Sunday, July 24, 2011

Big Exits Matter, But Not Today

I was one of those entrepreneurs who thought everything I thought of was going to be huge. I still do.

I jump into the model, move numbers around, apply growth rates, make assumptions, roll it back, push the numbers up and down, flow in different assumptions under different conditions.

It's actually fun.

I want to build a billion dollar company.

You know what's cool? Not talking about building a billion dollar company. What's cool is doing the work to get there. What's not cool is focusing on the big number. You start there, sure. It takes $100 million to $200 million of revenue to get a billion dollar valuation in a decent market on the upswing.

But really I don't care that much about that. I mean, I do--that will be great. I believe we can get there.

But what's compelling is building products that serve people, shaping them to serve them better, building a team to serve the mission, and all the little wins along the way.

It takes thousands of little wins to get there.

So here's how I build my models when I have no paying customers yet. I  take the target number, say $100 million. And I assume that we'll be hitting that in some future year, and that we grow from $70 million to get there, and I keep backing that down over a few years, just to get a sense of how that happens.

That's $8 million a month.

Which means about $400,000 per day in a 20-day business month.  So all you have to do is sell one per day at $400,000! Awesome!

That's a pretty good daily rate.  Break it down further--let's say you're global by then, and active 16 hrs per day. That's $25,000/hour.

How many people does it take to sell, service, and maintain $25,000/hr of revenue?

It depends. If you're selling boats, it's a lot different than if you're selling software subscriptions and getting half your revenue from advertising and lead gen.

We don't know what our revenues will be, or product split yet, so then I make it up, based on what we know from the existing markets.

I then look at what it takes to make the first million. And the first $100k. And break it down to hourly activity: how many site visitors become regular users convert to paying users or click on some revenue-generating ad? What do we need to improve the conversion rate? How can we get the traffic up? How many recurring payment accounts can we get for a freemium model? What's our distribution model to support that?

These aren't easy answers. But you do the research, make your assumptions, and build enough factors in to make the models flow, and test your assumptions.

$1,000,000, 12 months (starting lower at the beginning, higher at the end, you hope, but let's keep it even) is around $80,000/month on average. 20 days. $4,000 day. 10 hours (not global yet, and 10's a nice even number), $400/hour. Or $100 every 15 minutes.

So how many calls do you need to make? Referrals to get? Speeches to make? Customers to visit? Ads to run (very few I hope)?

Break it down. If you have a smile and dial business and your close rate is 5%, that means 100 leads becomes 5 closed deals.

How many calls are you making per hour?
Emails to friends, colleagues, new contacts per hour?
How many calls to niche publications and blogs are you making per hour?
How many comments are you contributing at other blogs and social media sites?

The bottom line is this: it takes work. You likely don't want a telesales team for your web app, but you can see there's a direct correlation to the amount of outreach you do to the results you get.

The more you can leverage the work of other people, though, to spread the word, the less dependent you'll be on your own work. You must enable this in your products to give your users a seamless, easy way to broadcast that what they are doing on your site helps them, and they want to share the love with others.

I'm saying this to myself as I ramp into business mode, in parallel with Beta 2. I needed a pep talk today, and this was one of two I gave myself.

The other was about exercise. So at 9 am I wandered down to the hotel pool and took a cold swim under a blue San Jose sky, and mapped out my West Coast week. So much to do, so much to do.  After all, it's going to be a billion dollar company ;)

Dig in.

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