Startup Key Assumptions: Step-by-Step Cheat Sheet

This is a step-by-step methodology for figuring a startup’s key assumptions. It covers how to determine minimum startup costs, how to project revenue for years 1-2, how to determine minimum expenses for years 1-2, how to determine the margins, and how to determine the breakeven date.

You don’t need an MBA to figure the key financial assumptions for a startup. Just follow this process:

1. Start with absolute, minimum required startup expenses:

A. Product design and development costs (MVP), V1, limited production run, packaging?
B. Inventory, domain name, website hosting, e-commerce, CC processing charges?
C. Incorporation fees?
D. Rent deposit, FFE, office expenses?
E. Salary?
F. Marketing, channel, shipping, distribution expenses?

Before we sell product 1 and make our first $, we will need to spend $x.

2. Estimate the number of units (clients) you expect to sell and the price per unit in the first 12 months of launch. Forecast sales for an additional 24 months.

A. Okay to have optimistic, probable and conservative scenarios.
B. How much you can sell depends largely on how much you expect to spend on marketing and sales. Assume YOU are the only salesperson.
C. How much can you reasonably sell to friends, family and early adopters? Do you have LOI’s or pre-orders?
D. Outline your sales funnel and each step in the process. Example of startup selling doggie vitamin water:

  • How many dog owners live in the area?
  • What percentage of this market can be reached through my marketing efforts and budget?
  • What percentage of pet owners exposed to my marketing will come to my website, or into a
    store that stocks my product, or walks by a vending machine?
  • What percentage of those people will actually make a purchase?
  • Of those who make a purchase, how much will they spend on average?
  • How many of those can be expected to be repeat buyers, how often?

E. As I generate sales (or raise investment capital), how fast can I grow this funnel over the next 2-3 years? 20%? 50% 100%?

At a minimum, we should be able to generate $x revenue in years 1, 2, and 3.

3. Figure absolute, minimum required month-over-month expenses for 12 months. Forecast expenses for an additional 24 months.

A. Product costs, COGS? (Assume minimal sales)
B. Marketing / sales costs?
C. Delivery, shipping, customer support costs?
D. Administrative / operational / legal / overhead costs, G&A? (Add 20%)

HINT: Try to keep ALL costs variable, ability to be adjusted quickly based on sales volume, investment capital, and other developments. People are EXPENSIVE, use contractors or commissioned people whenever possible.

In year 1, 2, and 3, we need $x to operate at a minimal level.

4. Determine your gross margin on sales.

A. Per-unit cost less cost of goods sold is your gross profit or margin. $100 sale minus $25 COGS = $75 gross profit. Divide gross profit by sales price to get margin: $75/$100 = 75%.
B. As a rule of thumb, you’ll need a gross margin above 50%. If you are selling trough retail, they will want a 40% – 60% mark up over their costs. You sell to retailers for $50, they sell to customers for $100.
C. Can you increase the margins in volume? Reduce your COGS?

Even at very low production levels, our margins are X.

5. Determine your breakeven point and capital needs.

A. In what month do sales exceed expenses?
B. What happens if you don’t hit breakeven when expected?
C. What “runway” is realistically needed? How much capital do you need to raise or borrow?
D. What is the critical timing for injections, if it is not all raised up front?

If we don’t raise (or invest) X by X, we don’t have a business.

6. BONUS: How do your assumptions and forecast compare to adjacent or competitive companies?

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