zero approval and encourages employees to take advantage of any training that will be valuable to them as an individual and to the company.
Going from a budget mindset to an ROI mindset is hard — especially in large or rigid companies. Here are the main principles to make it work:
There are two ways to do financial planning — top-down and bottom-up:
Top-down is easy yet useless. The only learning thing you’re accomplishing is learning whether or not the team believes the target is achievable.
Bottom-up is a much better approach because it drives accountability — managers themselves provide KPIs for a model maintained by finance.
At Chili Piper, the point of conversion is the same for everyone. Meaning, all teams deliver opportunities to the sales team.
Not MQLs or SQLs or some other acronym — because these conversion points don’t align our teams.
Sure, it might not be perfect, but it's important that everyone is working towards the same number. It also means improved visibility and alignment between marketing, outbound, and community.
Unless teams are aligned, there will always be room to excuse poor performance with murky explanations.
Budgets are typically allocated once a year, for the whole year, with quarterly adjustments. Once you get your number, you are free to operate within that budget.
But without a budget, there needs to be an efficient method for quick decision-making.
At Chili Piper, we use the decision memo format (more on that here). Anyone is allowed to create one, and anyone is allowed to contribute. Decision memos can be used for anything from buying software to hiring a new position.
The initiator must make their case thoughtfully to convince decision-makers of the return on investment. Decision makers are usually the founders or top leaders at the company.
At Chili Piper, the process usually takes a few days — you shouldn’t have decision memos sitting in limbo, or no one will take them seriously.
The drive to grow is our most important principle at Chili Piper. It requires having people who choose to try new things and evolve. It may sound simple but is hard in practice.
It requires enthusiasm to push the boundaries when teams are already stretched.
It requires humility to look at initiatives objectively.
Lazy passengers will have a hard time following this principle. Smart and enthusiastic drivers will suffocate in an organization that hinders their growth — so they end up at Chili Piper. 😉
Are you starting to think about your budget for the next year?
Stop right now.
If you’re an agile or fast-moving company, a budget is like a shackle — you’ll be held prisoner to the assumptions you make for the next year.
Thinking you need to build a budget to be successful is dangerous and, quite frankly, irresponsible. Especially in a fast-paced company where things can change on a dime.
Inspired by Peter Thiel's famous lecture and WSJ article, Competition Is for Losers, I will argue that budgets are a game of slow death.
To create a thriving business, we cannot limit ourselves to only assessing the cost side of the business — managers need to take ownership of a balanced cost vs. return function.
My antithesis to budgets?
The ROI mindset: Resources are always available for positive return efforts.
To make the best of the ROI approach, operators need to:
At its core, finance is about capital allocation.
There are opportunities in the wild, and managers choose where to allocate their capital to generate the best return possible. These can include:
There is always a cost associated with capital, even if you’re just holding cash (inflation anyone?) or doing nothing with your time — AKA, the cost of passing on investment opportunities.
Portfolio managers like VCs evaluate investments against other opportunities to create the optimal portfolio. The ideal portfolio generates the best return for the amount of risk being taken.
More on the Capital Asset Pricing Model.
Finance has portfolio allocation down to a T with a ton of academic theory and practical calculations. But every operational manager is also a portfolio manager. They manage a portfolio of allocated resources where they delegate tasks to people, deploy company money, and so on.
Portfolio managers wrangle these resources in any way they can to generate the best return for the company. Each manager is in a unique position because they have an exclusive set of investment opportunities available to them — the opposite of stocks that are open to everyone.
Private markets like VCs and private equity funds are not available to everyone, yet they often generate the best returns. In short, this is how the rich get richer — by gaining access to the investment opportunities others don’t have.
Good managers (a16z, Sequoia) often get bigger and bigger funds because other investors believe they have a special “Midas touch.”
Here’s a scenario:
Imagine a portfolio manager has access to dozens of incredible opportunities…
Would you give them money to capture the opportunities?
Your initial reaction would likely be yes. But if your budget is already allocated elsewhere, you will have to say no. You are saying no because other opportunities came along first, not based on their merits.
The same goes for a manager that keeps losing money: It would be silly to continue giving them more just because you've already budgeted for it.
The best operators act like portfolio managers — deploying their resources wisely to generate the best returns.
In this framework, borrowed from Matt Robinson, there are two distinct types of (good) managers:
Powder kegs are extremely enthusiastic managers — once you light their fuse, they explode in every direction.
Within the first few days of assuming their role, they've already scheduled weekly meetings with other leaders, figured out where the problems are, and started deploying resources to fix them. Before you know it, they’ve purchased tools for at least five figures, processes (I mean, umm… best practices) are popping up like mushrooms, and new hires are joining ASAP.
Great, right? NO!
While powder kegs are admired for their enthusiasm and domain knowledge, they have no regard for wider company priorities. They tend to create distractions for top leadership thanks to their excitement and never-ending ideas.
Powder keg managers are always picking a new hill to die on (over things like perceived gaps in company practices) and tend to “solve” problems by creating new levels of reporting.
However, there are good things about these kinds of managers. First and foremost, they know exactly where they’re going.
So, how do you get the best performance out of a powder keg? By putting in a limited amount of gunpowder — AKA, a controlled explosion.
And voila, you've just witnessed the birth of a budget.
Snipers, on the other hand, are similarly enthusiastic, but they keep an eye on the company’s broader priorities and initiatives.
Snipers still figure out where the gaps are and identify how to fix them, but they hold back on firing in every direction by adjusting the scope of their actions. For example, they might decide to let some small fires burn to prioritize the highest leverage activities.
Should we move over to a modern financial ERP tool built before Y2K like NetSuite? Yes, please! But is the deployment the best use of time today? Maybe yes, maybe in 12+ months.
While it might look like snipers aren't doing the busy work we're all accustomed to seeing, it's precisely this proactive decision not to do something which allows other managers the space to excel.
The approach requires trust and aligns much better with the ROI mindset.
In short, “powder kegs” manage input and activities while “snipers” manage scope and output.
Despite their shortcomings, budgets are popular. Here are my thoughts on why that is:
The ROI approach assumes there is no fixed budget constraint but that resources can be obtained for any project that delivers a positive ROI.
However, the creativity of finding these projects lies with each employee, meaning the approach is inherently bottom-up. If nobody comes up with good ROI actions, then the company sits idle.
The budget approach assumes a return on investment by saying, “I will give you no more than X, and you have to deliver at least Y.” Employees are incentivized to spend as much of their budget as possible because their only job is to limit downside.
Essentially, if an employee asks for a $10K budget, they would need to spend it all so they can get the same or higher budget next year.
If they don’t spend it all, the company will see it as a surplus and cut the budget for the following year — leading to reckless spending simply for the sake of spending.
Still confused?
Watch an explanation here.
Eventually, the method creates an org that dances to the tune finance plays — which is a centralized approach.
In companies that rely on budgets, getting more resources is a task for top management via capital markets and own cash.
What does this mean?
In most companies, the CEO and CFO receive and distribute resources from investors. There’s no way for employees to get more resources without going through them.
In an ROI mindset, anyone is eligible to get resources. For example, suppose Nicolas (our CEO) told Dan (our director of community) that we don’t have the budget for community dinners. In that case, Dan could get sponsors to pay for the dinners and continue fostering relationships — which is exactly what's happening.
In a budget org, it would simply be outside of the budget, and you'd drop the idea.
On the other hand, the ROI approach is decentralized and empowers each person to create new avenues for return and growth.
For example, we recently deprecated a small Chili Piper product. We had high hopes for it, but the market didn’t agree. We ran a number of experiments and very quickly understood that it was unlikely we'd generate the necessary return.
If we had a budget attached, we would have looked to spend it all before coming to the same decision. And if we had a budget owner attached, they would probably fight tooth and nail to prove that the budget was well spent and requires more money for the next period.
Another example: People at Chili Piper asked for a fixed team development stipend. I pushed back, saying that if a manager believes additional training will significantly increase their team’s performance, but it's outside of the stipend budget, I still want them to do the training.
And if there’s no relevant training, I don't want the team to do some course just for the sake of spending the budget. We settled on a smaller amount that requires zero approval and encourages employees to take advantage of any training that will be valuable to them as an individual and to the company.
Going from a budget mindset to an ROI mindset is hard — especially in large or rigid companies. Here are the main principles to make it work:
There are two ways to do financial planning — top-down and bottom-up:
Top-down is easy yet useless. The only learning thing you’re accomplishing is learning whether or not the team believes the target is achievable.
Bottom-up is a much better approach because it drives accountability — managers themselves provide KPIs for a model maintained by finance.
At Chili Piper, the point of conversion is the same for everyone. Meaning, all teams deliver opportunities to the sales team.
Not MQLs or SQLs or some other acronym — because these conversion points don’t align our teams.
Sure, it might not be perfect, but it's important that everyone is working towards the same number. It also means improved visibility and alignment between marketing, outbound, and community.
Unless teams are aligned, there will always be room to excuse poor performance with murky explanations.
Budgets are typically allocated once a year, for the whole year, with quarterly adjustments. Once you get your number, you are free to operate within that budget.
But without a budget, there needs to be an efficient method for quick decision-making.
At Chili Piper, we use the decision memo format (more on that here). Anyone is allowed to create one, and anyone is allowed to contribute. Decision memos can be used for anything from buying software to hiring a new position.
The initiator must make their case thoughtfully to convince decision-makers of the return on investment. Decision makers are usually the founders or top leaders at the company.
At Chili Piper, the process usually takes a few days — you shouldn’t have decision memos sitting in limbo, or no one will take them seriously.
The drive to grow is our most important principle at Chili Piper. It requires having people who choose to try new things and evolve. It may sound simple but is hard in practice.
It requires enthusiasm to push the boundaries when teams are already stretched.
It requires humility to look at initiatives objectively.
Lazy passengers will have a hard time following this principle. Smart and enthusiastic drivers will suffocate in an organization that hinders their growth — so they end up at Chili Piper. 😉
Mikus Krams is leading Strategy & Finance at Chili Piper. He is an enthusiast of B2B SaaS revenue machines. Previously, Mikus worked in tech M&A and helped build out the commercial and finance functions of early stage SaaS companies. Mikus has a Master's degree in Finance & Investments from the Rotterdam School of Management.
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