Venture Investing & Business Plan

Digbijoy Shuklahttp://networktosucceed.in/

An entrepreneur is a person who has possession of a new enterprise, venture or idea and is accountable for the inherent risks and the outcome – Source Wikipedia

Who is an entrepreneur?

Business Plan

For an entrepreneur however trivial it may sound it’s extremely essential to translate his idea to paper as one of the first critical steps towards building a comprehensive business plan & vision path for his venture.

The journey from being a mere idea in one’s head to paper is not an easy one, as it forces the entrepreneur to think with clarity, logic & see the opportunity in its totality.

This exercise is not just a funding application but actually a vision document for your venture, several entrepreneurs having done this exercise saw for themselves the potential & the gaps in the opportunity that they wanted to pursue.

Hence if you are serious about your idea & you feel you are on a big opportunity start putting it to paper not for anyone else but yourself.

Idea to Paper – Dreams to Reality

An idea is worth the paper it’s written on, unless backed by a business. And a business usually is: 

Tied to Solving a Large Problem, which If Solved, would Result in Huge Value to Someone, who (collectively) Would be Willing to Pay a Large Sum for the Solution.

Investors expect the bold questions in the statement above to be answered with crystal clarity. In addition, they like to have the following questions answered as well.

 ◦ Why hasn’t the problem above been solved before?◦ What makes you and your team experts at solving the problem?◦ Why can’t other companies solve the problem?

Barrier to Entry: Why can’t a company with $100M in capital solve the problem better than you?

Investors invest in businesses that are innovative and teams that can execute well. If a large company like Microsoft, Google, SAP, or Reliance can do what you’re proposing, they have 100x more capital than you ever will to pull it off. Be prepared to answer why you’re likely to succeed in spite of the competition.

 

Investors - Invest in a Business, Not a Idea.

Are you really committed to your idea? Do you have the courage to quit your cushy

salaried job? Are you willing to put in whatever little capital you

have, or can raise from friends and relatives, tighten your belt and somehow execute your idea?

DO YOU HAVE SKIN IN THE GAME?????

Once your concept is validated, investors come in with much greater confidence and give you a much higher valuation than they would have at an earlier stage. In other words, you get to keep a larger share of your company for the same money

Before Going for Funding…

Self Family & Friends Seed/Angel Venture Capital P.E. Debt – Bank Loan

Sources of Capital

Venture capital is a high risk, high reward business.

It’s the most expensive capital out there – since the investor is betting on a team with an idea, and not on a profitable business. For a typical early stage startup, it costs 25-35% of the startup for $1-3 million of investment.  

Comparatively, a $2M debt at a 10-15% interest rate, costs $200-300k in interest yearly, much cheaper if you assume the startup will be worth $10M in 2 years.

The challenge though, is most banks won’t provide $2M of debt capital to a young entrepreneur.

Venture Capital - High Risk & High Rewards

VC’s are in the business of making money. A VC fund has limited partners (LPs), usually

corporate’s or high net-worth individuals – who give their money to the venture capital firm to invest on their behalf.

The fund has team members (partners) who are responsible for investing from the fund. They usually pick sectors to invest in (software, Internet, healthcare, retail) – depending on the experience of the team members.

The experience matters since the team member helps guide the company they invest in with their experience and connections.

Venture Capital is a Business

Before trying to raise venture capital, decide what your business will look like in 3-5 years. VC’s invest in businesses that are likely to become BIG companies in 3-5 years, when they’d like to get their returns. VC Money is RIGHT for your business if:

 ◦ You are trying to build a $20M business over 3-5 years and ideally a

$100M business over 5-7 years◦ Your business can go public or be acquired for a large amount◦ You are comfortable with involvement from partners of the VC fund – on

strategic operations of your business

Having a venture investment in your company means you are signing on to be a high growth company and will do the things necessary to grow quickly and build the talent base, processes, and infrastructure that is necessary to support a high growth business. This is usually good when all goes well, but during rough times, it’s difficult to manage.

The right venture investor can be VERY helpful to building your business.  Their experience, advice, and connections have been invaluable. But it’s a little like marriage so choose your partner carefully; it’s pretty hard to get your venture capitalists out of your company if you decide later that you don’t like them.

 Is VC Money Right for You?

A TEAM is of paramount importance to a technology startup. Without a team, there’s a very small chance of raising venture financing, unless you’re a recognized name and have built successful businesses in the past.

VC’s look for a team of founders. The reasons are simple, but often not obvious.  1. A team is always better than an individual. A team will have better ideas,

complimentary skills, and the ability to support one another during tough times.

2. A team reduces the level of risk, especially a good founding team that compliments each other. Think of a team with a marketing, engineering, and sales background, not necessarily 3 engineers .

3. A team that has worked together for a period of time has worked out teething pains. They’ve learnt to work together and are likely to stick together.

VC’s bet on a team’s ability to solve the identified problem. Chances are the initial solution is partly wrong, and a good team will figure out what’s wrong with it and fix it.

Venture Capitalists Like to Back Teams, Not an Individual with an Idea.

Funding Institutions vs Business Life Cycle

Time/Revenue

MATURITY

IPO

Market ValidationCustomer AcquisitionNo or low RevenuesLow or –ive Cash FlowOperational Challenges

Growth ChallengesCAPEXInvestor PressureChange Management

Faith Money

Incubators Angels

Venture Capital

Working capitalBank loansPrivate equity

Late Stage

What What is the space

◦ Not telecom / entertainment Who are the market leaders

◦ Their size◦ The opportunity

Market potential from external sources◦ Very, very briefly

What is your product / service ◦ Does it need seeding

How does it fit in the landscape

Why Why is your product / service necessary

◦ What pain is it removing for the customer◦ Is it adding a service which will enhance a product /

service◦ Is the process different increasing productivity,

reducing cost, etc. etc. Is it doing something Different / Differently Is it “need to have” / “nice to have” Is there an IP What will the customer exactly get / see

Who

Identify exactly who the customer is◦ Is it creating a new customer base◦ Enhancing a customer base◦ Is your target the real customer ?

What are the parameters of your customer?◦ Geography◦ Age◦ Urban / rural◦ Etc etc.

Market Market size

◦ A billion dollar market is not YOUR market size - what is your market potential

◦ “1% of USD 1500 bn market” - ?? How has the market been validated by you? Specific markets / geographies / segments

which will be addressed

Competition Who is your competition?

◦ Product / service◦ Company◦ Alternate process

Size up your competition◦ SWOT of competition◦ Lessons learnt from competition◦ Trends in competitive companies

“Never say None”Potential buyers could continue without your

product / service

Competition Existing and future competition

◦ First mover advantage – rarely sufficient◦ Needs more vision and could be

IP driven market entry strategy Innovative commercial model

Your vision for the venture

USP What are your differentials

◦ What is your USP of your proposition◦ Any validation of your product/service◦ Pain point in competition being addressed by you◦ Product life cycle ◦ Specific market / selling modality◦ Cost differential

Is too common / too unique ?

Cross check idea / competition Who are the audiences you are addressing with your idea? What pain points you are addressing for these audiences? What evidence do you have that these pain points are real? What are the current solution approaches? What’s lacking in these approaches? How is your solution approach better? How big is this difference and what is it worth to customers? What’s in it for other stakeholders besides end-customers? Why hasn’t someone else thought of your idea yet? Are you sure nobody has thought of your idea yet? What is proprietary about your idea?

Customer How will you acquire customers

◦ Reflect market realities ◦ Customer behavior ◦ Partnerships – conflict situations◦ Demo / reference sites

Current customers◦ How did you acquire them◦ Sales cycle time◦ Why did they come to you vs competition◦ Why did they go to competition vs you

Quantification ◦ average revenue / client or target◦ Acquisition Cost / client◦ No of customers to break even

Customer Pricing model

◦ Vs cost◦ Vs competition◦ Pilot

Hybrid sales model Retention of customers

◦ Plan for retention of customers before acquiring them

◦ Average cost of generating business is 5 times from new customers vs existing customer !

Customer / Order profile◦ Are they one time / repeat orders◦ Stickiness for customer◦ Why did you lose customers◦ After sales support strategy

Delivery model How will you deliver

◦Build yourself◦Technology used◦Service provider partnerships◦Branding ◦After sales strategy◦Any relevant certifications◦Permissions reqd./ received

Team Who is the team behind this venture

◦ Background and experience◦ Contribution till date◦ Brief Job role◦ Gaps in team◦ Time contribution

Advisors ◦ Roles◦ Non compete

Team and Advisor Compensation ◦ Cash◦ Equity◦ ESOP

Mentor Team expansion

◦ Attract◦ Motivate◦ Retain

Cross check on your team Is the team leader strong and passionate? Will leader and team attract “A” players? Is the team appropriate for the stage of the company? Has the team worked together before? What are the team’s values and what type of culture will they

create? Is there a strong technical leader? Is there a strong marketing leader? Does the team have deep domain or technical expertise? Does the team listen and take criticism in a positive way? Does team have a good blend of “thinkers” and “doers”? If current plan doesn’t work out, will team adapt? Will the founders give up control if that is what the venture

demands? Passion, Integrity, Resourcefulness, Perseverance, Risk taking

ability, Mental horsepower

Financials Current / Projected for next 3 years

◦ Topline / bottom line◦ Headcount◦ Projected

When will it break even◦ Profitable businesses are more attractive

Self investment & funding received till date◦ Skin in the game

Investment sought◦ For what◦ Where will it take your venture◦ Next round requirement◦ Cash flow based workings◦ No debt retirement

Valuation expectation

Risks and Mitigating them Are they risks to your plan

◦ “No” is not an option

What are the risks to your plan

How will they be mitigated◦ Examples of early set backs and their handling is a

good idea

Exit Investors will monetize their investment

◦ How ◦ When◦ What

Building an exit option is necessary for yourself, your team, and your investors

Investor Perspective Alternative investment options

◦ Angel investing is an alternate asset class This space / sector is one of many

Your plan’s niches is just one of the many niches Your plan is in competition with another

Remember idea may be sold but investment may not happen◦ 3BHK in Delhi vs 3BHK in Bangalore

Some tips Be brief and direct; get to the bottom line quickly Identify what the business is immediately Define the customers quickly and the customer problem clearly Define what’s compelling and unique Describe how you will make money Provide a phased snapshot of your company 12, 24 and 36 months out Describe how you propose to take your product to market Make bottom-up as well as top-down projections Know what 4 to 5 assumptions your plan pivots on Discuss the key risk factors State how much money you will need and how you will use it State your possible exit strategies

Presentation should be self explanatory – there will be investors who may not be in the room

Clarity in text / relevant graphs more important than pictures Blue sky points not relevant

◦ Investors are quite knowledgeable !

And Finally Put some of your skin in the game

Getting a high valuation early can be fatal

Size of the pie wins every time over share of the pie

Investment Process

Preliminary

Evalua

tion

Business Due Diligence

Closure

• Meet the entrepreneur

• Discuss the business opportunity

• Preliminary evaluation of the business and specific industry

• 1-2 weeks

• Detailed business due diligence, market estimations & analysis, references

• Meet the core team in multiple meetings and understand the business

• Entrepreneur presents to multiple partners

• 4-6 weeks

• Issue the Term Sheet

• Accounting due diligence

• Legal due diligence

• Definitive agreements

• 4-6 weeks

Very selective process – One in hundred company completes the whole round

Case Study – Online Video Rental Business

$1.5 bn

# of urban HH = 100mn

Price Point = 50/- month

Market Size = 50*12*100 = 60 bn INR = $ 1.5 bn

$750 mn

DVD Penetration - 50%

# of HH = 50mn

Market Size = 50*12*50 = 30 bn INR = $ 750 mn

$375 mn

Internet Users – 25mn

Market Size = 50*12*25 = 15 bn INR = $ 375 mn

?

Mobile Users - 175mn

Urban Users – 75mn

» Competition » Don’t aim for more than 10-20% of market share» Compare growth rates, adoption rates from international

similar markets» More Case Studies – Classified market, New Media

Campaigns

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Digbijoy Shuklahttp://networktosucceed.in

Thank You