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Thursday, December 30, 2010

Sales Projections – Newbie vs Reality
Want to immediately identify yourself as a total sales/revenue noob? Make the following statement while talking to an investor (or a peer, the postman or your dog) about how your derived your revenue projections:

“We estimate that we can capture X% of the current market which will generate $YYY millions.”
Gut check moment….do you know what is wrong with that statement? No? Here it is, plain and simple. True sales projections are derived as a result of understanding how many opportunities a sales person can close in a given year. This includes online marketing/sales efforts. Even if a sales person is not directly contributing to a sale (like converting a website member to a paying account), there is a metric that one needs to derive to form the foundations of revenue projections. You need a formula based in reality.

By saying that all your company needs to do is capture a percentage, you are telling the other party that you have not gone through the thought process of how opportunities will be generated (above the funnel), how they will be converted (in the funnel), how long it will take to convert, what revenue will be generated per account, and when you will lose that customer (below the funnel).

This is the difference between a ‘Top-down” and “Bottom-up” strategy. Top-down strategies are basically WAGs (Wild Ass Guesses) stating some unrealistic percentage of market as a revenue number. Bottom-up strategies use reality to derive a revenue figure. When the VP of Sales conducts an annual sales meeting with his/her team, the individual sales people in the room don’t commit to sales figures based on a percentage, they think about the cycle of “bagging and tagging” a new customer. They also think about attrition rates and incremental revenue from their existing customer base. They consider all the factors that lead to a sale and then, based on lead generation, provide a projection that is a reflection of reality.

For example, Dr Suess starts a new company selling moss covered credenzas. He hires a marketing person to start generating inbound sales leads and then finds a sales person to close them (I am overly simplifying this, so go with it!). Dr Suess asks the sales person how much revenue he can “close” this year. The sales person pauses and thinks to himself;

“It takes me 2 weeks to get a meeting with a new lead, another month to ship them a sample, then a couple more months for them to decide. The first order is normally 10 units at $1000, assuming a first time buyers discount of 50%, which will take another month to run a credit check, set them up in our system and get the actual order from the customer. So it will take me about 4 months to close each new account, generating $10,000 per customer. I think I can find and handle about 10 sales over the course of the year so that makes $100,000 in revenue.”
He then tells Dr Suess he can generate $90,000 (giving himself a little wiggle room) in the next year. Dr Suess nods approvingly and writes down this number as the sales persons commitment. Let’s just assume the cost of living in Whoville is VERY low and profit margins are high.

The thought process the sales person went through is Bottom-up. It is based on his real experience selling credenzas and is therefore more realistic. If he had taken the Top-down approach the number might be completely unattainable. If the market was $100,000,000 and he made the noob mistake of saying he could close 0.5% of the market, he would have signed up for a revenue figure of $500,000. Given the sales cycle, what are the chances this sales person would close 50 account in a year? Slim to worse-than-dead.

This is why, when people talk about potential sales as a percentage of market, most people think they are just throwing out a mentally-lazy number and haven’t done the math. Someone with experience would state a number and maybe talk about how that number was derived. The beauty of a Bottom-up approach, especially when seeking investment, is this level of understanding helps the entrepreneur also deal with the wonderful question, “If you doubled your sales staff, how much more could you make?” Translation, “I am interested and might be inclined to give you more money because I trust your analysis.” Not a bad problem to have.
Hope you have a great 2011

Monday, December 27, 2010

The 'accidental entrepreneur'

Hi Folks,

Hope you are all well and have had a good break over Chirstmas and Newyear (as I write new year is still to happen). I had stopped posting for a while as I was visited by my insurance underwriters off my unemployment insurance (HBOS ) and asked how much money was I making with my Blog?...well that was a laugh...but to keep things on the up and up and make sure I did not upset HBOS again, I decided not to write again until I had a new job, which I have a temporary ( 6 months) contract with a microelectronics packaging company http://www.optocap.com/ good guys, I have worked with them in the past on two projects, one for a microdisplay company ( http://www.forthdd.com/) and another a stealth CPV company, these guys are just through an MBO so it is interesting times ahead for them.

Now to the post of today....I saw this article on the http://www.bbc.co.uk/ website wrt an entrepreneur, who stumbled in to starting companies, he makes some interesting comments, so enjoy:

WizPatent's Casey Chan: The 'accidental entrepreneur'

The commercial success of a medical research project led orthopaedic surgeon Casey Chan into the world of tech-start ups

By his own admission, Casey Chan stumbled into entrepreneurship.
He trained in engineering and medicine, but now divides his time between lecturing and researching at the National University of Singapore and creating new technology companies.
While working as an orthopaedic surgeon, Dr Chan became involved by chance in a research project to increase the strength of bone cement used in joint replacement surgery.
The system he designed turned out to be a commercial success. He believes the opportunity gave him the first taste of developing technology into a commercial product.
Dr Chan's latest innovations, WizPatent and WizFolio, arose after he wanted to patent a product but needed to sort through existing, similar patents to check for infringement or copyright issues.
"It's not just a matter of getting the documents," he explains.
"There's a whole series of knowledge management after you have gotten the documents."
Dr Chan found the process frustrating.
"The difficult part is making the decision on what you have retrieved, which means you need to decide which are the patents that are relevant to what you need to do.
"Then you need to organise it so that you can make a final decision based on your analysis."
The cumbersome procedure led him to develop WizPatent, a software system for managing patent documents.
It allows users to download and sort patents in an orderly fashion.
Dr Chan launched WizFolio soon afterwards to help users organise other forms of digital documents that can be cumbersome to manage, such as research papers.
"I've been developing software for the last 15 years," he says.
"And I've found that developing software is not any different from developing any other commercial product.

"My advice for people who are starting up…is it's very important that they actually pay themselves”
"You go through a whole series of processes. The first thing is identify if there is a need for such a product.
"Don't go and try and commercialise a product because you think it's a good idea or because the technology is cool. You want to make sure there is somebody that wants the product you are making."
Dr Chan believes his previous experience with start-up companies in Silicon Valley in California was invaluable when it came to creating his own company to launch WizPatent.
"I talked to a lot of other people that had been starting their own companies and then I invested in a number of these companies and got to know the process," he says.
But he admits that his lack of marketing drive has hampered the success of his company.
"The launching of a product is something that we don't do very well as entrepreneurs and that is one of the major deficiencies I consider myself as having," he says.
"If I were to do it again, I'd probably raise some funds from outside investors and hire a marketing team. I think that's very, very important. We did not do that, so right now we are just breaking even."
"I often think that jaywalkers are good entrepreneurs," says Casey Chan.
Casey Chan believes that all entrepreneurs experience failure repeatedly and that eight out of 10 new businesses "are probably going to fail".
"There's a lot of lessons to be learnt from a failure," he says.
"But you want to be able to get up from a knock-down position… to utilise the learning that you have derived from that particular failure."
For those reasons he is adamant that entrepreneurs should never leave themselves financially vulnerable when starting up a company.
"My advice for people who are starting up… is it's very important that they actually pay themselves. What you don't want is an entrepreneur who failed and is not able to recover from it."
Indeed, Dr Chan believes many entrepreneurs fail due to unexpected considerations.
"The biggest challenge I have, in terms of a start-up, is actually not the technology itself," he says.
"It is dealing with the personnel.
"When you are in a start-up company, every employee is a key employee and managing that is the hardest thing."
He says he has first-hand experience of the consequences of not getting this right.
"I have been involved in a number of start-ups. Many have failed, and many of them failed not because of the technology. They failed because of personality."
The experience has taught him that in start-up companies "the whole arrangement has to be very transparent".
He advises that particularly in collaborative ventures, everyone should get a "fair deal" and that agreements should be put in writing.
Ultimately, however, Dr Chan believes entrepreneurship is about risk and risk-taking.
"I often think that jaywalkers are good entrepreneurs," he says.
"They tend to take the risks and they want to get things done very quickly."