There’s a lot of startup wisdom that is floating around out there from venture capitalists.
But since VC firms have to aim for massive growth in order to get the returns they are shooting for, almost all of their advice is directed towards companies that are aiming to conquer the world.
And most of this advice is about the challenges that these companies will face in convincing VC’s they will conquer enough of the world to be worth investing in.
But just because you’re not pitching to VC’s doesn’t mean you can’t use some of their advice. It just means you will have to dig a little deeper to know how to use that advice.
In fact, one of my favorite tips for early stage startups is usually buried way down on lists of advice from the top VC’s. (For example, on Andreessen Horowitz’s website it is mentioned as a very small piece of the an article with the title 16 More Startup Metrics.)
Taking this advice and tailoring it to an early stage startup is one of the best ways to build credibility, no matter who your audience is.
And I’m continually using this technique with the startups that I mentor in order to help them build realistic growth projections that really impress.
The original VC version
The original advice from the venture capitalists is about a slide in the typical VC pitch deck that talks about the potential market size and how much share the startup can hope to gain in that market.
The purpose here is that the VC wants to know if the startup is entering a market that is big enough to be worth their time. And that the startup has a plan for gaining a big enough share of that market that is going to produce the kind of return that a VC needs.
In a very bad pitch, the entrepreneur starts this part by saying:
- According to Gartner/McKinsey/Other big research company, this market is worth $20 billion and is growing at 10% per year.
- If we can just get 1% of that market, then we will be doing $200 million in revenue and growing at 10% per year.
The VC advice is don’t do this, but they also have some tips on what to do instead which is where it gets more interesting.
They recommend a bottoms-up estimate based on how much you expect to sell per day and to what kinds of people, shops, etc.
You can still keep that top down market research number from Gartner/McKinsey/whoever, but only to use it as a sense check to this bottoms-up projection.
In the words of the article from Andreessen Horowitz, the thinking from the VC perspective is that this:
“forces you to think about the shape and skillsets of your sales and marketing teams — required to execute on addressing market opportunity — in a far more concrete way.”
But I think even with this additional amount of analysis it’s still possible to make some questionable assumptions about how popular your product will actually be.
Maybe in these big VC pitch situations, the product-market fit is already taken for granted, but this is where I think it’s important to take things a step further with early stage startups.
Otherwise, it’s easy to make overly optimistic jumps that leave your business plan with a gaping hole. And these holes are one of the biggest things that kills your credibility in front of potential investor or customers.
How to build up your credibility rather than tear it down
I’ve looked at this from both sides of the table: I’ve been involved in the evaluation process of startups looking to join the incubator / accelerator programs I work and I also advise startups on improving their pitches, business plans, and B2B sales materials.
And over and over again, I see the same mistakes that tear down credibility:
- Business plans that estimate sales numbers by assuming an arbitrary amount of market share in a few years time
- Pitch decks for investors that have sales projections prepared by an accountant that the founders can’t explain
- B2B sales materials that have no hook for retailers to say that this product is going to be a big seller for them. (or sell anything at all)
But how is it that you can close these gaps in your story and show something that will build up your credibility rather than tearing it down?
This is where the bottom’s-up analysis that is recommended by the VC’s comes back into the picture. But I recommend to take it even one step further than that.
I’m a big fan of Lean Startup concepts (and the work it was built upon, as I wrote about here), especially the core idea of conducting experiments to test assumptions.
And if you think about the bottoms up analysis recommended by the VC’s, there are still a few assumptions in there. (how many units you could sell per day for example)
So my recommendation is to take the ideas of Lean Startup, and fill in those bottoms-up assumptions with things that you do know from conducting experiments.
Which usually looks like one of these two options:
- If you have already started selling, capture your sales information in a way that you can use these initial sales as an experiment. For example, I had a startup I was mentoring who was doing B2B sales and had landed their first big reference client. My advice was to keep detailed track of not only how much money it took to service this client, but to look back and see how much effort it took to actually land this client in the first place. (# of meetings, calls, samples, etc.) Then you have a reasonable idea of not only how much money you can make from each client you add, but also how much it will cost you to acquire each new client.
- If you haven’t started selling yet, look for ways you can do a pre-sales experiment. This could be along the lines of getting pre-orders, email list sign-ups, or other ways you can judge customers’ interest in your product. Then by looking at conversion rates and other similar metrics, you can at least show proven interest in your product and project with some confidence that people are likely to buy at the same rates.
Go forth with a rock-solid growth story
Once you have one of these pieces of information, it is easy to fill in the gaps in your story:
- If you are presenting your business plan to an investor you can say that we have done this much in sales as a result of this much marketing and sales effort. With your investment, I can increase my sales effort by this much and hit these growth numbers by doing this much more sales…
- Or if you are in a B2B sales situation: you can say with confidence, I think this product will stand out on your shelf because I’ve received this much interest in the product based on this amount of marketing effort…
And it doesn’t stop there, this will build credibility with anyone that you are presenting your business to. When you have this kind of bottoms-up analysis in place, you can confidently say you know how to grow.
Even if you never have any plans to pitch to a VC.