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.
- Start with TAM: Total Available Market. For instance, all the television viewers in the world.
- 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").
- 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.
- 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.
- 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).
- 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.
- 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.
- Ask your friends what they think of the numbers. They will spot unreal figures and keep you from looking stupid.
- 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.
- Go back to Step 1 and repeat until you run out of time.