Two occurrences which have led to this article – the first was a question on one of the entrepreneur groups where I’m active and the second, an excellent article by Steve Blank.

The question was from someone looking at starting up and deliberating the approach to market sizing. His question was more to confirm his method, which was – ‘My target market is $10 billion. I am sure I can win at least 1% of this market. Hence, my revenues are going to be $60 million. In summary, I have a brilliant idea.’  Sounds absurd, doesn’t it? And yet, over 50% of the plans I see have the same approach in some form or the other.

The article by Steve Blank was excellent - a must-read for entrepreneurs.  A few firms that I have met come to me with detailed excel sheets (a dozen tabs at the minimum) including income statement, balance sheet, and cash flow forecasts for the next ten years – on a monthly basis. These are firms which would, in most cases, be at first customer discussion stage or perhaps rolling out a proof of concept. You can see the pride in their faces and imagine the effort that has gone into the preparation and you don’t have the heart to tell them - why in the world did you waste so much time and effort?

Don’t get me wrong. I am all for the preparation of financial statements and forecasts. And you can't possibly get away from the importance of the cash flow statement. But these should be statements and forecasts which help the thinking process of an early start-up, which help streamline its strategy.

The way I look at it, any market sizing will start from what is the total addressable market (TAM) and that may be the $10billion market mentioned above. The next step would be to identify the niche within the TAM that the start-up wishes to address. An example, the social networking market is $xx billion. However, my start-up wishes to address the eco-adventure seeking traveller which is the actual addressable market. And so I size this identified segment which is the serviceable market. That may be defined further to address specifically the traveller in UK, which may be the market being addressed in the near term and will help with the development of the tactical plan.

The next step aka the tactical plan is where the entire strategy of the firm develops and falls into place because it now becomes necessary to define how much of this market can be targeted and what is the most efficient manner with the limited resources available to a start-up. The forecasts are bottom-up at this stage and this is where the financial statement will begin developing. Say, for example, it is a B2B firm which has identified 5 sectors that they will target and prioritised within them. Of the first sector, let’s suppose they have decided that they need to win 5 accounts in year 1. On the basis of their market study, they determine their pricing model and hence determine the potential revenues. The next step is to analyse the sales approach. Let’s assume the average sales cycle in each account is 3 months. Hence it requires x number of sales personnel and so on and so forth.

At such an early stage of growth, the income statement, balance sheet may not necessarily be the best tools of monitoring and management. The monitoring would need to be far more tactical and operational to ensure that the firm stays on track to achieve its goals and there is a possibility to raise a red flag whenever there is either a deviation from the set target or if some element of the business model needs to be adjusted. After all, at this stage, the business model is not set in stone (frankly, it never is, is it?)

The Steve Blank article referred to: http://steveblank.com/2010/02/22/no-accounting-for-startups/