SO, WHAT EXACTLY IS A STARTUP?• While most startups do begin small, not all small businesses are startups• Fundamentally, a startup is an engine for wealth creation. Startups are crucial engines of growth of a country’s economy by creating wealth in society and by generating jobs.• Typically, a startup will grow at supernormal rates while adding tremendous value to itself. To be able to achieve such levels of growth and to generate such value requires the infusion of significant outside funding.• This outside funding is typically provided by venture capitalists who invest in high risk/ high return ventures
Start Ups• Additionally, startups need to be team driven if they are to successfully manage growth. A fast growing company needs different skills and expertise and no individual can alone hope to manage growth.• On the other hand, someone who’s tired of routine corporate life and wants to be independent without the constraints of working for someone, and therefore starts a small business cannot be said to be running a startup.• This person is in the income substitution business i.e. is substituting his / her income from a salaried job by being independent. S/he doesn’t want to get into the complexities of growing a business.• These businesses are typically small in size and have small growth rates.
Start Up• Do you have the appetite for high achievement and a willingness to take risks?• In spite of knowing that the chances that an idea for a high tech business to eventually become a successful company that goes public is as low as 6 in a million! Or are you better off in your job or income-substitution business?
Writing a Business Plan• The business planning process can be quite complicated as can be the writing of the plan itself.• Determining the appropriate form of the plan – what topics to put in, in what order, and with what emphasis – is important. However what is even more important is the content.• The content should convey an intimate understanding of what will make the business succeed. Investors don’t throw money at glossy plans, so focus more on the substance rather than the form
Business Plan• There are two basic types of plans:• “general planning and funding” document that’s useful at the beginning of a business and to raise funds• “operational” business plan is used to monitor and control the growth of the company.• In start-up situations, it is the general planning and funding document that is of essence.• This plan is usually written during a concept stage before any outside funding is received.• Don’t focus on creating an extremely detailed plan discussing every single item: you will put off investors. Remember you are selling the team and the unique market opportunity. So prepare the plan accordingly.•
Business Plan• While there are no hard and fast rules, it’s usually a good idea to keep a business plan to no more than between 20-25 pages in length.• One good way to approach a business plan is to first develop a presentation, then a 2-3 page Executive Summary and finally the business plan.• Investors don’t have the time to read a 100 page document to understand what you are trying to sell!
Important for VCs• First and foremost, as mentioned many times before in this series, is the management team. Go for 5,6 and 7 Domain Test of Team• The plan must contain detailed resumes of the management team and show how they’re qualified to handle their responsibilities.• Ideally, the team must be experienced and have an understanding of the marketplace, the technology, of running a business• Second, you must demonstrate that you understand the market and Industry. It is necessary to have data about the market from various sources. Go for 1,2,3,and 4 domain test• Third, you need to demonstrate how your offerings will be delivered to the customers and what your revenue model (i.e. flat monthly fee, % of transactions, license fee, etc) will be. This is the so-called business model and must be realistic. VCs prefer a predictable revenue model; the model must have strategies that dampen the effect of factors like seasonality. Try to develop a recurring revenue stream – this will ensure that every sale is not a new sale.
Business Plan• Section 1.0 Introduction of Company and team(Domain 5,6,7)• Where will the company be formed, and by whom? Where is the company based? What is the vision and mission of the company? Who are the legal counsel and the bankers?• Section 2.0 Market Opportunity• What is the opportunity/need/problem in the market? Who is experiencing the need? How big is the opportunity? How fast is the opportunity growing?• Section 3.0 Offering and Competition• What is being offered to address the need in the market? What are the different components of the offering?• Why/How is the offering unique? How will it successfully compete against competition? Why will people buy/use the offering as opposed to competition?• Section 4.0 Market• Who are the customers of this offering? How will they use it? How is the market segmented? How large are these segments? What is the value of this offering to them
• Section 5.0 Business Model• How will the offering be delivered to customers? What does the delivery chain look like? What is the value proposition across the chain?• Section 6.0 Sales/Marketing Plan• What will be the company and offering positioning? How will the positioning be achieved? What are the alliances/partnerships that will be established? What are the different modules/components to be sold? What is the sales strategy – direct/indirect? What are the price points?• Section 7.0 Product/Service Development Plan• What are the timelines and technologies? What is the strategy for product development?• Section 8.0 Road Map• Over the next 24 months what will be the sales/marketing objectives? What will be the company objectives? Product development objectives? What is the exit strategy?
Business Plan• Section 9.0 Current Situation• What stage is the offering/company in now? Are any customers testing/using the product? How much money has been invested? How many employees are there? What are the milestones ahead? How much money is required? For what purposes will the company use the money? How many employees will be hired?• Section 10.0 Financials• ViabilityReport• Breakeven point• What is the P&L, B/S, C/F for the next 12-24 months on a monthly basis? What are the quarterly P&L, B/S, C/F for the first 24 months? What are the annual P&L, B/S, C/F for years 3 to 5? When does the company break even in operating terms? What is the organizational structure of the company? How many people are there across functions? In all of these, the most important is the cash-flow statement!
Approaching VC• In cases, where a cold-contact just has to be done, the Executive Summary should be first sent in.• This is a 2-3 page document that captures the profiles of the key team members, the market need / opportunity , the unique offering , the business model,revenue projections, and some info on how much money is being sought and for what purpose.• This should be a well written, professional and crisp document. Make sure there are no spelling mistakes!• If this is of interest, the VC will probably call you for a meeting. Go well prepared for the discussion. As the old saying goes, "you wont get a second chance to make a first impression"!• Approaching a VC should be the job of the CEO. The CEO makes the elevator pitch, the main presentations and answers all the key questions about the company, the market, the positioning of the company, the road-map etc
How VC work• VC firms collect money from investors and then invest the money in a number of carefully selected fast growing businesses.• In the US, VC firms typically are partnership companies. In India, VC firms follow a structure more in common with a mutual fund structure (due to legal and tax reasons, VC partnership companies are not viable in India.• The VC industry in US. there is a VC fund into which various investors invest and there’s an Investment Management company (commonly referred to as an Asset Management Company or AMC) which manages the investments of the fund.• In the US, the typical investors in VC firms are the pension funds, university endowments, insurance companies, corporations, wealthy individuals etc.
How VC Works• In India, typical investors are wealthy individuals, developmental & financial institutions and some corporations. Laws do not permit pension money or insurance money to be invested. Universities in India have no real funds or endowments even if they were allowed to invest! It is therefore quite hard to raise funds in India for venture capital purposes.• The tax treatments of Indian VC firms also act as disincentives. Which is why a large number of VC funds operating in India are really off-shore funds - based in places like Mauritius - with overseas investors thereby ensuring operating flexibility, tax benefits and speed.• In India, traditional investors in VC firms have been development and financial institutions like ICICI, IDBI, SIDBI, and the like. These VC firms have had to deal with various operating constraints and have had difficulty dealing with high risk investing due to the very nature of the structure within which they had to operate.• Indian VC firms have to be registered with SEBI (Securities and Exchange Board of India