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While some basic budgeting is necessary for all corporations, I'm strongly of the opinion that the wrong kind of budgeting can seriously hamper growth, prevent the kind of returns needed by venture capital investors, and set a company on a path to at best, mediocrity, at worst, oblivion.

"If you're not failing every now and again, it's a sign you're not doing anything very innovative" - Woody Allen

Imagine for a moment you've just cleared a new drug through the FDA and insituted a profit-sharing/bonus scheme for all employees that is tied to the two most common outputs of a budget: sales revenue and EBITDA. Best case scenario for the employees is, the sales guys hit the revenue targets, and the operating guys control their costs. Everyone gets 100% of their bonus. Makes sense, right?

Sure - but unfortunately, this is not the best case for the company, or its shareholders. The best case for the company is that the sales guys hit their targets out of the park, and the operating guys still get their bonuses, despite all that new gear they had to buy and those new consultants they had to hire to support the massively higher sales number.

Operating guys hate it when sales guys threaten their bonuses. Sales guys hate it when the operating guys refuse to support them. The larger the company, the more solid the processes put in place to prevent these two teams from colliding. This isn't good for the owners. Could it be that budgets are to blame?

Venture-backed companies are supposed to be about high growth and the kind of performance that comes from too much Red Bull, nights out with your customers, and an insatiable desire to pick up the phone and sell. Yet how many budgets encourage that kind of behavior? Very few.

The sad thing is, there are plenty of successful analogies of a non-budgeted approach to achievment. These approaches don't ignore goals, they embrace them.

Takes sports teams, for example. Can you ever imagine a top-line sports coach saying to his players "okay gang, listen up - we're going to expend 1,500 calories each during this half of the game and stop once we have eighteen points on the board"? So why do we ask CEOs to do exactly this? Why not ask them instead to stretch a little?

The other problem with budgets is that they can easily give the illusion of control - while providing nothing of the sort. Take out the last budget someone handed you. Sure, the "actuals vs. budget" totals might match, but how many of the individual data points below match what was anticipated during the budgeting process, and how many of them occured by pure chance?

And how much were the totals influenced by a need to catch up to the goal? Which leads to the inevitable and much more important question of: How much could have the goal posts been moved back, if the budget had been based on maximum possible return, instead of a "most likely" mid-range data set?

This is not just an issue for startups - this is an issue that Fortune 500 companies wrestle with as well. Back in the years when Jack Welch was everyone's favorite CEO (i.e. before Steve Jobs inherited the title), Welch pretty-much single-handedly invented the Stretch - the concept that instead of budgeting, your should set "Stretch" goals and go after them with all your might.

According to Jefferey Krames and "The Lexicon of Leadership", Welch hated budgets. As Krames states, Welch operated more like a coach:

"He [Welch] preferred asking employees,“How good can you be?” and felt that Stretch targets rather than traditional budgets helped promote more boundaryless performance."

"How good can you be?" - that is an excellent starting out question for first-time - and even mature CEOs. I suspect many CEOs are not being asked that often enough by their coaches, directors, mentors, and investors.

Instead, they are asked :what's your budgeted goals", and end up settling a pat on the back for "achieving the budget" when they could be setting the world on fire.