For an entrepreneur however trivial it may sound it’s extremely essential to translate his idea to paper as one of the first critical steps towards building a comprehensive business plan & vision path for his venture.
The journey from being a mere idea in one’s head to paper is not an easy one, as it forces the entrepreneur to think with clarity, logic & see the opportunity in its totality.
This exercise is not just a funding application but actually a vision document for your venture, several entrepreneurs having done this exercise saw for themselves the potential & the gaps in the opportunity that they wanted to pursue.
Hence if you are serious about your idea & you feel you are on a big opportunity start putting it to paper not for anyone else but yourself.
Idea to Paper – Dreams to Reality
An idea is worth the paper it’s written on, unless backed by a business. And a business usually is:
Tied to Solving a Large Problem, which If Solved, would Result in Huge Value to Someone, who (collectively) Would be Willing to Pay a Large Sum for the Solution.
Investors expect the bold questions in the statement above to be answered with crystal clarity. In addition, they like to have the following questions answered as well.
Why hasn’t the problem above been solved before?
What makes you and your team experts at solving the problem?
Why can’t other companies solve the problem?
Barrier to Entry: Why can’t a company with $100M in capital solve the problem better than you?
Investors invest in businesses that are innovative and teams that can execute well. If a large company like Microsoft, Google, SAP, or Reliance can do what you’re proposing, they have 100x more capital than you ever will to pull it off. Be prepared to answer why you’re likely to succeed in spite of the competition.
Investors - Invest in a Business, Not a Idea.
Are you really committed to your idea?
Do you have the courage to quit your cushy salaried job?
Are you willing to put in whatever little capital you have, or can raise from friends and relatives, tighten your belt and somehow execute your idea?
DO YOU HAVE SKIN IN THE GAME?????
Once your concept is validated, investors come in with much greater confidence and give you a much higher valuation than they would have at an earlier stage. In other words, you get to keep a larger share of your company for the same money
Before Going for Funding…
Family & Friends
Debt – Bank Loan
Sources of Capital
Venture capital is a high risk, high reward business.
It’s the most expensive capital out there – since the investor is betting on a team with an idea, and not on a profitable business. For a typical early stage startup, it costs 25-35% of the startup for $1-3 million of investment.
Comparatively, a $2M debt at a 10-15% interest rate, costs $200-300k in interest yearly, much cheaper if you assume the startup will be worth $10M in 2 years.
The challenge though, is most banks won’t provide $2M of debt capital to a young entrepreneur.
Venture Capital - High Risk & High Rewards
VC’s are in the business of making money.
A VC fund has limited partners (LPs), usually corporate’s or high net-worth individuals – who give their money to the venture capital firm to invest on their behalf.
The fund has team members (partners) who are responsible for investing from the fund. They usually pick sectors to invest in (software, Internet, healthcare, retail) – depending on the experience of the team members.
The experience matters since the team member helps guide the company they invest in with their experience and connections.
Venture Capital is a Business
Before trying to raise venture capital, decide what your business will look like in 3-5 years. VC’s invest in businesses that are likely to become BIG companies in 3-5 years, when they’d like to get their returns. VC Money is RIGHT for your business if:
You are trying to build a $20M business over 3-5 years and ideally a $100M business over 5-7 years
Your business can go public or be acquired for a large amount
You are comfortable with involvement from partners of the VC fund – on strategic operations of your business
Having a venture investment in your company means you are signing on to be a high growth company and will do the things necessary to grow quickly and build the talent base, processes, and infrastructure that is necessary to support a high growth business. This is usually good when all goes well, but during rough times, it’s difficult to manage.
The right venture investor can be VERY helpful to building your business. Their experience, advice, and connections have been invaluable. But it’s a little like marriage so choose your partner carefully; it’s pretty hard to get your venture capitalists out of your company if you decide later that you don’t like them.
Is VC Money Right for You?
Venture Capitalists Like to Back Teams, Not an Individual with an Idea.
A TEAM is of paramount importance to a technology startup. Without a team, there’s a very small chance of raising venture financing, unless you’re a recognized name and have built successful businesses in the past.
VC’s look for a team of founders. The reasons are simple, but often not obvious.
1. A team is always better than an individual. A team will have better ideas, complimentary skills, and the ability to support one another during tough times.
2. A team reduces the level of risk, especially a good founding team that compliments each other. Think of a team with a marketing, engineering, and sales background, not necessarily 3 engineers .
3. A team that has worked together for a period of time has worked out teething pains. They’ve learnt to work together and are likely to stick together.
VC’s bet on a team’s ability to solve the identified problem. Chances are the initial solution is partly wrong, and a good team will figure out what’s wrong with it and fix it.
Funding Institutions vs Business Life Cycle
No or low Revenues
Low or –ive Cash Flow
What is the space
Not telecom / entertainment
Who are the market leaders
Market potential from external sources
Very, very briefly
What is your product / service
Does it need seeding
How does it fit in the landscape
Why is your product / service necessary
What pain is it removing for the customer
Is it adding a service which will enhance a product / service
Is the process different increasing productivity, reducing cost, etc. etc.
Is it doing something Different / Differently
Is it “need to have” / “nice to have”
Is there an IP
What will the customer exactly get / see
Identify exactly who the customer is
Is it creating a new customer base
Enhancing a customer base
Is your target the real customer ?
What are the parameters of your customer?
Urban / rural
A billion dollar market is not YOUR market size - what is your market potential
“1% of USD 1500 bn market” - ??
How has the market been validated by you?
Specific markets / geographies / segments which will be addressed
Who is your competition?
Product / service
Size up your competition
SWOT of competition
Lessons learnt from competition
Trends in competitive companies
“Never say None”
Potential buyers could continue without your product / service
Existing and future competition
First mover advantage – rarely sufficient
Needs more vision and could be
market entry strategy
Innovative commercial model
Your vision for the venture
What are your differentials
What is your USP of your proposition
Any validation of your product/service
Pain point in competition being addressed by you
Product life cycle
Specific market / selling modality
Is too common / too unique ?
Cross check idea / competition
Who are the audiences you are addressing with your idea?
What pain points you are addressing for these audiences?
What evidence do you have that these pain points are real?
What are the current solution approaches?
What’s lacking in these approaches?
How is your solution approach better?
How big is this difference and what is it worth to customers?
What’s in it for other stakeholders besides end-customers?
Why hasn’t someone else thought of your idea yet?
Are you sure nobody has thought of your idea yet?
What is proprietary about your idea?
How will you acquire customers
Reflect market realities
Partnerships – conflict situations
Demo / reference sites
How did you acquire them
Sales cycle time
Why did they come to you vs competition
Why did they go to competition vs you
average revenue / client or target
Acquisition Cost / client
No of customers to break even
Hybrid sales model
Retention of customers
Plan for retention of customers before acquiring them
Average cost of generating business is 5 times from new customers vs existing customer !
Customer / Order profile
Are they one time / repeat orders
Stickiness for customer
Why did you lose customers
After sales support strategy
How will you deliver
Service provider partnerships
After sales strategy
Any relevant certifications
Permissions reqd./ received
Who is the team behind this venture
Background and experience
Contribution till date
Brief Job role
Gaps in team
Team and Advisor Compensation
Cross check on your team
Is the team leader strong and passionate?
Will leader and team attract “A” players?
Is the team appropriate for the stage of the company?
Has the team worked together before?
What are the team’s values and what type of culture will they create?
Is there a strong technical leader?
Is there a strong marketing leader?
Does the team have deep domain or technical expertise?
Does the team listen and take criticism in a positive way?
Does team have a good blend of “thinkers” and “doers”?
If current plan doesn’t work out, will team adapt?
Will the founders give up control if that is what the venture demands?
Passion, Integrity, Resourcefulness, Perseverance, Risk taking ability, Mental horsepower
Current / Projected for next 3 years
Topline / bottom line
When will it break even
Profitable businesses are more attractive
Self investment & funding received till date
Skin in the game
Where will it take your venture
Next round requirement
Cash flow based workings
No debt retirement
Risks and Mitigating them
Are they risks to your plan
“No” is not an option
What are the risks to your plan
How will they be mitigated
Examples of early set backs and their handling is a good idea
Investors will monetize their investment
Building an exit option is necessary for yourself, your team, and your investors
Alternative investment options
Angel investing is an alternate asset class
This space / sector is one of many
Your plan’s niches is just one of the many niches
Your plan is in competition with another
Remember idea may be sold but investment may not happen
3BHK in Delhi vs 3BHK in Bangalore
Be brief and direct; get to the bottom line quickly
Identify what the business is immediately
Define the customers quickly and the customer problem clearly
Define what’s compelling and unique
Describe how you will make money
Provide a phased snapshot of your company 12, 24 and 36 months out
Describe how you propose to take your product to market
Make bottom-up as well as top-down projections
Know what 4 to 5 assumptions your plan pivots on
Discuss the key risk factors
State how much money you will need and how you will use it
State your possible exit strategies
Presentation should be self explanatory – there will be investors who may not be in the room
Clarity in text / relevant graphs more important than pictures
Blue sky points not relevant
Investors are quite knowledgeable !
Put some of your skin in the game
Getting a high valuation early can be fatal
Size of the pie wins every time over share of the pie
Very selective process – One in hundred company completes the whole round
Meet the entrepreneur
Discuss the business opportunity
Preliminary evaluation of the business and specific industry
Issue the Term Sheet
Accounting due diligence
Legal due diligence
Detailed business due diligence, market estimations & analysis, references
Meet the core team in multiple meetings and understand the business
Entrepreneur presents to multiple partners
Case Study – Online Video Rental Business
Mobile Users - 175mn
Urban Users – 75mn
Internet Users – 25mn
Market Size = 50*12*25
= 15 bn INR = $ 375 mn
DVD Penetration - 50%
# of HH = 50mn
Market Size = 50*12*50
= 30 bn INR = $ 750 mn
# of urban HH = 100mn
Price Point = 50/- month
Market Size = 50*12*100
= 60 bn INR = $ 1.5 bn
Don’t aim for more than 10-20% of market share
Compare growth rates, adoption rates from international similar markets
More Case Studies – Classified market, New Media Campaigns