Startup Forecasting (the easy way)
Happy New Year and welcome back to my Startup Tip of the Day.
I remember being 20 years old, sitting in front of a blank Excel spreadsheet without a clue in the world as to how I was going to build an accurate forecast for my first startup. Without proven revenues or associated costs, the entire page just seemed to scream of disillusion and quite frankly, made me feel uncomfortable just looking at it, knowing that I’d have to one day substantiate it all for prospective investors.
There’s a lot of pressure for companies to properly forecast their revenue guidance both to private investors, as well as when going public￼.
For startups, revenue activation and growth rate is typically the main focus for the founding team, especially if the company has raised investor capital. This, by design, is in stark contrast to profitability optimization (which most later stage companies turn their entire focus towards).
Today, I get questions from first-time founders asking how they can better forecast their revenues in their own financial pro-formal statements, so here’s a few thoughts:
Equidam (a valuation company), published an article in 2016 that highlighted the average revenue of startups and their corresponding growth rates. See chart below.
“The average company forecasts a growth rate of 178% in revenues for their first year, 100% for the second, and 71% for the third.
This means that a company that grossed $500,000 Year to Date (YTD) will forecast $1,390,000 for the next year, $2,780,000 for the following and $4,753,800 for the third one”
To me, these growth rates seem aggressively accurate, but again, each industry and sector varies widely coupled with the fact that some of these companies have raised venture capital which further expedited revenue activation.
“Growth rates for startups however vary widely by industry, country, and stage of development of the venture. Companies that start from scratch will of course find it easier to grow their revenues at higher percentage rates. One of the reasons for it is that a smaller number is easier to grow compared to a large one.
On top, different sectors have different setup times, adoption speed, sales cycles and market opportunities. Finally, countries have different home-market sizes, access to funding and talent etc.”
When thinking about your projections, I like to look at the following as reference points:
1) Current Industry/Sub-Sector – (Ibis industry world reports is a good place to start as they show different market capitalization and projected growth rates for various industries)
2) Current Revenue – How much do we have over what time horizon. How much did it cost us to acquire that revenue?
3) Benchmarks – if there are other firms in your space with articles written about their revenue and growth rate, are you in line with them or not? How much traction do they have? Have they raised capital, and how much revenue did that capital acquire them over what time horizon?
4) TAM – what is our total addressable market size? SAM – what is our actual serviceable market size based on our limited resources?
5) Bottom-Up Forecast – How many cold calls, emails, website visitors, trials, etc do you have to provide to convert each customer to revenue? What factors contribute to the nth (next) customer? Say for each new salesperson you hire, they each contribute x number of converted customers (gross revenue on average). Multiply that dollar figure out by a factor of 5 (for instance if you can hire 5 more people to grow your sales), to build your sales ramp-up model. Again, each $1 of gross revenue has an associated cost of customer acquisition (CAC). Knowing your CAC and associated Gross Revenue should help substantiate your projections greatly as you build your financial forecasts.
Photo by Isaac Smith
Thanks for reading! For more articles and business tips, visit my site: www.reaganpollack.com
Disclaimer: nothing contained in this post/article should be considered financial, legal, or accounting counsel or advice, as these are based solely on my own personal opinions, and not that of a certified professional or the law (as rules/regulations vary by location). Always consult with a certified financial, legal, accounting professional before taking any action, and proceed at your own risk.