There are slides in startup pitch decks devoted to this one topic, and they are often accompanied by detailed, data-rich spreadsheets. The funny thing though, they are often wrong.
I can’t lay much blame on the entrepreneur/founder for this. After all, forecasting product growth is quite a difficult task. So, if these forecasts are not ground in reality, why are they even present in these documents to begin with? Well. One could argue that investors like to get a sense of if the founders know what they are getting into, and if they understand their market well enough. I believe it is so because investors took Paul Graham’s novel approach of defining a startup, and tried making a framework out of it.
Almost ten years ago, Paul Graham wrote an article equating Startups with Growth. The article, aptly titled “Startup = Growth”, starts with defining a startup as a company that is designed to grow fast. It eliminated characteristics like being a new company, a tech company, venture funded company, or even an exit as defining traits of a startup, and established that the only thing essential to define a startup is growth.
And when institutional investors turned this definition into a framework for startup success, they wanted entrepreneurs to present a roadmap to growth. And the entrepreneurs; well, they obliged.
This led to a frenzy of startups trying to show a “hockey stick” growth trajectory, and in their attempts to fit their startup’s projected journey to match this coveted growth chart, entrepreneurs started cherrypicking numbers and metrics and even letting wishful thinking get the best of them. All of which resulted in a series of bad forecasts, and despite this happening over and over again, we are and have stuck by this ideology of showing ‘possibly inaccurate’ forecasts.
This desire to show growth matching up to a hockey stick trajectory is what led to the emergence of startups reporting on vanity metrics instead of staying true to business critical metrics.
So today, let us look at how and why we forecast for our growth, why that forecast goes wrong, and how can we do it the right way.
Wanting to forecast growth for your business, or wanting to see growth forecast of a business you are planning to invest in isn’t wrong.
Neither of those two parties are wrong. The second one is not wrong in expecting it, and the first one is wrong neither in reporting it nor in wishing for it, or working towards it.
Startups start from zero. We have countless examples of businesses that started as a side-gig, or in the founder’s dining room. And from this point of nothingness, they build it all up. Without growth, there is nothing that has been built, and eventually as you run out of steam, your startup will wither and die. Growth helps you foster further growth, it gives a boost to the morale of the troops, it helps you learn what your customers truly want from your business.
At the same time, growth is validation. Growth in the number of transactions you process or the number of transacting customers is the truest form of market validation you can get. Simply put, it is an indicator of the fact that as you are able to reach out to more and more people, more of them are responding positively to your product. The hockey stick growth trajectory is just incremental growth compounding with time.
So where does this forecast go wrong? And why?
Getting to this number while trying to show a hockey stick leads to a bad forecast. Here’s why.
#1. A lot of it is pure wishful thinking Most of the forecasting spreadsheets I have come across start with an initial base, assume a monthly growth rate (generally between 10-20%), and voila! Just like that, they are able to generate traction out of thin air, with there being little to no proof of means to achieve those numbers.
As a result, when they miss those first targets, and most of the times they invariably do, for the subsequent months, they are not witnessing compounded growth rather compounded delta between what they had projected vs the reality.
#2. It is disconnected from reality Imagine following the exact same routine in the gym day after day, followed by the same diet, and expecting even a 5% growth in muscle mass month-on-month. Does that sound possible to you? Or does it sound like a bunch of fantasy?
If you are truly looking to gain mass, in all probability you will start with a regimen, and then you will keep on kicking things up a notch or two every now and then if you are even hoping to maintain the current growth rate. You would be changing the way you exercise, the weights you exercise with, the exercise regimen you choose, the diet you follow, the intensity of your workouts. There is a lot that goes on behind the scenes for you to be able to match upto the desired outcome.
So how can you expect a fixed growth path, where things go smoothly up and to the right, with zero association of the steps needed to achieve that?
In reality, you will constantly be upgrading from one marketing channel to the next, trying out new strategies and initiatives, switching out from unscalable growth routes in favor of scalable ones. You will constantly need to be on the lookout for new ways to find growth as the previous ones start capping out and plateauing. And yet, the forecast assumed an effortless smooth growth rate of 10-20%. That just doesn’t sound very realistic.
Doing things in this manner does you a disservice because it often lulls you into a false sense of security as you hit your target numbers initially. When, in fact, as you move up and to the right, growing further keeps on getting more and more tough.
#3. It focuses on the wrong metrics Registered users? Signups? Newsletter subscribers?
While all of those are important in one way or another, but if you are basis your growth on these metrics, you will run into a brick wall sooner or later.
And yet, entrepreneurs often present these numbers when illustrating growth. The problem with these numbers is the simple fact that these are often lagging vanity metrics, with uncertain contribution to the actual business critical metrics.
We looked at user’s purchase intent in our last story. We looked at how TOFU disproportionately favors low purchase intent users. Which means that just because you are able to grow your signups by 20% does not mean your transacting users would also increase by 20%. The wider the mouth of your funnel, the more skewed your user distribution would be towards low purchase intent section of users.
So how can we create a more accurate forecast for our SaaS product’s growth
#1. By starting with things we have more control over. Sure, we can not accurately predict how our audience flow would be translating to actual customers. We can however plan for the steps we would be taking to facilitate desired levels of growth. We map it out by things we should do, and things we can do, and try estimating the effective output from these different initiatives as the initial results start rolling in.
Breaking things up individually based on inputs also helps you stay on top of your progress and catch shortcomings before they become business critical issue.
Take a simple example. If you are into account based marketing and sales process, that means you need a workforce. Which means a business growth of say 25% may need to be supported by an increase in headcount as well. And with this, now there are many things that can go wrong.
If you needed 5 people to facilitate this growth, but you have been able to hire just 1, that means you are going to miss your target.
It also raises the possibility that you would succumb under the pressure resulted from this need to hire, and shortchange on your hiring process. The result? Bad hires. Absolutely bad for the business.
Then there is the possibility that the sales process is proving to be longer than you initially anticipated. Once again, targets missed or quality compromised.
There are countless external factors at play that can influence the outputs you desire. Chasing them is just laying yourself out for failure.
Focusing on inputs is a much smarter strategy since that is something you can actually exercise control over.
#2. By measuring business critical metrics, not vanity ones Whether it is revenue or transacting customers, let’s turn our focus to leading business indicators. Things that actually impact the business directly.
If you focus on vanity metrics, all you will end up accumulating would be a whole lot of bad leads that will not convert as well as you had expected.
#3. By chalking out a roadmap Input to output will rarely be a straight line, and most definitely not a single step process. So, outline the different steps your SaaS business would need to take for each of those inputs to culminate into outputs.
The more detailed your roadmap is, the better you would be able to analyse the performance of each step. The better you would be able to improve the performance of the overall process.
#4. By knowing what can be scaled and how In the early days, you would be focused on getting your first customers. Then the first ten, first fifty, first hundred and so on. So, naturally, you would try out approaches that work at this stage but probably wouldn’t when you are looking for your business to gain a new customer every single hour.
Once your business has matured beyond the point where growth can be achieved by unscalable ways, you would need to make way for scalable channels. It would be helpful to outline this scalability plan, and what differences would be introduced to the inputs for it to scale the impact it makes to your business metrics.
Take content marketing for example. How would you be scaling it? Would you be introducing more channels to gain more content exposure? Would you be creating content of different formats? How much content would you be producing at scale? Would that need you to expand your content team? If so, what sort of resources would you need, and when?
That is the right way to approach forecasting for your SaaS product business.
If you noticed, we did not once talked about a growth rate when we outlined the growth forecasting framework. We already established that assuming a growth rate is a mistake and doesn’t make any sense. In our approach, we are working with a model that will help us in deriving the expected growth rate, and that would vary from business to business, and entrepreneur to entrepreneur.
While deciding your forecasting framework, you would be laying down the inputs, and outlining the steps needed on each input to achieve business objectives. This will help you draw estimates for expected growth on each input parameter, eventually leading you to an expected growth rate for your business overall.
As we witnessed in our account based marketing/sales example earlier, breaking things down this way helps you identify and anticipate potential bottlenecks in your process, and be ready with planned countermeasures for them.
It may seem like a lot of work the first time you do it, but as you go through the process a couple of times, it will start feeling like second nature to you.
Thought of the day
Have you ever tried preparing a projection sheet for the growth of your SaaS product? How did you go about the process? Did you create it on your own, or did you follow some template you find online? I would love to know more about it, drop me a line.
That’s it for today, see you tomorrow.
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