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Proving Math Works

by David Brock on March 15th, 2011

Not long ago, I was asked by some investors to assess the business plan of a start-up company.  I jumped at the opportunity, I love working with entrepreneurs and launching new products and companies.  The team I met with was filled with passion and excitement, they saw no barriers, everthing was opportunity for them to seize.

My job was to focus on their market, customer, and competitive assessments.  I was looking at their go to market plan, their sales and support plans to understand the risks in the plan and to make recommendations to reduce the risk and achieve their goals.  They had already completed a number of product tests with potential customers, so they knew they had a product that worked and delivered results to the target customers. 

They had done a lot of market analysis, defining the target markets and customer segments, sizing the opportunity.  They told me the addressable market was just under $10 billion a year.  The competition  was highly fragmented, with no competitor having more than 17% market share.  They kept insisting to me that they had done a very conservative analysis and believed they could achieve 0.5% market share within about 18-24 months.

Upon hearing this, I steeled myself for a painful afternoon.  I took a deep breath and asked, “How did you choose that number?”  They pulled out the charts showing all the market data, showed the revenues of the key competitors, and other market data.  Then said, “Given the leading competitors have 10-17 % market share, and there are a lot of smaller competitors, we think 0.5% is a very conservative number-we think there is enough room in the market to hit 0.5% share.

I sighed, I don’t know how many times I’ve been through these presentations.  I responded, “So you’re telling me that right now you have no revenue to speak of, but within 18-24 months you will be generating revenue at about a $50M run rate?”  They nodded enthusiastically, saying, “We think there is a lot of upside to that number, once people see our technology, they’ll recognize the superiority and flock to us!”

“OK,” I said, “I get the math—it works, tell me how you are going to generate $50M in 18-24 months.”  They started looking at me, clearly wondering why I didn’t get it.  They repeated their pitch, the market was currently just under $10 Billion annually, within 18-24 months it would be over $10 Billion.  “We believe we can get 0.5% of that, so we think we can generate $50M.”

“I understand the calculation, but tell me how you are going to generate $50M in revenue.  Also tell me how much it’s going to cost you to generate that.”  I said.

They responded to me, “Our marketing and sales budgets are ……….”

Frustrated, I interrupted, “No you don’t understand.  I hear the figures you are claiming, I understand the math.  Tell me how you are going to generate that revenue, give me a model so that I can understand what it takes to generate that number.”

They looked at me, clearly not understanding what I was talking about, so I started asking some questions, “What is the sales cycle like?  How long is it, what resources does it take, what is the average revenue you get for each deal?”  “For every deal that you qualify, what percent do you think you can convert to win?” “How many prospects will you have to meet with to qualify a sufficient number of  qualified opportunities?  How many leads to you have to have?  How will you generate those leads?  How much time will it take to generate those leads?” 

I took a breath and was about to go on, when I saw they clearly were clearly confused.  “We don’t know the answers to those questions, why do we need to worry about those issues?”

I see the same kind of thinking all the time—we build a sales plan, we build a new product launch plan, we build a business plan.  We establish some goals, make some assumptions, then prove that math works.  It’s not a bad starting point, but to be effective, we have to go deeper.  Do we have the resources in place to execute the plans we have established, can we build the program from the bottom up?  Sometimes we have to make assumptions like the number of leads, the number of calls we can make, the number of customers we will meet with—those become important milestones to track our performance against.

Building and executing an effective plan is more than showing that math works, it’s looking at it from several dimensions, from the top down, from the bottom up.  All plans require us to make some assumptions–particularly if we are doing something new and have no prior experience.  But these assumptions become critical metrics and milestones against which we track our progress.  If we start missing these milestones, or find the assumptions are wrong, then our ability to achieve our goals is threatened.

Have you built a real plan, or are you simply proving that math works.

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6 Comments
  1. Great post David!

    I see this on Dragon’s Den (Canada’s version of Shark Tank) when the investors ask entrepreneurs to explain HOW they will go from zero revenue to 100s of thousands in a short period of time.

    So many people forget that you need a strategy to increase sales, not just marketshare potential.

    Cheers!

  2. When investors required a business plan for our software product, I had to learn how to build a detailed operating plan that mapped the entire sales process.

    We hired a consultant team that was worth their weight in gold (at 1990’s prices). We had a sales plan, but putting it into a spreadsheet that covered a 5 year span gave us a model that you could poke and prod with what ifs that gave instant results.

    It was an excellent education that changed the way I look at business and painted a realistic picture that made our team and investors much more comfortable.

    Unfortunately, people see a billion dollar pie and think they can grab a sliver with a good idea and some marketing. That’s a plan without planning and as President Eisenhower said, “good planning is indispensable.”

  3. It seems that one of the reasons so many small businesses fail is a lack of understanding of the numbers behind their ideas. Execution often ends up being different than conceptualization.

  4. Love the story Dave. Can picture their faces now. Good post!

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