Entrepreneurs frequently complain that business angels and venture capitalists don’t take the sales growth projections in their business plans seriously. Rather that discounting those projections by 5, 10, 25, or even 50 percent, investors just ignore them.
While that frustrates many entrepreneurs, it makes a lot of sense because sales growth projections aren’t very informative.
Venture capitalists and angel groups are looking for companies that can scale quickly, reaching $50 million or more in sales in six years after starting. So entrepreneurs project that kind of sales in their business plans. For instance, more than half of the companies that presented to one angel group I know well presented sales projections of over $50 million in six years.
Unfortunately, very few companies actually achieve this level of sales in this amount of time. According to data from the U.S. Census on the sales of start-up companies six years after they were founded, only 0.4 percent of all software start-ups, 1.18 percent of computer peripherals companies, 2.0 percent of computer hardware companies, 2.61 percent of surgical and medical instruments companies, hit $50 million in sales within six years of starting.
If more than half of entrepreneurs seeking money from angel groups and venture capitalists project sales of more than $50 million in six years, but less than three percent of them actually make that target, then sales projections don’t provide much information to investors.
So it’s not a question of discounting the projections. The projections don’t help to separate the good deals from the bad ones. To make their decisions, investors need to look at something else.
* * * * *
About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of seven books, the latest of which is Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By. He is also a member of the Northcoast Angel Fund in the Cleveland area and is always interested in hearing about great start-ups. Take the entrepreneurship quiz.