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4 Steps to Build Projections for a Pre-Revenue Startup

When you are trying to raise capital to launch your pre-revenue startup and a potential investor asks you for financial projections, it can seem like a waste of time. You are just guessing right?

What an investor probably wants to see is a financial model for your startup more than exact financial projections for each of the next 60 months. A properly designed financial model will allow you to enter in key assumptions and see the financial impact of those assumptions. This allows you to determine what the potential is for the business and what the key levers are that can have the greatest impact.

At ProjectionHub we focus on 4 key steps to build a pre-revenue financial model:

  1. Estimate Website Traffic
  2. Use Reasonable Conversion Rates
  3. Scale your Expenses as you Grow
  4. Stay within Industry Norms

Let’s dive into each step.

How to Estimate Website Traffic for a Startup

The first step in generating reasonable revenue projections for your startup is to estimate how much traffic your site will receive. My favorite way to do this is to take a look at my competitors on Ahrefs. Ahrefs is a powerful tool that can be used for SEO research, competitor research and more, but specifically you can simply type in any website URL in the site explorer and ahrefs will give you an estimate of their monthly organic traffic. In my experience, the Ahrefs estimate seems to be quite conservative and actual traffic numbers are 2x to 5x higher than reported.

When we help clients with their projections and they estimate they will have 1,000,000 in organic website visits per month by year 2, but I check Ahrefs and see that their biggest competitor that has been around for a decade only has 100,000 in monthly organic traffic, it is safe to say that the client’s traffic estimate is too high. Ahrefs won’t tell you exactly how many website visitors you will get, but it can give you a good idea of the most traffic that you could reasonably expect to get.

If you are planning to do paid advertising, then the Google Keyword Planner is a gold mine. You simply type in the keywords you would like to advertise for and Google will provide you with a monthly search volume number, growth trends, and the typical cost per click that advertisers are paying for that keyword. For example, if you are selling CRM software to small businesses you might want to advertise for “small business CRM” and you will find that there is approximately 2,400 monthly searches with an extremely competitive ad market where the low end of the cost per click range is $23. So to get 1,000 targeted website visitors you would be looking at a minimum of $23,000 in ad spend.

Between Google Keyword Planner and Ahrefs you can get a good idea of what kind of traffic is possible for your startup.

What are Common Conversion Rates for SaaS and eCommerce Startups?

Once you estimate your monthly website traffic, you need to estimate what percentage of those website visitors will convert into customers. For your typical SaaS startup or eCommerce or Direct to Consumer business you should expect conversion rates in the low single digits.

Invesp has a great report on average conversion rates by industry. They report that the average conversion rate globally for an ecommerce website is 2.58%.

For a SaaS business, conversion rates can vary greatly depending on whether you offer a free trial or free version and premium version etc, but as an example, Business2Community reports that Spotify converted 27% of free users to premium while DropBox converts 4% of free users to paid users. Keep in mind that there is an extra layer of conversion in here. So maybe 10% of website visitors converted to sign up for a free trial of Spotify and then 27% of those free trial users converted to paid. That means that only 2.7% of website visitors actually converted into paying premium subscribers.

Your financial model should have reasonable conversion rates, make sure you aren’t outpacing Spotify conversion rates in year 1 because it is highly unlikely that your product will perform that well right out of the gate, so use industry data to make sure you fall in line with competitors.

How to Scale Expenses for your Startup

Projecting expenses for a pre-revenue startup is always a bit tricky in my opinion. In the first year you might have very specific expenses. For example, you might know you are going to spend $299 per month on startup legal services with Start.Law, but it is hard to know what legal services might be as you scale, raise additional rounds of capital, etc. There are a couple of approaches that we try to take at ProjectionHub. Expenses can scale in at least 3 ways:

  1. Expenses as a percentage of revenue
  2. Expenses that scale with employee headcount
  3. Expenses that grow based on milestones

Our financial projection templates allow you to add your expenses as a percentage of revenue, a fixed amount per employee, or allow you to add expenses as you hit certain revenue milestones. For example, payment processing fees will scale as a percentage of revenue. Stripe charges 2.9% + 30 cents per transaction. Your employees will likely utilize various software tools and services that will be billed on a per person level, so we allow you to add expenses on a per FTE. Finally, you might want to hire a new Account Executive for each $100,000 in MRR. Our templates will make it easy to scale your staffing costs in a stair step fashion as you hit new MRR milestones.

Ensure your Projections are Reasonable

Once you add your revenue and expense projections, you will want to make sure that your numbers fall within reasonable industry standards. A good way to do this is to take a look at the following report: [Startup Revenue Stats: A Study of 234 Tech Startups 2022. This report looks at 234 actual startups in B2B SaaS, B2C Software, Marketplace Businesses, and Direct to Consumer (D2C) Product companies and will help you determine whether your projections are way outside of industry averages.

The primary goal is simply to make sure that you don’t embarrass yourself by projecting to grow 10x faster than Google.

Yes, at the end of the day your projections are a best guess estimate, but I hope throughout this article you have found some tools and techniques to help ensure that your financial model is reasonable as you go out to raise capital. Best of luck!

About the Author

Adam is the Co-founder of ProjectionHub which helps entrepreneurs create financial projections for potential investors, lenders and internal business planning. Since 2012, over 40,000 entrepreneurs from around the world have used ProjectionHub to help create financial projections.

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