You have a great idea, definitely worth at least a hundred million dollars, if not a billion. People you have spoken to are convinced that it holds promise. You have slept on the idea and it looks good. You had your peers pick holes in your business case and found it still looks good. You are now a firm believer and are all set to pitch this to friends, family (and if you are lucky, to that Angel your uncle knows).
You have started to build out the business plan and you’ve arrived at the puzzling maze called the financial model. You see that you have a unique problem. How will you project how fast your startup is going to grow, when your concept is brand new? Will you grow like the landline phones and take 75 years to hit 50 million users or will you do an Angry Birds and hit it in 35 days?
What is the growth that you should project? (1)
If your product works in the social media space, should you use Facebook’s growth rate? If you are an ecommerce business, should you use Amazon’s? You could. But don’t.
Projecting your business’s growth is not about how good you are. It is not about being sexy but is about presenting a compelling investment case. And a compelling investment case is always grounded in the interesting and achievable.
But it is a 100 billion Dollar Market and There’s the Viral Effect
But the market size is about 100 billion dollars, and the billion you are projecting in year 5 is still just 1%, you say? While that is true, just because the market is large, it does not mean that you will be a success. It only shows potential for success. It supports the case for your business and is not the basis of your business case.
But your business has a potential viral growth effect. And you are going to make funny videos of a cat that is going to have a million views in 20 seconds. There is no proven, repeatable way to make user growth viral. The only people who can do that are your customers and, at this stage, you probably don’t have many to form a case with.
Your Business is Not a Pyramid Scheme
The prudent approach is to start with a growth target that you think is achievable with you leading the business. Think in terms of numbers that YOU can deliver, worst case. And build from there based on each initiative/ strategy that you plan to implement and the growth that it will deliver. Stay away from potential and stick to the possible.
An equally good approach is to set a realistic goal upfront and define strategies that will get you there. This could be as simple as saying I want 10,000 people to buy chocolates from my store at the end of year two and hiring 100 salesmen to sell 500 chocolates each by year two. That’s definitely more possible than the potential that 100,000 customers might buy your chocolate on seeing the viral video of a baby and a cat fighting over your chocolate (actually, that just might work).
You can always adjust the numbers to make it more interesting. At the end of the day, a model is usually built on excel and you change a few cell contents to change your user growth.
The key thing to remember here is that you probably have never given anyone money when they offer a fantastic return. You probably always questioned it. Pitching to an investor is no different. He is looking to make a risk-balanced investment and fancy growth numbers are more likely to do more harm than good.
A good litmus test for your projection is simple- would you put your money based on your model? There are multiple approaches to projecting growth and there is no sure-fire method. The closest you can get to a master formula is by being “reasonably” conservative in your approach and be prepared to tweak your numbers a few times during the pitching process.
One thing is for sure though- wizardry has nothing to do with projecting your startup’s growth. What does, is common sense and a realist’s approach.