Dear Professor Investor,
I've been working at an idea for a few months and it's now time for me to find out information (numbers) on potential markets. What are investors really looking for when it comes to the business plan and the market evaluation?
Samy from Beaverton
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It is important to know that investors can spot made-up numbers and are good at realizing if you are fudging your numbers. However investors are not looking for exact numbers; they are looking for numbers that seem reasonable. If you have a product that truly revolutionizes a market it's unlikely there is extensive accurate data out there. Instead of being right, investors want founders to be rational, reasonable and reasoned. Investors want founders to have backable evidence that you made viable and reasonable assumptions in the areas where there is little to no information available. Remember business plans may be dead, but business planning is not. A good way to understand how to report market numbers is to do it both bottom up and top down.
Lots of companies say that the market for their product has a million customers and they can assume they can get 10% of that. That is top down but only half the story. As a startup - saying you can market, sell and meet the needs of 100,000 customers right away is not reasonable. Bottom up means that you say you can produce 10 products a day. At five days a week you can make 50 products weekly. So in reality you can have a maximum of new 200 customers a month and 2400 a year which is a more reasonable goal to reach. Not all businesses have self-serve frictionless sales processes (think Google AdWords). Most businesses have to invest not just in a product but in the process of selling. If a salesperson is required, then there is a constraint on how much she can sell everyday. A bottom up approach would multiply the sales per day cap by the number of salespeople needed. Ideally founders can produce bottom up data that scales towards the top down figures. Investors are looking to make sure your assumptions are accomplish-able and reasonable.
Many of your assumptions will evolve overtime and so will your projections as uncertainties become crystallized. That is why investors want entrepreneurs to be reasonable and reasoned and not right.
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