Your startup's projections are making you look bad

I’ve been a mentor with the Brandery for the past three years and a principal in an accounting firm serving startups and small businesses for the past four. I’ve built, refined, reviewed, and salvaged more than a hundred financial forecasts for early stage, high growth companies, so I’ve developed some muscle memory around what works and what doesn’t.

The thing to realize is that there are no ‘right’ answers when it comes to projections, but there are definitely wrong ones. And the wrong answers tend to have some of the same things in common.

Exponential growth doesn’t happen automatically, if ever

Whether you realize it or not, when you quote your ‘month over month’ growth rate, you’re telling the world you're growing exponentially. On a trajectory like this:

Exactly 100.00% of all startups I meet assume exponential growth from day 1. For well over 90% of these startups, that growth model is wholly inappropriate - at least in the beginning - and its suggestion is frankly a little disqualifying.

There are two issues with the exponential assumption. One, it’s probably wrong, and here’s why. At its core, the growth equation is pretty simple:

Inputs x Conversion Rate = Outputs.

In order for the outputs – e.g. paying customers - to grow at an exponential rate, either your inputs, like site traffic, or your conversion rate must also grow at an exponential rate. Obviously the conversion rate cannot grow exponentially for long, which means the inputs must.

And this is where the logic of most models fails. Growing your inputs exponentially is hard work. You either need natural virality (e.g. monthly visitors recruit more monthly visitors, who in turn recruit more monthly visitors) or an intentional and consistent increase in the drivers of inputs, like sales reps or paid acquisition.

Most 'pre-scale' companies have fixed burn rates and no viral loop, which means most 'pre-scale' companies don’t have exponential growth. Period.

The second problem, as Christoph Janz points out in his post on the topic, is that modeling exponential growth may not just be wrong, it’s also dangerous.

Exponential growth happens like a snowball. It starts really slowly, and builds momentum, and speed, over time. Here’s how linear growth compares to exponential growth for a startup climbing from $5k MRR to $50k MRR over 12 months.

Notice how at the midpoint for the year, the exponential growth line is just shy of $16k in MRR - or 24% of the total goal - even though it's still ‘on pace’ to earn $50k by yearend. In fact, just under one half of the revenue growth for the year is forecasted to occur in the final three months!

And this is the risk. The paltry early growth targets can lull a team into a false sense of accomplishment, only to be shattered months later when the targets accelerate and the goal is missed by an embarrassing margin.

On the road to initial traction, don’t be afraid to embrace a plan that looks more linear than it does exponential. At a minimum, it will hold you accountable to growth from the beginning.

Calculate growth, don’t assume it.

Creating a ‘monthly growth rate’ assumption isn’t just wrong because it may assume a trend where there isn’t one, it also demonstrates a complete lack of awareness for how growth actually happens.

This is one of the more egregious mistakes early founders make in projecting growth – they start with some trailing metric of success, like users, customers, or traffic - and then they apply a standard growth rate to it.

But of course that’s completely meaningless. As Andrew Chen puts it, “if you do that, the whole thing is just a vanity exercise for how traction magically appears out of nowhere.”

Growth is a function of the inputs – time and money – into appropriate acquisition channels. It’s built through things like email campaigns, SEO, paid media investment, and inbound content efforts. None of these efforts have guaranteed or uniform rates of return – if they did, building a startup would be a trivial exercise. Instead, results vary based on the execution.

Modeling these results, then, shouldn’t assume some magical rate of return. It should reflect the channels and the inputs that, hopefully, result in that return.

So do less of this:

And more of this:

Use T2D3 as your upper bound

T2D3 is short for triple, triple, double, double, double. Popularized by Neeraj Agrawal of Battery Ventures, it’s a blueprint for the ideal growth trajectory of a startup – specifically, an enterprise SaaS startup. The playbook is fairly straight forward:

1. Prove product/market fit
2. Get to ‘initial traction’ ($1-2MM of ARR)
3. Triple the next year
4. Triple the following year
5. Double in a year
6. Double in a year
7. Double in a year

Agrawal didn't invent this blueprint out of thin air - it's based on real data. He evaluated seven of the most high-profile, successful enterprise SaaS IPOs in the Battery portfolio, and graphed their growth trajectories over time:

What does this mean for your early stage company? It means - don't show show 5x and 6x growth multiples on your path to scale.

If you’re pre-initial traction, consider treating the benchmarks above as your upper bound. In reality, your growth curve is likely to fall somewhere between more gradual and much more gradual than T2D3. These companies are some of the best in the game, and their paths to liquidity some of the quickest and most efficient. It's easy to get caught up in building excitement for your addressable market, but forecast a growth curve any steeper than these at your own peril. Unless there's a compelling reason you're going to break land speed growth records, doing so makes you sound like you don't understand the economics of your business.

Certainly each startup’s financial plan comes with its own nuances and challenges, but nearly all are susceptible to these pitfalls. Avoiding them is no guarantee of success, but it is a pre-requisite to having a realistic view of what the road to success will ultimately require.

Ryan Watson is the SVP of Finance & Operations at Ahalogy, a leading performance content marketing solution, and co-founder of Upsourced Accounting, a tech-enabled accounting firm for startups and small businesses.