Since my experience with start-ups began a few years back, I have seen many examples of top-down forecasting that has left many venture capitalists wondering if the speaker had any credibility whatsoever. Top-down forecasting is taking the market level from it’s highest point and working down to come up with your sales figures.
What I mean by this is the China market. If you wanted to sell a service to the Chinese marketplace, there is an estimated 1.3 billion people in China right now. If you could sell your service to just a small 1/2% of the population, you’d be a millionaire. That’s 6.5 million widgets sold of whatever it is you have.
Odds are that you probably could not reach that number of you tried. Even if you could, you’d need to sales force the size of the US to get to it. It’s not realistic and it sounds like a bunch of hot air.
Bottoms-Up Forecasting takes a more realistic and general approach to your sales figures. By estimating that you have 5 sales people on the floor, each making 10 calls a day to the 40 major markets in the US, you hope to sell 1-2 widgets per sales person per week. You now have a more realistic approach and clear benchmarks for your sales staff to work against.
Have you ever been asked to try and contact 1% of China? Yeah, I think not. You would have better luck getting your start-up funded by Vince McMahon of the WWE wrestling organization. You seen the size of that guy? Much less his demeanor?!