Some Thoughts On the Reliability of Forecasts for Business Planning
We recently watched an interview with Mark Cuban taken at the Clinton Global Initiative America Meeting, held in Chicago in June, 2013. When asked about the value of loans for very early stage businesses, we heard Mr. Cuban reply as follows: ” . . . loans are a dumb move for entrepeneurs. Banks expect regular repayment on specific dates. When you’re starting a business you have very little indication, if any at all, where your first or next sale will come from.” (this is merely our summary of what Mr. Cuban actually said)
We think his position is absolutely true, and brings into question another point, not touched on during the interview, but, nevertheless, very important for entrepreneurs thinking about starting tech businesses to consider: Forget about forecasts, they will not be reliable. Revenue and sales activity for very early stage tech businesses are especially difficult to forecast. There is a hidden moving target at work. Markets themselves can change, radically.
If forecasts are inherently unreliable for very early stage tech businesses, then why does a business plan remain an essential document for financing discussions, and, in some cases, customer relationships? Business plans are especially popular with banks, and the U.S. SBA. But remember Mr. Cuban’s point. Better to forget about conventional financing if your start-up business notion is in a technology area.
Venture Capitalists (VCs) also like to read business plans. Perhaps it’s easier to broadly estimate revenue for the types of markets of interest to VCs. These markets may not even exist, so estimating zero revenue for the first one to three years, as markets are built, may be acceptable for a business plan for VC review.
Even mature businesses built around technology products are tough to forecast. You can’t lose sight of an important variable largely out of your control: market sentiment about specific products. In 2013 PCs are largely out of favor, but just five years ago they were a very popular and accessible method of computing. So even the best sales team will have a tough time hitting their numbers in 2013 if they are selling commercial software to a PC market.
The key point, for tech entrepreneurs is to approach the task of forecasting with a very strong sense of skepticism.
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