Techpreneurship: Revenue Forecasting, the Key to Credibility

Jeff Amerine

Techpreneurship, with Jeff Amerine

(Jeff Amerine is an IA advisor and officer with the University of Arkansas Technology Licensing Office. Each Thursday, his Techpreneurship blog will appear in INOV8. Drop him a line in comments.)

In the 1990’s, the conventional bubble wisdom for tech startups involved grabbing share or eyeballs and blowing off business fundamentals.  For some startups this worked.  For the rest of the market, this approach served to be toxic both in terms of Techpreneurs’ perception of reality and shareholder value….

So now more than ever (with a few notable exceptions – think Twitter), good business fundamentals are back.  Revenue/sales forecasting is one of the basic blocking and tackling activities that gets done wrong frequently.

The temptation of Techpreneurs to estimate their revenue growth as an insignificant fraction of total market potential creates an almost guaranteed ride on the ejection seat out of an investor’s office.  So what’s the alternative?

Here are a few ideas and simple guidelines that can help.

1.  Definitely research total market size and more importantly addressable market size for your product or service.  This really ought to be the very first step to answer the questions, “will anybody buy my widget, if so at what price and, how many potential buyers are there?”  If the answer is “no or maybe,” or if there aren’t many potential buyers, find something else to do! 

Also, if the space is already crowded or commoditized, and you have no great special sauce or unique advantage — better to move on to a different idea…

2.  Next, if the answers are sound in step 1, forget about what you learned in step 1. Set it aside for now.  Think carefully about how you will sell your widget.  Will you sell it directly to your target customers?  Will you you use channel partners or resellers?  Will you use social media, cold calling, agents, etc.  This is the important “how” question.  These are key assumptions.  Techpreneurs need a clear view of their sales process.

3.  Given the answer in step 2, estimate the length of the sales cycle, i.e. the time from initial contact to close.  Assume everything takes twice as long as you expect.  The length of the sales cycle depends on many factors such as the target customers typical buying behavior, budget cycles, etc.  Realistic sales productivity assumptions are details you must know.

4.  Define your target sales pipeline.  This needs to be specific end customers or resale channels that you will target and close during the course of your sales forecast / projections. 

5.  With questions 2-4 answered, create a sales forecast driven by your documented, researched, and benchmarked assumptions.  Build either a three- or five-year forecast.  Consider doing a worst-case, best-case, and realistic-case projection. 

6.  With question 5 done, now look to see what that revenue projection will mean in terms or percentage of the addressable market.  This is your gut check or sensitivity analysis.  If it looks unrealistic, it probably is.  Cycle back through steps 2-5, and by all means, benchmark other companies that have had similar offerings or business models.

Working in the fashion described in questions 1-6 above will allow you to create a realistic sales forecast that can be backed up by sound assumptions.  This in turn should drive your revenue forecast and the creation of your income statement projections.

This is only half the story…The other half requires the same sort of process to realistically estimate expenses and capital requirements.  Just remember everything takes longer and costs more than expected. 

Your other thought is likely, “I am not an accountant, I hate finance, etc, etc.” Well, the good new is that Microsoft has some very easy-to-use, free Excel workbook downloads that provided integrated income statements, balance sheets, and statements of cash flows.  Once your assumptions are defined,  sales and expenses estimated you should be able to plug in to one of the MS Excel templates to create a reasonably good income statement.  

Let me know what you think, and what war stories you have around creating forecasts and projections…

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