Magic behing financial projections in a startup

One question I have been repeatedly asked in all entrepreneurship events recently has been “How important is Financial Projection for a startup?”. Like all subjective questions, the answer can range from “highly important” to “not important at all”. I have never seen any investor writing a cheque without looking at the financial projections, neither have I seen them making the projections the sole base for investment decision. It does not matter whether it is a 1, 3 or 5 year projection. All investors know that the 1st version of projections are going to change – still we insist on projections to determine how well prepared the entrepreneur is.

Let me list down the important things to keep in mind while building the financial model:

Clearly Stated Assumptions

While all models contain balance sheet, cash flow, and profit and loss statements in fair details, the basis on which it is arrived at should not be missed out. This can be easily captured in a simple sheet containing all assumptions. Give some thought to the important factors – if the market size is a billion dollar and growing by 50% a year, then the revenues sheet should show how fast you are growing. Investors have low attention span, and by looking at the assumptions list, they form an opinion on how thorough the entrepreneur is. It also gives an idea to the entrepreneurs on what the likely cash requirement is and when it may be required.

Make the model flexible

One exercise I have frequently done while arriving at the investment decision is make all revenue numbers 0 and cost projections 1.5 times – then look at how long the cash will last. The scenario is extreme but gives an idea about how the business is likely to shape up. Startups can look at building an aggressive, a conservative and a realistic model. If the model is flexible, it is sure to attract investor attention.

Projecting a revenue over 10 Crore in Year 1

I have never seen a startup achieving this magic number in year 1 and the higher this number, the less its credibility. Large numbers do not impress investors – what impresses them is a solid plan to execute (which means team expansion plans, sales and marketing plans etc. ). Spend lot of time with your customers and be realistic in revenue projections – thats how you will get the real revenues.

Basics of Accounting

During our days as accounting students, we would introduce a “suspense account” just to match the assets with liabilities. In real life financial projections, make sure assets = liabilities, ending cash balance for year 1 is opening cash balance for year 2 and all statements are linked perfectly! Excel is a powerful tool, but do not hard code numbers so that they “match up”.

Professional look and feel

After all the hard work is done, spend a little time in “beautification” of the statements – not cook up the numbers but use the fonts, colours, style etc. to make the projections look professional and easy to follow.

I am sure with all this and a little more, you will be able to attract investors and get your next funding! All the best!

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Last week, I attended the Entrepreneurship Summit at Indian Institute of Technology, Delhi. It was a homecoming of sorts (I am an alumnus, 2001 passout) after 10 years. Some things never change – wind tunnel, Dogra Hall, seminar Hall, Ex Hall (exhibition hall) are still as pristine as I left them!

Coming to the event, all in all it was average. The startup showcase at the ex-hall had lots of empty stalls. Most of the events were delayed. The plus points were a nice talk by Ashish Gupta of Helion Venture – good to see a VC call a spade a spade! From the investor’s side, I have found myself at a loss of words while saying no to entrepreneurs (though its an art I have mastered now over 3 years).

Pitch the Rich session was fine – the funda behind this being entrepreneurs pitching to rich people (thats not me!). A couple of companies have done well and may make the grade of Mumbai Angels as they have a great team and great concept running for them (admission for nursery kids, apps for iPhone). On the other hand, a couple of professionals may not even start, and I was surprised they are pitching to investors without knowing when they want to start or what their funding requirement is. I have never seen an entrepreneur get investments by saying they will start if they get the funding – investors prefer commitment over choice. All the best to the young guys anyways.

Lets hope for a better event next year.

I had written this article for YourStory, India’s leading website covering entrepreneurs.

As an entrepreneur, you have done all the hard work to start your venture, get a team around it, get customers to pay and investors are showing interest. But still there is that X-Factor which you need to close the deal – as they say, there is many a slip between the cup and the lip.

Listed below are top ten ways for entrepreneurs to close a deal:

  1. Talk to the investors directly – do not offload the task to your advisors or consultants. They are good for making the introductions, but after this its all about you and your team.
  2. Engage the investors – they are human beings too! Find their motivations, seek their help or advise and share the ongoings at your company honestly, it sure helps!
  3. Present the true picture – telling an investor “my product is half-ready” if you just have the specs will not work. What will work better is a working prototype.
  4. Avoid false statements – do not say you have personally invested 50 lakhs, if you cannot show it in your company’s bank account.
  5. Present the market scenario correctly – cold drinks is a huge market but you cannot claim to have only 2 competitors – can you match Coke or Pepsi?
  6. Listen to investors – VCs and investors speak to you because they are interested and also want to check if you are open to ideas.
  7. Keep your ego aside – no investor will like to deal with your ego, they want rationality in business.
  8. Get out of the syndrome of “I do not want you or your money” – be clear that this is the reason you are meeting the investors and do not want to burn the bridges for the future.
  9. Never say no to money – if investors want to put more money than you want, be 101% sure this is the last round of financing, else, take as much money as offered. Nobody has seen tomorrow.
  10. Know your competition – it is better that you tell the investors who the competitors are or likely to be rather than virginity claims of “we have no competition”. If investors know your competitor or discovers them, it can reduce your negotiating power or even kill the deal.

As a part of the eweek organized by NEN, entrepreneurship cell of Atharva College, Mumbai, hosted a business plan workshop by yours truly.

With more engineers than management students in attendance, it was a great experience, with questions flying from all corners. Questions ranged from silly ones like “How to make a public issue for starting a business?” (only Anil Ambani can do that), intelligent ones like “How to protect ur idea?” to practical ones like “How to start an incubation center?” (asked by the respected Principle). 

The e-cell members who escorted me were too eager to share their ideas – not knowing the hard fact of entrepreneurship – devil is in the execution! The best of part of going to such forums is that you get so much respect from the students, and they all are really so excited to start someday! All the best!

IIT Bombay E-cell selected Nurture Talent as their Training partner for the entrepreneurship summit. I conducted a workshop for all entrepreneurs participating in Vulture’s Nest and Eureka. It was a great experience, with lots of energy and talent among the participants.

It was a pretty exciting week. The pre-event workshop on how to make a business plan and pitch to investors was well attended, by around 25 entrepreneurs. More interesting than what I had to tell them about a business plan was what hey had to know about VCs and investors. Queries included issues like how can I put a professional touch – looks, finish to my presentation, VCs idea about my business, Consolidation of information in 5-10 minutes pitch, Financial breakeven issues, How much should be covered in 5 minutes, How do you negotiate with VCs, How important are Future projections, What stage to look for funds? How important are Risk factors in a pitch, What is the scene in Early stage investments, Why should I go for VCs and so on.

What I liked particularly was the loads of energy and talent in the entrepreneurs. Though I must add, lots of them had severe misconceptions – particularly about valuations. However, what is important for an entrepreneur is to keep an open mind and keep moving. There is nothing better than going out there, and showing the proof of business execution – and then go out to reach investors. Some of the teams were too good at the final sessions of Eureka, where I was a judge, and I leave it to E-cell to declare the winners – rather than spill the secret! More workshops are lined up this week, will keep updating!