Most successful technology companies aren’t rocket ships

Christian Chabot at IPO Dashboards:

Have you ever seen a business plan with hockey stick revenue projections? It’s common for VCs to receive business plans showing sales growing from $0 to $100m in the first 5 years of a company’s life.

In fact, growth conversations between VCs and management teams often cause angst. One of the reasons is that people from both groups tend to have unsubstantiated beliefs about how long it takes to build an important company.

Check out the data – less that a third of top 100 publicly traded software companies hit $50 million in sales in six years or less. Has the sector become nearsighted?

(h/t Paul Kedrosky)


chris says:

Forward Looking Statement: I read this blog for fishing interests. Also, I work in biotech, not tech.

All that said, here is my $.02: people seeking money from investors, whether they are VC’s, PE-types or public buysiders should refrain from making market projections unless their target market is completely uncharacterized. This is for one simple reason – it is the investor’s job to do that. They can’t possibly justify their risk capital without having a rock solid model on how you are going to penetrate a market. Therefore, let them do it – some will tell you not to give them projections at all, that they are paid to. Which is true. In the end, it will save a lot of eye-rolling or, worse yet, serious dischord in an potentially critical relationship.

I think I was agreeing with you, but was compelled to write this anyway. I see people do this all the time and they don’t recognize that it is destroying credibility.

Nice work on Matt Dunn’s nose.

I have to agree with you back, both on the insightful part and Matt’s nose.

It might weight a little more heavily towards your market, seeing as it’s often a lot more capital intensive, but sticking to projections that are focused primarily on costs, and allowing investors to pick up the slack on what you might do in the open market, makes perfect sense. I’ve created numerous financial models that I would up just giving to investors to toy with. Generally build them bullet proof, then plug and play on the assumptions so investors can do what ifs at will. Even angels should be sophisticated enough to ask the right questions, and dig.

In the middle of a small round now, and we did was a 13 month cost projection for presentation, and a completely separate “what if” model for revenue. Two investors have already engaged in their own competitive research.