Translating your idea to paper - constructing your business plan and deciphering the world of venture capitali

1. Venture Investing & Business Plan Digbijoy Shukla http://networktosucceed.in/

2. 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?

3. Business Plan

4. 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

5. 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.

6. 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…

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

8. 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

9. 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

10. 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?

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

12. Funding Institutions vs Business Life Cycle Growth Challenges CAPEX Investor Pressure Change Management IPO M A T U R I T Y Market Validation Customer Acquisition No or low Revenues Low or –ive Cash Flow Operational Challenges Late Stage Working capital Bank loans Private equity Venture Capital Incubators Angels Faith Money Time/Revenue

13. 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

14. 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

15. 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.

16. 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

17. 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

18. 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

19. 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 ?

20. 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?

21. 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

22. 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

23. Delivery model How will you deliver Build yourself Technology used Service provider partnerships Branding After sales strategy Any relevant certifications Permissions reqd./ received

24. 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

25. 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

26. 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

27. 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

28. Exit Investors will monetize their investment How When What Building an exit option is necessary for yourself, your team, and your investors

29. 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

30. 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 !

31. 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

33. Discuss the business opportunity

34. Preliminary evaluation of the business and specific industry

35. 1-2 weeks

36. Issue the Term Sheet

37. Accounting due diligence

38. Legal due diligence

39. Definitive agreements

40. 4-6 weeks

41. Detailed business due diligence, market estimations & analysis, references

42. Meet the core team in multiple meetings and understand the business

43. Entrepreneur presents to multiple partners

45. Don’t aim for more than 10-20% of market share

46. Compare growth rates, adoption rates from international similar markets