Agenda for Growth: Harnessing the power of asking ‘what-if’?

Could you name a company of any type that has operating profits of 70 percent of revenue? Or even 45 percent or 35 percent? These are the kinds of projections that entrepreneurs repeatedly present to angel groups and venture conferences, and promptly earn themselves a big red flag.

Projecting ridiculously high operating margins is credibility killer No. 1. It demonstrates to investors that the company founders don’t know the economics of their business, that they haven’t studied their competitors and comparable companies and that the management does not understand something fundamental about their pricing and cost structure. Sophisticated investors conclude that their money would not be in good hands.

The best entrepreneurs ground their creative ideas in solid numbers. Projections are not just for business plans. They should represent the results of analysis of different business strategies and capture the founders’ intelligence.

A good Excel model sharpens and integrates an entrepreneur’s understanding of the customers, their buying processes and how this relates to revenue assumptions, marketing strategies, operations, staffing, growth and financing plans. No startup should walk into venture negotiations without one.

A startup’s analysis should incorporate whatever competitive and industry data can be gathered. For example, one company estimated what it would take to provide competitive customer support by counting the technical papers and other support services on a competitor’s Web site. Another example is that in the software industry, survey data is available on the productivity level of sales teams. One would have to question a software company business plan that varied significantly from these norms in its sales staffing assumptions.

The fun starts here

A model enables a company founder to ask “what if”? What if I could get one customer to pay up front? What if I could get three customers to pay 20 percent up front? What if the price per user of my technology could be $199 instead of $195? What if my royalty structure in my R&D partnership could provide for a base payment that covered half my costs? What trade-off in the royalty would it make sense to propose? What if product introduction of my medical device requires 24 months, not 12 months? What if my support staff could become productive in one month instead of three?

All of these questions have a direct impact on how much money a startup has to raise from investors. Put together enough “what ifs” and you very well might have a bootstrapping plan.

Up here in Vermont, we have a lot of boots: ski boots (at least three different kinds), hiking boots, muck boots, riding boots — and when all else fails, hip waders. And a lot of entrepreneurs bootstrap increasingly sophisticated companies.

Regardless of what kind of boots you wear, and whether you bootstrap or work with investors, “what ifs” must quickly become “how-to’s”. At this stage, a company’s model is used to identify strategies to bound potential negative impacts of the unknowns, enabling companies to take less risk, discover the counter-intuitive strategies and anticipate growth hurdles.

Betsy J. Walkerman – who runs Headwaters Strategy LLC, an entrepreneurial strategy and technology licensing firm based in Underhill, Vt. – offered a presentation on “Asking ‘What If’ — Financial Planning/Modeling to Expand your Options” at the Dec. 7 Agenda for Growth conference in Bedford. For more information, visit HeadwatersStrategy.com or call 802-899-4641.