What does a venture capitalist look for in a business plan?
Since venture capitalists are high-risk investors, what they expect is a higher rate of return. Venture capital firms review hundreds of business plans and focus on only a few of them. Individual venture capitalists or venture capital firms extend equity financing to start-up new businesses or an existing business. They can take a minority stake or a majority stake. Some of the factors that venture capitalists look for in a business are management bandwidth, customer base, corporate governance structure, investment structure, and exit plan.
Write a professional business plan
The business plan must convince the venture capitalist and give them confidence about the expertise and experience of the management team to achieve the business objectives within a defined timeline. An effective and highly rewarding business plan should cover the following essential elements:
– Executive Summary
The most important part of any business plan is the executive summary, and it is often best written last. It is an initial interaction between the report writers and the VC. Summarizes a larger report or proposal or a group of related reports in such a way that VC can quickly become familiar with a large amount of material without having to read it all. It should be short and to the point with appropriate recommendations, justifications, and a conclusion.
It is recommended to address the following questions in an executive summary:
• Do you have a unique company?
• Do you already have customers and traction?
• Do you have patents or technology?
• Is your marketing plan special in some way?
If the product or service is technology oriented, it should be clearly explained with a proper description of the product, its comparison to the competition, the unique selling proposition, the technology to be used, and future innovations to help the VC understand the concept. complete. The stages and development of the products or services (seed stage, early stage, expansion stage) should also be mentioned.
– Market analysis
Potential market analysis separates the pure investor from a real entrepreneur. Many times, good products are not successfully commercialized because their inventors do not understand the market or do not have the necessary management team to capitalize on the opportunity.
This section of the business plan will be carefully examined; Therefore, market analysis should be as specific as possible, focusing on credible and verifiable data. Market research should contain a thorough analysis of the company’s industry and potential customers. Industry data should include growth rates, market size, recent technical advances, government regulations, and future trends. Customer research should include the number of potential customers, the purchase rate per customer, and a profile of the decision maker. This research drives sales forecasting and pricing strategy, which is related to all other marketing, sales, and distribution strategies. A realistic SWOT also attracts venture capital. Finally, comment on the percentage of the target market that the company plans to capture.
– Marketing plan
The main purpose of the marketing section of a business plan is to convince the venture capitalist that the market can be developed and penetrated.
Prices
The strategy used to set the price of a product or service provides the investor with information to evaluate the strategic plan. Explain the key components of the pricing decision, ie, image, competitive aspects, gross margins, and discount structure for each distribution channel. The pricing strategy should also include consideration of futures
product launches and future products.
Distribution channels
For a service provider, the distribution channels are not as important as the means of promotion, but for a manufacturer’s business plan, the distribution channels that will get the product to the end user must be clearly identified. Distribution options for a manufacturer may include:
• Direct sales, such as mail order, direct contact through salespeople, and telemarketing;
• Original Equipment Manufacturers (OEMs), integration of the product into the products of other manufacturers;
• Distributors or Wholesalers; or Retailers.
Each of these channels has its own advantages and disadvantages and financial impact, so these must be explained and clarified in the business plan. Mention if more than one channel is being used and should be compatible.
Promotion
Plans for product sales sheets, potential advertising plans, Internet strategy, trade show schedules, and any other promotional materials should be included in the marketing promotion section of the business plan. It is also important to explain the thought process for the selected promotional activities and also for the non-selected ones.
Competence
A business plan should also discuss the level of competition and competitors. If the company is a first to market, the entrepreneur must explain how the market need is currently being met and how the new product will compete with the existing solution.
A VC will look to see how and why the company will beat the competition. Try to anticipate the competition’s response to the product. Include, if possible, a direct comparison of products based on price, quality, warranties, product updates, features, distribution strategies, and other means of comparison. Document the sources used in the analysis.
– Business operations
The operations section of the business plan should discuss the location and size of the facility. Factors such as labor availability, accessibility of materials, proximity to distribution channels, and fiscal considerations should be mentioned. Describe the equipment and facilities. If the business needs international distribution, please mention if the operations facility will provide adequate support. If the work will be subcontracted to subcontractors, eliminating the need to expand the facility, please indicate this as well. The investor will look to see if there are any inconsistencies in the business plan.
The venture capitalist will also ask questions such as: If sales projections predict a growth rate of 25 percent per year, is the current site room for expansion? Are there vendors who can provide the required materials? Is there an educated workforce in the area? Sales projections will determine the size of the operation and therefore the funds required both now and in the future. Include the sources and uses of financing in the business plan and make sure the assumptions are realistic.
– Management team
The venture capitalist invests in people, people who have made or are likely to make successful trades. The team must have experience and talent in the key disciplines: technology development, marketing, sales, manufacturing, and finance.
In most start-ups, the management team consists of a few founders with mixed backgrounds. In this case, there is a gap in the skills and knowledge of the team, it is important to mention how this gap can be filled. Include a list of board of directors or advisors: key outside industry or technology experts who provide guidance and credibility. This is another area where empty positions can be filled from the tips of a well-connected investor.
– Financial projections
To attract investors and maintain their interest in future financing, it is important to have a realistic financial forecast. Good financial forecasts embed the performance targets outlined in the plan into the financial goals so that ROI, profitability, and cash flow milestones can be clearly established. Investors use these forecasts to determine whether (a) the company offers enough growth potential to generate the kind of return on investment the investor seeks, and (b) the projections are realistic enough to give the company a chance. reasonable to achieve.
The financial statements that investors are concerned with are the balance sheet, statement of cash flows, and statement of income expense for a period of three to five years. It would help the VC distinguish the process adopted for business development, operations, and overhead and staffing. It is also imperative that the forecasts include a footnote section that explains the main assumptions used to develop the revenue and expense items.
The financial plan depends on important assumptions, which can be daily (debtor days, charity, days of average inventory turnover) or annual (depreciation, etc.) or any other unit of measurement that must be carefully established.
Product development expenses should be closely tied to product introduction schedules in other parts of the plan. These expenses are typically highest in the early years and gradually decrease because product line extensions are less expensive to develop. A detailed set of expense assumptions (operations and overhead, staffing and staffing) should account for headcount, space, selling and administrative costs, and major promotions.
The balance sheet must agree with the statement of income and cash flows. The statement of cash flows must correlate with the balance sheet and income statement and must coincide with the timing of the funding requirements established in the plan.
– Amount and use of funding required and exit opportunities
Please indicate how much financing your business requires and from what sources (ie management, venture capital, banks and others) and explain the purpose for which it will be applied. Consider how VC investors will exit the investment and earn a return. Potential exit strategies for investors may include floating the company on a stock exchange or selling the company to a commercial buyer.