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Business plan formulation and venture capitalist
 

Business plan formulation and venture capitalist

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    Business plan formulation and venture capitalist Business plan formulation and venture capitalist Presentation Transcript

    • Business Plan Formulation Venkatesh Sarvasiddhi Head-Direct Marketing HCL 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. * Acquired by Bay Networks, Inc. 156M NA 30.05 1/98 Acquisition * 48.0M 7.50M 5.67 8/97 Second 7.0M 4.25M 3.75 11/96 First 1.2M 120K 1.00 9/96 Seed Post-money Valuation Total Finance Share Price (USD) Date Round
    • 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 Sections
      • Executive summary
      • Introduction / Company Overview
      • Concept / Proposition / Product description
      • Market opportunity
      • Competition survey
      • Development Plan and milestones
      • Marketing Plan
      • Management
      • Financials
      • Offer
      • 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