Understanding Your Model with Sensitivity Analysis
While I love the fact entrepreneurs don’t have to waste time writing long business plans that are out of date before they are finished, I do still encourage the entrepreneurs we work with at Birchmere and my students at Carnegie Mellon to spend time thinking through their financial model.
I understand that often the business is really embryonic and therefore the projections are absolutely going to be wrong. However, it’s very helpful to have the discipline to really think through the underlying financial assumptions.
As you think through those underlying assumptions, it’s helpful to delineate principled choices from those that are really plugs for a range of possibilities.
For example, in a SaaS business, if you project your ARPU (Average [Monthly] Revenue Per User) to be $140 from early experiments you’ve run it’s tempting to just plug that in. However, it’s probably more accurately estimating it being somewhere between $110 and $150 (entrepreneurs tend to use plugs toward the optimistic end of the range). Similarly, you may expect your CAC (Customer Acquisition Costs) to be $275 but really project it to be between $250 and $320 looking at a few experiments you’ve run in a couple different channels.
While my recommendation for your summary projections would be to just use $140 and $275, I’d encourage entrepreneurs to iterate through the numbers (probably in the above example in $10 increments) and look at key metrics in this case this might include: total MRR 6, 12 and 18 months out or minimum cash balance based on holding all other values in the financial model constant. For each of these key values, you can do a nice table showing the specific metrics value in the cells with rows & columns being the different options as illustrated below.
The NoWait Host App … So Easy Even a VC can Use It
One of the things I’ve always been proud of the NoWait team for is how customer centric their culture is. One of the ways they reinforce this cultural value is that every new employee works a few shifts as a restaurant host at one of their customers. Until they do this they aren’t officially on-boarded.
Last night the non-employee Board Members at NoWait (myself & Chris Olsen) hosted for a few hours at Texas Todd’s Texas Roadhouse in Monaca. It was a lot of fun and definitely great to be officially on-boarded!
(You can scroll through a few photos above using the arrows)
Pivot But Don't Travel
Before Eric Ries came down from the mountain with his Lean Startup gospel, it was common to watch entrepreneurs continue to “grind it out” or basically take their strategy and constantly slam their plan into a market without the market showing any signs of reciprocity (or interest) until they ran out of money.
As the concept of a pivot has been hyped and become part of our zeitgeist (see this New Yorker cartoon), I fear entrepreneurs have run too far with the concept and started traveling instead of pivoting.
The idea of a pivot is that at the end of each build -> measure -> learn cycle you may end up needing to pivot. The pivot should be driven by what hypothesis you invalidated.
However, there is a significant difference between a “pivot” and a “travel” In basketball, a player can pivot around moving one of their feet, but the second foot needs to stay planted on the ground. If the player lifts up that second foot, they are traveling and possession changes to the other team.
In The Lean Startup Methodology, that foot that stays planted is your big vision. It’s the reason you turned down that six-figure salary from Google or Facebook, to live on ramen noodles and change the world. It’s the thing you can’t stop thinking about even on Saturday night at three in the morning. Don’t simply “pivot” that vision away.
So places that try to be a smaller derivative version of the Valley inherently fail to understand what it is or, more so, what made it what it is and how long that took. Trying to play the Valley’s playbook always (always, always) fails. When you hear communities saying, “Just like they have Stanford, we have X engineering school!” they are probably doing it wrong.
Simply put: If you want to play the Silicon Valley game, you are just best off going to the Valley.
So true!! Don’t try to be Silicon Valley, try to be the best city you are.
LinkedIn is a very good company with a very good business. Trying to take LinkedIn head-on seems foolish to me. Whatever will compete with LinkedIn will have to chip away at the monolith by exploiting opportunities that seems small today but are likely to become valuable over time.Competing with LinkedIn and the Case Against Unbundling by Charles Hudson
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