Sunny Whether: Two Types of Forecasting Models for Running Your Startup

Hey founders, want to hear something incredibly frustrating about seed financing? I don’t believe the forecast you show me. You know the one that inevitably has you at $100 million in revenue by Year Three? Yeah, that one. It’s a great discussion point to understand how you think of your business’ potential but as an operating plan? Throw it away post-funding. What??? Well, if you’re pre-product/market fit, over-optimizing for “hitting your numbers” can be a false positive if it creates an “up and to the right” graph that actually builds upon the wrong learnings, or masks leaky bucket of customer attrition.

Not everyone may agree – there’s a strong “growth solves all problems” camp – but in those formative days, you want to find the healthy, sustainable path forward. *Just* committing to grow customers or revenue or usage can still create a hollow company. Of course figuring out when you have product/market fit is an art as well, but here’s a great Marc Andreessen post.

Ok, so far I’ve told you the forecast I’m looking at during fundraising is a lie and the one you’re using during initial iteration is a trap. So when is the right time for a startup to build a forecast that actually starts measuring the health of the company?

The earliest a company should “manage by forecast” is post product/market fit and the absolute latest is at Series A fundraise.

Moving from managing via rearview mirror (“we’re up 10% over last week”) to prioritizing a roadmap and resources that will deliver against planned growth (“we’re up 11% week over week vs 10% forecast”) is a big maturation milestone. But how to set a forecast? A combination of Bottom Up and Top Down modeling.

Bottom Up Forecasting
Bottom Up Forecasting uses your trailing data and the “naive” assumption that tomorrow will be the same as today. So if you’ve been growing 25% month over month, just draw that out over the next year. Sanity check this by asking yourselves (and your team) what has to happen to maintain this pace. Do they believe it’s sustainable? What have been the main drivers of your growth to date and are they likely to continue into the future? If you’ve been spending to acquire customers (profitably hopefully!), what sort of budget will be required to support the ongoing acquisition? Are there areas of variable cost or support that need to be scaled alongside the growth? Important to make sure your forecast and your operating plan match up!

Top Down Forecasting
Top Down Forecasting sets a goal for a point in the future and works backwards to calculate what monthly growth is required to hit the target. What are some typical goals? Profitability. Revenue runrate that you believe is required to raise additional financing. A monthly manufacturing number that starts to see economies of scale take effect. Top down is interesting because it essentially ignores today’s reality and says “look, to be a viable company we need to get to X milestone by Y date. Let’s go!”

Since most of Homebrew’s investments are in early stage companies, we get to experience “first forecast” with almost all of them. In most cases we try to shift focus to a Top Down Forecasting model as it’s more milestone-based, which we think is appropriate for early stage startups. But even a Bottom Up Forecast is better than no forecast. Reviewing actuals against plan is a great conversation starter for seed stage Board meetings as Series A investors increasingly expect to see mature, well-managed companies that will know how to productively spend the additional funding. Fear not the forecast for it will show the way!

I’ve been searching online for good forecasting discussions/resources which are applicable to tech startups. If you see any, throw the URLs in the comments and I’ll add them here.

Average American Gives 3.1% of Income to Charity. Three Product Ideas To Help Me Be More Charitable.

So the average American gives 3.1% of their pre-tax income to charity annually. Thinking about my own giving over the past decade, there have been several times at or above this percentage, but more often under (largely based on not sufficiently increasing giving during windfall years). There are three products which, if they existed, could help me in being more charitable:

1. “Tripit for Charities”

Nearly all my giving occurs online and is thus accompanied by an email receipt which I save for tax purposes (usually by printing out and throwing in a pile until next year’s tax season). I’d like the ability to forward these receipts to a product which aggregates and tracks my giving so that I can more easily take my deductions but also be reminded of organizations I’ve given in the past, what I gave and how to give in the future. All the email receipts include the tax ID number of the charity so the data here is readily available for parsing. This product can also give me relevant alerts and summaries about activities from the charities I support, since I don’t find their individual mailings to be very effective (nor is following a charity on social media the best way for me to stay connected).

2. Small Group Subscription Giving

I like to give. I like my friends. I like learning. Combine the three and you could do something where a group of friends sign up to commit $100/mth to charitable giving. Selection of the charity each month could take place from a small list of vetted charities all with the same theme (eg “Environment”) or where the service selects a charity from the interests the group has pre-selected. If 10 friends commit, it feels like you’re making a meaningful contribution each month ($1000) and getting educated about an organization that you might not have known about. All the while creating more positive interactions with the people you care about. I *think* something like this must already exist but have had trouble finding one.

3. Matching Dollars

Matching dollars can be a strong incentive to give. When I was at Google their generous corporate matching program definitely caused me to give more – I wanted to “max out” the match allocation each year. Why can’t there be a version of this which isn’t aligned with one’s employer? Here’s how I imagine it would work:

  • Large donor or company pledges $10,000 to a charity in form of matching grant (let’s say the organization will receive the money regardless of whether full match is used or not).
  • When I, as a small donor, visits the charity’s website to make a donation I see that if I can hit a certain level of pledge – say $100 – then the corporate donor will “match” it from their original donation. If I was arriving at the site originally planning to donate $50, I can certainly imagine the corporate match causing me to increase my contribution.

Basically, trying to use various repositioning of how corporate donations are used to help get addition dollars from smaller givers. I’m sure the best behavioral economics could do a redesign of charitable giving checkout flows that would be quite effective!

“Writing started as therapy:” How Blogging Helped Founder Marc Barros Deal With Being Fired From His Startup

I first “met” entrepreneur Marc Barros via his blog One Entrepreneur’s Perspective which contained a solid string of posts analyzing why GoPro succeeded while his action camera startup Contour struggled. As we got to know each other IRL, I was excited to hear about his next project, the phone camera lens Moment. Marc agreed to answer a few questions for me here.

Hunter: Your blog “One Entrepreneur’s Perspective” has some really great lessons learned from building Contour, what led you to start documenting the experience and sharing publicly?

Marc: Writing started as therapy. After being fired from Contour I was physically exhausted and emotionally destroyed. I had nothing to do everyday, except to think about what happened. So I just started writing, most of which will never see the light of day.
I found writing was a way to understand the emotions I felt while providing them a place to go. Having started Contour as a college kid, I basically spent my 20′s discovering myself while trying to run a company. In that time I started a company, went through the 2008 economic collapse, lost my mom, struggled to fund the company, and in the end got fired. The result was that I buried everything and it wasn’t until I stared writing that I discovered just how far it went.
Most importantly, writing helped me to reflect on what happened. It gave me time to really think about the lessons I learned, what I felt at the time, and how I would have done things differently. It’s a form of reflection I never could have done while in the heat of the battle. It required getting my heart broken to really understand the underlying experiences.
At some point I decided it was worth sharing my experiences. I figured if I could help at least one other entrepreneur, it was worth the time. The purpose of my blog is…
   * A place I can share my perspective about life as an entrepreneur
   * Write about topics entrepreneurs are too afraid to bring up
   * Provide inspiration for other entrepreneurs
I’ve found on my own blog that I can’t always predict which posts will “go viral.” Have you been surprised by reception to any of your posts? What seems to be of most interest to your readers?
Totally. The length of the post or the time I spent on it both appear to be irrelevant to what takes off.
One thread I am finding to be consistent is emotion. The more honest the posts are about personal topics, the more they resonate. Usually the posts I am most nervous to post are the most emotional. And in the end they appear to resonate the most because I receive emails saying, “I swear you wrote that just for me.”
That is a very humbling feeling.
Some have opined that no great CEO has time to blog regularly. Do you agree? As you spin up your new company how do you expect your writing to evolve?
I think it’s less about blogging and willing to be open and reflective on what you are doing. I have found that writing is making me a better entrepreneur. Similar to teaching it makes you step back and really think about what you’re feeling, why you’re feeling it, and how you will manage it.
Most CEO’s don’t struggle with the tactical nature of the business. Instead they deny the weight of the emotional burden. It’s a very real struggle and there is no place for it to go. Not everyone would agree, but I believe that vulnerability makes you a better leader.
In starting Moment my frequency has definitely slowed, but I try to spend the first hour to two of my day writing. Whether it’s posts we share on Moment about building the company or posts I share on my own blog, I find it keeps me connected to what’s going on.
Post Contour I had nine years of experiences just ready to burst out. Now my challenge is to write about things I’m feeling today. Worry, Confidence, and the Value of A Founder’s Time are examples of topics I have been thinking about recently.
What are some of your favorite, perhaps less-known, blogs?
It’s hard to me to know how popular each of them are, but the blogs that consistently turn out posts I like to read…
Ben Horowitz - Deeply understands the CEO struggle.
Chris Devore - Very detailed, but thoughtful.
First Round - Really interesting, topical content.
T.A. McCann - I wish he would write more.
Rand Fishkin - A mix of marketing and emotional topics.
You’re up in Seattle – for folks who don’t live there, describe the tech scene, especially from an entrepreneurship standpoint.
The Seattle scene is different from the valley or NYC. The speed and level of competition in the Valley is significantly higher, which you can feel from the minute you get off the plane. It feels like you are walking into the professional leagues where there is a rich history of entrepreneurial success. The depth is undeniable but so is the expectation to perform at an unsustainable rate.  I hear people struggle with a culture that is about being hot or not.
Seattle on the other hand has more depth and is a lot more affordable. It moves at a slower rate and although it’s still building its history of entrepreneurial success, you get a sense that people really care about one another. The people moving to Seattle to start companies refer to an improved sense of purpose. You have mountains, water, and technology all within a few minutes of one another. Plus amazing coffee and beer! Although Seattle has had a few mega wins (Amazon and Microsoft), the lion share of success is just starting to arrive (Zulily, Concur, Moz, Tableau, Zillow, Redfin).

For Startups, Knowledge is a Commodity but Insights are Valuable

joefriday

People overvalue knowing. The Internet turns knowledge into a commodity. Most - market size, a Stack Overflow question, detailed Wikipedia page – are readily available via a Google search or two. At Homebrew we have the chance to meet a good number of teams each month. In the 1000+ we’ve discussed since 2013, I can’t really think of many that I wouldn’t consider to be knowledgable. They had lots of information about their industry, both learned and experienced. They possessed facts that were pretty much indisputable. But when I think about the founders we’ve backed, the teams we got most excited by, it wasn’t the depth of their knowledge, it was the uniqueness of their insights.

Facts are largely statements about the past and present, but startups are about the future. They’re bets about what is going to happen next – informed by knowledge but not limited by it. And while a fact is a truth, an insight is a hypothesis. It could be wrong. That’s the scary part. Running into the fog and assuming the ground is there beneath your feet.

When I see people pitch investors or interview for jobs, the difference between solid and exceptional is often the presence or lack of a POV. Sometimes it’s because they’re playing it safe. Sometimes it’s because they never were coached or challenged to embrace critical thinking. Sometimes it’s because there’s no passion there. “I want to work at a startup and you’re a hot company.”

So before you raise funding, apply for a job, tell a reporter about your startup, make sure you’ve got your insights ready to go. Not just the facts.

The Trust Economy?

“I’m one of those people who thought Airbnb would never work.” That’s the provocative opening line in David Brooks’ recent op-ed about trust and the emerging peer economy. Brooks finishes by theorizing “we’re probably entering a world in which some sectors, like energy, retain top-down regulatory regimes. Other sectors, like bake sales, are unregulated. But more sectors, like peer-to-peer, exist in a gray zone in between.”

At Homebrew we’ve also spent time looking at what comes after top-down industrial capitalism. Our conviction is so strong that we’ve coined our interest the Bottom Up Economy, which focuses on how individuals, teams and small-medium enterprises leverage tech for new marketplaces, revenue streams and efficiency. For example, Layer brings a communication API to developers, Shyp is the easiest way to ship anything and UpCounsel is building the world’s largest law firm out of high quality, independent lawyers.

Anyway, check out the Brooks editorial.

Startups That Help Small Businesses

New York Times gives some love to startups helping small businesses leverage tech. We’re into this area pretty substantially via our Bottom Up Economy thesis at Homebrew (how tech can help the middle and longtail). Here’s one of my favorite quotes from the article:

Simplifying the nuts and bolts of selling can free up small business owners to focus on expanding their business or communicating with their customers, he said. “Some of the only people who can expand now are the Starbucks of the world,” Mr. Richelson [ShopKeep founder] said. “What we’re doing is taking back Main Street for small businesses.”

My First 15 Minutes of Work Each Day

So with the year halfway gone, I’m taking a look at how I schedule my time. Semi-related, was charting some of my daily “workflows.” Here’s the first 15 work minutes of my day, which usually occurs ~6:30am PT. What do your first 15 minutes of work look like?

Get up and grab my phone:

1. Check Techmeme site to see read new headlines.

2. Open Nuzzel app to see what my friends have shared. Save anything interesting to Pocket.

3. Open Twitter app and look through “Mentions” tab from whilst I slept. Respond/fav.

4. Open Mailbox app for email.

First pass - archive everything new that’s not important.

Second pass - open & respond to anything which can’t wait until I kiss my daughter (she’s either still sleeping or with my wife by this time). Usually it’s < 5 messages.

Third pass – read The Skimm newsletter to catch me up on top news stories from the past day.

5. While I’m on home wifi, update Reeder for my RSS feeds.

Done.

Disclosure: I’m an investor in Nuzzel and The Skimm via my venture fund Homebrew