When you’re pitching to investors and generally when you’re looking for financing, you need to have a full financial model with all the necessities: some of which being Cash Flows, ROI, Sensitivity Analysis and pro-forma Income and Balance Statements. This is key, as investors are looking to see the viability of your business and potential returns if they do decide to invest.

The two main issues are hockey stick growth and top-down research. You need to be able to back up your numbers!

I know you’re thinking: “Obviously!” But, we see the same old story over and over again – unrealistic sales models that get torn to pieces when you’re at the front of a room of 20 investors. Needless to say, this is not good for your prospects.

Hockey Stick Growth

This is an example of how most entrepreneurs envision their sales, whatever their business model may be. This is not convincing.

More realistically, you’re going to have key events that define the stage at which your sales figures will grow. Not only should you identify these events to investors, but you should be able to explain your reasoning with solid research (we’ll address this in a bit).

Of course, these are just examples, but I think you get the idea.

Top-Down Research

The second issue, which really goes hand-in-hand with the first issue, is the usage of top-down research when making sales projections.

Let’s face it, it’s extremely difficult to forecast demand for any product or service in the marketplace pre-commercialization (this is why investors get pumped up when they see that a product already has sales). The classic example of how entrepreneurs handle this is the following:

“Well, the market for my product in North America is $250 Million and I believe that I can get 5% of that market share by the fifth year of commercialization. Therefore, my revenue figure in my fifth year is going to be $12.5 Million and I will have steady growth up until then.”

While this may not kill your pitch (because almost everyone does it), it’s not going to be effective, it’s not accurate and you will get called on it. So the question is, how do we accurately forecast demand?

The answer is, we can’t. But we can try and we can get a better picture than the hockey stick model. The best method is to:

  • Have an in-depth look at your competitors and talk to their customers
  • Conduct beta testing of your product or service
  • Collect information from your beta tested customers
  • Segment the market and research each segment
  • Look at the innovation that has taken place in the industry or that is currently taking place
  • Look again at your competitors
  • Look at macro forces that will be affecting your industry, consumer demand for your product and the economy
  • Establish realistic stages of growth for your business (see “key events”)
  • Establish a sales model and align it with your marketing plan

Not necessarily in that order. This is an example – the process differs in each particular case.

Going through a formula like this will at least impress your potential investors and show that you’re a thoughtful and industrious business person. It will also provide you with first hand insight into your market and lead you to information that will be incredibly useful.

It will indeed provide you with a more accurate sales model than the ol’ “hockey stick approach”.

Stay tuned: there are still more mistakes that investors see over, and over, and over again – mistakes that you can use to make your investment opportunity stand out against the others.

Love, Lumos.

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