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Jul 26, 2023Liked by Raymond Luk

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/

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