What do Venture Capital Companies look for in a business plan?
Are you a start-up business, looking to bring in some Venture Capital Investment? You know you need to have a business plan but you are not sure what to include in this business plan.
I have been supporting SMEs for almost 20 years now and, in that time, I have helped many companies prepare business plans for presentation to likely investors, including VCs. I am also on Enterprise Ireland’s Mentor Panel and have participated on their panels helping start-ups develop their pitches for VCs.
Over time, it’s clear that VCs look for a fixed number of things. Different VCs might focus on different industry sectors but there is a commonality about what they look for in a business plan
What is a venture capital company?
The first thing you need to do is put yourself in the shoes of the VC. VCS are organisations who provide financing to early stage companies where the VC sees potential for growth in the value of the company. Their intention is to sell on their stake in the company when the business has grown to the point where it can be either launched on the stock market or acquired by a larger company.
The VC invests in a number of companies and it is unlikely that they all will be successful. This means that the successful companies have to be so successful that the gain on them can offset the losses on the unsuccessful companies.
When making decisions to invest they use the business plan to help them estimate the likelihood of success and to understand the risks involved in the candidate business.
There are 6 key areas that you need to address in the business plan for Venture Capital Companies
Businesses create value by providing solutions to the problems of their customers. In some cases, the customer may not be aware of the problem. It doesn’t matter. Your job is to identify the problem that your target market has and to show the VC that you have a very good understanding of this. You need to be able to quantify the cost of the problem to the customers so that you can show that it’s something they will pay for.
You then need to explain how your product or service is a solution to the problem. You will have to explain the technology and show how it is different or unique. If you have IP protection on the solution, this is the place to highlight that.
Once the problem and solution are identified, you need to discuss the market for the solution. What is the size of the market. How are you going to communicate about your product or service to the market. Do you understand where they go for information etc. How are you going to deliver the product or service to the market.
The VC will want to be confident that you understand the market. They will also want to see that the market potential is big enough to drive growth in the value of their investment.
Have you competition in the market for your product or service? How does your solution compare to the market? How does the competitor’s pricing compare to your pricing? The VC will want to be confident that you understand the competition.
The VC are not just investing in a product or service. They are also investing in your team’s ability to execute your plans. This requires you need to provide a brief biography of your team members.
The key issue is to show the track record of the team. What have they accomplished in past that would indicate that they can be successful with this project. Also, what progress has been made to date on your project.
Ideally, your team will already have a mix of skills although sometimes funding is used to hire missing skills.
Finally, they will want to know how much money you are looking for now and how you intend to invest that money in developing the product or service.
They will be looking at your plans for implementation and using their experience with other start-ups to decide if they can belief in your approach and plans.
Format of the business plan
Usually the business plan is a narrative document with appendices for the financial projections. The projections are important in that they demonstrate your understanding of the business and they show how the funds raised will be applied.
The business plan should have sections addressing the key points above.
When structuring the business plan, remember that the Venture Capital Company will be reviewing lots of business plans, so anything you can do to make their job job easier will be welcome.
Try to have no more than 15 pages in total. Have an executive summary to get them interested in reading the full document. Where the plan contains a lot of detail, think about putting that detail into appendices so that the reader has the option of choosing whether or not to get into that detail right now.
Process of preparing a business plan.
Usually a company will start of by working up the financial projections and then craft a narrative around the projections. This can be an iterative process in that the work you do on the projections will develop your thinking on the project and you may find that your assumptions change as your understanding evolves and in turn your plan will change.
The bottom line is that the business plan and pitch are tools to sell the company to prospective investors and you need to approach it from that perspective. The most important step in that is to understand the VC – “your customer” in the process of selling the idea.
If you have any questions about this article or if you need support preparing a submission to a VC, you can contact me by email at jim (at) accountsplus (dot) ie.