QTMA co-chair Shani Mithani and advisor Julien Lin give an introduction on using various methods to forecast revenue. The video recording is also attached (bottom of the page).


Issues of the Commonly Used Approach to Revenue Forecasting

  • The common approach to forecasting revenue is not as accurate and misses key details
  • This approach for user and revenue forecasting requires additional detail to be believable to potential investors

Best/Worst Case Scenarios

  • Since companies have an endless number of possibilities for their future, it is unrealistic to determine one single forecast
  • Beneficial to take a more dynamic forecasting approach and to talk about the potential outcomes for a company
  • This presents a much more realistic view of your company that investors want to see

Example

Properly is a Canada-based startup that operates in Calgary, Ottawa, and Toronto. Properly allows customers to access their mortgage so they can buy and move into their new house before selling their old one.

  • Best case scenario: Properly becomes an international brand and makes $1bn in purchases annually. This is possible since they have established barriers to scale, and strong AI developments to value houses.
  • Worst case scenario: Properly remains a three-city company and generates $40mn in revenue annually. This occurs because their growth is stunted by American competitors, and heavy investments that are required to expand.

Churn Rate and Company Growth

  • Churn: how many customers stop using a product
  • In consumer tech, both the target addressable market (TAM) and churn rate are high
  • High TAM compensates for the churn rate; companies in consumer tech therefore have slower growth
  • Investors want to see how a company’s growth will stack up going towards their TAM
  • It’s therefore important to explicitly mention growth targets per year

Fluctuating Prices

  • Prices will always fluctuate
  • Customer acquisition cost (CAC): cost of acquiring a new customer
  • Customer lifetime value (LTV): total amount of money a customer is expected to spend towards a company during the customer’s lifetime
  • CAC will increase as a company increases the % of their TAM that they bring in
  • Higher costs are due to increased marketing spend
  • As time goes on, users will be less bought-in and LTV will decrease

Example

Slack is a popular business-communication platform based in California.

  • When Slack initially launched, they were able to get many Silicon Valley business professionals to use the app
  • However, marketing to broader America was very difficult as there were less interested users
  • Slack’s cost to market to segments outside of California is therefore enormous

Other Metrics to Consider

  • MAU/DAU: monthly/daily active users
  • Shows popularity and activity of the platform (strength of network effect)
  • MRR: monthly recurring revenue
  • Shows stability of the company’s revenues
  • Take rate: how much the company charges per transaction
  • Shows pricing power (how much more a company can charge without losing customers)
  • Churn: how many people are leaving the platform
  • Shows popularity and stability of the platform
  • LTV/CAC: lifetime value/customer acquisition cost
  • Burn rate: how fast the company is using cash when growing

Other Approaches to Consider: Constraint-Based Approach

  • If your business has a high TAM, start with your estimated budget or other constraints
  • Since your company is bound by these constraints, you can take a constraint-based approach
  • A constraint-based approach allows you to predict your company’s revenue if the constraint is fully utilized (see example below)
  • Apply this approach to any constraints that your business may have (ex. limited talent)
  • This approach is especially powerful when presenting to investors as it provides a clear case as to why your company deserves funding

Example

A company is constrained by their marketing budget. They can use a constraint-based approach to predict how many sales they can get if this budget is fully utilized.


Other Approaches to Consider: Growth

  • If you’re forecasting your company’s growth, consider other variables

Other Approaches to Consider: Plan Backwards

  • If your company has a small TAM, start with your main goal, and plan backwards the resources and milestones required to attain the goal
  • Realistically look at how many users you can capture within a certain time frame, and work backwards to determine what resources you need to reach that goal

Workshop Recording

Recording.mp4