May 2012

Revenue Estimation

Contents

1

Introduction

2.Revenue estimation methodologies• Overview• Applications

3.Classic mistakes

4.Presenting revenue estimates to investors

3

• Revenue estimation is critical to any business plan

• Yet, accurate estimation is rare

• A key focus area for investors

Introduction

4

• Top down− “Market is known to be $200M. The leader has 15%. We

can get 5% of it”

• Bottom- up− “We will start with 1 restaurant in the first year. It’ll have 50

covers. Occupancy will go from 40% to 80% over a period of 12 months. We’ll make $200 per cover per day. So we’ll generate 50X60%X 200 X365= $2.19M. Next year I’ll open 2 additional branches….”

Methodologies

Applications

Bottom up

Top down

• Quick sense check

• More relevant to get to addressable market size

• Reflects your plan to address the market

• Closer to the ground, brick by brick, with a keen eye on feasibility

• Tightly coupled with marketing plan and spend

5

Both models are relevant as long as judiciously applied.Both models are relevant as long as judiciously applied.

6

Typical funnel: Market size to business revenue

Addressable market

Market/ industry

Revenue

7

Typical funnel: Market size to business revenue

Global market Relevant market Addressable market

A plan targeting the addressable market will comprise grounds up assumptions. Estimated revenue is a byproduct of such a plan. A plan targeting the addressable market will comprise grounds up assumptions. Estimated revenue is a byproduct of such a plan.

Illustrative

What’s essential for bottom up revenue estimation

Assumptions

• Granular model should expose every assumption behind the estimate

• Establish sanctity of assumptions through market data, first hand observation or primary research

• Test for different ranges (sensitivity analysis)

8

What’s essential for bottom up revenue estimation

Scenarios

• Scenarios reflect range of possibilities in the face of uncertainty

• Test your plan for conservative

assumptions while pursuing an aggressive case

• Funding should provision for conservative scenarios

9

What’s essential for bottom up revenue estimation

Linkage to rest of the business

plan

• Revenues are tightly coupled with your entire plan- not an ‘island’

• Resourcing, marketing spend, timeline (seasonality where applicable) – they all have a key impact on revenues

• Assumptions, costs and revenues should move in tandem

10

11

• “Let’s assume 1% market share of this $300 bn global market….!”

• Assumptions not validated early on and turn out to be surprisingly ‘off’− E.g. Latent need ≠ Demand

• “There is demand BUT getting those first customers is taking far more time than we thought”

• Excel model can be linear…the market rarely is− Unpredictability− Small sample− Minimum threshold theory

• Giving up too soon

• Not giving up soon enough!

Classic mistakes to avoid

12

• Back it all up with rationale for assumptions− Past trends/ market benchmarks− Cite parallels from different contexts if your offering is new− The more granular the better. And then show it off!− However, all said and done, real benchmarks from competitors/ others,

are often more impactful than assumptions in a vacuum

• Be credible in your approach− When you call something conservative, share the basis− Enthusiastic, but never dishonest− Acknowledge risks

• Rehearse− Know your stuff like the back of your hand− Have a devil’s advocate and run thru likely questions− Practice

Presenting revenue estimates to investors

Thank you.