Pitch Decks · Financial Modeling

How do you calculate a realistic & fundable Net Income Goal?

Alison Lewis CEO/Creative Director

April 30th, 2015

I am working on the pitch deck and get stuck on the projections. 
I can run these numbers six ways till Sunday and it's still pretty much a WAG of how many SKUs + orders we can sell. 

I know the short term numbers pretty accurately, but have been asked to do a 5 year plan. 

Investors want to see $1B
So do I back calculate how many we need to sell of each SKU to get to that number? Or is it better to be real? What size number in 5 years looks good to THEM? 

Daniel Farmer Vice-President Sales & Operations at Baldgorilla

May 8th, 2015

after doing a few of these plans and working out some predictions here is what I can say. There are two ways of looking at this, one is TOP down witch is a common mistake Ex: the population of the world is 7 billion people so I should be able to sell 1 unit to each and thus shall sell 7 billions units.

The better approach is Bottom up, that means figure out what is required to sell a single unit. (I.e. Time, money, production, etc.) then understand your growth pattern, so if you want to sell 10-100-1000 etc. what is required and at what point do you need additional support staff and structure. once you have that than you can build a sales plan and a revenue plan.

Remember if I sell space shuttles, no matter how great I am I wont be able to build more than 1 at a time and if it takes 5 years, my plan is to sell 1 in the next 5 years max. the rest will be back ordered.

in conclusion, we can make numbers say whatever we want, just keep it realistic and make sure you can back them up easily.

Good luck

Steven Rubenstein

April 30th, 2015

Always be real. If you put a random number out there, it will be obvious. You can count on 1 hand the number of companies that have actually generated $1B in revenue after just 5 years. (Groupon is one.) It happens that rarely. Achieving $100M in revenue by year 5 is more reasonable -- and even that rarely happens.

Investors know you are trying to impress them. To put it bluntly: Investors know you have no idea. And they know your projections will almost never be reached. What they are really looking for is how you reached your WAG.

What are your assumptions? Are they reasonable and achievable? Do you truly understand your market and your revenue model? Are you familiar enough with the competition and how they are doing?

So don't try to reach a particular number by year 5. Focus on looking intelligent, analytical and realistic, with a touch of optimism of course.

Dwayne Johnson Social Alchemist - I build equitable, prosperous, sustainable smart cities and regions.

May 1st, 2015

Jeff and Chris speak truth. While going through the modeling exercise can be painful to the uninitiated, it is likely one of the best things a CEO of a growth business can do. Done well, you key assumptions about how your business works and scale; assumptions will be tested as your business grows.

I love comps. Find a couple businesses similar growth model to yours that scaled successfully and see what worked. Do the same for ones that didn't work so well. If you can find a failure, even better. You'd be amazed how much you can find out by calling people and asking questions when you're not an obvious competitor.

Find someone like Chris to buy a cup of coffee or hire and draw up a workable model. If you don''t know how to do it, you're better getting someone to develop a quick and dirty one for you that knows what they're doing. There are people that geek out on this type of stuff, especially if it is innovative, complex or out of the ordinary. An hour conversation can get you to the critical elements you need to consider and some ways to at least understand the ambiguities associated with them and how to address them.

Understanding models shows your competence. Your investors don't have any idea what 5 years out looks like but if you're armed with tools to predict and make course adjustments on your growth path to keep your upward trajectory you'll win friends and influence investors. 

Chris Carruth VP/Director. Strategy | Business Development | Operations | Product | Solutions

April 30th, 2015

A couple of insights...(in advance sorry for the length)

a) As Jeff points out, a real model is necessary -  setting a target and working back is inherently flawed ...revenues are the result of company activities across all functions, not the other way around.

b) If you are looking at SKUs, read company reports of competitors and interview previous sales/operations/marketing execs. Most of the time they are willing to help if at all possible. including introducing you to others that might have more insights. This applies to all products and services.

c) In a case near and dear to me..and still percolating, we have the same issue for a new product that fits between categories so how do you come up with a reasonable sales forecast? We learned what the minimum "shelf volume" was and built a business case based on meeting the minimum velocity the channels required to stay listed while also using purchase intent scores that were derived by a multibillion channel retailer. So we know the propensity to buy, we know the minimum needed to stay listed, and created a model based on these and other data points published in reports, earnings statements, etc.

Point being is there is always a way to define what is the minimum needed to stay "alive" which can be bounced off other data points to see if they corroborate or conflict each other. Caution is better than projections that can never be supported.

If a web app, then acquisition/retention metrics are CRITICAL. You can find some clue if you use services like App Annie or Tower or other app metrics service providers to see how many downloads there are of competing solutions, as well as estimated ad revenues and value of the app itself. It is a ballpark SWAG but it is at least an educated SWAG. And in almost every case you can find a proven consultant, who has worked in the industry and knows the dynamics, that can look at the model and suggest ways to make it "better".

And, given the unknowns on newer products/services, build a sensitivity tool that shows how changes, good and bad, usually in 5% increments +/-, impact the pro forma and ROI. These can also be strung together to show a compounded scenario of multiple parameters changing at the same time. And if you know a good quantitative analytics guy/girl they can build a market simulation model that lets you do this quite easily, once it is set up.

Last, be upfront. Explain the assumptions behind the major line items and the risks the company faces. Be ready to review how the strategy addresses these risks and if they materialize  the story of how you will recover. Offer up the modeling worksheets for them to chew on...which most won't do beyond  a cursory scan.  Above all, remember, facts tell, stories sell. 

Disclaimer - I do this kind of work for a living so easier said than done..but if you take the time to learn you can always come up with a defensible model..which is what investors look for.

Patrick Hidalgo

May 1st, 2015

Whatever you are selling, consider some form of a sales funnel model to help you build your projections.  It will force you to think about the logistics/strategy of actually reaching your targets.  As mentioned by other commentors, even if your numbers end up being wrong (and they will), having a well thought out, detailed, defensible model will go a long way with investors. It will separate you from other companies soley pitching the idea that all they need to do is capture 10% of a $10B market.

Bridger Jensen Owner & Founder at Venture Imagery

May 9th, 2015

Bridger's $.02 -

I just see a red flag when you say "Investors want to see $1b". Who cares what they want. Put what is real.

Aside from that, if you have a lot of interpretations about your projections, then you may have to split up your projections.

If you need to split projections up into three groups parallel projections. 1. Low goal .2 Target Goal 3. Stretch

See one of my spreadsheets from a few years ago where we did exactly that when attracting an investor. view?usp=sharing

Currently I am creating a similar  financial proforma to attract a website firm to exchange design and engineering for equity. Wish me luck.  :) 

John Seiffer Business Advisor to growing companies

May 1st, 2015

@ Alison Lewis - I'm not sure there will be 10 billion people on the planet in 10 years  and in any case they won't all be using your product. That kind of talk will make investors nod quietly while backing away so they don't disturb the crazy person.

As to the idea that investors want to see $1B - this is an enlightening article by an entrepreneur who's now a VC. http://cdixon.org/2012/07/19/shoehorning-startups-into-the-vc-model/ 

He says you shouldn't raise VC unless you're going to be a $1B company otherwise things that might be good if you didn't raise VC are bad. That's not to say you should make up projections to LOOK like $1B but rather you should really be building an actual billion dollar company. 

Think of it this way - one has to be tall and fast to play professional basketball. That doesn't mean a short guy like me should show up to try outs with elevator shoes. It means a short guy like me should find other things do to. 

Alison Lewis CEO/Creative Director

May 1st, 2015

Appreciate the feedback For sure there will be 10B people. http://singularityu.org/team-projects/

We can reach $1B in 8 - 10 years with enough SKUs as a white label. 

Shingai Samudzi

April 30th, 2015

Good points Steven.

I'm curious about where $1B is coming from.  Are they telling you that they are expecting projections to that point, or are you assuming that much because they are indicating they expect high revenue projections as a parameter for selecting investments?

Chris Carruth VP/Director. Strategy | Business Development | Operations | Product | Solutions

May 1st, 2015

Looked at the website..now thoroughly confused. This looks like a focused and expanded version of "1M by $1M" program ran by a Silicon valley org but focused on innovative breakthroughs in specific sectors? Yes there will be 10B people worldwide according to most sources by 2050 according to the UN and US reports but..how does that have anything to do with $1B in revenue under a white label business model? Involving what products? Without spending too much time on this...my counsel remains to be VERY CAUTIOUS in proposing any business can generate $1B..over any average timeline that investors usually expect, which is 5 years ..the odds are way against it.But perhaps your timeline is much longer.. Yes, exceptions exist..but they are exceptions.. Regards, Chris Carruth The financial " bottom line" is the end of the story. I help create the chapters in between. 817.691.7655(cell) --------------------------------------------