Wrong assumptions kill more startups than bad products
As an entrepreneur, one key role is to plan the journey of your venture. And for doing that you have to visualize what the future looks like. You have to look at the immediate future, the mid-term as well as the long term. And of course, that means that you have to make assumptions.
As you will agree, there is no guarantee that life will play out the way you assume it to be. And hence, it is important to think of different permutations and combinations with different assumptions. E.g. if you are estimating sales volumes, work on the assumption sheet at a very granular level. Rather than saying “Of the 1000 customers we tap, we will be able to convert 50”, it will be better to break each variable and then put different numbers for each e.g.
1) Of the [number] potential customers we connect with
2) [Number]% of potential customers will ask for a call
3) Of those, [number]% of potential customers will agree to a meeting
4) Of those who meet, [number]% of potential customers will agree for a PoC/trial
5) Of those who do the PoC, [number]% of customers will become a customer
6) Of those, [number]% of customers will pay an upfront annual fee, and [number]% of customers will pay quarterly
In this example, you will need to make assumptions on all steps of the GTM. And it is therefore, prudent to assess what the business will look like at different levels of assumptions.
Likewise, you will have to make assumptions for every single aspect of your business — Product development, team hiring timelines, communication design & development timelines, cost structures (and this has to be super, super granular), cost of sales (e.g. how many times do you have to go visit the customer to close a B2B sale, and who will go and how much does it cost you to close that one sale), revenue potential, servicing costs, etc.
Most startups is make very ambitious assumptions, largely due to the enthusiasm and optimism around their concepts. And while the enthusiasm and optimism is absolutely necessary, I tell startups to make really, really modest assumptions (usually modest assumptions play out in real life than optimistic ones). The reason I ask them to make really low assumptions on the excel sheets is because that allows you to assess the worst case situation of your startup. And leave the enthusiasm and optimism to play out in the execution part, and beat your excel sheet assumptions month on month.
How do you make any assumptions? Well, start by understanding the subject well. Understand the sector, understand the business dynamics in that sector, talk to a lot of people who can provide a perspective, study other companies (even if you are planning to beat them hollow, understand what they do and what you are going to do for your numbers to be better).
What are the different types of assumptions you have to make for your venture? (Note: This is NOT and cannot be a comprehensive list. Every business, and every entrepreneur will have a different set of circumstances and they will have to make different types of assumptions that are relevant to their context. E.g. someone who has become an entrepreneur after being the head of Asia Pacific Sales at a global ERP leader will have different access to decision makers than someone who will have to start building that access, and hence the assumption factors are likely to vary).
Aspects of business to make assumptions for
1) Is there a need for the product — what problem are you trying to solve and how important is the problem for the consumer/customer
2) Product-Market Fit — how well does your product/service address the consumer need
3) Pricing — how much is the customer willing to pay for the product/service
4) Costs — how much does it cost you to deliver that product/service (This is one aspect that most people get totally wrong
e.g. In the case of a venture manufacturing t-shirts, they will assume the actual cost of raw material, production, distribution costs, etc. However, they will often miss out on adding the cost of dead inventory, unsold goods, damaged goods, etc. Often, they will miss adding the cost of capital.)
5) Traction — how many people will you be able to enroll/sell/get to use or whatever you intend to make the users/customers do
6) Operations planning — how much time & effort and how many people does it take to manage the business (e.g. how many orders can one packing person service in a day — if you were an e-commerce company)
7) Funding needs — how much money do you need to start and scale this business, and what is the overall business case in the mid to long term
And remember, there isn’t ONE right number. These are, after all, just assumptions. Hence, it is important for you to assess the risks and upsides with different levels of assumptions that lead to different outcomes.
If assumptions are partly dependent on research, how do I do it if I am doing something totally different than what is prevalent in the market? i.e. what do I do if the current or past is not an indicator of my potential. Well, it is indeed possible that the past is not what you want to base your business on. You intend to disrupt the market. However, the same variables (by and large) will apply in most cases. The numbers may vary but you are likely to have the same parameters e.g. in the above case — how many customers can I reach, how many people will call us to meet, how many will try the product, how many will place a trial order, how many will give a regular order after trials, how much will they pay, how many meetings will it take to close the order, etc.
You may disrupt the numbers and get much better results than how the market is currently doing. But there will be some variables on which you will have to make assumptions. Else there is no way you can plan. Even if you are way off on your assumptions, at least you will know how wrong you were, and hence you will be able to adjust your future plans at least.
Remember, it is important to assume costs well because costs will remain by and large the same even if your sales volume drops to 50% of the assumption. (One of my mentors had advised me “Double your cost assumptions and make your revenue targets half. If your business case still works, then go in the market and execute it on your original plan of lower costs and higher revenues.” His intention was to prepare us for the worst case, while implementing to achieve the best-case outcome.
To download a free PDF of my book on Starting Up and Fundraising, click here.
By Prajakt Raut — Managing Partner Supply Chain Labs — A sector-agnostic fellowship fund investing in startups disrupting supply chain, and Founder applyifi.