The assignment this week in Venture Design was to start putting numbers behind the assumptions underlying our venture. Particularly, we used a process called Decision Driven Planing to try and understand if there is any practical value to our venture, and more importantly, what assumptions this value rests on, if it does exist. I’m going to structure my post this week as a simple pros and cons list:
Being forced to think through all of the different moving pieces, dependencies and costs of the venture dragged to the surface pieces that I had avoided thinking about or that had never even crossed my mind. For example, I had never considered how much the number of shirts ordered at a time effects the cost of the shirt. Shipping is a huge part of the cost of a product, so anything I can do to encourage batch purchases is a huge win.
Assumptions for everything. Until I had to list them out, I never considered exactly how many assumptions I was making. Everything from how much a shirt costs to ship to how many friends I can expect a current customers to bring in per year. I’m left with more questions and more pieces to test then I started with. I guess thats a good thing, but a bit intimidating as a solo project for a 6 week class. I’m having to accept I will only scratch the surface of this venture, and that to get it really moving I would need to devote serious time.
It makes it feel legitimate. I like being able to play around with numbers and see which ones really matter most to the bottom line. It helped me determine what to focus one.
It make you re-consider design choices made. I was originally thinking of this venture as a club - a company structured like an exclusive organization, where customer acquisition was achieved entirely by member recruitment. What this sheet exercise showed me was that if I want to have a chance of recouping my lost salary and paying back startup costs, scale would be vital. I need this thing to grow fast.
Even though the numbers all have little footnotes next to them reminding me that they are based on assumptions that are really rough, its hard not to think of them as real. Thats the danger of numbers; they are concrete that they are a poor fit to describe a very amorphous concept.
The act of ‘going backwards’ and starting with the amount of money needed to even make this venture worth perusing felt fake. Yes, there is some value to it, but it doesn't stop the sort of numbers tweaking that make business plans so useless at this point in the process. I set my goal ( $1,085,144.80 in 5 years. Look cents, how precise) but then when my initial numbers put me well below that goal, I went and started fiddling with numbers to see what it would take to make it. How is this any different than the much decried practice of making business models that reflect exactly what you want them to say?
Especially in areas such as growth, tiny changes in the number can have huge swings in the model. I was playing around with using existing members to recruit new members (using free merchandise as an incentive). I set my coefficient of recruitment (is that a thing?) to .1 customers a month. So I was assuming each of my customers was going to recruit 1.2 friends into the program per year. Using these numbers I would have a profit of $443,615.15 after 5 years of hard work. Not nearly enough to payback my loan, much less my time. However, if I just edged up that number to .15 people per month, or 1.8 people per year, I was suddenly rolling in $4,373,038.41 after 5 years. Forecasting that far out with numbers that rough is useless. Though I guess it did show me that recruitment was extremely important.