Venture capital backed businesses often have as a major objective getting on the "fast track," that is, seeking very rapid growth towards a liquidity event, such as a sale or public offering. When this is the case, the early performance of the business is under close close scrutiny by the initial investors, and will undergo very detailed analysis by prospective buyers and investors as their decision on commitment to the investment nears.
The new round of investors must analyze what they are acquiring near the physical assets of the business. They are investing in or indicating themselves to the continued operation of the business, and a performance level that justifies the amount of the investment. Prospectors investors must assess the environment in which the company is operating, and generate a forecast of how far it might go under their stewardship.
Did the company enjoy some "first mover" advantage in the early performance figures, which the competition has since neutralized? Are there some patents or processes that will keep the company ahead of the curve for a while longer?
The business must be evaluated as an entry in a competitive system. The state of competition, and the relative strength of the business within the market are strong indicators of the business' prospects for survival and thriving. Is the brand strong, highly recognizable, thought well of? Is it extendable, or already being stretched? Is there a strategic "pruning" that could improve the business' focus and prospects?
If there has been a decline in the number of competitors, investors must assess whether it is normal turnover in a dynamic marketplace, or wherever the revenue model for this type of business is flawed.
Another consideration is whether there is some untapped value in the company. Perhaps it has been strapped for cash, when a violent (and expensive) ad campaign could have improved its situation dramatically. Possibly, it is only one product or process from a major breakthrough, and fresh capital could enable an acquisition that solves the problem. There may also be some cross-marketing or strategic partnership opportunities that could take the business to the next level.
The history of sales growth within the company and in relation to similar businesses is another measure of company progress. Seasonal fluctuations can be significant when we have a reliably short history to consider. For example, how much better was this holiday gift-giving season than last? Are there any cyclical issues at work? Is our a luxury product that flourishes only when times are prosperous?
How are the longer-range patterns of change in the industry going to affect the company? Are they well positioned for the wireless, broadband, palm-size, global world we are becoming? Are there any changes in the regulatory atmosphere that could have an impact? Are they a reliably high-cost provider in an industry that is becoming increasingly price driven?
When the business and the market have been analyzed, the probable sales volume of the business can be forecast. In rapid growth companies, sales are frequently expected to be accelerating. Unlike traditional sales forecasting, we are not simply looking at minor changes in slope of a 10-year sales increase "ramp."
If a specific month of our second year showed some percentage growth in sales over the comparable month of our first, should we extend this rate into the third year? Since the company is so new, are the forecasts from the original business plan still helpful? How well has the company done so far with respect to plan?
The reliability of a forecast is always uncertain. Attempting to forecast in today's dynamic environment is especially difficult. We are in a period of rapid technological change that has dramatically shifted the business cycle dramatically.
Past performance is no guarantee, and often not even an indicator, of the future. Still, the basic value in making a forecast is that it forces the investor to look at the future objectively. A forecast does not eliminate the need for value judgments, but it does require the forecaster to identify elements influencing the future.