Forecasting Revenues Key to Successful Launch

The late, legendary Silicon Valley attorney Craig Johnson used to say, “The leading cause of failure of start-ups is death, and death happens when you run out of money.”

And the leading cause of running out of money in a start-up is poor financial forecasting.

At the core of unrealistic forecasts is the undying optimism of most entrepreneurs.  Their “what could possibly go wrong?” attitude leads to many forecasting disasters.  My father used to say that when he looked at investing in an entrepreneurial venture he would always double the start-up costs and triple the time it takes to get to breakeven.

My rule of thumb is a bit different.  I believe that being overly optimistic leads to entrepreneurs making fatal mistakes in estimating revenues, which is at the heart of most forecasting errors.  So, my approach when reviewing a business is plan is to cut revenue forecasts in half.

Here are the four most common revenue foresting mistakes I see:

  • Assuming an “instant on” button for a new business.  Most business plans I read show significant revenues from the beginning of the business, sometimes even for the very first month that they open their doors.  The reality is that it takes time to build a customer base for any business.  That is why an entrepreneur should have at least six months personal living expenses available to make it through the startup in addition to the money the new business needs.
  • The magic of the hockey stick.  A common pattern in business plans is to show a relatively slow initial start to revenues, and then assume some that unexplained breakthrough will occur that leads to a sudden and dramatic increase in sales.  When you graph this type of revenue forecast it looks just like a hockey stick.  The reality is that such sudden growth is just not that common and usually results from specific actions.
  • Assuming enough sales to make the business model look successful.  In this mistake entrepreneurs forecast their expenses and then they plug in enough revenues to make the business become profitable.  When I press these entrepreneurs, their explanation of revenues is “well, these are the revenues I need to make the business work.”  The truth is that the market will not give you the sales you need, it will only give you the sales you earn through a well-executed business model.
  • The marketing plan tells a different story than revenue forecasts.  The marketing plan should specifically explain what you are going to do to achieve the revenues you forecast.  Why will customers want what you are selling?  Who are these customers?  How are you going to communicate to them about your business?  The marketing plan should explain in words the numbers shown in the revenue forecast.  Most plans just do not make this connection.

To avoid running out of cash before your business model has time to work requires an accurate assessment of how much money you will really need to get the business off the ground. While knowing your costs is important, accurately forecasting your revenues is critical.

It is so sad to see a business model that has real potential fail simply because the entrepreneur was unrealistic about how much money it would take to get to the point of success.

Beyond Bootstrapping your Office Space

Most of the start-ups I work with look to space as an important way to bootstrap their space.

They begin by working out of their dorm, apartment, parent’s house, or our hatchery.  Keeping their space cost to zero keeps their overhead low and helps them get to positive cash flow more quickly.

Eventually, or should I say hopefully, their growth takes them to a point where they need real space. But, they often continue to bootstrap by building their own desks, buying old used chairs, and cobbling together what ever they can to get by with furnishing their new location.

A company called turnstone is running a promotional program that is going to give away five $25,000 office make-overs to emerging businesses and help them move beyond their bootstrapped work space.

All you need to do to enter the contest is upload a video to the turnstone website pitching why you deserve a turnstone makeover.  From these submissions, they will be selecting the 25 best entries for a public vote.  This voting will determine the five that get an office makeover.

Good luck!!


Bootstrapping Legal Work

I have generally hesitated on relying on bootstrapping legal work when it comes to complex legal work.  However, I have run into more and more entrepreneurs who do just that.

During our recent vacation, we spent one night with our old friends Joe and Nancy Rankin in Cary, NC. 

Joe has successfully navigated the patent process on his own for several products he has developed.  His business, SECTION8 tactical Inc., offers products to assist competitive shooters, tactical officers, and military personnel with their daily operations.

He said that doing your own patent work takes a great deal of time, patience and attention to detail.  But, he insists, it can be done.  For simple products like the ones he offers, this strategy can make sense. 

Here is a link to his product website.