$50 Million Is the New $100 MillionNov 21, 2006
Back when I first started in the venture capital business at the end of Web 1.0, it was de rigueur to have a plan showing at least $100 million in revenue by year five. It was always on that slide in the powerpoint deck that went by quickly, because everyone had one and they all said the same thing. Most of them should have had a footnote that read: “Nudge, nudge, wink, wink, of course we’ll be trading on Nasdaq long before we have to even explain to anyone how we achieve that.”
Today’s business plans all have a more prudent revenue figure. I’ve been amazed, however, at the consistency of this prudence. Five-year projections are now exactly one-half of what they were in early 2000. All of them. If I took the time to analyze the revenue projection slide for every company I’ve seen over the last year I’m positive I’d see an average five-year revenue projection of $50 million with a standard deviation of about $5 million. Apparently $50 million is the new $100 million and I never got the memo.
Recently while talking to an entrepreneur about her plan she went through the requisite five-year revenue target. We talked about where that number came from and she gave a very thorough description of the assumptions and levers in her model. She then also told me that she was very recently attending a top local business school’s entrepreneurial program where the students were explicitly told that if they ever raised venture money they had to develop a revenue model that could show at least $50 million by year five. Heh.
For the record, what I need is to believe a business can return at least 10x our investment, and potentially much more than that. Often this does mean a realistic revenue plan that gets to $50 million by year five. It can mean many other things, however, depending on what valuation methodology will be applied at time of liquidity. I’m flexible, try me.
More importantly, though, is to convince me that you can make the hurdle. Tell me where the sensitivity is in your model and show me what happens when that key variable ends up 25% below expectations. Explain how the organizational structure and operational plan (and venture investor targets have been developed to focus attention on the drivers of your model. Ensure that your assumptions do not show customers paying 2x their current cost for something that gives them 10% incremental value or that your plan does not require 75% of the U.S. population to become paying customers to succeed. Most of all, help me gain confidence that when your plan breaks, and it will, you will be able to figure out how to put it back together again.
I’m not expecting the $50 million revenue number to go away. Heck, it is a good number and I will always hope that every revenue number I see will be achieved. These days, however, when we get to that slide in the powerpoint deck I will be spending some quality time discussing it.