Reflection Three

In continuation of Rao’s description of finance-smart entrepreneurs, he explains that they use the following strategies:

*prove bottom-up strategies

*focus on cash flow till Aha (when a venture’s potential and/or leadership skills are evident)

*finance appropriately to the stage

*channel equity

*Use Alt-VC first

*Seek scalable debt

*Choose smarter instruments

*Use VC intelligently

*develop the right capital structure

To take a closer look at “prove bottom-up strategies”, let’s look at why Rao suggests that bottom up would be an advantage over “top-down”.  With “top-down”, it involves the size of the total market and forecasting an estimated market share.  With this strategy, a new venture would have a disadvantage because they don’t have a basis to forecast revenues because they have no history, no basis to compare to in order to estimate market share.  Rao also expresses using the “top-down” strategy one would go through the development of visions, mission statements, strategies, and then tactics. He claims that billion-dollar entrepreneurs use a more practical approach because they know their venture’s vision is “cloudy” and they may have to pivot to succeed.

Bottom-up projections help with better estimating cost, revenues, and time to get to revenues. Rao goes on to explain that bottom-up projections improve sales and marketing effectiveness, as they help to find the right sales driver (the right strategy to get sales), determine the amount of money to be spent on that right sales driver, and can help estimate the expected sales. They also help the entrepreneur test out their variables such as customers’ knowledge about the product and the ease of buying the product and they help the entrepreneur see how the variables affect buying decision, such as making changes if needed to find the right sales driver.

For bottom-up sales forecasting, the entrepreneur must know the cost to reach potential customers, estimate how many customers will buy, and the time it will take for the customer to make the decision to buy and then act on it. This forecasting helps better monitor actual performance and allows for the opportunity to adjust when needed.

“When price and quantity input are developed carefully and are relevant to a company’s business model, then the bottom-up forecast methodology can be a practical and credible tool in forecasting, evaluating and adjusting the projections (Wardowski 2022).”

What are your opinions on bottom-up versus top-down?  I see both sides, but lean toward the bottom-up. I see how it makes sense as Rao points out, to find out what works (tactics) first and then develop strategies based on those successful tactics. Then with these pieces of information, forecasts can be improved and thus, expansion can happen.

Stay tuned to find out more in the next reflection on Finance Secrets of Billion-Dollar Entrepreneurs: Venture Finance without Venture Capital.

References:

Rao, D. (2020). Finance Secrets of Billion-Dollar Entrepreneurs: Venture Finance without Venture Capital. FIU Business Press, Mango Publishing Group.

Wardowski, Y. (2022). Bottom-up Forecasting. Financial Edge. https://www.fe.training/free-resources/financial-modeling/bottom-up-forecasting/