A recent survey reveals that startups are guilty of making some inaccurate forecasts, which can lead to disappointment. How do you avoid this trap?
The “how to pitch a startup idea” is a mistake that many startups make. They have an unrealistic forecast and the result is failure.
Real-life example:
I met up with a buddy, a Sand Hill Drive venture investor, for lunch. When I asked him how he was, he said, “I’m OK.”
“I’m going to chuck something at someone if I see another hockey stick projected this week.”
I had to ask him to clarify the hockey stick metaphor since it had been so long. He replied:
“That implies sales are flat and uninteresting right now, with nothing happening—but things will pick up as soon as I collect your money.”
Forecasts for sales should be based on assumptions.
The fundamental issue isn’t a disparity between a lackluster recent history and ostensibly fantastic growth in the near future. Growth is a positive thing. Startups that are striving to expand are favored by venture capitalists.
No, the issue is overly optimistic expectations with no foundation in reality. When a growth prediction is based on reasonable assumptions and presented in a transparent manner, it is beneficial to investors.
When you combine an appealing conversion rate for online traffic with a credible marketing approach to substantially increase incoming traffic, you get a more credible projection. Show statistics on sales per shop for a tangible product, as well as evidence of new distributor contracts, to dramatically expand the number of outlets. Create a prediction starting with the most basic assumptions and working your way up to the total.
How to Avoid Making Impossible Projection
Forecasting sales as a tiny but substantial part of a very big market is one way to avoid. That logic appears often in the company ideas we analyze for our angel investing group.
The issue is that it never seems to work. True companies don’t launch and take a sliver of a $50 billion market. It doesn’t stand up if you can’t break it down into basics like average deal size, sales touches, conversation rates, sales per shop, subscriptions per trial, and so on.
Keep in mind that sales projections are about individuals making predictions about the future. In practice, whether your plan is for investment, a bank, or just running your own business, the sales forecast is used to break it down into assumptions, track actual results over time, and review the plan versus actual results on a regular basis, as well as manage the underlying assumptions with management programs.
Calculate realistic profit and margin estimates.
Unfortunately, many of the business plans we review for angel investment and business plan competitions grossly overstate earnings and margins.
You may discover statistics on typical real-world earnings as a percentage of sales per industry. This information is provided in LivePlan and may be obtained from a variety of sources. In most sectors, net profits as a percentage of sales range between two and ten percent.
However, we often see company plans that forecast earnings of 20%, 30%, or even more as a percentage of sales. That strikes me as an apparent blunder that might easily be avoided. Projecting unrealistic earnings, unless you have previous data indicating remarkable profitability, does not suggest you will generate high profits, but rather that you do not comprehend the standard spending habits for the business you’re in.
For example, in a sector where marketing spends on average 50% of sales, I’ve seen company plans estimating 40% returns on sales but only spending 5% of sales on marketing.
Similarly, gross margin is defined as sales minus direct expenses. Averages for the industry are easily accessible. When a business plan estimates a gross margin that is far higher than the actual company in that sector, it demonstrates a lack of knowledge rather than exceptional managerial ability.
Assumptions that you can monitor as you go are a critical aspect.
Business plan projections should be an exercise in understanding the drivers and triggers that keep the company running. In the first plan, make a prediction and analyze the findings at least once a month for the rest of your life. If you develop it on trackable assumptions, the review and modification process will flow straight to management.
Building your predictions on reasonable assumptions is vital for credibility in a company plan for investment objectives or for presenting a bank.
Building realistic projections based on ground-up assumptions is a planning approach that leads to improved management for all business plans and enterprises.
So keep this in mind: anybody can enter fantastic figures into a spreadsheet. The actual challenge is meeting those figures in real life.
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The “business idea pitch example” is a mistake that many startups make. They often overestimate the success of their business ideas and as a result, they fail.
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