Start-up Forecasting

"Forecasting is difficult, especially if it's about the future."

Forecasting start-up revenue is not easy. I write with a few thoughts on how best to handle the need to present financial forecasts vs. the uncertainty inherent in any model.

In general, two forecasting methods exist. The first, tops down, seeks to identify an addressable market and revenue becomes a function of market share. The second, bottoms up, is often best captured by detailed assumptions regarding how to get to revenue. For example, I am partial to the productive sales rep model: W# of sales reps * X rep maturity ramp * Y quota per rep * Z productivity per rep.

In my experience, both models are straightforward to develop. The art lies, however, in the skillful blending of the two approaches to satisfy a board, prospective investor, sales team, etc.

Forecast errors compound across time. Therefore, it pays to focus on three to six month bottoms up plans. A near-term bottoms up plan requires thoughtful detail and projections based on specific variables - how many sales heads, quota, ASP, etc. Operating history then turns the assumed variables into actuals and the model begins to solidify.

Beyond six months, the bottoms up approach is simply an exercise in guess work. How then should a management team think about the long-term?  I have found two useful models. The first is to examine historical comparables - for analog companies, what was the revenue ramp rate?  A model can be focus on projections that assume either the average, median, or top decile growth rates for comprable companies. Ie - it happened before and history looked like $xm, $ym, and $zm over three years.

Another model is to set strategic market share goals. In essence, the long term plan focuses more on clearly defining an addressable market and a strategic goal of capturing x% of the market.  Again, the art lies in defining the market, the market's growth rates, and a strategy for competing for 20-30% of the market at large.

It pays to invest in both near-term detail and longer term aspirations. The former assuages board members and investors and provides them confidence in your operating bona fides. The latter fires the imagination and helps paint the picture of how a very large, venture return company can be built.

The Power of Frameworks - Respect the Process

After winning the Orange Bowl, Jim Harbaugh saluted his team for "respecting the process." 

Stanford's Carol Dweck (must read book MindSet) argues that growth-mindset people focus on the "process and not the outcome."

With an outcome in their sights (lose weight, sell more, pick new year's resolutions, rebrand), most people jump right in.

However, outcomes are derivative of commitment to a sound process. Without a clear process, most people fail or practice random acts of violence that may or may not work.

Since becoming a CEO, I have come to appreciate the wisdom of frameworks and processes.  Whenever I think about an outcome, I must catch my enthusiasm to reach it and instead, step back, and define a process for how to realize the goal.  The universal application of "process vs outcomes" is very real. In fact, I find that any process is better than no process at all and the specific process matters far less than committing to one.

For example, how did you pick your New Year's Resolutions?  How are you planning to lose weight?  How will you develop a strategic development plan? Forecast sales....Develop software?

To take one example - New Year's Resolutions - the American Association of Happiness happens to have a very handy framework with which to develop a sound list.  MAPS - pursue personal resolutions that will result in MEANING - AUTHENTICITY - PURPOSE - STRENGTHS.

I would argue that the power of frameworks compounds across the # of team members - ie the more people that you have working to a goal, the more value you will derive from a joint commitment to a process. Why? Frameworks provide a common mental model, semantics, structure that help overcome individual idiosyncrasies and biases. The shared model provides a vocabulary for common action, dialog, and progress. Without a framework, individual biases will make communication challenging - leading to frustration and failed missions.

Little in the world is truly new. For any particular goal - running a marathon, swimming a mile, to brand positioning - there are sound frameworks. The value of frameworks helps teams focus on the "upstream" work that will lead to the outcome rather than the outcome itself. Moreover, the value of a process compounds with the # of team members - the larger the team the greater the value.