Grim Fairy Tales – Part IV

Wishing On A StarThis is the fourth in a six part set of blogs about “how not to raise money for your start-up”. The grim stories you read here are based on real life events – meetings and conversations I have had over the years, and will no doubt form the basis for my next book.

So far I’ve covered Management in Part IValuation in Part II and USP/Market in Part III. This time we’ll take a look at sales.

So when an investor is looking at a company from the perspective of sales, he or she will be evaluating three basic elements of your company:

1. Do you have any sales? How big are they, how repeatable are they, are they good quality sales?

2. What is your sales forecast? Is it credible, do you know how you will achieve it, is it a hockey stick, are they scalable?

3. Do you have a sales strategy that enables you to exploit your target market(s) to the maximum? Do you know how you will build sales, do you have the people to do this, what is your strategy?

Put simply, what have you done, what will you do, and who will do it & how?

For the most part, the companies I see (and work with) have no sales – or at best very low sales.

So the sales evaluation comes down to what they are going to achieve in the future – and how.

My Grim tale for this topic is quite simple. Back in 2006 I was working with an EIS fund that didn’t yet have a fund. The FSA had just approved us, and to fill the coffers until we had raised our first fund we were taking on pre-IPO companies and raising funding for them. Times were still good, AIM was buoyant – you could float a rock and a few people did.

One of the many people who referred deals to us – someone who should have know better – sent me a business plan with a cover note saying: “Take a look at the numbers, this is a amazing!”

She was right, they were amazing, but not in a good way.

The normal course of sales projections is that the management will tell you that their numbers are conservative, that they could easily exceed expectations (they very, very rarely do that). And the numbers will be a traditional hockey stick – low to start, low in the middle, but astronomical by years 4 & 5.

This was different. As ever I will spare the CEO’s blushes and not identify him (we’ll call him Fred), or his business. Or for that matter, the advisor who genuinely thought it was a good business. In fact in my library of nearly 2,000 business plans, this particular one takes the prize for most ambitious sales forecast.

To set the scene, the model was fairly straight forward. Fred was going to supply FMCG (Fast Moving Consumer Goods) products to corner shops. As he wrote the plan, he had not yet set up the company, he had no supply agreements, no purchase agreements, no staff and no premises or distribution facilities. This was Fred’s dream, to supply products to all the small retailers in the country at prices lower than their current supplier.

So ignoring the fact that Fred had a lot of work and expense ahead of him, and a lot of people to hire, I took a look at his sales forecast. Actually I started with his assumptions. He had assumed that it would take 3 months to get the business started, and trading. And that he would by the end of the first full year trading be supplying ALL the products to a minimum of 10% of all the corner shops and small convenience stores in the country. And therefore it was quite simple to use market statistics to produce his sales forecast which went something like this:

First 3 months: £0

Next 12 months: £216,000,000

Next 12 months: £550,000,000

Next 12 months: £1,000,000,000 (estimate)

Yes, the word “estimate” appeared in year 3. And no, I did not mistype those numbers – a sales forecast of £216 million pounds in the first year of trading. From a standing start. In one of the most competitive sectors there is.

If I wanted to make up an example of a bad sales forecast (I don’t need to, I have plenty), then I would not make up such an extreme example. So this is a gift for me!

Your sales forecast must be credible, achievable, and you should know your strategy to achieve it. Whether direct or indirect, home or abroad, B2C or B2B – you should have a plan that starts on day 0 and builds sales over time. Your forecast is always an estimate – it will never be an accurate prediction.

Although there is one exception. I once saw a business plan which stated: “No sales were forecast for the first six months and the Company comfortably achieved this target”!

And a sales forecast that says something like: ” We only need to secure 0.01% of the market to achieve profitability has almost certainly been written the wrong way around – starting with the final result and working backwards. Just look up the word “variance” in a statistical sense ad you will find the issue with this  It is OK however if you start at zero, explain how you make your early sales, explain how you will grow the sales, and put a plan together for the next few years – and at the end of all that you will have achieved 0.01% of the market. You built a sales model that ended up there.

Ultimately if you don’t sell, you don’t survive. It is a good general rule of thumb that all business plans will be described as “conservative” yet the sales will take longer and be lower whilst the costs will be higher and come quicker. And you as CEO won’t believe this is true because you just spent 3 months analysing and preparing all the numbers of your plan.

All I can say is, these truisms are frequently accurate. Should you therefore adjust your numbers down to the point where they are self-evident? In a word, no. You should explain your assumptions, build in contingencies for things working differently (e.g. make as much of the expense dependent on sales – no sales, no expense), be prepared to adapt the plan, and hire a team which has experience working in early-stage, high growth companies.

Next time: Scalability

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