Ensuring a return-on-investment for potential investors can be near to impossible as a start-up. A recent study by Iuliia Ignatova, Nataliia Datsenko, and Nataliia Rudyk, has stated that “the lack of instrumentarium to forecast” i.e. the lack of tools available to estimate customer numbers, could be a factor that impacts potential investment for start-ups. It essentially posits that the ability to effectively estimate customer numbers by effect allows financial estimations to be made, thus making a start-up more attractive to potential investors.
“An important factor, which influences the business activity and development of small and medium innovative enterprises, including start-ups, is a possibility to determine the number of its potential clients. The main cause of “failure” of such enterprises is the lack of tools for forecasting the potential number of its clients and, thus, the financial results.”
Investors want a return on any project they choose to move forward with, but making a decision could be difficult if the start-up has no financial history to go on (highly probable) or just no statistical data to go on in general. One way to estimate without primary data is to analyse the profitability of a project based on data from similar companies in the sector/analogies.
“The proposed model is based on the hypothesis of normal distribution of a random number of clients and allows making a high accuracy forecast depending on the day of the week and, thus, estimating the investment risks for potential investors.”
By using an analogy, start-ups or investors are able to overcome the need for primary data: which many start-ups simply do not have. The research uses the popular start-up Buffer as a case study to showcase the analogy based method, and explains the mathematical process for forecasting Buffer’s client numbers. The research states that the creators hope to pursue further research into other influential factors that might affect the results, such as marketing activities, website quality, and visitor numbers.
By including further specific information, from a primary source or a secondary one in the form of analogy, this can change the results as compared to broader comparative methods. But adding specific factors to the mix will ultimately lead to more accurate, defined results that will give start-ups and investors something more reliable to work with when considering business potential.
Tip for start-ups and SMEs:
- Keep detailed statistical data on your business activities like Buffer has done
- If you do not have any statistical data, think about companies in the same field that have kept full records of data. This will allow you or a potential investor to utilise a method of analogy to heighten your chances of obtaining investment capital