When estimating growth, how do you do it?

3

I have an excel spreadsheet I'm using to manage my projects. I have my assumptions about my product that drive base, then I try to apply a "Growth rate".

Here... to make it easier to understand I included a bastardized version of what I am using:
https://spreadsheets.google.com/ccc?key=0AjZDe7zZyUw_dDlOcnIzclBCQV9iS2hpSS0xNnRBeGc&hl=en&authkey=CJiH9lo If you go to the Revenue Forecasting tab, I am basically applying a % growth rate to two factors: first being # of users using the mobile application (acceptance), and secondly the growth rate of new customers. These are carried over month to month. But it makes the graph look, well, a huge hockey stick. Is that an expected growth perspective for an investor? I'd like to be more tempered, but maybe that's what growth really does look like. Even if it was, I don't think that' sustainable because of the raw exponental increase in resources you would need.

Thoughts or tips on how you forecasted growth? Please remember when looking at mine I changed all the factors around so it doesn't mimic reality! :)

• We have two charts. A "realistic" one that we use internally to judge whether to buy beers on Friday and one that we give to potential investors that's the Al Gore hockey stick. We showed a couple the realistic one and they ho hummed... so we gave them what they want. :) – Sean 10 years ago
• More detail on your specific growth assumption chart. These are "knee jerk" and I am sure can be explained by something I missed -- the total customer number assumes a 100% retention rate, even as the usage rate grows. Does this make sense? If the usage rate among customers is so low -- are they customers? or users? Is the usage rate the conversion rate from user to customer? If so -- what is the assumption of ongoing customer retention? I don't see a sales/marketing cost tied directly to the revenue -- so I can't calculate the cost of acquisition or conversion. – Joseph Barisonzi 10 years ago

3

The assumptions I have found the most important part of the growth projections is the supporting growth assumptions. What are they based on and how realistic are they? The assumptions construct a "logic model." The validity of that logic model - often assessed at a gut level -- is the foundation for the acceptance of the financial projections. I have found that spending the 80 of the 80/20 in the development of financial growth projections on the assumption set delivers the best results.

The Haircut Then next most important thing that I have learned is that the despite my best attempts to be conservative the potential investor will always cut the growth rate in half, double the projected costs, and lengthen the projected time to market by at least 30%. I always have a copy for myself that does this ahead of time so that I know what they will see.

To address the above-- or minimize the risk of it derailing the conversation -- I always produce three versions of the growth chart -- anemic, organic, explosive -- each with very defined set of assumptions that change. I have found having a chart that shows summery results of each of the three models communicates an understanding of the fluidity of the start up environment.

Best of luck in your modeling!

• I really like your multiple outcomes chart. That's why I created mine the way I did, I can adjust any parameter on the fly and the whole thing updates, right to the income statement and statement of cash flows. – Nick 10 years ago
• Additional thing Nick -- include key assumptions on the financial docs. The "accountant" brain of the prospective investor team wants to go back to the financial and just see it all there. – Joseph Barisonzi 10 years ago