Investors: you need to stop asking founders for financial projections. Founders: you need to start doing financial projections. I believe in both and I’ll explain why in this post. Thanks for reading A Leap of Faith. Subscribe for articles on pitching, funding and founder storytelling.
The one method of financial projections you can make on day zero that accounts for uncertainty is a monte carlo simulation - a practice used in innovation accounting (and sometimes used in normal financial practice when people remember it exists.)
This is a method usually combined with a funnel projection approach as you indicated. But instead of using single numbers, e.g. acquisition rate = 25% you use a range e.g. 10-30%. The width of the range represents the level of uncertainty in the project.
A monte carlo simulation (with some assumptions) can help you calculate, not an exact projection, but a range of possible outcomes.
It's not perfect - but it's miles better than nothing.
The only caveat I'll make to this is that you need to have a clear business model hypothesis to do this sort of analysis. If an early stage project doesn't even know their monetization strategy, then of course - any method of projection makes zero sense.
Hi Raymond,
The one method of financial projections you can make on day zero that accounts for uncertainty is a monte carlo simulation - a practice used in innovation accounting (and sometimes used in normal financial practice when people remember it exists.)
This is a method usually combined with a funnel projection approach as you indicated. But instead of using single numbers, e.g. acquisition rate = 25% you use a range e.g. 10-30%. The width of the range represents the level of uncertainty in the project.
A monte carlo simulation (with some assumptions) can help you calculate, not an exact projection, but a range of possible outcomes.
It's not perfect - but it's miles better than nothing.
The only caveat I'll make to this is that you need to have a clear business model hypothesis to do this sort of analysis. If an early stage project doesn't even know their monetization strategy, then of course - any method of projection makes zero sense.
Here's a longer article if you are interested in the approach: https://kromatic.com/blog/using-a-monte-carlo-simulation-to-forecast-innovation-outcomes/