A REALISTIC VIEW OF THE STARTUP “HOCKEY STICK”

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By Lauren Lark

LibesMichael “Luni” Libes is a 20+ year serial entrepreneur, founder/co-founder of six startups, now focused on helping the next wave of entrepreneurs via a variety of efforts including: Fledge, the “conscious company” accelerator; Kick, the “inclusive” incubator; teaching and mentorship at Pinchot; author of The Next Step series of books; and creator of this site, The Next Step, , which aggregates his books, online classes, thoughts and advice.

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Ah… the proverbial hockey stick in a startup’s financial projections. No one believes it, and yet it must be included in any investor pitch.

The original article is at:  http://bit.ly/1MyHvdk

Why? Two reasons. First and foremost, investors are looking for big opportunities, and if the revenue forecasts grow exponentially, that serves as a proxy to claim a large opportunity exists. Second, investors want their money back (and more), and they only way they (think they) can do that is my having the company grow at least 10x in value, necessitating fast growth.

The problem with the hockey stick is also twofold. First, no savvy investor ever believes those projections, with few taking the time to dig in to understand and work through a more realistic outcome. Second, most entrepreneurs have no idea how fast startups are expected to grow, but know they need to include a hockey stick, and the result of that is more often than not, a crazy, unjustified, unrealistic series of revenues.

For example, yesterday I received a plan with $3 million of revenues in the first year, growing to $300 million in the third year. All on an investment of a few hundred thousand dollars. How realistic is that? Not at all. Not a plan that has ever happened before.

How do I know? On the left below is the actual revenue growth of the fasting growing company in the history of mankind, Groupon. $30 million in revenues in their first year of sales (not their first year of operations, as the whole idea of group coupons took quite a few pivots to discover). By year two they topped a half billion in revenues, and more than a billion in year 3.

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Problem for Groupon is the chart on the right above. Despite all that growth, the business was not anywhere near profitable. Their astounding hockey stick revenues was purchased far more than earned, paying customers cash to take Groupon’s product. This can be seen in the net loss in red. Groupon spent more than $1 for each $1 of revenues. They did manage to eventually get the losses down to zero, and go public, but Groupon did not turn out to be the huge success matching its initial hype.

Looking at a few other high growth stories, in the graph below we see how incredibly fast Groupon’s growth truly was. Skip over Zynga, as it’s another boom and bust story. Facebook and Google, unarguably two of the most successful companies of the early 21st Century, both took four years to grow to hundreds of millions of dollars in revenues. Both raised hundreds of millions of dollars to achieve that much growth. Both now earn billions of dollars of profits. Moving on to the slowest growth on this chart we find Amazon. It’s clearly another powerhouse of the 21st Century, but was only at tens of millions in revenues in its third year, taking six years to reach $500 million.

Odds are incredibly low that you are building the next Amazon-scale business, or Google, or Facebook. Odds are your first year of revenues, if successful, will be still be in the single digit millions in your fifth year. The following table shows three realistic sets of revenue projections for three different paths of startups.

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To read the entire article go to     http://bit.ly/1EjQRbz

 

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