Disruptive technology · Financial Modeling

How can I plan or project for a disruptive business?

Katrin Haen Pres of Blu Sand and Partner in Dip Into Pretty, Innovator at heart

April 28th, 2015

Trying to figure out financial projections and costing but I have no comparisons to work with.  How does one figure out viability and scale?

John Seiffer Business Advisor to growing companies

April 28th, 2015

Expenses are generally easier to get right than revenues. But in both cases you start with your assumptions.

For example you can learn what an engineer costs (salary plus benefits) in your area. Then you make assumptions about how many you'll need to hire and when. Your assumptions will be wrong, but because you made the formulas based on them you can adjust as soon as you get any data at all.

Same thing with revenue. You make assumptions about what customers are willing to pay, what the LTV of a customer is, how long the sales cycle will be etc. Then build revenue formulas around those assumptions. Very quickly you'll get actual data that can change those formula.

FYI - investors are more interested in your assumptions than in your actual financial projections because they know the projections will be wrong, but the assumptions give insight into how quickly you'll be able to adapt to the real world. 

Niall McGinnity Cloud accountancy and startup / small business expert

April 28th, 2015

Katrin, this is a fairly common problem.

The best advice I can give you is to prepare something from bottom up that is based on reasonably solid assumptions. I.e. what will you sell the product at, how many channels will it be sold through, what is the digital and offline advertising cost of these channels, is the income recurring or one-off etc.  You might say for example that you want to drive 10,000 visitors to your site and aim for a conversion rate of x% paying customers. Then you could build in growth rates on both visitor numbers and/or conversion rates to show a growing revenue stream. You'll end up with a series of variables against which you can then test how sensitive your model is to say, conversion rate, CPA etc.

For all the assumptions on income then make sure the overheads are consistent - make sure you have enough staff, advertising budgets, travel budget, hosting facilities etc to accommodate the sales activity and growth you are predicting.

Ultimately the chances are you will be fairly inaccurate when you compare these results down the line to what actually happened. However, the fact that you can demonstrate at this stage to a potential funder that you have seriously considered the strategy and how much it will cost will mean more than whether the mathematics are accurate in the long run.

Patrick Larsen Defense Technology Startup and Helping Veterans, LION

April 28th, 2015

I'm assuming you are doing these projections to raise money. If not, my advice won't be as applicable. 

Build a model where you can change core inputs and they cascade through the model. That way you can change things quickly when someone says "Too low!" or "Too high!" to any of your core assumptions.
Have pretty, formatted outputs that you paste into slide decks. 

Pitch Deck:
Remember that you are building a sales document. As such, keep the intended customer and desired outcome in mind at all times. 
You are trying to come up with numbers that justify your ask ($X at X% equity, $X Valuation)
So, look at other presentations (google) for disruptive companies and see how they framed the pitch.

Use as many concrete numbers as possible. 
Look at the growth of public companies that disrupted so that you can back up your growth numbers. 
If you are Uber, you grab numbers for how much money is spent on Transportation, not just taxi's. But, all the numbers are there for how much people spend on Taxis, Buses, Rental Cars, New Cars, Used Cars, and then some amount of pure, new usage. 

Top Down:
This approach is lazy. "It's a $100B market, so if we just get 1% we are a Billion Dollar Company"
All you want to do is prove that the opportunity is semi-realistic and sufficiently large should you succeed. Or, that you can get acquired. 

Bottoms up:
Build you valuation bottoms up.
This many users acquired per month. This much revenue per user, per month. This much churn. This Cost of Customer Acquisition. ETC.
Make sure these numbers can shift over time as you reach economies of scale and such. 

How do you get there:
More important than the projections is your plan to achieve those projections
Milestones, activities, impact of those activities, team, financial/marketing/productivity leverage
How are you going to do what you say you will do
Why should I trust you? How passionate are you? Will you stick it out when it gets hard? Are you stubborn enough to see it through but humble enough to listen and pivot? Can you lead? Can you sell (customers and investors)

The projects are all pie in the sky. 
What they are showing is a couple things:
-How you think.  Realistic, Analytical, Thorough?
-How hard you work.  This project is a plan and should translate into actual work. How much are you willing to work?
-How well you sell.  You are going to pitch this thing
-How big the opportunity is. What the pivots might be
-What the risks are and the critical path, critical points of failure

Paul Paetz Startup Advisor, Consultant in Disruptive Innovation, Adjunct Professor

April 28th, 2015

Your question makes me believe you are misusing the term "disruptive".

You shouldn't forecast for a disruptive business. That's unrealistic, especially until you know that you have created something with disruptive potential and can project market size based on the job-to-be-done and early traction. If neither of these is known or definable, you're just guessing.

Better to define your financial needs in terms of a small market segment or segments that are wide open for the taking and that you know you can dominate with your solution if/when you have it. Once you have success there, you will be able to create more credible forecasts, and you'll have a sense of what kind of sustainable growth rate you're targeting. That's also where you'll find your viability and scale data.

Karen Leventhal

April 28th, 2015

We went through this not too long ago. I recommend the bottom up approach, as it will help you get more grounded at the very least. The growth rate is the big unknown and it felt to us like staring in a crystal ball. We looked at the growth rates of similar starts ups. But since their market was different, could we really extrapolate? We looked at the CAGR of established brands that might be similar. But could we really extrapolate those numbers to a start up? Finally we did some research and used Y Combinator's suggestion for successful start ups 5-7% week over week. We applied that conservatively.  http://techcrunch.com/2013/08/24/how-fast-should-you-be-growing/  

Those numbers start can start to look pretty big by year 4 or 5, so then we triangulated by looking top down. We started to downshift our growth, by figuring how much of the overall market it was realistic to grab within 5 years, and that's how we came to our projections. 

However, candidly speaking, until you go out and try to scale, it seems like the growth rate is pretty much a stab in the dark, to me. But we at least tried to go to validated sources to do our stab in the dark. 

Julien Fruchier Founder at Republic of Change

April 28th, 2015

Beyond the good advice provided here, I would link assumptions to experience so far. If you can't demonstrate uptake and product-fit to base your forecasts on, it's just pie-in-the-sky dreaming. 

I used to do a lot of financial forecasting. I now focus on showing sales, size of the market and then maybe three scenarios that give stakeholders a sense of the best, likely and worst case so they can get a sense of a) what would happen if we turn into a unicorn, b) what the world will look like if we fail (complete with divestment protocols) and c) what we're working toward. 

I believe investors want to see a good balance between optimism and pragmatism.

Tiffany Ullian Co-Founder and CEO at FASHION CURATED

April 29th, 2015

Totally agree on the advice pointing to a bottoms up approach and ensuring you are building a flexible/ agile model. A flexible model will save a lot of frustration and time. 

When confronted with making assumptions on a disruptive model, I found it was helpful to do market research via surveys. It helped me validate or change assumptions and allowed me to show supporting data explaining why I made those assumptions in the first place. 

Google docs allows you to build a survey for free. Alternatively there is survey monkey which has tiered pricing options.
I used Google docs and then hired Survey Sampling International to access a specific target audience. For an inexpensive alternative, you can find individuals in Fiverr to take your survey or use social Facebook.

Once you have those starting assumptions in place, you can use industry averages to gauge traffic and conversion rates to scale (i.e. Paid Search Marketing average for the Fashion industry). As you build your revenue, and scale your marketing costs, you can capture larger audiences that drive larger traffic and conversion numbers.

With some digging, there is great data from existing disruptive business models that you find on the web which can help you find comparative statistics by industry, since you mentioned you don't have a similar product comparison. It will at least give you a starting point. 

Hope this was helpful. 

Good luck!