Coverage by Bhat Dittakavi of Variance.AI on “Art of Projections” by Jay Krishnan on 26th October 2017 at T-HUB 
Art of Projections
No financial model is standard template for all. Cost of goods sold for SaaS businesses is different from that of non-SaaS businesses. Differences also will be in the lines of top down or bottoms up.
Business Plan VS Business Model
Crux of the business plan is business model. Crux of the business model is financial model. Crux of the financial model is projections.
There are two approaches for doing financial projections: Top down and Bottom up.
Top-down VS Bottom-up
Say you are asked to do Market size of footware needed in Beijing. This is top down approach. This is how consultants typically do. Entrepreneurs shall use bottom-up approach.
Convergence of both the approaches is important. Entrepreneur shall do both. If you did only the top-down, I doubt a series A investor funding you without having you do the bottom-up.
Top-down
I have taken the financial projections of the last startup I have sold for you to review.
How to do top-down?
Step 1) Market size from industrial reports. It is OK not to be a disruptive startup as disruptive Startups upset really many.
Step 2) Figure out your competition. They eat into your market size. Biggest competition comes from non-brands, the long tail. Anyhow, focus on big guys.
Step 3) We assume there is produxt market fit. That is not a concern. Understand your value proposition. Value Proposition is about how you are different from others. Don’t state the value proposition. Try to answer how? How is the Value Proposition. Not what.
Step 4) The final step is to project forward the market share estimation for the next 3 to 5 years.
Bottom-up
Assumption: Market size is a myth and ignore it. Work your way up starting from costs.
Figure out the production costs. Fixed production cost becomes eventually controllable. Control of variable costs is the key. Early stage complaints lead to variable costs that include the time of CEO. Then cost of sales: channel strategy, distribution, marketing, sales and so on.
Final costs are conversion ratio. It is hit ratio. For example, you made 10 customer calls. 2 answered. One said ok. This is 10% conversion. This is part of CAC: Cost of customer acquisition.
As entrepreneurs, you shall always undersell and overperform. If you promise two crore in annual revenues to the board and actuals turn out to be 50 lakhs, it won’t be a good case for investors.
You have control over expenses and not revenues. Focus on expenses. 
Variable costs are hard to control, not the fixed costs. Seasonally in product sales of some businesses mean variable costs also can be controlled to a degree.
Rules of thumb:
1) Double your marketing budget. 2x.
2) Estimate for legal, insurance, tools, licenses and more. Double them for India. 2x. Quadruple them for USA. 4x.
3) ABC, start doing Activity Based Costing (ABC) after 3rd customer. Otherwise you may be investing time and resources in a loss making customer. Activity could be that one customer, that one channel, that one purchase order.
Early in the game, marketing costs typically got to be 25% of the revenues.
For B2C, variable costs such as CPC, CPM, CPA are all relevant.
Red tabs are costs and green are revenues.
This is what got into my BOM. Then finally I did COGS. Then product costs. Then personnel costs.
Look at the percentage of salaries to fixed costs. You see trends emerge based on SaaS and other business types.
Here is my product development phase, release phase and then scale phase. These are part of timeline on my projections.
Cost between prototype 1 and prototype 2 change as second is incremental and also we add many new features.
I also account for New Product Initiatives (NPI) separately.
Fixed Pricing
ROI is important 
The minute you miss free cash flow, you go and raise capital. 
You raise capital to build a business. You don’t build business to raise capital. 
4-year Projection of 1, 2 to 5 to 10 crores sounds logical and believable. Projection of 1, 10, to 50 to 1000 crores don’t sound logical. Go with the prior.  Keep the non-linearity.
First crore is probably easier than the next crores. Segment the projects as product release phase and revenue generation phase as shown below.
56 rules for Startup Financial Checklist 
My Startup: Radifinity is about this device that caters to any service any protocol and any port. It can connect with any object. It has 14 sensors that look for light, humidity and so on and it talks to any network. It learns and controls itself. Our customer Aditya Birla Group acquired us.
Competitive analysis
Download financial projections template from university of California Berkeley and use it as starting point. Here it is.
Q) About investors?
Pedigree of institutional investor is different from that of angel investor. Angel forces you to pivot so he can exit faster. Angel wants to get his money out in next round. Institutional investors have larger appetite.
Series B is when you have clarity. Series A investors may not let the investors before exit as they don’t want their money used for exiting them.
 Then entrepreneur will have 25-30% stake. CISCO got an amazing trajectory of numbers. No numbers and costs of research was huge in two years. Investors let the original founders go. Year 4 revenue went to 1 million then to 10 million. Switch from initial IP centric work to later scaling.
Investors like beautiful stories with great vision. They have no balls to do what founders do. Tell the investors you are gonna make money as you go and tell them not to ask for breakeven rightaway.
In India you may end up reporting to the investors.
Q) How many years to project?
3 is great. 5 allows you think. Beyond is time waste.
Q) Example of bottom-up?
How many did I hire that can sell and generate sales.
Q) What is your sales cycle?
Activity based costing allowed us to understand that we are better off serving Infosys over Birla as the costs are less. We induced more repeat sales that made sales cycles shorter. I got to spend lot of time to collect the check from Birla.

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