7. Die is cast
Not understanding the revenue drivers
What are the leverage points of revenue build-up?
Underestimating time to generate revenues
Costs come before revenues
Underestimating costs
Leading to cash crunches and ultimate failure
Lack of comparables
VC’s check industry standards
Top-down versus bottom-up forecasting
How do you get to projected numbers?
Views a venture as a set of assumptions that must be learned about, rather than a plan to be proven.
It is positioned as a six step process:
Differentiation between primary and derivative assumptions with focus on extracting and understanding primary assumptions
Early construction of a business model that allows calculation of the impact of the primary assumptions on derivative assumptions such as sales or revenue
Assignment of uncertainty ranges to primary assumptions
Identification of the critical assumptions by determining the impact of their uncertainty ranges on the net present value of the venture
Selection of the next venture milestone based on a test program that results in maximum reduction of uncertainty at least cost in least time for the most critical assumptions
Document all assumptions that you are making as you go through thinking about venture deliverables
Focus on the most critical assumptions.
Some assumptions are more critical than others, due to their close association with the key production- or consumption-chain, hence driving the cost, revenue or business risk of the venture
Create management interventions (« checkpoints ») to deliberately structure the systematic testing of critical assumptions as the plan unfolds
Link the critical assumptions and the checkpoints.
The goal is to have a chart that will help you identify which critical assumptions will be tested at which checkpoint – bearing in mind that many critical assumptions might be tested more than once