$50 Million Is the New $100 Million

Nov 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.

Discussion and Comments

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  1. Mercer On Value says:

    Permanent Record – A New Blog

    A new blog has appeared in the Blogosphere.  It is called Permanent Record, and is written by Rob Hayes, an early stage venture capitalist.  The tag line on the blog is digital breadcrumbs from an early stage venture capitalist.  The…

    Commented on November 22, 2006 at 11:04 am
  2. mike says:

    That slide is a funny paradox. Everyone knows it’s BS, but it serves a few purposes:
    If the slide is missing then the meeting quickly ratholes into “how big can this market really be?”
    It also serves as the catalyst for congealing the entrepreneur’s execution model. If I am indeed going to generate $50 mil in 5 years, then what the hell is this company going to have to look like?
    Plus you guys get to hear how well developed the thinking is, even if the company is pre-revenue.
    The tricky part, I’ve found, is that you want to have that number big enough to get the VC jazzed, but small enough so that when you actually land the invesment you can still hit your numbers. I’ve watched teams that pitched growing revenues so huge that they snared the investment, but were bound to fail (miss the number) even though they sold tens of millions.

    Commented on December 4, 2006 at 7:03 pm
  3. Dave says:

    rob: so tell me something… why the hell does the 5-year revenue # / hockey stick slide even matter AT ALL these days?
    i mean come on, you and i both know anyone projecting their startup biz out 5 years is full of shit. the few who aren’t are just lucky, not smart (to wit: the only one i know of that really BEAT their year 5 #’s was PayPal, i company i joined in year 3… and for sure they had changed the business completely in years 1 & 2).
    the fact that all the MBAs and VCs continue to play this game appalls me no end.
    what DOES matter is figuring out your general 12-24 month strategy, and some idea of tactics you intend to use over the next 3-6 months. anyone who tells you they can see farther over the horizon than that is a liar.
    to me, what would be a lot more important is a) understanding your general customer value #s / acqusition cost #s, or more realistically b) a plan for how you get to that level of understanding within the first year.
    IF you can figure out whether your paid customer acquisition is cashflow positive, and/or IF you can figure out some organic / viral method of customer acquisition, then MAYBE some kind of projections beyond the 2-year timeframe matters.
    however, that’s such a small % of population it’s not even realistic to consider.
    in summary: long-term projections are only useful to the extent they prove the entrepreneur understands the VCs need to make a shitload of money. beyond that, it’s just spreadsheet garbage imho.
    entrepreneurs should understand some basic idea of customer value/cost, and some idea of how to ramp up acquisition. with luck, they might figure out how to turn that into a profitable business.
    my .02,
    - dave mcclure

    Commented on December 8, 2006 at 2:57 am
  4. abbiamo perso la says:

    abbiamo perso la

    $50 Million Is the New $100 Million

    Commented on February 15, 2007 at 9:26 pm
  5. Scott Rafer says:

    I showed up here to make the comment dave did.
    Rob, I’d question doing business with anyone willing to represent that they have any clue about the year 2012. I like knowing that people have a solid reasoning process. That excludes 5-year projects rather than mandates them.

    Commented on July 13, 2007 at 6:50 pm
  6. Scott Rafer says:

    “… excludes 5-year projections …”

    Commented on July 13, 2007 at 6:52 pm
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