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Pitfall 3

Pulling a Goal Out of Thin Air

Some entrepreneurs pull goals out of thin air. The ones who create theirs from solid data are the ones who don’t have to question the validity of their goals.

A typical pitfall that entrepreneurs encounter early is setting goals without having gone through the process of reverse engineering them and making sure they are sound. Like any expert climber, you must properly plan for the journey—especially for a trip of this magnitude. Consider some of the critical questions a climber needs to ask and answer before setting out:

•How many miles is the trip?

•What kind of food is important to bring?

•What clothes, coats, and shoes will I need?

•How much moleskin will I need to cover my blisters?

•Will I need oxygen?

•What other supplies do I need?

•Where will we camp overnight? What shelter do we need?

•Which route will I take up the mountain?

•How long will it take to reach the summit?

•How will I train for the expedition?

•Who will be joining me on this adventure?

•How do I hire a guide for the ascent?

•What will the celebration look like at the top?

Without proper planning, you could get halfway up the mountain and end up having to turn around for any number of reasons: you could run out of food, have the wrong gear, or even lose track of the path to the top. To ensure the greatest chance of success, the mountain needs to be analyzed and the journey reverse engineered. This applies to the entrepreneur as well, who must reverse engineer the voyage up the business mountain.

The Reverse Engineering Critical Questions

Let’s review the previous climbing questions again, only this time through an entrepreneurial lens:

•How many miles is the trip?

What is your current revenue? What’s the difference between where you are now and the revenue goal? Estimate how many products or services you will need to sell to reach this goal.

•What kind of food is important to bring?

How much cash will you consume in reaching your goal? What is the expected yearly burn rate and total cash outlay to reach the goal?

•What clothes, coats, and shoes will I need?

What will your company look like when you hit your goal? How will the brand be represented? What articles and press releases will you launch? What will be your reach and market penetration? How will people perceive your brand and what brand ranking will your company need to achieve to hit your goal?

•How much moleskin will I need to cover my blisters?

Write out the difficulties you expect to encounter along the way. What obstacles will you need to overcome? What equipment will you likely need to replace along the way?

•Will I need oxygen?

Do you expect to make a large purchase of technologies or acquire other companies to reach your goal? Will you need an infusion of cash at some point up the mountain? Do you plan to expand internationally? Are you going to run a Super Bowl ad or dominate the market with advertising? If you answered yes to any of these, where will the money come from? Will you self-fund from the profits of the company? Will you seek additional funding: venture capital, private equity, debt financing, friends and family, angel investors, crowdfunding, personal savings, or a strategic partner?

•What other supplies do you need?

What is your required list of equipment? If your company deals entirely in virtual goods or services, list out all the computers, desks, chairs, phones, etc.

•Where will we camp overnight? What shelter do we need?

How many locations or markets do you need to be in to achieve the goal? How many offices or buildings will you need?

•Which route will I take up the mountain?

Plan the ascent up the mountain year-by-year. Plan what the revenue per year increase will look like. Plan how many people you need to hire and when. Determine when you must move into your new office space. Plan for any acquisitions or purchases of technology or intellectual property. Do it year-by-year all the way up to the month you reach your goal.

•How long will it take you to reach the summit?

Is it six years, ten years, or three years? This is best determined by first discovering the revenue number, growth rate, and number of units sold. Once you have a clear vision around these items, you can confidently estimate a timeframe.

•How will I train for the expedition?

What skills do you, as the CEO, need to have to accomplish your goal? How will you get that training? How will your current and future team get the skills they need?

•Who will join you on this adventure?

When you hit your goal, how many people will be working at your company? Lay out the org chart. Use your current production rates to determine the number of people needed to produce the product or deliver the service. Add in sales, marketing, and customer support departments. Add in key roles for HR, operations, and finance. Will you bring legal in-house? If you feel like you are taking a stab in the dark about how many people you will have when you hit your goal, you can reverse engineer this as well by working backward from “revenue per employee” (RPE). For example, if you have a goal of $10 million and your rev/employee is $400,000, that equals twenty-five employees. Here is a chart that displays RPE by industry of S&P 500. Startups in growth mode are going to be in the $150,000-$400,000 range.


Source: https://craft.co/reports/s-p-500-revenue-per-employee-perspective

•How do I hire a guide for the ascent?

Who has experience creating successful ventures? Ask that person to mentor you, or hire a coach. There’s no need to make the mistakes other climbers have made—a coach or mentor will help you avoid such pitfalls.

•What will the celebration look like at the top?

How will I celebrate my victory when I finally summit? Do something big to celebrate, like taking the entire company on a Caribbean cruise with everyone’s families. Or celebrate by getting the payday you’ve been working for. Sell the company to your largest competitor or a private equity group and make sure you celebrate personally as well as with a reward and party for the company.

Perform a Reality Check

Now that you’ve laid out your plans in intricate detail, let’s do a reality check by looking at others who have climbed the mountain and see how things measure up. Let’s assume an expected growth rate of $3 million to $30 million in six years. The formula for growth rate is:

([Present—Past] / Past) * 100

We will calculate as if the “Present” is at the end of the goal and “Past” is today. So in our scenario, the growth rate when we reach the goal would be:

([$30,000,000—$3,000,000]/$3,000,000) *100 = 900 percent

This is a 900 percent growth over ten years. How does that play out year-over-year if we lay it out linearly? Growth is rarely in a straight line, but for these purposes it helps to illustrate what it looks like:

RevenueYoY Growth RateCumulative Growth RateThree-Year Growth Rate
$3,000,000000
$6,000,000100.0%100.0%0
$9,000,00050.0%200.0%0
$12,000,00033.3%300.0%300.0%
$15,000,00025.0%400.0%150.0%
$18,000,00020.0%500.0%100.0%
$21,000,00016.7%600.0%75.0%
$24,000,00014.3%700.0%60.0%
$27,000,00012.5%800.0%50.0%
RevenueYoY Growth RateCumulative Growth RateThree-Year Growth Rate
$30,000,00011.1%900.0%42.9%
Average31.4%500.00%86.43%

This is an average growth rate of 31.4 percent. So how does this compare to other growth stories? The following chart reflects the median growth rate of publicly traded companies in the major markets over the last ten years from the time of this writing.

“Dow Jones: The Dow Jones Industrial Average tracks thirty large, publicly owned blue-chip companies trading on the New York Stock Exchange (NYSE) and the NASDAQ.”

“NASDAQ: The NASDAQ composite was created by the National Association of Securities Dealers (NASD) on February 8, 1971. The NASDAQ Exchange is mostly composed of more than three thousand stocks of the world’s leading tech and biotech leaders like Comcast, Apple, Netflix, PayPal, Google, Microsoft, Oracle, Amazon, and Intel.”

“Annualized Growth Rate: The yearly average increase in the total value of an individual investment.”

“Blue Chip: A blue chip is a nationally recognized, well-established, and financially sound company. Blue chips generally sell high-quality, widely accepted products and services. Blue-chip companies are known to weather downturns and operate profitably in the face of adverse economic conditions, which helps to contribute to their long record of stable and reliable growth.”

Annualized Growth Rates
Dow JonesS&P500NASDAQ
9.70%11.33%18.46%

These numbers represent large blue-chip companies, which are different from where you are, so there are a couple of other indices we need to consider. Companies in their first ten years have the potential to grow much faster than the publicly traded markets listed above. According to data gathered from Inc. Magazine, the average three-year growth rate for the five thousand fastest growing companies in the US is 155 percent. This compares to our scenario very well. Our average three-year growth rate is 86.43 percent, which is very conservative for a new start-up. The chart below shows the median growth rates of private companies listed on the Inc. Magazine’s. 500/5000 index for the last six years. It also has the top fifty fastest growing privately held companies so you can see how the very top performers do.

YearGrowth Rate (Median)Top 50
2020165%9127%
2019158%7453%
2018172%9154%
2017142%9339%
2016143%7684%
2015150%8123%
Six-Year Avg155%8578%

But let’s get a little more specific. Here are the numbers broken down into several industries for the last six years, including how the top twenty-five performed. Pick your industry and see how your three-year growth plan measures up to how these fast-growing companies are experiencing rapid growth. For the most recent data go to EntrepreneursParadox.com/GrowthRate.

IndustryMedian GrowthTop Twenty-Five
Advertising/Marketing171%6586%
Agriculture & Natural Resources159%N/A
Business Products and Services136%2114%
Computer Hardware161%200%
Construction146%942%
Consumer Products & Services187%2402%
Education156%1290%
IndustryMedian GrowthTop Twenty-Five
Engineering124%575%
Environmental Services135%202%
Financial Services150%1868%
Food & Beverage176%1201%
Government Services197%898%
Health169%2598%
Human Resources118%898%
Insurance131%357%
IT Management129%940%
IT Services112%N/A
IT System Development182%842%
Logistics & Transportation154%1690%
Manufacturing115%659%
Media217%461%
Real Estate170%1060%
Retail224%1929%
Security185%349%
Software183%3129%
Telecommunications134%434%
Travel & Hospitality153%355%

For an updated and comprehensive list of all industries, go to: EntrepreneursParadox.com/CompareGrowthRates.


If you are really dreaming big, here is another piece of data to compare against: the fastest growth to one billion dollars:


Don’t Pull Numbers Out of Thin Air

Do your research. The two most common responses I hear from entrepreneurs when I do this exercise are: “I want my company to grow to $50 million or $100 million” and “I want to do it in five years.” Make sure you’re not just pulling numbers out of thin air. Walk through this exercise by going to the website (EntrepreneursParadox.com/CompareGrowthRates) and enter your actual numbers so you can have a realistic, feasible, and motivational goal. Evaluate where you’re at today and what it will take to get you to where you want to be. Is your plan realistic based on comparables, growth rates, and the number of units you would need to sell to achieve your goal? Rework the numbers until you believe them wholeheartedly. You own this. You may feel a bigger potential than what others are doing, and that’s great. Use this as the baseline and then go with your gut.

Visualize the Goal

The purpose of this exercise is not just for planning—you need to be able to close your eyes and vividly picture the day you accomplish your goal. You need to be able to visualize where you are in the office and see, feel, and smell the environment and events as they take place. Don’t dismiss the power of this undertaking. In fact, give it a try right now. Put the book down, or press pause if you’re listening to the audio version. Picture yourself and your surroundings at the end point of your journey as viscerally as possible. Did you see it? If not, fill in the details even further, then close your eyes again and create this picture as if you are actually there. This may take a few attempts before you start to see the details and colors of the room, but it is important that you can see the friends who took the journey with you, feel the hands you’re shaking, and taste the celebratory cake. Practice this visualization repeatedly, especially in the morning before getting ready for the day. Cement the image in your mind until it’s all but inevitable.

“YoY: Year-Over-Year (YoY) is a frequently used financial comparison for comparing two or more measurable events on an annualized basis. Looking at YoY performance allows for gauging if a company’s financial performance is improving, static, or worsening.”

Overcoming Pitfall 3: Reverse Engineer the Goal

•Go to the website and calculate your desired growth rate for your company. You can put in the final revenue numbers or your Year-over-Year (YoY) growth rate, which it will calculate for you. EntrepreneursParadox.com/CalculateGrowthRate.


•Go to the website and compare your growth rate to the most up-to-date stats for growth rates of other companies in your industry. EntrepreneursParadox.com/CompareGrowthRates.


•Write out your goals in detail following each bullet point as shown in the chapter.

•Go to the website and enter your data to get a visual representation of your goal in infographic format. EntrepreneursParadox.com/GoalInfographic.


The Entrepreneur's Paradox

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