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1
What the Investor is looking for
A Workshop for Practitioners in business plan writing
presented by
Colin Alexander Director, Consultancy and Projects
Alastair Cavanagh Manager, Business Angel Networks
Bicester 22 March 2005
2
Before we start
Internal – a management map
External - a sales document
Environment of business
Investors - angels, venture capitalists, banks
Highlight what a prospective investor is looking for
85% rejected; 15% considered
Credibility
No magic formula - your plan and you must own it
3
Before we start
Most new business ideas do not get backing
NOT
because the proposition is weak
BUT
Because the entrepreneur has failed to communicate the investment argument effectively.
4
Targeting your plan to investors
Identify the investors – angel, venture capitalist, bankImagine you the investor – what would you want to see?Make it easy for investors to understand; (half page product, rest in IP and competitors)Research investors; get feedback, learn from each presentation Be careful with advice from friends
5
The Business Angel Investor
• Why?
• Who?
• What?
• Benefits?
Is the entrepreneur willing to ‘sell’ part of the business?
Is the entrepreneur aiming to exit the business?
6
Business Angels – why?
• Early stage• No revenue• No profit• No assets (IP driven)
Therefore no debt finance from banks
(incl SFLG)
7
Business Angels – who?
• Investing % of own funds (c10-20%)• Serial entrepreneur• Owner / Manager• Recently exited business or cashed in assets• Too young to retire• Most are generalists not specialists• Not all multi-millionaires!
8
Business Angels – who? …con’t
• £10K - £500K per deal• Syndication • Looking for high returns• Post-investment role • Tax breaks (EIS)
Looking to recycle knowledge and make money
9
Business Angels – who? ...con’t
• Ian Laing – Milton Park, Oxford Asymmetry, Oxford Semiconductors
• Invests with colleague• Up to £1m• Uses contacts for technical due diligence and
build teams• £ 50% : IP 50%• Key: passion + personal chemistry + trust
10
Business Angels – who? …con’t
Typical investor
£30k per deal Less than 25%
Future dilution?
How to set valuation? NEGOTIATION
11
Business Angels- what?
Χ Lifestyle businessesΧ Dividend
Χ “Me Too”Χ Service based
Χ Features not benefits
Χ New to sectorΧ Part timeΧ No personal risk
High growth potential 10 fold return
Innovation Unique proposition IPR
Growing market Clear need Routes to market Sales strategy
Management Experience Commitment Personal investment
12
Business Angels – benefits?
Early stage
- available pre-revenue
- unsecured against family assets
- no fixed repaymentLonger term investment Investors bring skills / contactsShare risk as well as rewardΧ Shareholders!
13
Selling the Business (1) The Business Plan
Executive summary
Brief History
Product or service
Market and competitors
Marketing plan – The route to market
Production and operation
Management team and its objectives
Financials
The Offer - return and exit
14
Risk is everywhere
Address risk in each section
Summarise major assumptions
Sensitivity analysis must reflect the identified risks
Explain underlying thinking
Build confidence in the management team
15
Executive summary
Two pages maximum
Write it last; hardest part to write
Take the reader from opportunity to proposition
Outlines market, business model, key drivers
Inspires confidence in the team’s ability to deliver
Only section you can guarantee will be read
16
Finance
Summary
Consistency with the rest of the Business Plan
Investors will look for two moments:
Breakeven (cumulative profit)
Cash flow going positive
Cash flow the key forecast
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Finance
Risk – It is everywhere
List the highest probability risks
List the highest impact risks
Measure sensitivity (worst case/best case)
Be realistic – Don’t be too ambitious
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Finance - The Offer
What we are putting in
What we want you to put in
When do we want it
How much are we giving away
How are we both going to get our money back
Balance the Risk against the Reward
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Finance - The Offer
Ordinary Shares
Preference Shares
Debentures
Loans
Don’t give give away too much too early
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Finance - The Offer
Valuation
Enterprise value = equity value + (borrowings - cash)
Net assets
Multiple of Profits/Sales/Earnings
Off Balance Sheet factors
Bid premium
21
Finance - The Offer
How do we get our money back?
Dividends (profit sharing)
Buy back of shares
Trade Sale
Public Offering
Give me the Money
22
Selling the Business (2) The Business Plan
Executive summary
Brief History
Product or service
Market and competitors
Marketing plan – The route to market
Production and operation
Management team and its objectives
Financials
The Offer - return and exit
23
The product or servicewhat is it and what it will be used for?
Functionality vs technical detail
How is the proposition anchored in a real market opportunity?
What benefits does your product bring to customers? How do you measure these benefits
What problem does it solve?
Why will customers continue to buy it?
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Two rules…
1. Never underestimate how little people understand about science and technology
2. Never assume they want to know
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Markets and competitors
Size of market
Market segmentation and niches
Major customer types – a typical customer
Consumer buying patterns and priorities
Actual/projected growth rates
Geographic breadth and variation
How the market operates
26
Market and competitorsWhat you need to write in a business plan
Stage 1
A general description of the market -
size, geographical spread, major customer types
Recent history and future development -
growing or static, how does the market operate, principal axes of competition: price, quality, service and reputation
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Market and competitorsWhat you need to write in a business plan
Stage 2
Analysis of your target market segment…
where the segments are: local, regional, international
the relative sizes and rates of growth
particular characteristics
consumer buying patterns and priorities
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The Market Analysis
Underpins both the sales and financial forecasts Ensure that:• Market opportunities are realistically evaluated
and supported by data eg number of potential customers, target market share
• You show a good qualitative understanding of how the market works, (what your customers want, how to reach them, adjustments they may have to make to support your product or service)
29
Competitor analysis What you need to write in a business plan
Who are the potential competitors?
On what basis do my rivals compete: price, sales volume, reputation, product design, quality, reliability, service?
What makes my product superior or different (critical success factor)
What barriers does a new entrant face and how will my rivals react to my entrance
In what area are my competitors vulnerable and how can I exploit this?
How do my potential customers see the competition?
30
Marketing plan
You have described the market, identified your target segment and analysed the competition, now state how you will reach the market
Pricing
Promotion
Selling and distribution
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Markets: finding, reaching, satisfying
Definition of ‘customer’ or ‘market’A set of ‘actual’ or ‘potential’ buyers of a product or service
Definition of ‘business model’The method chosen by a company to deploy its resources most effectively
Examples: licensing, joint venture, partnering, merger
32
Pricing in your plan explain….
• How is it set (cost plus or demand based);• How does it compare• What margin (price – cost) does it give you• If the target price differs markedly from
prevailing prices, explain why• Common fault is underpricing
33
Risk is everywhere
Address risk in each section
Summarise major assumptions
Sensitivity analysis must reflect the identified risks
Explain underlying thinking
Build confidence in the management team
34
Selling and distribution straightforward, though often neglected
• What distribution channels exist?• Which will you use: management team selling,
sales force, agents, commission reps• Geographical coverage of sales operation• Not too much detail, but explain the strategy and
why you think it will work
35
Writing style tricks
• Explain acronyms NMR, CDMA, ASCI
• Say it out loud, write as you would speak, not like a textbook perfect English
• Avoid passive tense adjectives and adverbs (unique, world-beating) clichés
• Vary sentence length
• Summary: who, what, when, where, why, how
• Specific words (red and blue) not general ones (brightly coloured);
• Concrete words (rain,fog) rather than abstract (bad weather)
36
Re-cap
Target business plan to be a sales document for investors not an internal management tool
Avoid infatuation with your product
Show understanding of your target market
37
Excite this man
38
Case StudyIs this a winning business plan?
What is good?
What is bad?
What is missing?
What is redundant?
39
Breakout sessionYou are the investor
• You are a group of investors with £50,000 to invest • Your group decides which company to invest in, and why• Your representative gives a two minute presentation,
telling the workshop which company and why. • A short discussion will follow each presentation
Instructions• Read the four executive summaries• Write down your impressions as you read• Use the questions to help you analyse
40
You are the investor - Questions
1. Do you understand what the business is? 2. Is there is a market for this product?3. What is your opinion of those who wrote the plan? What
type of people are they? Are they scientists or business people?
4. Do you feel that your £50,000 is safe with this company?5. Will you get it back?6. What are the main risks as you see it?7. What else would you like to know about the company?8. Which company has the most credibility for you?
41
Contact
Colin Alexander
c.alexander@oxin.co.uk
Alastair Cavanagh
a.cavanagh@oxin.co.uk
www.oxin.co.uk
Ralph Baker
ralph.baker@businesslinksolutions.co.uk
www.businesslinksolutions.co.uk
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