The Venture Capital Business Plan

By: Peter Adams Monday November 3, 2014 1 comments Tags: angel investing, Peter Adams, venture capital

 



By Peter Adams

Venture capital and angel investing involves making decisions about companies with relatively little information and high degrees of uncertainty.

There is debate among the venture community about the need for a business plan, and it's time to discuss this issue and come to an understanding about why a venture capital business plan is necessary and to dispel some of the straw man arguments against them. After that, I'll cover what the elements of a venture capital business plan should be.

Straw Man Argument #1:

"If you create a written business plan, then it's set in stone and can't change."

I don't understand why people think that writing down your goals means that you can't ever change them. I do know that people who don't write down their goals rarely achieve them. The same thing goes for companies. Research has shown that companies with a written business plan perform at consistently higher rates than those that don't. There is absolutely nothing about a business plan that says you can't change it!

Straw Man Argument #2:

"You don't need a business plan, just fail fast and iterate."

Ok, so if you're going to try stuff randomly, does that somehow make it more effective? Or would it be better to do your homework and find out what works and what doesn't? Research where the real opportunities lie and what the costs of pursuing each would be.  Startups have precious little capital to spend on random failures. Why not narrow down your options to those most likely to succeed and those that take the least resources, so that your efforts will less often end up in failure? That's what a business plan does for you.

Straw Man Argument #3:

"You don't need a business plan any more to get money from venture capital."

Ok, there have been companies that have raised money from nothing more than a pitch deck. It does happen. BUT companies that have worked out their competitive environment, strategy and finances are going to be much more successful from VCs - even if the VC never sees the plan. Experienced entrepreneurs who have multiple successful VC-backed exits may not need a written plan for themselves, but it certainly helps to have one to make sure the less experienced people on the team understand the specifics and are aligned to the plan.

I can tell when companies know what they are talking about and are experts in their field, because they can tell me why they made the decisions they did and they can back it up with data. The best way to get that information is by putting together a business plan to refine your strategy and know where you're going so that you don't present the VC with a confused and random strategy.

Straw Man Argument #4:

"The old SBA-type business plan doesn't apply to the world of venture capital."

Ok, this is partly true - venture capital strategy requires different information than small business looking for an SBA loan. This is still a straw man argument though, because who said a business plan has to be an SBA business plan? What would a venture capital business plan look like and how would it be different?

The Venture Capital Business Plan

The venture capital business plan -- first of all -- needs to be written by the founder(s). When someone tells me that they have a great plan because they paid $20,000 to a consultant to write it, I'm going to run away from that deal as fast as I can. There's a lot of work that goes into a plan and it's work that nobody else can do for you. If you can't do it yourself, then perhaps a venture business is not the right place for you to be.

What goes into the plan is likely to be as debatable as whether you should have a plan at all. I will outline eight elements with the caveat that every deal is different and there may be additional elements required for some kinds of deals. I intentionally left out the product because that is the main thing founders want to talk about and where they have focused their energies. I would want to see a product plan when the product is complex and will take lots of resources to complete. I would also want to understand if this were a single product, or if it was a platform for a family of products, and what the other products were in the pipeline. These eight elements are the things I look for a founder to know right off the top of their head.

How long should these business plan elements be? The answer is just long enough, but not too long or too short. Most of them can be handled in just a few pages, so this doesn't need to be a weighty document. Instead of thinking of the business plan as a single document, think of it as these separate elements. You can change one or more of them without having to change everything else.

Venture Capital Business Plan Elements

  1. Market: Who is the customer, value proposition, market size and the competition? Many companies don't have a firm grasp on what their market is, what the Total Addressable Market is, and how they have an unfair competitive advantage in the market. A good business plan will help focus on these things in order to target efforts to the right people in the right way.

  2. Go-to Market: How will you reach the customer effectively? Why do I list this separately from the marketing plan? Mainly because most marketing plans talk all about who the customer is, but they don't get deep into the strategy to SELL to that customer. Most founders I talk to drastically underestimate the cost of acquiring a new customer, so the go-to-market plan provides a place to get into the detail of what is the riskiest part of most investments.

  3. Strategic Plan: How will you get from Point A to Point B and what are the steps and metrics? A strategic plan needs only to be a few pages. The most common elements are Mission, Vision and Values - who you are and what drives you. Then Objectives (your highest level goals) and strategies (the specific programs and steps you will take to achieve your goals). You should describe these in a way that is clear about what constitutes measurable success.

  4. Proforma: Detailed financial projections, researched assumptions and five years out. Your proforma should have multiple tabs that will vary by company, but common ones include marketing, staff, distribution channel breakdown, product mix, expense details, revenue details.

  5. Valuation: Work through five different valuation methods for your pre-revenue company. The process of working through the valuation methodologies will help you to come up with a reasonable valuation and to negotiate it reasonably with investors.

  6. Cap table (Proforma) Finance Strategy: All funding tranches, exit, dilution analysis. A proforma cap table allows an investor to see how much they will be diluted as you go through future rounds.  More importantly, it shows the founders how many rounds they will need to get to exit and what milestones they will achieve at each tranche. Understanding your funding strategy will be crucial for success since you want to raise only as much as you need at each stage, but enough for you to grow big and grow fast.

  7. Exit Strategy: Acquisition/IPO strategy, industry leaders, acquisition trends, multiples, etc. You should have your top acquisition partners identified and know who else they have acquired, what the strategic reasons were and what the multiples of revenue/EBITDA or subscribers was. The company that acquires your company is your main customer - so you need to know your customer to be able to reach them and develop relationships early.

  8. Pitch Deck and executive summary: Pitch deck and exec summary for five minute live pitch. The pitch deck is the tip of the iceberg.  It contains summaries of all of the other elements above. You will want multiple pitch decks - one that you provide in person and another that you can send as a stand-alone document when requested. The Executive summary should be a 1-2 page summary of the key elements of your plan.


 

If you have these eight documents, and they are well researched and revisited often (probably prior to your quarterly board meetings), then your odds of raising venture capital and -- more importantly -- of building a successful company will be greatly increased.
Peter Adams

About the Author: Peter Adams

Peter Adams is co-author of Venture Capital for Dummies (John Wiley & Sons. 2013) and serves as the Executive Director of the Rockies Venture Club, America’s oldest angel investing group.  RVC is a non-profit organization furthering economic development in Colorado whose companies raised over $23 million in the past year.  RVC’s connects investors and entrepreneurs through conferences (Angel Capital Summit and Colorado Capital Conference), networking events, angel investing educational offerings and facilitation of Colorado’s largest angel investor groups.  Peter is the founder of the Biz Girls CEO Development Program for high school age girls and is an Adjunct Professor in the Colorado State University EMBA program. Peter holds a BA Degree from Colorado College, PhD/ABD from University of Colorado and an MBA from Regis University.


Peter,

While you have many excellent points in your article, I must humbly disagree with one thing you've said. The founders do not have to write the business plan. They must be involved in the strategy sessions that formulate the business plan; however, the actual writing can (and many times should) be outsourced for a few reasons:

1) If the founders take 3-6 weeks to write the business plan, they're taking time away from selling their services and increasing revenues
2) Many founders are not able to write a compelling Executive Summary which is needed in many cases to get meetings.
3) The best business plan writers are able to help pinpoint areas of weakness (or vulnerabilities) within the business that will make it harder to attract funding & can offer viable solutions to the founders.
4) The best business plan writers have access to sources of capital.

- Cheree Warrick