What does a venture capitalist look for in a business plan?

Because venture capitalists are high-risk investors, they expect higher returns. Venture capitalists review hundreds of business plans and focus on just a few. Individual venture capitalists or VC firms extend equity financing to new business start-ups or an existing business. You can take either a minority stake or a majority stake. Some of the factors VCs look for in a company are management breadth, client base, corporate governance structure, investment structure, and exit plan.

Creation of a professional business plan

The business plan should convince the venture capitalist and give him confidence in the expertise and experience of the management team in achieving the company’s goals within a defined time frame. An effective, high-reward business plan should cover the following key points:

– Summary

The most important part of any business plan is the executive summary and is often best written last. It is a first interaction between the report authors and the VC. It summarizes a longer report or proposal, or a group of related reports, so that VC can quickly become familiar with a large body of material without having to read it all. It must be short and concise with appropriate recommendations, justification and a conclusion.

It is recommended to answer the following questions in a summary:

• Do you have a unique partnership?

• Do you already have customers and traction?

• Do you own patents or technologies?

• Is your marketing plan special in some way?

If the product or service is technology driven, it needs to be explained clearly with the right product description, its competitive comparison, its unique selling proposition, the technology to be used and future innovations to help the VC understand the whole concept. Phases and development of the products or services should also be mentioned (seed stage, early stage, expansion stage).

– Market analysis

The analysis of the market potential distinguishes the pure investor from the real entrepreneur. Often good products are not successfully commercialized because their inventors do not understand the market or they do not assemble the management team necessary to seize the opportunity.

This section of the business plan will be carefully reviewed; Market analysis should therefore be as specific as possible and focus on credible, verifiable data. Market research should include a thorough analysis of the industry and the company’s potential customers. Industry data should include growth rates, market size, current technical advances, government regulations, and future trends. Customer research should include the number of potential customers, the purchase rate per customer, and a profile of the decision maker. This research drives sales forecasting and pricing strategy which relates to all other strategies in marketing, sales and distribution. A realistic SWOT also attracts venture capitalists. Finally, comment on the percentage of the target market the company intends to capture.

– Marketing plan

The main purpose of the marketing portion of a business plan is to convince the venture capitalist that the market can be developed and penetrated.

pricing

The strategy used to price a product or service provides an investor with insight into evaluating the strategic plan. Explain the key components of the pricing decision, ie image, competitive aspects, gross margins and the discount structure for each distribution channel. The pricing strategy should also include considering the future

Product releases and future products.

distribution channels

For a service provider, the distribution channels are not as important as the promotional tools, but for a manufacturer, the business plan should clearly identify the distribution channels that will bring the product to the end user. Distribution options for a manufacturer may include:

• direct selling, such as mail order, direct salesperson contact and telemarketing;

• Original Equipment Manufacturer (OEM), integration of the product with products from other manufacturers;

• distributors or wholesalers; or retailers.

Each of these channels has its own advantages, disadvantages and financial implications, so these should be explained and made clear in the business plan. Mention if more than one channel is used and should be compatible.

financial support

Plans for product sales sheets, potential promotional plans, internet strategy, trade show dates and other promotional materials should be included in the “Marketing Promotion” section of the business plan. It is also important to explain the thought process of the selected promotions and also the unselected ones.

contest

A business plan should also talk about the level of competition and competitors. If the company is first to market, the entrepreneur must explain how the market need is currently being met and how the new product will compete against the existing solution.

A VC will look at how and why the company will beat the competition. Try to anticipate how the competition will react to the product. If possible, include a direct product comparison based on price, quality, warranties, product updates, features, distribution strategies, and other comparison methods. Document the sources used in the analysis.

– business operations

The operations section of the business plan should discuss the location and size of the facility. Factors such as labor availability, accessibility of materials, proximity to distribution channels and tax considerations should be mentioned. Describe the equipment and facilities. If the company needs international sales, mention whether the facility provides adequate support. If work is outsourced to subcontractors, eliminating the need to expand facilities, state this as well. The investor will check if there are any contradictions in the business plan.

The venture capitalist will also ask questions like: If sales forecasts predict a growth rate of 25 percent per year, does the current location allow for expansion? Are there suppliers who can provide the required materials? Is there a well-trained workforce in the area? The sales forecasts determine the size of the operation and thus the funds required now and in the future. Include the sources and uses of funding in the business plan and ensure that the assumptions are realistic.

– Leadership team

Venture capitalists invest in people – people who have run or are likely to run successful businesses. The team should have experience and talents in the key disciplines: technology development, marketing, sales, manufacturing and finance.

In most start-up companies, the management team consists of a few founders with different backgrounds. In this case, there is a gap in the skills and knowledge of the team. It is important to mention how this gap can be closed. Include a list of board members or advisors: key outside industry or technology experts who provide guidance and credibility. Here, too, open positions can be filled by suggestions from a well-connected investor.

– financial forecasts

A realistic financial forecast is important to attract investors and maintain their interest in future financing. Good financial projections integrate the performance goals outlined in the plan with financial goals so that return, profitability, and cash flow milestones can be clearly stated. Investors use these projections to determine whether (a) the company offers enough growth potential to deliver the type of return on investment that the investor is seeking and (b) the projections are realistic enough to give the company a reasonable opportunity to to achieve this.

Financial statements that investors care about are the balance sheet, cash flow statement, and income statement for a three to five year period. It would help the VC to see the process used to develop the business, operations and overhead, and staffing and staffing. It is also imperative that the forecasts include a footnote section explaining the key assumptions used to develop the revenue and expenditure items.

The financial plan depends on key assumptions, which can be daily (debt days, charity, average inventory turnover days) or annual (depreciation, etc.) or any other unit of measure that needs to be carefully stated.

Product development spending should be closely linked to product launch timelines elsewhere in the plan. This expense is typically higher in the early years and decreases as product line extensions are less expensive to develop. A detailed set of cost assumptions (operations and overheads, labor and staff) should consider the number of employees, floor space, selling and administrative expenses, and key promotions.

The balance sheet should match the income statement. The cash flow statement must correlate with the balance sheet and income statement and should be timed to coincide with the funding needs identified in the plan.

– Amount and use of required funds and exit options

State how much funding your business needs and from what sources (i.e. management, venture capital, banks and others) and explain the purpose for which it will be used. Consider how the venture capitalists will exit the investment and earn a return. Possible exit strategies for the investors can be the company’s IPO or the sale of the company to a commercial buyer.