Bottom-up revenue forecasts are the only way to go for startups, especially for Software-as-a-Service (SaaS) startups. Too often, entrepreneurs will take a big number, like all the people in China, and say are going to get 1% of them to buy something, and thus have a big business. Alternatively, an entrepreneur will start with a small number, like their current revenue, and forecast that it will grow at some growth rate indefinitely (if only things were like the wise man who asked the king for one piece of rice and to have that piece doubled for every spot on a chess board). Unfortunately, top-down revenue forecasts should not be used for startups.
Here’s an example bottom-up SaaS revenue forecast approach:
- Take the number of sales reps expected to make quota (e.g. 2)
- Multiply by the monthly quota per rep (e.g. $25,000 in new annual contract value (ACV) per month or $75k ACV per quarter or $300k ACV per year)
- Multiply by the monthly renewal rate (e.g. between 97% and 99.5%)
- Add in any consulting or one-off revenue
- Arrive at the total monthly revenue
Bottom-up forecasts are the only way to go for SaaS startups and should be used from idea stage all the way through growth stage.
What else? What are some other thoughts on bottom-up SaaS revenue forecasts for startups?