Tue, May 31, 2016
One of the common pitfalls for entrepreneurs who are pitching their company for funding is the financial model — mostly the question of (addressable) market and their revenue projections.
Typically you want to demonstrate a huge market which you will conquer and dominate in next to no time.
But how do you determine the market size without sounding outlandish? And how do you present a growth strategy which has the qualities of the fabled “hockey-stick growth” while making sure the numbers make actual sense?
For the market size question I usually suggest an outside/in approach: Determine the total market, home in on your total addressable market and then figure out the size of your initial market.
For example: Say you are building a product a mobile phone based service for the elderly population. Your initial geographical market is the US. There are 6.8BN mobile phone lines in the world. The USA represents 327M of those. It is expected that about 25% of those are in the hands of the elderly — thus your initially addressable market is 82M people.
As for your growth strategy: To develop a sound strategy you have to deeply understand your business and underlying business model. Spend time in a spreadsheet to play with the different variables and see how it affects your numbers. You want to intuitively understand what it means if your sales cycle increases from 30 days to 90 days or if your gross margin on sales goes down from 25% to 10%.
Building a sound financial model is paramount to truly understanding your business, your potential and raising capital. There is no rocket-science involved — just a bunch of hard, nose-to-the-grindstone work.