Estimating revenue projections and growth requires founders to make assumptions. How practical and reasonable those assumptions are will determine how accurately you have been able to determine the revenue and growth.
Any projections you make will just be a reflection of how YOU expect the market to behave. And because there are no guarantees that the world will behave as you predict it to, it is prudent to be very, very conservative and realistic with the revenue estimates. Do not stretch the revenue assumptions in an excel sheet. There is no point in winning the battle of making the revenue higher than the costs in an excel sheet. What you put in the excel sheet exercise has to be what you feel has a reasonable chance of working in the market.
However, in the early phase, especially in new categories, it will be difficult to know what the right assumptions could be. Hence, entrepreneurs should work on various scenarios and think through how they would deal with different situations in terms of revenue and growth. Each scenario will have different outcomes and corresponding resources and hence different cost structures. Therefore, the scenarios have to be within the constraints of currently available capital for the present and near term, even if the mid and longer term projections assume capital infusion.
More importantly, they should measure what is happening in the market so that they can use in-market data to make adjustments in their projections as they get data and insights from the market.
The prudent way of arriving at an estimation of revenue is to build a business case ground up. I.e. how much revenue are you expecting per customer, how many customers can you get, how much does it cost to get each customer, etc. At the startup stage, it is important to do a month-by-month detailing of how you see the customer base increase based on what specifically you plan to do in your marketing & sales plan. Needless to say that this is not a one-time exercise, and you will keep reworking on this till the business case starts making sense.
While doing month-by-month revenue estimation, if you have multiple revenue streams, then make the revenue estimates for all the revenue streams, which then total up to make the overall revenue for the company. E.g. if you were doing an ad-supported Freemium product online, you would like to estimate your revenues from ads on the free downloads and the subscription from the paid downloads separately.
Do remember that your growth and revenue numbers should be mapped to the marketing plans and marketing investments, and should be rooted in reality. “We are smarter and we know social media marketing really well and hence our customer acquisition cost is much lower than others” is not a statement that investors would be keen to bet on [though if you state that they would be keen that you demonstrate your skills in lower cost customer acquisition :).
As one of my mentors had said “See the film in your mind… for a startup, it is critical to be very clear on what specifically is going to happen on the marketing, product and sales front in which month, and therefore, what revenue and customer numbers that will likely translate into”.
Consider the following
· Try to achieve higher conversions than other comparable brands in the market, but estimate much lower conversion. This way, even if you do not do better than market average, your plans don’t go awry.
· Validate your assumptions — validate your assumptions — validate your assumptions…. Again and again and with multiple sources. Going wrong in assumptions can be disastrous, even if the rest of the components of your business do well. E.g. if you assume a 0.5% conversion, but it actually turns out that you get 0.3% conversions, you may be off by a considerable margin in your profitability and may also run out of cash sooner.
· Identify the key matrices that you need to measure. E.g. Gross margins, cost of customer acquisition, headcount per ‘unit’ [i.e. could be a set of customers], etc.
What is the right revenue estimate for a startup?
There is obviously no right or wrong revenue estimate. It is often a reflection of the vision and aspiration of the entrepreneur.
However, out of the many mistakes that a lot of entrepreneurs make while estimating revenue, the two top ones clearly are:
1. Estimating too little
2. Estimating too much
Here’s an oversimplification of how you could think about the revenue targets that you aim for. Obviously, this is an oversimplification, but it does give you a good view of what you could potentially aim for.
The hypothesis of this oversimplification is that investors like to back potential market leaders. If so, assuming the market potential for the concept you are pursuing is around INR 1,000 cr., and the market leaders will have anywhere between 25–40% market share, it will be good for you to at least aim to be a Rs.250 — Rs.300 cr. company in a reasonable time frame. This at least gives you a good shot at being among the top 3–4 players in that category.
If, on the other hand, if the market potential is INR Rs.10,000 cr, a Rs.2500–3000 crore revenue aspiration within a reasonable time period will be reasonable IF you want to seek VC funding. Of course, if you are not seeking capital and if you are bootstrapping, and intend to continue doing this as a self-funded venture, then any revenue estimation that makes sense to YOU is the right one. But if you are seeking to attract VC money, you will have to aspire to be amongst the leading players in the market.
To download a free PDF of my book on Starting Up and Fundraising, click here.