This document provides an overview of revenue estimation methodologies and common mistakes to avoid. It discusses top-down and bottom-up approaches, with bottom-up being more closely tied to a company's specific plan. A bottom-up model requires granular assumptions validated by market data and testing under different scenarios. It also stresses linking revenue estimates to the full business plan by ensuring assumptions, costs, and revenues change together. When presenting estimates, companies should back up assumptions with past trends, benchmark competitors credibly, and acknowledge risks.

1. Revenue Estimation
May 2012

2. Contents
1
Introduction
2.Revenue estimation methodologies
• Overview
• Applications
3.Classic mistakes
4.Presenting revenue estimates to investors

3. Introduction
• Revenue estimation is critical to any business plan
• Yet, accurate estimation is rare
• A key focus area for investors
3

4. Methodologies
• Top down
− “Market is known to be $200M. The leader has 15%. We
can get 5% of it”
• Bottom- up
− “We will start with 1 restaurant in the first year. It’ll have 50
covers. Occupancy will go from 40% to 80% over a period
of 12 months. We’ll make $200 per cover per day. So we’ll
generate 50X60%X 200 X365= $2.19M. Next year I’ll open
2 additional branches….”
4

5. Applications
• Quick sense check
Top down • More relevant to get to addressable market
size
• Reflects your plan to address the market
• Closer to the ground, brick by brick, with
Bottom up a keen eye on feasibility
• Tightly coupled with marketing plan and
spend
Both models are relevant as long as judiciously applied.
5

6. Typical funnel: Market size to business revenue
Market/
industry
Addressable
market
Revenue
6

7. Typical funnel: Market size to business revenue
Illustrative
Global market Relevant market Addressable market
A plan targeting the addressable market will comprise grounds
up assumptions. Estimated revenue is a byproduct of such a plan.
7

8. What’s essential for bottom up revenue estimation
• Granular model should expose every
assumption behind the estimate
• Establish sanctity of assumptions
Assumptions through market data, first hand observation
or primary research
• Test for different ranges (sensitivity
analysis)
8

9. What’s essential for bottom up revenue estimation
• Scenarios reflect range of possibilities
in the face of uncertainty
• Test your plan for conservative
Scenarios assumptions while pursuing an
aggressive case
• Funding should provision for
conservative scenarios
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10. What’s essential for bottom up revenue estimation
• Revenues are tightly coupled with your
entire plan- not an „island‟
• Resourcing, marketing spend, timeline
Linkage to rest
(seasonality where applicable) – they all
of the business
have a key impact on revenues
plan
• Assumptions, costs and revenues
should move in tandem
10

11. Classic mistakes to avoid
• “Let‟s assume 1% market share of this $300 bn global market….!”
• Assumptions not validated early on and turn out to be surprisingly „off‟
− E.g. Latent need ≠ Demand
• “There is demand BUT getting those first customers is taking far more
time than we thought”
• Excel model can be linear…the market rarely is
− Unpredictability
− Small sample
− Minimum threshold theory
• Giving up too soon
• Not giving up soon enough! 11

12. Presenting revenue estimates to investors
• Back it all up with rationale for assumptions
− Past trends/ market benchmarks
− Cite parallels from different contexts if your offering is new
− The more granular the better. And then show it off!
− However, all said and done, real benchmarks from competitors/ others,
are often more impactful than assumptions in a vacuum
• Be credible in your approach
− When you call something conservative, share the basis
− Enthusiastic, but never dishonest
− Acknowledge risks
• Rehearse
− Know your stuff like the back of your hand
− Have a devil’s advocate and run thru likely questions
12
− Practice

13. Thank you.