After a few spits and spats on the Twittersphere recently around five year revenue projections, I had a BFHHM (big Ha-Ha moment).
Startups in Northern Ireland and Ireland are confusing budgets with plans. Why? Probably because the main source of investment advice is a government agency. These public servants are well-meaning but inexperienced* and risk-averse (and what could be less risky than a nice secure government job!). The world of startups is unpredictable, sometimes you end up sleeping on a friends sofa eating 19p noodles for breakfast and that’s very very far out of their comfort zone? Who would choose this uncertainty?
So, inspired by my stint selling ginzu knives on late night infomercials – I thought I would assemble a five-year revenue forecast right in front of your eyes.
[Warning! Do not try this at home. This demo is performed by a professional hack with controlled parameters.]
All I need is (a) the size of your addressable market and (b) Average Revenue Per User (ARPU).
So the Year-5 revenue is ₤12M. [Note, a conscious simplification in the model, overstates this revenue somewhat. If anyone – that hasn’t seen this demo before on StartVI – can spot it, there’s a Guinness in it for you.]
Did my hands move too fast?
OK, step by step.
Let’s say there are 1,000,000 subscribers in your addressable market – those are the prospects that are qualified to buy your product or service and who you plan to sell to. Now, for starters, you were probably taught TAM – or Total Available Market – and right there is a silver bullet – but we leave that whole discussion to a time when I have more than 30 seconds. 1,000,000 subscribers happens to be a conservative forecast, so I’d expect that, with a “hot” product, to acquire at least 5% market share in five years. If you can do that in three years, god bless you, I’ve never achieved that. And if it’s more conservative than 5%, I be asking the question: “what’s wrong with your product, or your team’s ability to deliver?”
So, you’ll have 50,000 subscribers – net of churn. See how I carefully avoid that spreadsheet complication. And if your average subscription is ₤20 per month, then the Year-5 revenue is £12M
[Small digression here. Only in Ireland and Northern Ireland do folks state cumulative revenue. The number used here (US) is the revenue in the actual fifth year of operation, NOT the cumulative revenue of all five years – nice try though ]
If you want to see an aggressive forecast, look to a revenue from a 20% market share in five years, which is every bit as challenging as 5% market share in three years! But hot is hot, right? But if you try to suggest anything north of 20%, you’ll get laughed at.
So the Year-5 revenue is ₤48M.
Easy. What? You want to see revenues for Years-1 thru Year-4?
Ok. So, in planning mode (not budgeting mode). I’m looking for a growth ramp that (a) doesn’t have the attributes of that fabled hockey stick and (b) has year-over-year growth that is operational realistic. And just as a target (projected) market share can be conservative or aggressive, so can the ramp up. Here’s what I use …
Plugging whichever you like [which of course depends on your personal tolerance for Cojones
Grande) you’ll have …
So, the question you have to answer punk, is “are you feeling lucky?”
Or, do you think you can do ₤888K in subscription revenue the first year? Well I’ve personally seen that done and actually done it.
“What about profit?”
Well, I can do that too. But I’d need another 30 seconds.
Seriously. Planning is NOT budgeting. This cocktail math can help you make some very serious decisions about the whole nature and direction of your business – without counting paper clips. And as collateral benefit, we now have everything you need to determine a valuation for a pre-revenue investment round?
What!!!!!! … you ask?
*Can I entertain you with the anecdote of the public servant advising startups who informed me confidently they had “come from industry”, from the private sector. When quizzed, it turned out that their experience for advising in the software and digital industry came from working in a shop. Then straight into the agency as an industry expert. ??♂️