First develop a business model.
If you've been through a plan review with someone like a potential investor, think for a moment about the questions you get asked.
"How did you calculate the cost of goods?"
"What are your assumptions about how long it will take to get customers?"
"When do you expect the growth rate to stabilize?"
"Where do you expect to find these customers?"
"How many are there and who are the competitors?"
"What's the current solution these potential customers are using today?"
Behind all these questions is the idea of checking and validating assumptions. In the process of asking questions, and answering them, it's sometimes hard for this not to feel like grilling. If the conversation goes in that direction it can be a bit of a problem.
Think about having the same discussion in a different way - by preparing your sales forecast by making your assumptions explicit.
- Sales to segment A will be $500 per customer. (Pricing assumption based on comparables in table 1 following)
Table 1:
Competitor XYZ is $450 but solution takes 30 minutes to implement each time; we are less than 30 seconds and feel we would test a $50 price increase in support. (NOTE: test concept underlies validation of the first assumption.) Etc
- COGS assumptions of 35% are based on the attached 3 estimates from contract manufacturers. Please note that the scale required to reach these prices is 500 units per week which we will not achieve for three months (see scaling and growth assumptions following.) So for the test phase we will hand assemble first production products at $1,500 each, effectively eliminating contribution margin. Why? Because a fully committed scale up in manufacturing will cost $450,000 and we are not prepared to do that until we have growth rate assumption risk eliminated by actual sales test results.
- Sales growth month to month is based on having an inside sales person (initially the CEO/entrepreneur) making ten calls per day. (A full time person we think can make 50). We hypothesize that we will get one order per 5 calls. If this holds true for one month, we will hire and train a full time sales person who will be productive (or terminated) by month 3. During this time the training and continued calling will be staffed by the CEO/entrepreneur. If the calling rate holds up (and there are more than 300,000 potential customers in the industry) we will add sales person two. By this time (in six months) we will be getting 20 orders per day from these two callers and our revenue will stabilize at that rate. In month seven, we will begin testing additional sales strategies including direct to buyer email, google adwords, bing and social media campaigns based on our sale success. A key part of this is the positive feedback and referrals we anticipate from our users. We will validate this assumption by direct to user contact from the CEO/entrepreneur during months two-six.
- Here are the assumptions about our expenses:
You get the idea.
This is also the way I'd present it. That is, I'd walk through the assumptions on each item and explain them.
In every case, where I can get comparables, I'd use them. Where I cannot I'd say so. It's important to make sure that none of my assumptions are better than anything ever before achieved so that the whole financial results system is based on hypotheses that are within the realm of achievable.
This whole process avoids the common problem of sounding like you are overselling an opportunity and creating doubt when, in fact, if your assumptions are strong and your comparables reasonable, you arrive at the same numerical result with a confident and enthusiastic audience.
Then, what about "five year" projections that everyone seems to ask for?
They're an exercise in spreadsheet math, of course. Growth rate is based on the whoel equation of individual customer acquisition rate (like the 1 per 5 calls in the theoretical example above) the presence of alternative products or services for the target customer (did you include a Porter 5 Forces anaylsis in the presentation?) your ability to scale your sales efforts, future costs in acquisition, product, etc., presence of new competitors emerging over time, size of the served market, ability to expand, etc.
I'd think that a savvy investor gets to the same place pretty quickly. So instill confidence by your explicitly demonstrated ability to analyze and pivot your tactics and strategy, show the audience your assumptions about growth rate, and leave it. This really gives the investor the ability to assess you the entrepreneur - which is where the decision is going to inevitably end up.