Entrepreneur Myths (13 page)

The moral of the story is that predicting the future is impossible — and it’s impossible with sales forecasting.

Sales forecasting can ruin your startup

When I see sales projections, my first thought is, “Hmm, let’s see what kind of bullshit we’ve got here.” Having been on both sides of the table, I know how to dress up a sexy sales forecast for investors. However, sophisticated sales projections based on tens of assumed variables can hurt your startup. You start believing your own bullshit because you spent considerable time developing a sophisticated financial model based on rocket-science assumptions.

My advice: make your projections simple enough that a high school student can understand them. If I don’t understand your financial model, I do not invest.

Sales forecasting based on reality

Make sure your financial model is not a house of cards. Years ago, when I was selling business and game software into 10,000+ retail outlets for different companies, there were months when the CEO pressured me to increase my sales so the company would look good to the investors. I was able to change the dynamics of the sales projections by making a few calls to my large distributor and retail buyers at the end of the month.

FYI: Increasing sales through distribution is challenging because you have to be careful how you market the product through the retail channels. You don’t want returns if the product doesn’t move off the retail shelf because you will lose money on the logistics side, plus it’s a hassle.

A few times, I stuffed so much product onto retail shelves that it gave me serious concern. The numbers looked good at the retail level, and the product was merchandised well in each store, but my anxiety was over whether the product would fly off the shelves. I warned the CEO that product returns could be massive, and a few times they were. Back then, my perspective was from a sales viewpoint. After I placed the product on the retail shelf, I figured it was up to the marketing department to create the consumer demand and move it off the shelves.

It doesn’t work like that in the real world. The large distribution and retail buyers called me to bitch about marketing not pushing it off their shelves and I had to handle the returns. It is better to be conservative with your sales forecast than to offer pie-in-sky forecasts. If the investor isn’t happy with your conservative sales projections then tell him to fuck off — in a nice way, of course. It’s impossible for anyone to predict the future. Why would you be any better?

If you plan to predict sales, you have to ride the market. Sales performance is a result of internal as well as external conditions. For instance, no matter how many automobile rebates were issued during the Great Recession of the late 2000s, the external market, in addition to the competitive intensity of other auto manufacturers, dictated the volume of each company’s sales forecast.

Lesson learned: Sales are important, but the rate of product returns from unhappy customers is also critical if you plan to stay in business for the long term. I don’t often hear investors discussing the topic of sales returns or canceled subscriptions in the early stages of the company. But returns are a good indication of the company’s performance with the customer. In 2011, Netflix increased the subscription price and customers are revolting. The rate of subscription cancellations after a rate increase will determine whether the Netflix financial models are forecasted accurately.

Sales forecast pulled out the ass

The number of entrepreneurs driving their businesses based on sales forecasts they simply pulled out of their asses, based on bullshit assumptions, is astounding. Once the sales forecast is set, it drives their entire business and all the people around it. The result is a clusterfuck sales situation because salespeople end up doing things, sometimes even lying to the customer, just to meet their sales numbers.

You can determine the psychology and profile of the entrepreneur and their team by looking at their sales projections. When entrepreneurs forecast projections based on some percentage of the entire market, my first question is, “How did you come up with this specific percentage?” The answers they give are quite amusing. They range from total bullshit to rocket science assumptions that I don’t even understand, or they just don’t make sense.

Even more amazing is when the marketing budgets don’t match up with sales velocity. Unless you’re a lucky bastard like Google, you’ll have to spend money on marketing the product. For instance, Microsoft spent $100 million on marketing the launch of their new search engine, Bing, a competitor to Google. I don’t think that was enough money. Even Google advertised their new web browser called Chrome — deviating from their strategy of not using advertising to market their products.

When it came to my venture, entrepreneurdex, the venturcelerator using complexity science to fund and launch startups, I didn’t do a sales forecast. Why? Because I don’t know yet how it’s going to play out. I do understand my business model. I do plan to make money, but spending hours forecasting sales five years into the future is a waste of my time. I won’t do it.

Business modeling vs. sales forecasting

You need to do simple sales forecasting for your company, that anyone can understand. But I would rather see your business model. A business model demonstrates how a company makes money. It is not rocket science. It requires high school math, research and creativity.

My last bit of sales forecast advice: focus on fully understanding your business model, before wasting time on sales forecasting. Your business model will enable any investor to understand how your venture will make money today and into the future. For example, if you focus first on a freemium strategy, by offering basic services for free, you need to show investors how you will transform a percentage of the free users into paying customers under a subscription model, or develop transaction and advertising revenue streams.

Brain Candy: questions to consider and ponder

(Q1)
How critical are sales projections in running your venture — especially if you have no sales?

(Q2)
How do you determine sales projections in your business? Do you pull the numbers out of your ass or the ass of someone else?

(Q3)
How can you predict the future? How can you be so sure of it? If you can predict the future, can we go to Las Vegas together?

(Q4)
Do you base your sales projections on the sales pipeline that was provided by your sales or marketing people? What if your salespeople are just pulling the numbers out of their asses to make themselves look good? What if they are overly optimistic?

(Q5)
What if your marketing people are basing their sales projections on industry norms or just a simple percentage of the total market? Now that’s scary forecasting because it’s top-down instead of bottom-up.

(Q6)
Have you figured out your business model?

(Q7)
If you’re an investor, how do you analyze an entrepreneur’s sales projections? What variables and assumptions do you seek?

Entrepreneur
Myth 21
| You must have an office

Do you need an office when you start your venture? Absolutely not. In fact, you should delay getting an office as long as possible. The ultimate is to generate revenues before leasing an office. Startups should keep their fixed costs as low as possible. 

How about an office with cheap rent? I have one for you for $5 per day. No need to pay for rent, insurance, water or utility bills. No deposit or lease required. You don’t even need to purchase toilet paper. And your employees or partners will be happy to pay for their own coffee. The cool thing about this office is that you have access to more than 17,009 locations across the world. You can be everywhere and anywhere.

There is no better office for a startup than Starbucks. Period.

Entrepreneurs have pitched me at my office, at their offices, and, for some, their office was the local Starbucks. I’ve seen Silicon Valley entrepreneurs, still living with their parents, get funded. I was funded,
more
than once, while operating my startup out of my home office. Why pay for office space when you can use that money for product development? I know one entrepreneur who racked up more than $40 million in sales while working out of her home — and she still refused to get a real office. Her fixed costs were low, that’s for sure.

Why entrepreneurs rent executive suites, so they can commute 10 miles to their one-room office, is beyond my comprehension. Maybe it makes them feel like they’re in business. There is no need for an executive suite. Most likely, you’ll only see other startup entrepreneurs at the executive suites. And reserving a conference room can be fun. You’ll go through fucking hell scheduling a room because 20 other companies might be fighting over the one large conference room.

It’s one thing be in an executive suite; it’s another to advertise it. The receptionist usually gives it away very quickly to your callers that you’re officing out of a shared executive suite. And to most people, use of an executive suite indicates an undercapitalized business. So why pretend?

One portfolio company operated out of an executive suite during their startup phase, despite me funding them for millions of dollars. I called and asked the receptionist to put me through. It was obvious he was looking through the directory, trying to find the name of my startup. It was not professional, to say the least. Now, to defend the office suite market sector, I know it doesn’t always happen — but it does happen.

If you want an office, find an incubator.

If you’re trying to decide whether to get an office because you’re convinced you need it to raise capital, but you have shit for revenues — think again. I raised $50K to $500K of seed capital, which is the hardest money to raise, while working out of my home office. I sold millions of dollars of products for startups and corporations, out of my home office. In one startup, we raised more than $500K, and we didn’t get into an office for more than nine months. Now, that’s saving some money.

One problem with renting an office is the lease liability. Leases suck unless you have revenues to pay for them because they lock you in for one to two years. I funded an entrepreneur for more than $1 million only to find out he rented offices in a high-rent, high-tech district. He thought he made a bargain — but they were locked in for two years. Not very smart, especially when it’s on my fucking dime.

Don’t be embarrassed to tell people you office out of your home or Starbucks. If the investor or your potential employees don’t seem impressed, who gives a fuck? When you hire employees during the startup phases, make sure they also work out of their homes. You can hold company meetings at Starbucks. Virtual collaboration is easier these days, thanks to Facebook, Skype, Google+, Twitter, etc.

My advice to college students: Run your venture from your dorm room as long as possible. Why the fuck not? You’re paying a fortune for the education anyway. Wait to get an office until after the school tosses you out for turning the entire dorm into your corporate headquarters. But before you get an office, consider Starbucks.

My advice to high school students: Run your venture from your bedroom. Your parents are paying the mortgage or rent anyway. Start your venture, make money and surprise them with a vacation. If your parents are not happy with you transforming their home into a worldwide corporate headquarters, my advice to high school students is the same: Office out of Starbucks until you’re making money and can afford an office.

I funded another company for millions of dollars, and instead of getting out of their shared executive office, the founding team stayed for another year. It was fucked up. One was in an office down one long-ass hallway, another was 50 yards in another direction, while the third one was even further down around the corner. They had to use Skype to communicate with each other. The sick part was that it wasn’t fucking cheap. But it was convenient for them geographically. I got tired of seeing the exorbitant expense, and made them move out and sublease at my offices.