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Business plan formulation and venture capitalist

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  • 1. Business Plan Formulation Venkatesh Sarvasiddhi Head-Direct Marketing HCL Technologies
  • 2. 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
  • 3. 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:
  • 4. 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
  • 5. 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
  • 6. 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
  • 7. 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
  • 8. 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)
  • 9. 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
  • 10. 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%
  • 11. VC Firm’s Annual Throughput
    • 10,000 qualified business plans
    • 1000 meetings
    • 400 company visits
    • 25 new investments
  • 12. 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
  • 13. 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
  • 14. Difficulties in Valuing Start-up Companies
        • Immediate earnings are negative
        • No past history
        • No comparable companies
        • No market prices
  • 15. 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
  • 16. 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
  • 17. 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
  • 18. 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
  • 19. 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)
  • 20. 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)
  • 21. 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)
  • 22. 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
  • 23. 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
  • 24. 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
  • 25. 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)
  • 26. Concept / Proposition
    • Description of the product / service
    • Intellectual property protection
    • Unique selling points – differentiators
    • Unfair advantage over competitors ?
  • 27. Market Opportunity
    • What unfulfilled need the product satisfies
    • Market size, segmentation
    • Target customers, demographics
    • Is it a new market, growth market, or established market ?
  • 28. Competition Survey
    • Identify existing competitors
    • Substitute products
    • Potential competitors
    • SWOT analysis
  • 29. 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
  • 30. 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
  • 31. Management
    • Team structure – CEO, CFO, CIO, CTO
    • Vice Presidents (marketing, finance, engineering)
    • Organizational chart
    • Letters of intent from potential senior team members
  • 32. Financials
    • Pro forma (Projected) and existing financial statements
    • Balance sheet
    • Profit and loss statement (Income statement)
    • Cash flow statement
    • Break even analysis
  • 33. Offer
    • Valuation
    • Basis for valuation (P/E, Revenue multiples)
    • Percent of the company for investment
    • Exit routes for the investors
    • Capitalization structure
  • 34. Appendix
    • Endorsement from reference customers
    • Letter of Intents from potential customers
    • Product block diagrams
  • 35. 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.
  • 36. 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
  • 37. 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