In the business of financing technology businesses, one of the most tricky areas is how you treat the forecasts in the pitch decks. Typically, you are taking a very limited, usually heavily biased, data set and using it to provide a baseline for forecasting a much longer trajectory. If you are familiar with probability, you’ll know that while this is possible, the result will have a very low confidence level. Therefore, you need to discount these forecast very, very heavily.
I was reminded of this when I read the Bloomberg New Energy Finance press release on Electric Vehicle sales forecasts. The headline is that Electric Vehicles will Accelerate to 54% of New Car Sales by 2040. I a sure there’s sound methodology behind this work, and the resulting graph looks great:
Now, please consider that Tesla Roadster, the first street-legal, serially produced EV with a viable range was introduced in 2008. When you are taking a 1% market share figure and growing it to 54% over 25 years, a tiny variance in that slope can end up with a vastly different figure.
As a VC, you come across enough forecasts to intuitively discount the out years. This is not really a science but more of a sense. However, it can make a massive difference in the eventual exit size and how much capital the business may end up consuming.