How to write a business plan for VC’s and business angels: an introduction for first time entrepreneurs
VC’s and business angels read business plans slightly differently from other professionals. As a first time entrepreneur who’s trying to raise funding, you should be aware of that.
First, VC’s and business angels look at the people who are going to run the business, people who are expected to give return on their investment. An old adage in venture capital circles says “I’d rather back an ‘A’ team with ‘B’ idea than ‘B’ team with ‘A’ idea”.
Since the judgment about the future success is based on the past accomplishments, you should highlight what you have already achieved and, importantly, to what extent your knowledge, skills and experience match the opportunity that you have just proposed.
2. The external conditions that you can’t control
Next, investors evaluate your business idea in the light of external environmental conditions. They want to know how feasible your idea is, and are you able to realize that idea and convert the opportunity to money.
In short they evaluate the conditions which shape the chances for success and return on investment. In that context the very important point is what is the market for the new product/service and how likely it will evolve.
By market is understood the mutual relation between the offering, the customers and the competition. Of course, everybody wishes to have blue ocean (an unexplored area of opportunities), but it is not always possible. Thus, the realistic market forecast is essential for the outcome of the investment decision. Here you have to distinguish between two cases; First when the market does exist; Second when the market does not exist.
Market exists: focus on differentiation
If the market exists than you have to explain them how your product differentiate from the competition and why do you expect that it will attract the customers.
Market doesn’t exist: focus on why you will create it
In the second more difficult case when the market still does not exist, you have to teach them about the particular market and why or how your product can create a new market.
3. The ‘dial’
Finally if they are satisfied with the first two points they will pay careful attention to the dial.
The dial is the legal, contractual relationship between the startup, its supply chain (providers of the complementary resources) and venture capital. It’s where you are in the value chain, and how you relate to the other elements of the value chain.
And of course, VC’s and investors are interested in the share of the expected profit that each participant in the value chain (entrepreneur, investor, suppliers) is going to get. Usually it is very sensitive issue and good deal should reflect rather trust than formal legalese.
4. Exit strategy
Along with the dial the investors consider the exit strategy.
Exit strategy is cashing out the investment. The investors estimate if the new business after few years will be ready for trade sale or initial public offering. The initial public offering is still rare, while the trade sale is the most common way for the investment exit.
At the end of the day the investors will put their money only if they can find good fit between all three elements: people, business idea, external environmental conditions and out of that can make a good dial. The “dial”, the people and the exit strategy are what make the venture capital investment analysis different than standard business analysis.
The structure of the business plan
The business plan is a formal document that follows accurately outlined structure. It should contain the following sections:
- Executive summary
- Company/business description
- Product and/or services
- Market analysis – macro and micro environmental analysis
- Marketing plan
- Operational plan
- Financial plan
- Management and organization
The executive summary summarizes the main points of the business plan and it is usually written at the end. It should not be longer than two pages.
It is something like company’s ID card. It takes care about the vision and mission statement of the company, business philosophy of the owners, core competences and industry to which the business belongs.
Product and/or services
This section covers detail description of the new product and/or service. The topics of interest are: To which segment it is intended: to the other business (B2B), or to the end users (B2C). What is the competitive advantage of the new offering? How it will add value to the customers? What will be the level of the quality.
Market analysis – macro and micro environmental analysis
By macro and micro environmental market analysis are understood the extensive analysis about the environment in which new company is going to operate.
Macro-environmental analysis are focused on the Political, Economical, Social, Technical, Environmental and Legal conditions of the targeted market area. They are also known as PESTEL analysis.
Micro-environmental analysis or industry analysis examine market forces that shape the market and directly affect perspectives of the new company. They are:
- Threat of the new competition;
- Threat of substitute product or services;
- Bargaining power of customers;
- Bargaining power of suppliers;
- Intensity of competitive rivalry.
They are also known as Porter five forces, named after Harvard professor Michel E. Porter who first introduced this sort of analysis.
Marketing plan also follows some standard format. It emphasizes the way in which new product/service is going to reach the customers.
The method is called marketing mix and consists of eight elements (8P) related to customer’s experience:
- Physical evidence
However it is not very common practice to use all eight elements. More convenient way is to select four elements most relevant to particular product and/or service. It is usually reduced to Product, Price, Place and Promotion.
Promotion means all methods of communication that marketeer may use in advertising the product to the targeted audience. Place is synonym for distribution and refers to the various (or one) distribution channel(s) chosen for the proposed business model.
Operational plan outlines daily operations, equipment, processes, supply chain requirements, quality control, customer service, inventory control, product development, location, amount of space needed for premises.
The financial plan is bloodstream of the business plan. It contains detailed analysis of the expected costs and revenues and trace the growth potential of the company.
The formal parts of the financial plan are:
- start up (initial) expenses,
- opening balance sheet,
- income statement,
- cash flow statement,
- break-even analysis
- and a profit/loss projection for few years (depends of the project).
Management and Organization
It is all about the people, who is who and who will do what in the new organization. While financial plan is bloodstream, management and organization is hart of the business plan and for the majority of the investors it is the most important part of the business plan.
Everything that can support the business plan like advertising materials, market research studies, photos of the locations and planned equipment, articles from the magazines related to the business and/or product, letters of support from the future customers…
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