Business plan formulation and venture capitalist


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Business plan formulation and venture capitalist

  1. 1. Business Plan Formulation Venkatesh Sarvasiddhi Head-Direct Marketing HCL Technologies
  2. 2. Outline of the Presentation <ul><li>Business Plan basics: What? For whom? </li></ul><ul><li>Fund raising process </li></ul><ul><li>Venture Capital firms </li></ul><ul><li>Structure of a business plan </li></ul><ul><li>Details of the individual sections </li></ul><ul><li>Final checklist </li></ul>
  3. 3. Business Plan and its Target Audience <ul><li>VCs / Angels </li></ul><ul><li>Potential senior employees </li></ul><ul><li>Bankers </li></ul><ul><li>Attorneys and accountants </li></ul><ul><li>Leasing companies </li></ul>BP is a “document” and not a Power point presentation !! It is targeted at:
  4. 4. Stages in the Growth of a Company <ul><li>Idea / Concept </li></ul><ul><li>Prototype / Proof of the concept </li></ul><ul><li>Incubation / Product development </li></ul><ul><li>Organization building </li></ul><ul><li>Scale up (alliances, partnerships) </li></ul><ul><li>IPO: Initial Public Offer </li></ul>
  5. 5. Funds Requirements <ul><li>Idea / Concept: USD 10K </li></ul><ul><li>Prototype: USD 50K </li></ul><ul><li>Product development: USD 0.5M – 2M </li></ul><ul><li>Organization building: USD 8M-10M </li></ul><ul><li>Scale up: USD 50M </li></ul><ul><li>IPO: Initial Public Offer </li></ul>
  6. 6. Sources of Funds <ul><li>Idea / Concept: Personal savings </li></ul><ul><li>Prototype: Loan from friends and relatives </li></ul><ul><li>Incubation: Angel / Early stage fund </li></ul><ul><li>Organization building: VC, first round </li></ul><ul><li>Scale up: Second round / growth/ scale up funds </li></ul><ul><li>IPO: Investment bankers, underwriters </li></ul>
  7. 7. Cost of Equity <ul><li>Angels would expect higher rate of returns than VCs </li></ul><ul><li>Typical VC expectations is 40-50% compounded annual return </li></ul><ul><li>Risk-return curve: New venture increasingly reduces its risk as it goes through stages </li></ul>
  8. 8. Types of Risks <ul><li>Technology risk: Platform does not succeed </li></ul><ul><li>Product risk </li></ul><ul><li>Market risk: Competitor, price-performance </li></ul><ul><li>Management risk: Scale-up, team building </li></ul><ul><li>Product liability risk </li></ul><ul><li>Image risk: Cultural, socio-economic factors (mostly for pharma / biotech) </li></ul>
  9. 9. Venture Capital Firms <ul><li>VCs and Angels provide private equity for young companies </li></ul><ul><li>Angels / High net worth individuals </li></ul><ul><li>Early stage VC firms </li></ul><ul><li>Scale-up VC firms </li></ul><ul><li>Technology / “Space” specific </li></ul><ul><ul><li>Biotechnology </li></ul></ul><ul><ul><li>Networking </li></ul></ul><ul><ul><li>Chips and hardware </li></ul></ul><ul><ul><li>E Commerce </li></ul></ul>
  10. 10. Structure of a VC Firm <ul><li>General partners 3-5 (themselves successful entrepreneurs): put about 2-3% of the corpus </li></ul><ul><li>Limited partners (Pension funds, Retirement plans) </li></ul><ul><li>Management fee is about 2-3 % per year </li></ul><ul><li>Funds about 5-30 new companies per year </li></ul><ul><li>Employs junior managers for due diligence(associates) </li></ul><ul><li>After IPO/Acquisition, general partners keep 20% of gains, limited partners get Principal+80% </li></ul>
  11. 11. VC Firm’s Annual Throughput <ul><li>10,000 qualified business plans </li></ul><ul><li>1000 meetings </li></ul><ul><li>400 company visits </li></ul><ul><li>25 new investments </li></ul>
  12. 12. Role of the VC in the Portfolio Company <ul><li>Negotiate aggressive terms </li></ul><ul><li>Select strong co-investor </li></ul><ul><li>Help in constituting the Board of Directors </li></ul><ul><li>Assist in </li></ul><ul><ul><li>Recruitment </li></ul></ul><ul><ul><li>Market validation </li></ul></ul><ul><ul><li>Strategic relationships </li></ul></ul><ul><li>Pursue liquidity aggressively </li></ul>
  13. 13. Valuation: Bargaining Point <ul><li>Causes of mismatch </li></ul><ul><ul><li>Asymmetry of information </li></ul></ul><ul><ul><li>Ego </li></ul></ul><ul><ul><li>Greed </li></ul></ul><ul><li>Factors that drive the valuation </li></ul><ul><ul><li>Technology, ESOP rates, management </li></ul></ul><ul><ul><li>Orders in hand, scalability, brand strength </li></ul></ul>
  14. 14. Difficulties in Valuing Start-up Companies <ul><ul><ul><li>Immediate earnings are negative </li></ul></ul></ul><ul><ul><ul><li>No past history </li></ul></ul></ul><ul><ul><ul><li>No comparable companies </li></ul></ul></ul><ul><ul><ul><li>No market prices </li></ul></ul></ul>
  15. 15. VC Fund Raising Process <ul><li>Introduction (phone call, e-mail, referral) </li></ul><ul><li>Submit business plan / executive summary </li></ul><ul><li>Presentation </li></ul><ul><li>Company visit </li></ul><ul><li>Due diligence (management reference checks, customer calls, market analysis) </li></ul><ul><li>More meeting(s) </li></ul><ul><li>Term sheet </li></ul><ul><li>Legal / Closing </li></ul>
  16. 16. The Deal: Capital Structure <ul><li>Equity allocation </li></ul><ul><ul><li>Founders (20 %) </li></ul></ul><ul><ul><li>Future employees (Option pool) (40 %) </li></ul></ul><ul><ul><li>Investors (40 %) </li></ul></ul><ul><li>Number of investors / firms </li></ul><ul><li>Imbalance, Dilution </li></ul><ul><ul><li>Serious investors ask for 20% or more of ownership </li></ul></ul><ul><li>Pre and post-finance valuations </li></ul>
  17. 17. Term Sheet <ul><li>Agreement to agree or to work towards investment </li></ul><ul><li>Captures key terms of the final legal contract </li></ul><ul><li>Seat on the Board, Founder vesting </li></ul><ul><li>Key terms </li></ul><ul><ul><li>Equity allocation, type (preference, convertible) </li></ul></ul><ul><ul><li>Liquidity, conversion </li></ul></ul>
  18. 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. 19. What is the financer looking for? <ul><li>Basic value proposition </li></ul><ul><li>Market size, segmentation, target customers, competitors </li></ul><ul><li>Entry barriers, IP protection, Unique Selling Points </li></ul><ul><li>Technology expertise and domain knowledge </li></ul><ul><li>Alliance and strategic partnerships </li></ul><ul><li>Promoters, Board of Directors, Top management (VPs) </li></ul>
  20. 20. Checklist continued… <ul><li>Team (Project management, execution capabilities) </li></ul><ul><li>Scalability and growth potential </li></ul><ul><li>Marketing and selling plan: channels, distributors, customer acquisition costs </li></ul><ul><li>Milestones and deliverables (prototype, proof-of-concept, beta customers) </li></ul><ul><li>Requirement and application of funds: Setting offices, where, how many? </li></ul><ul><li>Equity/Capital structure, Financing policies (debt/equity ratio) </li></ul>
  21. 21. Checklist continued… <ul><li>Revenue model: Sources of revenue (service/product mix) </li></ul><ul><li>Profitability, break even point, growth estimates (revenue, team size) </li></ul><ul><li>Risks and contingencies: De-risking/risk management/risk containment plan </li></ul><ul><li>Projected (pro-forma) financial statements </li></ul><ul><li>Exit strategy (IPO, equity buyer, strategic buyer, Merger & Acquisition) </li></ul><ul><li>Valuation and offer (equity price, number of shares) </li></ul>
  22. 22. Business Plan Document <ul><li>Agreed program of expectations, actions, and results to which the whole team is willing to commit </li></ul><ul><li>Description of why, how, and when the firm will accomplish economic viability </li></ul><ul><li>Economic viability comes from sustained positive cash flows </li></ul>
  23. 23. Business Plan Structure <ul><li>CEO is perpetually writing a business plan!! </li></ul><ul><li>BP should be limited to about 30-35 pages </li></ul><ul><li>Subject matter should have graphs and pictures </li></ul><ul><li>Must have a 3-4 page executive summary </li></ul><ul><li>Allied material should go to the appendix </li></ul>
  24. 24. Business Plan Sections <ul><li>Executive summary </li></ul><ul><li>Introduction / Company Overview </li></ul><ul><li>Concept / Proposition / Product description </li></ul><ul><li>Market opportunity </li></ul><ul><li>Competition survey </li></ul><ul><li>Development Plan and milestones </li></ul><ul><li>Marketing Plan </li></ul><ul><li>Management </li></ul><ul><li>Financials </li></ul><ul><li>Offer </li></ul><ul><li>Appendix </li></ul>
  25. 25. Introduction / Company overview <ul><li>History of the company, when incorporated </li></ul><ul><li>Founders and their brief profiles </li></ul><ul><li>Form of the organization: C, S corp, LLC </li></ul><ul><li>Product / Service </li></ul><ul><li>Current revenues and profits (if any) </li></ul>
  26. 26. Concept / Proposition <ul><li>Description of the product / service </li></ul><ul><li>Intellectual property protection </li></ul><ul><li>Unique selling points – differentiators </li></ul><ul><li>Unfair advantage over competitors ? </li></ul>
  27. 27. Market Opportunity <ul><li>What unfulfilled need the product satisfies </li></ul><ul><li>Market size, segmentation </li></ul><ul><li>Target customers, demographics </li></ul><ul><li>Is it a new market, growth market, or established market ? </li></ul>
  28. 28. Competition Survey <ul><li>Identify existing competitors </li></ul><ul><li>Substitute products </li></ul><ul><li>Potential competitors </li></ul><ul><li>SWOT analysis </li></ul>
  29. 29. Development Plan and Milestones <ul><li>Prototype : How will it look </li></ul><ul><li>What will be version 1 – what features </li></ul><ul><li>Precise description of the milestones and dates </li></ul><ul><li>Initial team scale-up </li></ul>
  30. 30. Marketing Plan <ul><li>Strategy – direct or through channels </li></ul><ul><li>Quantitative marketing goals (revenues, team size) </li></ul><ul><li>Branding strategy, Co-branding, if any </li></ul><ul><li>Distribution and alliances </li></ul><ul><li>Pricing and promotion </li></ul>
  31. 31. Management <ul><li>Team structure – CEO, CFO, CIO, CTO </li></ul><ul><li>Vice Presidents (marketing, finance, engineering) </li></ul><ul><li>Organizational chart </li></ul><ul><li>Letters of intent from potential senior team members </li></ul>
  32. 32. Financials <ul><li>Pro forma (Projected) and existing financial statements </li></ul><ul><li>Balance sheet </li></ul><ul><li>Profit and loss statement (Income statement) </li></ul><ul><li>Cash flow statement </li></ul><ul><li>Break even analysis </li></ul>
  33. 33. Offer <ul><li>Valuation </li></ul><ul><li>Basis for valuation (P/E, Revenue multiples) </li></ul><ul><li>Percent of the company for investment </li></ul><ul><li>Exit routes for the investors </li></ul><ul><li>Capitalization structure </li></ul>
  34. 34. Appendix <ul><li>Endorsement from reference customers </li></ul><ul><li>Letter of Intents from potential customers </li></ul><ul><li>Product block diagrams </li></ul>
  35. 35. Executive Summary <ul><li>Company name , address, contact person, email, phone </li></ul><ul><li>Brief history of the company: date founded, headcount </li></ul><ul><li>Management summary: Promoters, senior staff </li></ul><ul><li>Brief description of product/service and its strengths and weaknesses (Elevator pitch) </li></ul><ul><li>Market – existing and projected (industry, competition), focus area, revenue model (sources of revenue) </li></ul><ul><li>Growth potential, projections </li></ul><ul><li>Milestones – achieved and projected (prototype, beta) </li></ul><ul><li>Finance – needs and applications, offer, pre-money valuation, financials. </li></ul>
  36. 36. Final Checklist !! <ul><li>Look for spelling mistakes </li></ul><ul><li>Provide a table of contents </li></ul><ul><li>Check page number consistency </li></ul><ul><li>Do not bind in a hard folder </li></ul><ul><li>Write a nice covering letter </li></ul><ul><li>Do not use too many colors and fonts </li></ul><ul><li>Explicitly add confidentiality clause in the beginning </li></ul>
  37. 37. Summary <ul><li>Business Plan preparation is a serious process which takes 2-4 months </li></ul><ul><li>Fund raising itself takes 4-7 months </li></ul><ul><li>Business Plan is a dynamic document </li></ul>