VC funding for early stage concepts


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What do investors look for in a business plan?

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VC funding for early stage concepts

  1. 1. Understanding the concept of venture capital Prajakt Raut Entrepreneur & Entrepreneurship Evangelist
  2. 2. Collateral free financial capital – investor takes equity in the company Investor shares risks Typically for funding early-stage concepts/companies venture capital
  3. 3. venture capital is not just about the money <ul><li>Value that a good investor delivers: </li></ul><ul><li>Knowledge </li></ul><ul><li>Access </li></ul><ul><li>Resources </li></ul><ul><li>Operational guidance </li></ul>
  4. 4. <ul><li>Three classes of investors </li></ul><ul><li>Angel investors </li></ul><ul><li>Venture Capitalists </li></ul><ul><li>Private Equity Funds </li></ul>venture capital
  5. 5. Stage Scale Different stages of the venture carry different risks
  6. 6. <ul><li>Risks at early stage </li></ul><ul><li>Concept risk </li></ul><ul><li>Execution risk </li></ul><ul><li>Scale-up risk </li></ul>
  7. 7. <ul><li>Risks at early stage </li></ul><ul><li>Concept risk </li></ul><ul><li>Execution risk </li></ul><ul><li>Scale-up risk </li></ul><ul><li>Risks at growth stage </li></ul><ul><li>Execution risk </li></ul><ul><li>Scale-up risk </li></ul>
  8. 8. <ul><li>Risks at early stage </li></ul><ul><li>Concept risk </li></ul><ul><li>Execution risk </li></ul><ul><li>Scale-up risk </li></ul><ul><li>Risks at growth stage </li></ul><ul><li>Execution risk </li></ul><ul><li>Scale-up risk </li></ul><ul><li>Risks at mature stage </li></ul><ul><li>Scale-up risk </li></ul>
  9. 9. <ul><li>Risks at early stage </li></ul><ul><li>Concept risk </li></ul><ul><li>Execution risk </li></ul><ul><li>Scale-up risk </li></ul><ul><li>Risks at growth stage </li></ul><ul><li>Execution risk </li></ul><ul><li>Scale-up risk </li></ul><ul><li>Risks at mature stage </li></ul><ul><li>Scale-up risk </li></ul><ul><li>Proving concept </li></ul><ul><li>Jugaad </li></ul><ul><li>Flexibility </li></ul><ul><li>Fine-tuning offering </li></ul><ul><li>Processes </li></ul><ul><li>Focus </li></ul><ul><li>Operational efficiencies </li></ul><ul><li>Increasing profitability </li></ul><ul><li>New markets/new capabilities/new concepts </li></ul>
  10. 10. Angel Investors/Seed Stage Funds
  11. 11. Venture Capitalists
  12. 12. Private Equity Funds
  13. 13. <ul><li>A document to convince investors/stakeholders that </li></ul><ul><li>What you want to do is sensible </li></ul><ul><li>How do you plan to do it is sensible </li></ul><ul><li>You are better than others at doing it </li></ul>What is a Business Plan?
  14. 14. What do investors look for in a business plan? <ul><li>1) Will this team deliver </li></ul><ul><li>2) Does the concept address a real customer need </li></ul><ul><li>3) Is the market size large </li></ul><ul><li>4) Who is the competition </li></ul><ul><li>5) Is there a Sustainable Competitive Advantage </li></ul>
  15. 15. What should you include in a business plan? <ul><li>Concept overview/business description </li></ul><ul><li>Team – current and ‘in discussion’ </li></ul><ul><li>What issue / pain point are you solving </li></ul><ul><li>What is the size of the opportunity </li></ul><ul><li>Product / Service Overview </li></ul><ul><li>What is the value proposition/positioning </li></ul><ul><li>Business model / financial model </li></ul><ul><li>Competitive landscape </li></ul><ul><li>Risk factors </li></ul><ul><li>Funding objective and use of funds </li></ul><ul><li>Exit potential </li></ul>
  16. 16. Concept overview/business description <ul><li>No more than one short, unambiguous paragraph </li></ul><ul><ul><li>Reader should not need to read it again to understand </li></ul></ul><ul><ul><li>Capture the essence in a one crisp line </li></ul></ul><ul><li>Use simple language </li></ul><ul><li>Sell the potential </li></ul>
  17. 17. Team - the most important ingredient for VCs <ul><li>“ VCs prefer A-Class teams with mediocre business plans over B-Class teams with great business plans” </li></ul><ul><li>Diversity of skills, domain expertise critical but with similarity of passion </li></ul><ul><li>Include profiles of those who are ‘sort of willing to join’ too </li></ul>
  18. 18. What issue / pain point are you solving <ul><li>Are you addressing a real consumer problem? </li></ul><ul><ul><li>Don’t force fit your solution to a problem </li></ul></ul><ul><li>All ‘what if’ scenarios need to be thought through </li></ul><ul><li>Get your friends and well-wishers to ask you hard questions </li></ul>
  19. 19. What is the size of the opportunity <ul><li>Break it down to last detail </li></ul><ul><ul><li>Total market size </li></ul></ul><ul><ul><li>Addressable market size </li></ul></ul><ul><li>What price point and how does that translate into revenue </li></ul><ul><li>Test the assumptions </li></ul>
  20. 20. Product / Service Overview <ul><li>KEEP THIS SIMPLE – VERY, VERY SIMPLE </li></ul><ul><ul><li>Assume that the reader does not know your domain at all </li></ul></ul><ul><li>Critical points to highlight </li></ul><ul><ul><li>Uniqueness </li></ul></ul><ul><ul><li>Specific benefits </li></ul></ul><ul><li>Other criteria </li></ul><ul><ul><li>Scalability </li></ul></ul><ul><ul><li>IP protection </li></ul></ul><ul><ul><li>Replicability </li></ul></ul>
  21. 21. Value proposition <ul><li>What are you positioning this as </li></ul><ul><li>Why will the consumers buy it </li></ul><ul><li>Do a ‘Benefits Barrier’ exercise </li></ul>
  22. 22. Business/financial model <ul><li>Three key questions </li></ul><ul><ul><li>How much will you sell at </li></ul></ul><ul><ul><li>How many will you sell </li></ul></ul><ul><ul><li>Where will you sell… and how </li></ul></ul><ul><li>Who will pay for it – [user and buyer could be different] </li></ul><ul><li>Translate the above questions into a financial model </li></ul><ul><ul><li>Entrepreneurs should focus on the questions </li></ul></ul><ul><ul><li>Get experts to do the financial modeling </li></ul></ul>
  23. 23. Competitive landscape <ul><li>Who will you compete with? [current or in future] </li></ul><ul><li>Why would someone choose you over them? </li></ul><ul><li>Why do you have a chance to be a dominant player? </li></ul>
  24. 24. Risk factors <ul><li>Market risks? </li></ul><ul><li>Financial risks? </li></ul><ul><li>Competitive risks? </li></ul><ul><li>Business model risks? </li></ul><ul><li>Execution risks? </li></ul>
  25. 25. Funding objective <ul><li>What do you need the money for </li></ul><ul><li>How much do you need </li></ul><ul><li>Also mention any fund raising history, if any </li></ul>
  26. 26. Exit Potential <ul><li>How is the investor going to earn a good return? </li></ul><ul><ul><li>Sale to a strategic investor </li></ul></ul><ul><ul><li>Exit by selling stake to a growth stage investor </li></ul></ul><ul><ul><li>IPO? </li></ul></ul><ul><li>[Note: Exit does not mean that the entrepreneurs has to </li></ul><ul><li>Exit] </li></ul>
  27. 27. In conclusion <ul><li>This is not easy </li></ul><ul><li>This is not a one time exercise – iterative process </li></ul><ul><li>Share it with friends, get feedback, rework </li></ul>
  28. 28. Different documents for different uses <ul><li>Summary Plan (8 - 10 pages) </li></ul><ul><ul><li>Initial presentation to showcase concept and business case </li></ul></ul><ul><li>Full Business Plan (15-40 pages) </li></ul><ul><ul><li>Typically for financing purposes </li></ul></ul><ul><ul><li>Operations and projections presented in greater detail </li></ul></ul><ul><ul><li>Usually presented after the investor(s) have indicated initial interest </li></ul></ul><ul><li>Operational Business Plan (usually in excess of 40 pages) </li></ul><ul><ul><li>Usually the business plan on which entrepreneur & investor will agree before funding </li></ul></ul><ul><ul><li>Blueprint for company operations </li></ul></ul><ul><ul><li>Source of guidance to top managers </li></ul></ul>
  29. 29. Prajakt Raut [email_address] Prajakt has over 23 years of experience as an entrepreneur, marketing professional and business strategy consultant. Prajakt primarily consults early stage companies on strategy, focusing on business model & monetization and on creating processes to prepare the company for growth. Prajakt is the co-founder of Orange Cross , a healthcare services management company and an internet based venture, currently in stealth mode .