sales, investorsWhat’s the best way to calculate the sales for a tech startups, taking into account we haven’t started in the business, we have some competitors and it’s a new idea. We are doing this exercise to receive financial aid.
A frequent way to do it is to pull a number and a monthly growth rate out of (let’s face it…) nowhere, and put some wishful thinking forward to explain them. It’s not that wishful - you’d usually base the reasoning on experience and gut feelings, the market size, the market’s eagerness to buy, and the competitive environment. But it’s still a stable % per month growth rate - which will give a good laugh to anyone who has actually run a business or seen what the trenches look like in a lot of startups on a day to day basis. (“Uh huh? And you’ll do that how?”)
A more appropriate way to do it is to look at your inputs and the outputs that may result. This allows you to make educated guesses of what affects your business most and the potential plateaus to be on the lookout for. Your largest revenue predictors are the number of leads you’re handling, those leads’ quality, how streamlined your sales process is, and the quality of your sales team.
Suppose on the sales side that:
Leaving the sales’ handling capacity and the ensuing plateaus aside (because your sales can only deal with so many leads per month, deals per month, and accounts in total), you can now get a reasonable feel of what impacts your business:
The big question, of course, is how to get those extra/better leads. Is it more prospecting? More marketing? More targeted prospecting? More targeted marketing? Who takes care of it? At what cost? What about sales capacity? Can you train your SDR to qualify more efficiently? Your AE to close more often? Your AE to close larger deals? What about your AM? Does your product itself have an impact on those? Have you spotted a few channels that yield more/better leads? If so, which ones? Can you tap into indirect channels? And so forth.
The point in asking yourself these types of question is: someone out there is going to look at your revenue predictions and wonder why you expect to make so and so by then. You really want to have thought this through and be able to walk them through your sales forecast.
Those who actually ran a business will want to hear something like this:
We expect our sales to progressively reach $x of revenue per month when given y leads per month, and we hope to get there by that date. These figures make good sense because [size of market + ease to approach leads + size of client problem + ease to close clients + ramp up time due the length of the sales cycle + maximum sales capacity considerations].
The jump over here is when we expect to do our first sales hire. We’ll look for an AE profile with a good track record at prospecting. We’ll follow up with another sales hire there.
This jump here is because we expect to ship [sexy new feature]. We expect % of our clients will eventually buy it because [reason]. Also, we think that it being around will help our sales close more deals, faster.
That jump over there is because of the marketing hire from did the previous month. We expect to get x more leads per month going forward because [reason], and that’ll earn us that much more. It also means we’ll need to be hiring a new sales the next month to keep up with the added workload, and yet another at that point here.
If you’re able to spell things out and explain where you’re spending your investor’s money, why, and what the expected return is, you’ll leave a deep impression that you really know what you’re doing.
Later on, after actually starting your business, you’ll be able to amend the model based on the numbers you’re actually observing. You’ll be able to say things like “throwing an extra marketer onto producing and promoting an extra blog post each week yields an extra x leads per month” or “it makes more sense for my marketer to focus on this and that because we get slightly fewer but much better leads when he does”.
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