Keys to Raising Financial Capital
Keys to Raising Financial Capital
Overview • There is no secret for raising financial capital • Requires effective articulation of your vision and how you will achieve it • Typically communicated through a compelling business plan and investor presentation
No single “right” format for investor presentations • Although they tend to cover the same topics • Always check to see if there is a preferred format for a given audience (competition, grants, investors, etc.)
Sample investor presentation format 1. Introduction Define the company/business in a single declarative sentence
2. Opportunity/Problem – Describe the problem/opportunity of the customer – Outline how the customer addresses the issue today
3. Your Solution – Demonstrate your company’s value proposition to make the customer’s life better (your product/service) – Provide use cases (scenario of how your product or service will be used by customers)
Sample investor presentation format 4. Market Analysis – Identify the current and expected customers – 4Ps
5. Competitive Advantage – List competitors – List your competitive advantages
Sample investor presentation format 6. Team – Founders and management – Board of advisors
7. Financials – Abbreviated income statement for at 3-5 years – Funds requested, timeline, and proposed use
8. Closing – Exciting summary slide of the investment opportunity
Highlights for the financials of the investor presentation Year 1
Year 2
Year 3
Revenues • Product 1 • Product 2
$100,000 $100,000 $0
$200,000 $150,000 $50,000
$500,000 $300,000 $200,000
Expenses • R&D • Manufacturing • Marketing • Salaries
$90,000 $50,000 $20,000 $15,000 $5,000
$170,000 $30,000 $40,000 $70,000 $30,000
$400,000 $10,000 $100,000 $150,000 $40,000
Profit (Pre-Tax)
$10,000
$30,000
$100,000
Financing Round 1: $50,000 for R&D Round 2: $20,000 for Marketing
Growth Strategy Phase 1: Establish 3 profitable locations Phase 2: Launch franchise program with $25,000 license and 8% royalties
The investor presentation should consider the changing factors of the venture over time • • • • •
Business size Diversity Complexity Management style Organizational goals Source: Five Stages of Small Business Growth
The Five Stages of Small Business Growth Complexity Large
Stage 1 Existence • Growth through creativity • Crisis of leadership
Small Young
Stage 2 Survival
• Growth through direction • Crisis of autonomy
Stage 3 Success
• Growth through delegation • Crisis of control
Stage 4 Take-Off
• Growth through coordination • Crisis of red tape
Age of the Organization
Stage 5 Resource Maturity
• Growth through collaboration • Crisis of ? Mature
Source: Five Stages of Small Business Growth
Areas of concern and focus (1) Existence • Can we get enough customers? • Can we grow into a viable business? • Can we expand from one customer or one product? • Do we have enough money? Source: Five Stages of Small Business Growth
Areas of concern and focus (2) Survival • Can we reach break even? • Can we stay in business? • Can we grow?
Source: Five Stages of Small Business Growth
Areas of concern and focus (3) Success • Stabilize? – Enjoy the riches generated and current lifestyle
• Expand? – Reinvest earnings into the firm – Incur more risk – Work towards a bigger upside
Source: Five Stages of Small Business Growth
Areas of concern and focus (4) Takeoff • Can you delegate responsibilities? • Will there be enough cash to generate the demands and risks that growth brings?
Source: Five Stages of Small Business Growth
Areas of concern and focus (5) Maturity • Consolidate to develop efficiencies and improve profitability? • Work to retain the advantages of small firms – Flexible – Creative – Entrepreneurial spirit Source: Five Stages of Small Business Growth
Summary • Raising financial capital requires: – Effective articulation of your vision – Understanding of how the firm will grow successfully from phase to phase – Solid business plan and investor presentation • With comprehensive financials
Building Financial Statements
Objectives • While uncompetitive products, ill-suited strategies, and poorly performing teams influence failure, most companies fail due to: – Lack of MONEY – Lack of TIME
• Managing finances effectively can help you from running out of money prematurely and from spending money at the wrong time
Financial statements help… • Investors understand – The profit potential of your firm – How much money you need to get there • On what timeline and for what purpose
• Entrepreneurs understand – Level of risk/reward for your venture – Value of your company (and in turn, your percent ownership) when it’s time to raise capital for the venture
Financials statements typically exist in three general forms • Income statement Summarizes revenues and expenses
• Cash flow statement Sum of retained earnings minus the deprecation provision made by the firm
• Balance sheet Summarizes the assets, liabilities, and shareholders’ equity at a specific point in time
1. Income Statement Definitions • Revenue (Sales) – Money paid to the company by customers in exchange for the sale of a product or service by the company
• Costs of Goods Sold (COGS) – – – –
Direct costs to produce each product or offer each service For a product, all components and manufacturing costs For a service, all costs of fulfillment; all labor costs. Costs of goods sold are often variable as component and manufacturing costs drop as volume increases.
Key questions to consider • Revenue forecasts: What can we sell, given the market, our pricing, and our capability? • COGS forecasts: How will our costs of goods sold change as our revenues change? • SG&A forecasts: What marketing/sales effort do we need to reach our revenue goals? What infrastructure do we need to support our business? • How much money do we need to accomplish growth?
2. Statement of Cash Flows • Reports cash receipts and payments over a period • Lists all cash going into and out of the business • Activities that impact cash are organized into three categories: 1. Operating activities: Cash changes by operating the company 2. Investing activities: Cash changes from buying/selling assets (equipment, building) 3. Financing activities: Cash changes by borrowing funds, selling stock, paying dividends, reducing debt, etc.
Using the Cash Flow Statement • The amount of money needed can be estimated by: - (Start-Up Expenses) - (Operating Expenses) + Revenues Cash Balance = Minimum Funding Required
3. Balance Sheet Definitions Balance Sheet of XXX Corp. - 31 December of 201x (in thousand $)
Current Assets (liquid in less than a year)
Fixed Assets Other Assets
Cash and equivalents Accounts receivable Inventories Property, plant and equipment (minus Depreciation) Intangibles (minus depreciation) Investment securities
Total Assets
=
(payable in less than a year)
Accounts payable Accrued expenses Short term debt
Long-Term Liabilities
Bank loans Bonds issued
Shareholders’ Equity
Common stock Additional paid-in capital Retained earnings
Current Liabilities
Total Liabilities + Shareholder’s Equity
Summary • Financials statements are a valuable tool to both investors and entrepreneurs • Critical to determine how much money you need when and for what purpose • Quantifying the risk and reward is an early step to determining if to launch the venture
Sources of Financial Capital
Objectives Where Startup Money Comes From
Source: pivotal-services.com
The right type of money your business needs depends on these questions • How much money you need? • What will the money will be used for? • At what stage is your business in? • What is your capacity to repay the money?
How much money do you need? • Amount needed determines who is interested • First $10,000-$25,000 is often founders, friends, and family money – For students, grants and competitions are also options – Crowdfunding is a rapidly emerging model as well
• While a bank may look at a deal of $100,000 or less, most venture capital firms would consider this to be too small as even a seed capital deal – Angels invest at the $50,000-$250,000 level (individually or as a group)
What will the money be used for? • Banks (lenders) like deals with hard assets – Secures loan with collateral
• Investors are the usual option when the money will be used to pay for the day-to-day operating expenses of the business or in the case of more risky activities such as new development and launch
At what stage is your business? • Earlier stage businesses including start-ups have to rely upon more personal funds, competitions, and grants • Next are monies obtained through private investors (angels) then VCs, since they involve more risk than most banks want to assume • Later stage businesses that are in the growth phase are more bankable depending on what the money will be used for
Bootstrap (Self-funding) Financing Pros & Cons Advantages • Owned by founders • Easy ownership terms • Controlled by founders • Lower pressure • Little time spent on fundraising
Disadvantages • May constrain growth due to limited capital • Lack of funding commitment for future • Loss of advice and social capital from professional investors
Debt Versus Equity • Debt Financing – Secured financing of a new venture that involves a payback of the funds plus a fee (interest for the use of the money).
• Equity Financing – Involves the sale (exchange) of some of the ownership interest in the venture in return for an unsecured investment in the firm.
Debt Financing Pros and Cons • Advantages – No share of ownership required – More borrowing allows for potentially greater return on equity – During periods of low interest rates, the opportunity cost is justified since the cost of borrowing is low
• Disadvantages – Regular (monthly) interest payments are required. – Continual cash-flow problems can be intensified because of payback responsibility. – Heavy use of debt can inhibit growth and development.
Equity Financing • Money invested in the venture with no legal obligation (in the U.S.) for entrepreneurs to repay the principal amount or pay interest on it. • Instead, ownership (equity) in the companies is sold to investors.
Venture Capital Evaluation Process • Stage 1: Initial Screening – This is a quick review of the basic venture to see if it meets the venture capitalist’s particular interests.
• Stage 2: Evaluation of the Business Plan – This is where a detailed reading of the plan is done in order to evaluate the factors mentioned earlier.
• Stage 3: Oral Presentation – The entrepreneur verbally presents the plan to the venture capitalist.
• Stage 4: Final Evaluation – After analyzing the plan and visiting with suppliers, customers, consultants, and others, the venture capitalist makes a final decision.
Summary • The right type of money depends on the timing, purpose, and stage • May use – Self-funding + Equity + Debt
• Crowdfunding may be a viable option
Defining the Business Plan
Objectives • What is a business plan? • Why write a business plan? • Advantages and disadvantages of great business plans.
What is a “business plan”? • Plan for the creation and management of the business • With special attention to: – Marketing plan describing match of strategy and products to current and future markets – Operations plan discussing processes – Financial plan assessing all costs and financial requirements
What is a business plan? • Details exactly how the company will materialize • Explains the market size and the competitive environment with supporting evidence • Describes why your team is the right team to capitalize on this opportunity • Typically 15 to 20 pages • Serves as an “owner’s manual” for the company
Why write a business plan? 1. Writing forces the person (team) preparing the plan to look at the business in an objective and critical manner 2. Helps to focus ideas and serves as a feasibility study of the business’s chances for success and growth 3. Finished plan serves as an operational tool to define the company’s present status and future possibilities
Why write a business plan? 3. Helps manage the business and prepare for success or adaptation 4. Serves as a strong communication tool for the business – Defines your purpose, your competition, your management, your financial goals, etc.
5. Provides the basis for your financing proposal
Who are these people, anyway? • • • • • • •
Where are the founders from? Where have they been educated? Where have they worked? What have they accomplished? What is their reputation? What is their directly relevant experience? What skills, abilities, and knowledge do they have? • How realistic are they about their venture’s risks and rewards?
• Who else needs to be on their team? • Are they prepared to recruit highquality people? • How will they respond to adversity? • Do they have the ability to make hard decisions? • How committed are they to this venture? • What are their motivations?
Value Chain Evaluate what to do “in-house” vs. outsourcing
Advantages of great business plans • Yardstick to measure performance • Starting point for operations, marketing, and financial plans • Demonstrates focus and the plan for profits • Connects all of the elements of the company • Can assist in attracting management team and employees • Greatly improves fundraising ability
Disadvantages of great business plans • • • • •
Requires significant research and thought Must stand up to criticism and challenges Requires your honest, critical appraisal Needs regular, recurring updates Demands acceptance by the management team
Summary • Business plans are the owner’s manual for your company • Provides a tool to plan, track, and adapt your business • Requires significant time to write (and revise to stay relevant)
Objectives of the Business Plan
Objectives • If, when, & how to write your business plan – Business plan should be preceded by the Business Model Canvas
• Understand that the entrepreneur is the primary audience – With secondary audiences being investors and others
Objectives of the business plan and investor presentation include: • Establishing credibility with the investor, ally, client, or talent • Framing the goals of a new venture to be consistent with the goals of the audience • Describing the unique benefits of the venture • Offering solid, compelling evidence to support the plan • Building a good relationship with the audience
P.S.U.C.F. 1. 2. 3. 4. 5.
Problem – Big and painful Solution – Clear and unique Unequal Advantages – Team , go-tomarket, distribution, IP, etc. Competition – Buyer’s options Financials – Needs, funds use, risk vs. return
1. Problem • How many buyers? – In number and in dollars?
• How painful is it to the market? • How is the problem dealt with today? – Competitors? – Substitutes?
2. Solution • Basics of your solution • Basic unique advantage • Define the scale and timeline of the advantage
3. Unequal Advantages • Legal and ethical but “UNEQUAL” – – – – – – –
Intellectual property? Unique processes? Unique position? Unique relationships? Unique go-to-market advantage? Unique advantage in operations? Sustainable price point advantage?
4. Competition • How else can prospective buyers fix problems or find satisfaction? – – – – – –
Your competitor’s solution? Build it in-house? Wait? Status quo? Pretend it does not exist? Deflect problem to a supplier? Ask their present solutions provider to adapt a “temporary” solution?
Competition is ANYTHING that hinders sales
5. Financials • Money you need to succeed • Planned use of funds • Major milestones • High level 3 to 5 year financial projections • Possible “exit” scenarios and returns
Summary P.S.U.C.F.
1. 2. 3. 4. 5.
Problem – Big and painful Solution – Clear and unique Unequal Advantages – Team , go-tomarket, distribution, IP, etc. Competition – Buyer’s options Financials – Needs, funds use, risk vs. return
Writing the Business Plan
Objectives • No universal “right” format • Certain areas are expected to be addressed in the business plan • Beware common mistakes made in business plans
No universal “right” format • Although business plans and investor presentations tend to cover the same topics, there’s not a universally applicable format • Always check to see if there is a preferred format for a given audience (investors, grant makers, etc.)
Suggested format from Sequoia Capital 1. Company Purpose Define the company/business in a single declarative sentence
2. Problem – Describe the pain of the customer (or the customer’s customer) – Outline how the customer addresses the issue today
3. Solution – Demonstrate your company’s value proposition to make the customer’s life better – Show where your product physically sits – Provide use cases
Suggested format from Sequoia Capital 4. Why Now – Set-up the historical evolution of your category – Define recent trends that make your solution possible
5. Market Size – Identify the current and expected customers – How many dollars are spent on products like yours – What are the trends (opportunities & threats)?
6. Competition – List competitors – List competitive advantages
Suggested format from Sequoia Capital 7. Product – Product line-up (form factor, functionality, features, architecture, intellectual property). – Development and describe the roadmap
8. Business Model – – – – –
Revenue model Pricing Average account size and/or lifetime value Sales & distribution model Customer/pipeline list
Suggested format from Sequoia Capital 9. Team – Founders & Management – Board of Directors/Board of Advisors
10. Financials – Income statement – Cash flow statement – Balance sheet
11. Closing
Suggested format from the U.S. Small Business Administration (SBA) 1. 2. 3. 4. 5. 6. 7. 8. 9.
Executive Summary Market Analysis Company Description Organization & Management Marketing & Sales Management Service or Product Line Funding Request Financials Appendix
Suggested format from SBA Appendix • Resumes • Credit history – Personal & business
• • • •
Product pictures Letters of reference Details of market studies Relevant magazine articles or book references • Contracts
• Licenses, permits, or patents • List of business consultants, including attorney and accountant
Top 10 Mistakes in Business Plans 1. Too Long – Executive Summary: 1 page – Business Plan: 15 to 20 pages – Investor Presentation: 10 slides/20 minutes
2. Poor Positioning – No validation – Your solutions and/or technology are looking for a problem to solve – Invisible solution
3. Lack of Focus – If you have multiple opportunities, break them into phases instead of implementing them all at once
Top 10 Mistakes in Business Plans 4. Not Enough Real World Market Analysis – Use bottom up numbers, not top down – Prepare a logical growth rate – Prove you have a reachable market – go after a significant piece of a market – Do not prove the obvious
5. No Business “Cockpit Gauges” – What are the top three drivers or metrics of your business?
6. Unclear Business Model – How will you make money? – What is your path to profitability? – Oblivious to the budget cycle and sell cycle – Oblivious to adoption and implementation time table – Too dependent on others – Scalability – how will you get that big?
Top 10 Mistakes in Business Plans 7. Poor or Incomplete Competitive Analysis – You always have competition – Not disclosing all the competition – Do you homework
8. Weak Team Information – It is a team effort – Admit you have holes – Out implement
9.
Poorly Defined Leverage Points – You cannot do it alone – Who has vested interest in your success – What are your leverage points?
10. Goofy Fundamentals that Distract – Do the basics right the first time – Get “adult supervision” – Look like a “standard” investment deal
Summary • If seeking investments or loans, align your plan for the investor/lender • Be thorough in your plan and support it with data and references • Beware common mistakes made in business plans – Short, simple, and certain
Overview • There is no secret for raising financial capital • Requires effective articulation of your vision and how you will achieve it • Typically communicated through a compelling business plan and investor presentation
No single “right” format for investor presentations • Although they tend to cover the same topics • Always check to see if there is a preferred format for a given audience (competition, grants, investors, etc.)
Sample investor presentation format 1. Introduction Define the company/business in a single declarative sentence
2. Opportunity/Problem – Describe the problem/opportunity of the customer – Outline how the customer addresses the issue today
3. Your Solution – Demonstrate your company’s value proposition to make the customer’s life better (your product/service) – Provide use cases (scenario of how your product or service will be used by customers)
Sample investor presentation format 4. Market Analysis – Identify the current and expected customers – 4Ps
5. Competitive Advantage – List competitors – List your competitive advantages
Sample investor presentation format 6. Team – Founders and management – Board of advisors
7. Financials – Abbreviated income statement for at 3-5 years – Funds requested, timeline, and proposed use
8. Closing – Exciting summary slide of the investment opportunity
Highlights for the financials of the investor presentation Year 1
Year 2
Year 3
Revenues • Product 1 • Product 2
$100,000 $100,000 $0
$200,000 $150,000 $50,000
$500,000 $300,000 $200,000
Expenses • R&D • Manufacturing • Marketing • Salaries
$90,000 $50,000 $20,000 $15,000 $5,000
$170,000 $30,000 $40,000 $70,000 $30,000
$400,000 $10,000 $100,000 $150,000 $40,000
Profit (Pre-Tax)
$10,000
$30,000
$100,000
Financing Round 1: $50,000 for R&D Round 2: $20,000 for Marketing
Growth Strategy Phase 1: Establish 3 profitable locations Phase 2: Launch franchise program with $25,000 license and 8% royalties
The investor presentation should consider the changing factors of the venture over time • • • • •
Business size Diversity Complexity Management style Organizational goals Source: Five Stages of Small Business Growth
The Five Stages of Small Business Growth Complexity Large
Stage 1 Existence • Growth through creativity • Crisis of leadership
Small Young
Stage 2 Survival
• Growth through direction • Crisis of autonomy
Stage 3 Success
• Growth through delegation • Crisis of control
Stage 4 Take-Off
• Growth through coordination • Crisis of red tape
Age of the Organization
Stage 5 Resource Maturity
• Growth through collaboration • Crisis of ? Mature
Source: Five Stages of Small Business Growth
Areas of concern and focus (1) Existence • Can we get enough customers? • Can we grow into a viable business? • Can we expand from one customer or one product? • Do we have enough money? Source: Five Stages of Small Business Growth
Areas of concern and focus (2) Survival • Can we reach break even? • Can we stay in business? • Can we grow?
Source: Five Stages of Small Business Growth
Areas of concern and focus (3) Success • Stabilize? – Enjoy the riches generated and current lifestyle
• Expand? – Reinvest earnings into the firm – Incur more risk – Work towards a bigger upside
Source: Five Stages of Small Business Growth
Areas of concern and focus (4) Takeoff • Can you delegate responsibilities? • Will there be enough cash to generate the demands and risks that growth brings?
Source: Five Stages of Small Business Growth
Areas of concern and focus (5) Maturity • Consolidate to develop efficiencies and improve profitability? • Work to retain the advantages of small firms – Flexible – Creative – Entrepreneurial spirit Source: Five Stages of Small Business Growth
Summary • Raising financial capital requires: – Effective articulation of your vision – Understanding of how the firm will grow successfully from phase to phase – Solid business plan and investor presentation • With comprehensive financials
Building Financial Statements
Objectives • While uncompetitive products, ill-suited strategies, and poorly performing teams influence failure, most companies fail due to: – Lack of MONEY – Lack of TIME
• Managing finances effectively can help you from running out of money prematurely and from spending money at the wrong time
Financial statements help… • Investors understand – The profit potential of your firm – How much money you need to get there • On what timeline and for what purpose
• Entrepreneurs understand – Level of risk/reward for your venture – Value of your company (and in turn, your percent ownership) when it’s time to raise capital for the venture
Financials statements typically exist in three general forms • Income statement Summarizes revenues and expenses
• Cash flow statement Sum of retained earnings minus the deprecation provision made by the firm
• Balance sheet Summarizes the assets, liabilities, and shareholders’ equity at a specific point in time
1. Income Statement Definitions • Revenue (Sales) – Money paid to the company by customers in exchange for the sale of a product or service by the company
• Costs of Goods Sold (COGS) – – – –
Direct costs to produce each product or offer each service For a product, all components and manufacturing costs For a service, all costs of fulfillment; all labor costs. Costs of goods sold are often variable as component and manufacturing costs drop as volume increases.
Key questions to consider • Revenue forecasts: What can we sell, given the market, our pricing, and our capability? • COGS forecasts: How will our costs of goods sold change as our revenues change? • SG&A forecasts: What marketing/sales effort do we need to reach our revenue goals? What infrastructure do we need to support our business? • How much money do we need to accomplish growth?
2. Statement of Cash Flows • Reports cash receipts and payments over a period • Lists all cash going into and out of the business • Activities that impact cash are organized into three categories: 1. Operating activities: Cash changes by operating the company 2. Investing activities: Cash changes from buying/selling assets (equipment, building) 3. Financing activities: Cash changes by borrowing funds, selling stock, paying dividends, reducing debt, etc.
Using the Cash Flow Statement • The amount of money needed can be estimated by: - (Start-Up Expenses) - (Operating Expenses) + Revenues Cash Balance = Minimum Funding Required
3. Balance Sheet Definitions Balance Sheet of XXX Corp. - 31 December of 201x (in thousand $)
Current Assets (liquid in less than a year)
Fixed Assets Other Assets
Cash and equivalents Accounts receivable Inventories Property, plant and equipment (minus Depreciation) Intangibles (minus depreciation) Investment securities
Total Assets
=
(payable in less than a year)
Accounts payable Accrued expenses Short term debt
Long-Term Liabilities
Bank loans Bonds issued
Shareholders’ Equity
Common stock Additional paid-in capital Retained earnings
Current Liabilities
Total Liabilities + Shareholder’s Equity
Summary • Financials statements are a valuable tool to both investors and entrepreneurs • Critical to determine how much money you need when and for what purpose • Quantifying the risk and reward is an early step to determining if to launch the venture
Sources of Financial Capital
Objectives Where Startup Money Comes From
Source: pivotal-services.com
The right type of money your business needs depends on these questions • How much money you need? • What will the money will be used for? • At what stage is your business in? • What is your capacity to repay the money?
How much money do you need? • Amount needed determines who is interested • First $10,000-$25,000 is often founders, friends, and family money – For students, grants and competitions are also options – Crowdfunding is a rapidly emerging model as well
• While a bank may look at a deal of $100,000 or less, most venture capital firms would consider this to be too small as even a seed capital deal – Angels invest at the $50,000-$250,000 level (individually or as a group)
What will the money be used for? • Banks (lenders) like deals with hard assets – Secures loan with collateral
• Investors are the usual option when the money will be used to pay for the day-to-day operating expenses of the business or in the case of more risky activities such as new development and launch
At what stage is your business? • Earlier stage businesses including start-ups have to rely upon more personal funds, competitions, and grants • Next are monies obtained through private investors (angels) then VCs, since they involve more risk than most banks want to assume • Later stage businesses that are in the growth phase are more bankable depending on what the money will be used for
Bootstrap (Self-funding) Financing Pros & Cons Advantages • Owned by founders • Easy ownership terms • Controlled by founders • Lower pressure • Little time spent on fundraising
Disadvantages • May constrain growth due to limited capital • Lack of funding commitment for future • Loss of advice and social capital from professional investors
Debt Versus Equity • Debt Financing – Secured financing of a new venture that involves a payback of the funds plus a fee (interest for the use of the money).
• Equity Financing – Involves the sale (exchange) of some of the ownership interest in the venture in return for an unsecured investment in the firm.
Debt Financing Pros and Cons • Advantages – No share of ownership required – More borrowing allows for potentially greater return on equity – During periods of low interest rates, the opportunity cost is justified since the cost of borrowing is low
• Disadvantages – Regular (monthly) interest payments are required. – Continual cash-flow problems can be intensified because of payback responsibility. – Heavy use of debt can inhibit growth and development.
Equity Financing • Money invested in the venture with no legal obligation (in the U.S.) for entrepreneurs to repay the principal amount or pay interest on it. • Instead, ownership (equity) in the companies is sold to investors.
Venture Capital Evaluation Process • Stage 1: Initial Screening – This is a quick review of the basic venture to see if it meets the venture capitalist’s particular interests.
• Stage 2: Evaluation of the Business Plan – This is where a detailed reading of the plan is done in order to evaluate the factors mentioned earlier.
• Stage 3: Oral Presentation – The entrepreneur verbally presents the plan to the venture capitalist.
• Stage 4: Final Evaluation – After analyzing the plan and visiting with suppliers, customers, consultants, and others, the venture capitalist makes a final decision.
Summary • The right type of money depends on the timing, purpose, and stage • May use – Self-funding + Equity + Debt
• Crowdfunding may be a viable option
Defining the Business Plan
Objectives • What is a business plan? • Why write a business plan? • Advantages and disadvantages of great business plans.
What is a “business plan”? • Plan for the creation and management of the business • With special attention to: – Marketing plan describing match of strategy and products to current and future markets – Operations plan discussing processes – Financial plan assessing all costs and financial requirements
What is a business plan? • Details exactly how the company will materialize • Explains the market size and the competitive environment with supporting evidence • Describes why your team is the right team to capitalize on this opportunity • Typically 15 to 20 pages • Serves as an “owner’s manual” for the company
Why write a business plan? 1. Writing forces the person (team) preparing the plan to look at the business in an objective and critical manner 2. Helps to focus ideas and serves as a feasibility study of the business’s chances for success and growth 3. Finished plan serves as an operational tool to define the company’s present status and future possibilities
Why write a business plan? 3. Helps manage the business and prepare for success or adaptation 4. Serves as a strong communication tool for the business – Defines your purpose, your competition, your management, your financial goals, etc.
5. Provides the basis for your financing proposal
Who are these people, anyway? • • • • • • •
Where are the founders from? Where have they been educated? Where have they worked? What have they accomplished? What is their reputation? What is their directly relevant experience? What skills, abilities, and knowledge do they have? • How realistic are they about their venture’s risks and rewards?
• Who else needs to be on their team? • Are they prepared to recruit highquality people? • How will they respond to adversity? • Do they have the ability to make hard decisions? • How committed are they to this venture? • What are their motivations?
Value Chain Evaluate what to do “in-house” vs. outsourcing
Advantages of great business plans • Yardstick to measure performance • Starting point for operations, marketing, and financial plans • Demonstrates focus and the plan for profits • Connects all of the elements of the company • Can assist in attracting management team and employees • Greatly improves fundraising ability
Disadvantages of great business plans • • • • •
Requires significant research and thought Must stand up to criticism and challenges Requires your honest, critical appraisal Needs regular, recurring updates Demands acceptance by the management team
Summary • Business plans are the owner’s manual for your company • Provides a tool to plan, track, and adapt your business • Requires significant time to write (and revise to stay relevant)
Objectives of the Business Plan
Objectives • If, when, & how to write your business plan – Business plan should be preceded by the Business Model Canvas
• Understand that the entrepreneur is the primary audience – With secondary audiences being investors and others
Objectives of the business plan and investor presentation include: • Establishing credibility with the investor, ally, client, or talent • Framing the goals of a new venture to be consistent with the goals of the audience • Describing the unique benefits of the venture • Offering solid, compelling evidence to support the plan • Building a good relationship with the audience
P.S.U.C.F. 1. 2. 3. 4. 5.
Problem – Big and painful Solution – Clear and unique Unequal Advantages – Team , go-tomarket, distribution, IP, etc. Competition – Buyer’s options Financials – Needs, funds use, risk vs. return
1. Problem • How many buyers? – In number and in dollars?
• How painful is it to the market? • How is the problem dealt with today? – Competitors? – Substitutes?
2. Solution • Basics of your solution • Basic unique advantage • Define the scale and timeline of the advantage
3. Unequal Advantages • Legal and ethical but “UNEQUAL” – – – – – – –
Intellectual property? Unique processes? Unique position? Unique relationships? Unique go-to-market advantage? Unique advantage in operations? Sustainable price point advantage?
4. Competition • How else can prospective buyers fix problems or find satisfaction? – – – – – –
Your competitor’s solution? Build it in-house? Wait? Status quo? Pretend it does not exist? Deflect problem to a supplier? Ask their present solutions provider to adapt a “temporary” solution?
Competition is ANYTHING that hinders sales
5. Financials • Money you need to succeed • Planned use of funds • Major milestones • High level 3 to 5 year financial projections • Possible “exit” scenarios and returns
Summary P.S.U.C.F.
1. 2. 3. 4. 5.
Problem – Big and painful Solution – Clear and unique Unequal Advantages – Team , go-tomarket, distribution, IP, etc. Competition – Buyer’s options Financials – Needs, funds use, risk vs. return
Writing the Business Plan
Objectives • No universal “right” format • Certain areas are expected to be addressed in the business plan • Beware common mistakes made in business plans
No universal “right” format • Although business plans and investor presentations tend to cover the same topics, there’s not a universally applicable format • Always check to see if there is a preferred format for a given audience (investors, grant makers, etc.)
Suggested format from Sequoia Capital 1. Company Purpose Define the company/business in a single declarative sentence
2. Problem – Describe the pain of the customer (or the customer’s customer) – Outline how the customer addresses the issue today
3. Solution – Demonstrate your company’s value proposition to make the customer’s life better – Show where your product physically sits – Provide use cases
Suggested format from Sequoia Capital 4. Why Now – Set-up the historical evolution of your category – Define recent trends that make your solution possible
5. Market Size – Identify the current and expected customers – How many dollars are spent on products like yours – What are the trends (opportunities & threats)?
6. Competition – List competitors – List competitive advantages
Suggested format from Sequoia Capital 7. Product – Product line-up (form factor, functionality, features, architecture, intellectual property). – Development and describe the roadmap
8. Business Model – – – – –
Revenue model Pricing Average account size and/or lifetime value Sales & distribution model Customer/pipeline list
Suggested format from Sequoia Capital 9. Team – Founders & Management – Board of Directors/Board of Advisors
10. Financials – Income statement – Cash flow statement – Balance sheet
11. Closing
Suggested format from the U.S. Small Business Administration (SBA) 1. 2. 3. 4. 5. 6. 7. 8. 9.
Executive Summary Market Analysis Company Description Organization & Management Marketing & Sales Management Service or Product Line Funding Request Financials Appendix
Suggested format from SBA Appendix • Resumes • Credit history – Personal & business
• • • •
Product pictures Letters of reference Details of market studies Relevant magazine articles or book references • Contracts
• Licenses, permits, or patents • List of business consultants, including attorney and accountant
Top 10 Mistakes in Business Plans 1. Too Long – Executive Summary: 1 page – Business Plan: 15 to 20 pages – Investor Presentation: 10 slides/20 minutes
2. Poor Positioning – No validation – Your solutions and/or technology are looking for a problem to solve – Invisible solution
3. Lack of Focus – If you have multiple opportunities, break them into phases instead of implementing them all at once
Top 10 Mistakes in Business Plans 4. Not Enough Real World Market Analysis – Use bottom up numbers, not top down – Prepare a logical growth rate – Prove you have a reachable market – go after a significant piece of a market – Do not prove the obvious
5. No Business “Cockpit Gauges” – What are the top three drivers or metrics of your business?
6. Unclear Business Model – How will you make money? – What is your path to profitability? – Oblivious to the budget cycle and sell cycle – Oblivious to adoption and implementation time table – Too dependent on others – Scalability – how will you get that big?
Top 10 Mistakes in Business Plans 7. Poor or Incomplete Competitive Analysis – You always have competition – Not disclosing all the competition – Do you homework
8. Weak Team Information – It is a team effort – Admit you have holes – Out implement
9.
Poorly Defined Leverage Points – You cannot do it alone – Who has vested interest in your success – What are your leverage points?
10. Goofy Fundamentals that Distract – Do the basics right the first time – Get “adult supervision” – Look like a “standard” investment deal
Summary • If seeking investments or loans, align your plan for the investor/lender • Be thorough in your plan and support it with data and references • Beware common mistakes made in business plans – Short, simple, and certain
