Nesheim Online

WORST CASE FORECAST OF STARTUP REVENUE: How serial entrepreneurs think about that

Today I spotted this FriendFeed from a talented Asian serial entrepreneur whom I greatly respect:

"Tip to management: Your 'worst case scenario' is never the worst case scenario. The worst is usually a lot more worse than your scenario."

Revenue forecasting for startups is all about telling your story in numbers. It is about the adventure you are planning on undertaking, with all of its risks and uncertainties. The unknowns are vast. The risks are huge. The rewards are deeply personal and valuable. And it is a lot of fun. That makes it an adventure.

You need numbers to talk about those elements, especially about risk.

It is common (especially among MBAs) to prepare a "downside scenario" or a "worst case." Those numbers tell you a lot about what you could do differently than planned in case bad things happen. For instance, such analysis is helpful to get a reality check on how small the cash flow burn rate could be and still make something good happen.

But there is a problem with worst case analysis: all entrepreneurs are grossly overly optimistic. It is in their genes. Their DNA has it built in. It is unavoidable.

And, believe it or not, it is the same with their investors.

The result is often the blind leading the blind as hiring decisions are made, product launch plans are altered and so on. Crashes into the wall of reality are common.

So what to do, how can you alter your behavior as a startup CEO, so you can avoid crashing onto the rocks?

Here is what I suggest: do what serial entrepreneurs do. They prepare for the worst being worse than they could think of by preparing psychologically to do the impossible when those terrible, unexpected disasters arrive.

The psychological preparation focuses on being ready to act with decisions that are deeper, harder, higher, stronger and more radical than could be spoken of before the disaster arrived.

For instance, today I got a call from a serial entrepreneur in L.A. doing a bootstrap with money from his last business. He called in frustration to discuss how he has hit the wall with his second startup. All the great research showed a vast market eager for his Internet service. But it was not to be. The paying customers did not pay. So we brainstormed for an hour, probing the impossible, pushing the envelope of how to radically alter the business model, change customers, drop all the current efforts and use the data pool to enter a very different business (e.g. perhaps moving from premium giant B2B customers to discount offerings from distressed small enterprises). We looked at everything we could think of in one hour.

I am not sure what that that talented entrepreneur will do. But I do know he is very intelligent, street smart and has an excellent track record of producing results in all of his prior jobs running businesses.

He is also open to talking about the  impossible: shutting down the business, walking away from it. That takes guts. But that's how psychologically prepared he was for our working session.

You need to be prepared for the worst because it will be worse than you can think about today. You cannot train for it. But you can prepare for it. And remember: Fear will be your major enemy. Audacious courage will be what you need inside of you. Here are a couple of tips to think about:

• It is where the spiritual side of you will empower you or crumble. Family and friends are part of it. So is religion. So are morale and morals. Many serial entrepreneurs spend time with peers and mentors and behavioral coaches and priests and pastors well in advance of the worst of times. this is the stuff that produces your character.  You need a lot of the good kind when the worst of times hits you.
• It is also where physical comes in. The psychological stress will try to break your immune system. Then comes sickness and the dread cascade of declining effectiveness on the job. The discipline of regular exercise (daily) plus wise diet and sleep (8 hours) combine to boost your immune system, thus sustaining you during the worst of times.

BOTTOM LINE: Great startups are led by people able to cope with the impossible when the worst arrives. Yes, they do think about the downside in advance. But instead of analyzing night and day, they prepare psychologically. So for worst case thinking, get prepared for worse-than-you-can-think thinking. That's the entrepreneurs' way of interpreting the Boy Scout Motto: "Be Prepared." When you can cope with such worst of times, you are well on your way to building an unfair competitive advantage.

I wish you The Best on your Adventure!

FORECAST STARTUP REVENUE: How serial entrepreneurs do it

Wondering how to forecast sales for your startup?

How do you predict an outcome for a business that does not yet exist? For sales in a market that has not yet been born?

As the old saying goes(I think it is Japanese): "It is easy -- once you have learned the first time."

Here are tips for you to use that I've learned watching how serial entrepreneurs forecast sales:

First: Two things to remember when forecasting numbers:

• This is not a prediction. It is a forecast of what sales could be (depending on all the other factors turning out as you assume they will in your business plan). Investors understand that. Accountants and giant corporate executives don't (they are locked into the annual predicting with accuracy game).
• This is part of a story in financial terms. You tell your story with words, numbers and emotions. This is the numbers portion. It is part of the financial story -- in financial terms -- about how your plan could turn out if all goes according to plan (which of course it will not -- but investors know that). This adds to the words you will write and speak as you tell your story to investors and future employees and bloggers.

Now for the tips on sales/revenue forecasting:

1. Start with TAM: Total Available Market. For instance, all the television viewers in the world.
2. Focus on SAM: Served Available Market. For instance, all the TAM that are also connected to the Internet at broadband speeds and that are in the age bracket 25-35 years of age. These are your "Ideal Customers" that you are focused on ("targeting").
3. Put layers into SAM: Perhaps you will start with your home country (U.S) then go to China, then to Europe (starting with the U.K.). Or you start with 25-35 ages, then 35-55 and then 55 plus. Pick the years each of the layers (market segments) starts and add them together to become your SAM. Each will have a different growth rate.
4. Choose a rate of adoption of your first product/service offering. You might begin with a modest rate sales in the first year after launch. But if you are a gaming or social networking service, you'll expect to get a rocket ride of popularity during the first 18 months after launch.
5. Compare your launch adoption rate to similar products/services. Cousins or similar startups will give you an indication of reality. The numbers are relatively easy to find on someone's blog on the Internet. Recently public companies have the details in their IPO prospectuses (find them on EDGAR database, free).
6. Pick your share of market in Year 5. Gorilla's own 30% share of market, 3% is for starving monkeys, the range between them is for two chimpanzees with half the share of the gorilla. You want to be the gorilla. Anchor your sales in Year 5 at the share of market for a gorilla.
7. Choose sales between your first year of sales and Year 5. The rule of thumb is to double sales each year. Start in Year 5, cut the number in half for Year 4 and smooth down to your starting year. Yes, it is a hockey stick curve. There are exceptions, as noted above for intense game and social networking startups.
8. Ask your friends what they think of the numbers. They will spot unreal figures and keep you from looking stupid.
9. Aim to get the right number of zeros in the forecast of revenue for Year 5, the number in the first digit does not matter.
10. Go back to Step 1 and repeat until you run out of time.
    

BOTTOM LINE: Serial entrepreneurs work in that level of detail when they do their forecasts of revenue for a new enterprise. The marketing work comes first (Marketing's job) followed by the selling work (Business Development's job). Who are your Ideal Customers? How many are there, where? What will be the early rate of sales ("customer adoption")? Note carefully: There are no industry reports to rely on. Your market does not exist, is only a guess by any of the pudits, the bloggers. You are as smart as they are (maybe more so) about the new market. Also, you will aim for the gold (become THE gorilla of a new market category), settle for nothing less. That is how it is done. It is one of the skills that contribute to building an unfair competitive advantage.

STARTUPS AVOID DEPENCENCIES: Control of your destiny is vital

Are you thinking of a startup idea that depends on other companies, perhaps large corporation who have to agree?

Must some other business group give you permission before you can be a roaring success? Of course you know you will need "strategic partners," but what danger does that put you in? Can it bring advantages that balance the risks?

That issue ("dependency") is a HUGE issue to startups. It contains bad news and good news.

It can be a deal killer with potential investors.

It can inhibit great people from joining you.

Or it can give you near-monopoly power versus your competitors.

Or it can give you a launching boost that rockets you to amazing success.

If you have this issue in your business plan, you'll need a careful plan to deal with it successfully.

First a real EXAMPLE for you to think about:

Today in Tech Crunch I spotted a great sample of this issue and its impact on a recent startup. In a nutshell, AnyClip had to launch without the mass of content-providers it had hoped to get, corporations with videos agreeing to support the AnyClip movie finding service. Read more and you'll see in detail what is happening right now to this respected startup, AnyClip. For today, here are my observations for you to think about:

• Launch delayed. AnyClip had been climbing the "hot ladder" of success, the bloggers got excited and started spreading the word. But the contracts (lawyers, giant corporations, sluggish responses) were slower in arriving than hoped for.
• Launched with less energy. AnyClip went ahead, finally. They decided to make their move now (probably before the hot buzz cooled off). That is less than the best, the hot air is less so the balloon rises less rapidly, to less height.
• Launched with less "Wow". The lack of abundant content plus missing indexing left reviewers of the launch yawning (instead of raving). The central compelling reason to use AnyClip was mooted. Promises not delivered leads to growing criticism and more skeptics.
• Helps competitors. Now me-too competitors are more eager to leapfrog AnyClip. Or to avoid their business model and try one less dependent on signing up content providers.
• Hope still exists. Now AnyClip will have to more slowly sign up the content it needs and index it. That slower growth is not all bad. The startup is still able to focus on its dream (deliver amazing "finds" in viewable video content). It still has the defacto position of leader of a new space. It still is without a competitor leaping over them.

BOTTOM LINE: It is better for a startup to avoid depending on giant corporations for its success. Independence is golden. Free to do what you want is better than having to wait for others to negotiate legal documents. If you must work a bplan that includes giant corporations, do your best to alter it so that if they do not cooperate for a long time (maybe never), you still have a startup that can start up. Mastering the art of managing "dependency" will contribute to your building an unfair competitive advantage.

I wish you The Best on your Adventure!

PROFILE OF A STARTUP ENTREPRENEUR: What to look for

Yesterday in Silicon Valley I met with a serial entrepreneur from Asia and some of his fresh core team. The lunch was at an Asian bistro frequented by startup people. I noted a solo guy at a nearby table kept looking our way. That's typical: the best are always looking for the best (to recruit or invest in). And everyone listens for rumors of the next great idea.

We finished a pleasant and tasty lunch, agreed on our next steps, and then I headed off to do a bit of grandpa duty at my daughter's place. After a delightful time holding my granddaughter and then finishing the tasks requested, I fired up the Porsche for the two hour return home to Carmel . I reluctantly eased my way into rush hour traffic (I only do rush hour traffic for grandchildren and settled down to crawling along the highway. After an hour of slow and go, I finally found open road in the Salinas Valley. I checked for the CHP, downshifted three gears, stepped on the gas and the Porsche roared to life. I was home faster than an F-16 pilot on Saturday night.

During the slow and go period, I reflected on our lunch discussion. What stood out was what were the things the leader found important to discuss with me and his new guys (all first timer startup techies, all new to Silicon Valley).

Here is what I saw and suggest you reflect on:

• Openness. The founder (I'll call him Lee) was comfortable talking with me about sensitive things in front of the new guys: legal tasks to set up the new enterprise, issues with investors, technical hurdles facing the new enterprise, risks that could kill the startup, and so on. He was never hesitant, never awkwardly trying to cover over delicate problems (as have many before him with whom I have met). Just an open discussion of what to do next, with whom.
• Frankness. Lee discussed the general idea and recent good news about corporate business partners. He also talked about the very dangerous water that has to be crossed in coming weeks to get the new business funded and started. He pulled no punches, just said it like he saw it. That gave me information that helps me get ready to supply some tips that can ease the burden and reduce the risk of doing this startup. It also gave the new guys a sense for the level of risk they will be taking, thus keeping them from one day suddenly getting very surprised and very scared.
• Sober. Enthusiastic, yes, yet calm and measured. That is what I mean by sober. Lee displayed clear confidence in what he was going to do, yet he also was not naively optimistic. He was aware of the big opportunity he intended to pursue: a chance to create a gorilla of a new space. Yet he was realistic that even he might not execute the vision with success. This balanced viewpoint gave psychological permission to the rest of us to openly ask questions of each other and make express thoughts about the future. Enthusiasm grew at this point and the monologue turned into a dialogue.
• Street smart. Lee had me explain to his new guys what Silicon Valley's ecosystem was about and how it contributed to increasing the chances of success for a high tech startup. I also discussed the dangers therein. Lee also described to them how he had felt the first time about Silicon Valley people, how they worked, and what they thought about newcomers. The new guys relaxed at this point, you could see it in their faces. They began asking me tougher questions and were not hesitant to continue probing. They are quick learners, very intelligent and quite determined to figure out what this startup can become.
• Sympathetic. It was clear that Lee was emotionally in touch with his new guys. And he appreciated how they felt, new to the daunting Silicon Valley, and soon to be living away from their home country. He would expect world-class results from them, that was clear to me and the new guys. Yet he was not cold or trying to be tough nosed about communicating that. I could sense the camaraderie increasing among the group, a clear feeling of a close team forming.

The lunch revealed a lot to me about the people doing this startup. The founder displayed the special characteristics noted above. His newcomers became increasingly knowledgeable about what they were committing to. I saw who I was going to work with and left feeling optimistic that we could all help each other succeed.

BOTTOM LINE: Startup founders are in the people business. Serial entrepreneurs know that very well. Recruiting the best talent gives the best chances of success. How the founder interacts with the key early employees lays the foundation for the company culture. It will be built on the values of the early core team. As noted above, winning startup leaders do things differently than people from large corporations and very differently than people from large companies in Asia. This is part of what has made Silicon Valley such a great place to build great startups. It is part of their unfair advantage. But this can and has been done in many other places in the world. I suggest youtudy the notes above and test them on how you behave. That will tell you a lot about who you are and how much of an entrepreneur you are, Silicon Valley style. Make adjustments accordingly and boost your unfair advantage!

I wish you The Best on your Adventure!

TESTING THE "WOW" IN YOUR STARTUP IDEA: How do you do that?

Today I'll address an increasingly important marketing issue for startups: "How do you know, test, measure, the amount of "Wow" that your idea has?"

This was triggered by a recent comment from G.G.:

After reading this post a question came to my head? How does one know when they achieve that 'Wow' moment. Looking back at a previous story on this blog I think that a good barometer for the Wow meter will be whether or not the 30 second elevator pitch makes someone say, "Tell me more."

G.G. has noted one important test. There are others I'll discuss them in a moment.

Recall that the "Wow" is the excitement (a strong, positive emotion) a customer or end user feels immediately after seeing their first viewing of your product/service offering. It is so attractive that it compels him to eagerly wish he could purchase your product immediately. In today's hyper-competitive markets, it is a must-have. Love at first sight. There is no time to improve and work on making it better because your intense competition will include at least one startup with "Wow" and leave you in the dust.

Industrial products need the same testing for "Wow" as do consumer products. Believe it or not, those industrial guys also have emotions. So do those engineers.

Yes, I know that you see the "Wow" in your idea and think it is very cool and a killer app. But that is not yet a prove fact for your customers.

Here are some methods for testing the "Wow" of the idea you are very excited about. They are practical and they work.

Let's start with Level One: that is when you have an idea that is in your head, you have no prototype, nothing to demonstrate.

• Do an elevator pitch. G.G. wisely suggested this as a primal test of an idea's "Wow". In less than 30 seconds you have to get the stranger so eager that he says "Tell me more." Hopefully with a lot of enthusiasm. No long lists of features. No time for education. Short and focused and crisp. If he yawns, time to go back to the drawing board.
• Test with friends. This simple test is rarely done, to my amazement. Serial entrepreneurs do it religiously. Jeff Hawkins tested his prototypes for the original Palm PDA on families of trusted employees. He chose people living in Chicago (far from gossip filled Silicon Valley and filled with Midwestern people who respected traditional promises of secrecy). He went back to the drawing board a lot of times before he "got it right."
• Test one thing only. Test one thing at a time, one thing that you believe will stir up the emotions. Not several things during the same test. People remember one thing about a product, recall single impressions. Not stories, not pages, not long paragraphs. Keep trying out alternative things until you find what resonates with the people.
• Phone customer examples. This is especially important if you have an industrial or high tech product. A simple call to a handful of the decision makers in a corporation will be enough for Level One testing. It will also press your ability to do an elevator pitch to a stranger, on the phone. People are curious about new things and will respond to you. Listening to their reaction will tell you a lot about what is and what is not "Wow" about your product.

When you have the results of Level One testing, you are ready for Level Two. That is when (1) you think you have figured out what excites people about your product/service and (2) you have something to show people (e.g. web site mock-up, physical model, working demo).

Now you are beginning to sweat "leaking the idea" and need to work on keeping the secret as long as you can. This is tricky, but is doable with some careful choosing of who you use and how you do your tests.

• Test on a deliberate, small group of customers. Up to a dozen are required per test of a selected message. You will be looking for consistency of responses and surprises. Your Level One testing will have given you the message you are trying out. Now you are seeking to validate the degree of "Wow" this group has when they see your product/service. Consumer testing firms can arrange to do formal, carefully prepared focus groups, but most startup people and investors find that less valuable at this stage than you talking to people on your own, learning as you speak and listen.
• Poke doubters. Everyone knows a few people who always see the glass half empty. They are negative about everything. Test them to see them react in person. You will observe their body language. If they denigrate the iPhone prototype but start to play with the expanding photo feature, you have learned something valuable about "Wow". If they are confused about how to turn the thing on, ditto.
• Beware of the optimists. They will mislead you more than help you, unless you are careful of what they say. Look for consistency in their responses to what is so amazing about your great product. Their accolades will be gushing and flowing with buzz words. So work to see what in your offering seems to be especially appealing to all those tested.
• Watch for what is missing. Your demo may expose what is not there. That is why you need to be present during the testing, so you can get a dialogue going to generate more responses to your idea. Surprises like this, when discovered early enough, can keep a startup from wasting precious time or even forestall a premature death of a new enterprise.

By this time you should know what is way cool about your offering. That is what the "Wow" is all about. It is what makes your product/service compelling. It will propel customers to pay for it, eagerly.

You are not yet ready for Level Three (prepare a list of customers who will tell people they are eager to buy your offering), but you are getting there. Completion of the first two levels will give you standout power and confidence you are on the right track to build an amazing business.

BOTTOM LINE: You must find the "Wow" in your idea before you try to recruit others to join you, before you try to raise seed capital. It is essential. Without it, you are dead in the water, a sailboat without a wind. With it, you are jet propelled. It will be central to your unfair competitive advantage. Simple testing, done deliberately, planned with care, is how it is found out. Serial entrepreneurs do it every time. It is not rocket science. So go do it. And come out wiser and stronger, loaded with "Wow."

I wish you The Best on your Adventure!

COMPELLING REASON TO BUY: Startups have to deliver it with "Wow!"

Back from a bout of flu during which I was reading and thinking a lot. Periods of sickness generate perspective, give you time to contemplate priorities in life and what is important.

As I reflected on startups that have shut down recently and compared them to others that are thriving, one pattern became clear: The thriving enterprises had created reasons for customers to be compelled to make the purchase.

That "compelling reason to buy" turns out to be a lot more than "way cool" or "clever" or "I like the pink one."

It is about something complex that is triggered in the soul of the customer when she sees what is offered by your company.

It is emotional, a lot of emotions in fact.

It is not a list of more features than your rivals.

It is not about being faster or quicker or better or cheaper.

It is about "Wow!"

When you get a "Wow!" reaction from customer after customer who sees your product or service offering, you've got it. And them. The customers are hooked and propelled to buy. Your business has shifted from selling to filling orders.

That is where you must aim your enterprise: to figure out what is compelling compared with the alternatives your customer has in front of him.

That will differentiate your business from competitors. It will start your branding. It will become the envy of your competitors. They will complain that you have an "unfair advantage".

First startup to figure that out wins the gorilla share of market (30% and the game is over). It is not about "first mover advantage." It is about "first to get it right wins."

Research in Motion delivered a solution for continuous email communication (Blackberry).

Apple delivered a solution for affordable song by song purchase and playback (iPad).

Both were late to their competitive battles, both became gorillas of new market categories.

Google, a startup, delivered a superior search solution, after others had pioneered before them.

Yahoo was first to get it right as a startup in delivering the Internet portal that now dominates.

Investors today look for this compelling reason to buy in every startup idea they see. Don't show up without it.

BOTTOM LINE: I find investors today especially sensitive to "why will the dog eat the dog food, eagerly?" You are going to have to have some proof.  It may be in a beta test, surveys, demos, whatever, but in any case you have to have it. The customer must be instantly excited when they see your offering. They have to say "Wow!" immediately. That is now central to becoming a gorilla of your new market. It is fundamental to building an unfair competitive advantage.