Business plan formulation and venture capitalist

Business Plan Business Plan FormulationFormulation

Business Plan Business Plan FormulationFormulation

Venkatesh SarvasiddhiVenkatesh SarvasiddhiHead-Direct MarketingHead-Direct Marketing

HCL TechnologiesHCL Technologies

Outline of the Presentation

• Business Plan basics: What? For whom?

• Fund raising process• Venture Capital firms• Structure of a business plan• Details of the individual sections• Final checklist

Business Plan and its Target Audience

• VCs / Angels• Potential senior employees• Bankers• Attorneys and accountants• Leasing companies

BP is a “document” and not a Power point presentation !!

It is targeted at:

Stages in the Growth of a Company

• Idea / Concept• Prototype / Proof of the concept• Incubation / Product

development• Organization building• Scale up (alliances, partnerships)• IPO: Initial Public Offer

Funds Requirements

• Idea / Concept: USD 10K• Prototype: USD 50K• Product development: USD 0.5M –

2M• Organization building: USD 8M-10M• Scale up: USD 50M • IPO: Initial Public Offer

Sources of Funds

• Idea / Concept: Personal savings• Prototype: Loan from friends and

relatives• Incubation: Angel / Early stage fund• Organization building: VC, first round• Scale up: Second round / growth/ scale

up funds • IPO: Investment bankers, underwriters

Cost of Equity

• Angels would expect higher rate of returns than VCs

• Typical VC expectations is 40-50% compounded annual return

• Risk-return curve: New venture increasingly reduces its risk as it goes through stages

Types of Risks

• Technology risk: Platform does not succeed

• Product risk• Market risk: Competitor, price-

performance• Management risk: Scale-up, team building• Product liability risk• Image risk: Cultural, socio-economic

factors (mostly for pharma / biotech)

Venture Capital Firms

• VCs and Angels provide private equity for young companies

• Angels / High net worth individuals• Early stage VC firms• Scale-up VC firms• Technology / “Space” specific

Biotechnology Networking Chips and hardware E Commerce

Structure of a VC Firm

• General partners 3-5 (themselves successful entrepreneurs): put about 2-3% of the corpus

• Limited partners (Pension funds, Retirement plans)

• Management fee is about 2-3 % per year• Funds about 5-30 new companies per year• Employs junior managers for due

diligence(associates)• After IPO/Acquisition, general partners keep

20% of gains, limited partners get Principal+80%

VC Firm’s Annual Throughput

• 10,000 qualified business plans

• 1000 meetings

• 400 company visits

• 25 new investments

Role of the VC in the Portfolio Company

• Negotiate aggressive terms• Select strong co-investor• Help in constituting the Board of

Directors• Assist in

Recruitment Market validation Strategic relationships

• Pursue liquidity aggressively

Valuation: Bargaining Point

• Causes of mismatch Asymmetry of information Ego Greed

• Factors that drive the valuation– Technology, ESOP rates, management– Orders in hand, scalability, brand strength

Difficulties in Valuing Start-up Companies

• Immediate earnings are negative

• No past history

• No comparable companies

• No market prices

VC Fund Raising Process

• Introduction (phone call, e-mail, referral)• Submit business plan / executive

summary• Presentation• Company visit• Due diligence (management reference

checks, customer calls, market analysis)• More meeting(s)• Term sheet• Legal / Closing

The Deal: Capital Structure

• Equity allocation Founders (20 %) Future employees (Option pool)

(40 %) Investors (40 %)

• Number of investors / firms• Imbalance, Dilution

• Serious investors ask for 20% or more of ownership

• Pre and post-finance valuations

Term Sheet

• Agreement to agree or to work towards investment

• Captures key terms of the final legal contract

• Seat on the Board, Founder vesting• Key terms

Equity allocation, type (preference, convertible)

Liquidity, conversion

New Oak Communications, Inc.

Round Date Share Price (USD)

Total Financ

e

Post-money Valuation

Seed 9/96 1.00 120K 1.2M

First 11/96 3.75 4.25M 7.0M

Second 8/97 5.67 7.50M 48.0M

Acquisition *

1/98 30.05 NA 156M

* Acquired by Bay Networks, Inc.

What is the financer looking for?

• Basic value proposition• Market size, segmentation, target customers,

competitors• Entry barriers, IP protection, Unique Selling

Points• Technology expertise and domain knowledge• Alliance and strategic partnerships• Promoters, Board of Directors, Top

management (VPs)

Checklist continued…

• Team (Project management, execution capabilities)

• Scalability and growth potential• Marketing and selling plan: channels,

distributors, customer acquisition costs• Milestones and deliverables (prototype, proof-

of-concept, beta customers)• Requirement and application of funds: Setting

offices, where, how many?• Equity/Capital structure, Financing policies

(debt/equity ratio)

Checklist continued…

• Revenue model: Sources of revenue (service/product mix)

• Profitability, break even point, growth estimates (revenue, team size)

• Risks and contingencies: De-risking/risk management/risk containment plan

• Projected (pro-forma) financial statements • Exit strategy (IPO, equity buyer, strategic

buyer, Merger & Acquisition)• Valuation and offer (equity price, number of

shares)

Business Plan Document

• Agreed program of expectations, actions, and results to which the whole team is willing to commit

• Description of why, how, and when the firm will accomplish economic viability

• Economic viability comes from sustained positive cash flows

Business Plan Structure

• CEO is perpetually writing a business plan!!

• BP should be limited to about 30-35 pages

• Subject matter should have graphs and pictures

• Must have a 3-4 page executive summary

• Allied material should go to the appendix

Business Plan Sections1. Executive summary2. Introduction / Company Overview3. Concept / Proposition / Product

description4. Market opportunity5. Competition survey6. Development Plan and milestones7. Marketing Plan8. Management9. Financials10.Offer11.Appendix

Introduction / Company overview

• History of the company, when incorporated

• Founders and their brief profiles

• Form of the organization: C, S corp, LLC

• Product / Service

• Current revenues and profits (if any)

Concept / Proposition

• Description of the product / service

• Intellectual property protection

• Unique selling points – differentiators

• Unfair advantage over competitors ?

Market Opportunity

• What unfulfilled need the product satisfies

• Market size, segmentation

• Target customers, demographics

• Is it a new market, growth market, or established market ?

Competition Survey

• Identify existing competitors

• Substitute products

• Potential competitors

• SWOT analysis

Development Plan and Milestones

• Prototype : How will it look

• What will be version 1 – what features

• Precise description of the milestones and dates

• Initial team scale-up

Marketing Plan

• Strategy – direct or through channels

• Quantitative marketing goals (revenues, team size)

• Branding strategy, Co-branding, if any

• Distribution and alliances

• Pricing and promotion

Management

• Team structure – CEO, CFO, CIO, CTO

• Vice Presidents (marketing, finance, engineering)

• Organizational chart

• Letters of intent from potential senior team members

Financials

• Pro forma (Projected) and existing financial statements

• Balance sheet

• Profit and loss statement (Income statement)

• Cash flow statement

• Break even analysis

Offer

• Valuation

• Basis for valuation (P/E, Revenue multiples)

• Percent of the company for investment

• Exit routes for the investors

• Capitalization structure

Appendix

• Endorsement from reference customers

• Letter of Intents from potential customers

• Product block diagrams

Executive Summary• Company name , address, contact person, email,

phone• Brief history of the company: date founded, headcount• Management summary: Promoters, senior staff• Brief description of product/service and its strengths

and weaknesses (Elevator pitch)• Market – existing and projected (industry,

competition), focus area, revenue model (sources of revenue)

• Growth potential, projections• Milestones – achieved and projected (prototype, beta)• Finance – needs and applications, offer, pre-money

valuation, financials.

Final Checklist !!

• Look for spelling mistakes• Provide a table of contents• Check page number consistency• Do not bind in a hard folder• Write a nice covering letter• Do not use too many colors and fonts• Explicitly add confidentiality clause

in the beginning

Summary

• Business Plan preparation is a serious process which takes 2-4 months

• Fund raising itself takes 4-7 months

• Business Plan is a dynamic document