‘Back to basics’ investment approach
- Realistic, robust business models
- Innovative, commercially viable technology
- Protected intellectual property (IP)
- Ability to take leading position in growing market
- Evidence of customer base (ideally some revenues already generated)
- Experienced teams.
Private Equity Investment Process
Stage - Approaching the VC / evaluating the plan
Entrepreneur - Appoint advisers
- Prepare Business Plan
- Contact VCs
Venture Capitalist - Review Business Plan
Reports - The Business Plan
Purpose of the Business Plan
Essential document to:
- formally assess market needs and competition,
- review business’ strengths and weaknesses
- identify critical success factors (CSFs)
- explain strategy, tactics and actions to achieve profitable growth
- Can be used to agree and set targets, address gaps in team, help plan for succession, review and streamline existing operations, maximize internal financial resources.
- Not just prepared for purpose of raising finance.
Sahlman, (1997):
- People
- Opportunity
- Context
- Reward
The Business Plan Sections
Executive Summary
Technology/Product
Management
Financial Projections
Operations
Market
Seven Domains Framework (Mullins, 2003)
Market and industry attractiveness
Market: Potential Customers
Industry: Competitors
Sustainable advantage needed
Target segment
Team domain - Mission, aspirations and propensity for risk
Ability to execute on critical success factors
Connectedness
Porter’s Five Forces
Buyer Power
Barriers to entry
Supplier Power
Threat of substitutes
Degree of rivalry
Investment proposition traps
The large market fallacy - target large share of segment rather than overall market
The better mousetrap fallacy
- better technology does not equal better solution, about satisfying needs
The ‘no sustainable business model’ trap - benefits and cost structure must be sustainable
The ‘me-too’ trap - low barriers and lack of sustainable advantage are a red flag
The hubris trap - previous success does not mean seven domains can be ignored
Disruptive technology
A new technology that unexpectedly displaces an established technology
Sustaining technology
Incremental improvements to already established technology
Market Analysis
- Size of market
- Growth rates
- Government regulations
- Legal and ethical issues
- Is market developing, growing, maturing, decreasing?
- Impediments to market entry
- Potential customers and individual purchase rate
- Who makes purchase decisions?
- What percentage of market will company capture?
Marketing Plan
- Need to convince investors that market can be developed, penetrated and company has ability to take leading position in growing market with evidence of customer base (ideally some revenues already generated)
- Cover:
- Pricing
- Distribution channels
- Promotion
- Analyse competition
- Analyse strengths / weaknesses of competitor products
- Address likely competitor responses to your product
Technology
- Competitive edge
- Vulnerability to technological advances
- Development milestones
- IP protection
-USP
Intellectual Property
Patents, trademarks, designs, copyrights
VCs will ask who owns it, can it be transferred, is it licenced for royalties or equity stake, in cases of insolvency
Management Team
What does team bring to the business?
Experience, in running businesses before
How learned from not so successful businesses
Demonstrate that company has quality of management to be able to turn the business plan into reality
Complementary strengths of team – eg. technical, strategy, finance, marketing
Specify roles
CVs with prior experience and special abilities each member brings to the venture
How will team and staff be incentivised?
Performance measures
Non-executive directors
Advisory board
Help from VCs (or Tech Transfer office re spinouts)
Business Operations
Timetable and budget for completion of a prototype and final product;
Location and size of planned manufacturing, production and research facilities;
Availability of labour;
Whether any aspect of manufacturing is to be outsourced;
Accessibility of materials;
Proximity to distribution channels;
Availability of government grants and tax incentives;
Equipment used or needed and cost;
Flexibility and efficiency of facilities;
Applicable safety and employment laws;
Quality control of production;
Requirements for information technology systems.
Financial Projections
Does the company offer enough growth potential to deliver the type of return on investment that the investor is seeking?
Are projections realistic enough to give company reasonable chance of attaining them?
Include: balance sheet, income statement and cash-flow statement, for a period of three to five years.
Include notes that explain major assumptions used to develop revenue and expense items
Explain research undertaken to support the assumptions
Include scenario / sensitivity analysis (eg What if revenues are down 20%? What if costs go up 20% -or both? Show impact on profits and cash flow).
Includes: Income Statement projections, Cash flow projections, Preparation of Projections
