Growthink Blog

How to Write a Business Plan for Raising Venture Capital


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Are you looking to raise venture capital?

You need a good idea – and an excellent business plan.

Business planning and raising venture capital go hand-in-hand. A business plan is required for attracting venture capital. And the desire to raise capital (whether from an individual “angel” investor or a venture capital firm) is often the key motivator in the business planning process.

But how exactly will your business plan persuade investors to sign a check?

This article provides advice on how to position each section of the business plan for an investor audience. These tips draw on Growthink’s decade of experience consulting to start-ups in the business planning and capital raising process.


Executive Summary

Goal of the executive summary: Stimulate and motivate the investor to learn more.

  • Hook them on the first page. Most investors are inundated with business plans. Your first page must make them want to keep reading.


  • Keep it simple. After reading the first page, investors often do not understand the business. If your business is truly complex, you can dive into the details later on.


  • Be brief. The executive summary should be 2 to 4 pages in length.



Company Analysis

Goal of the company analysis section: Educate the investor about your company’s history and explain why your team is perfect to execute on the business opportunity.

 

  • Give some history. Provide the background on the company, including date of formation, office location, legal structure, and stage of development. 


  • Show off your track record. Detail prior accomplishments, including funding rounds, product launches, milestones reached, and partnerships secured, among others.


  • Why you? Demonstrate your team’s unique unfair competitive advantage, whether it is technology, stellar management team, or key partnerships.

 

Industry Analysis

Goal of the industry analysis section: Prove that there is a real market for your product or service.

 

  • Demonstrate the need – rather than the desire – for your product. Ideally, people are willing to pay money to satisfy this need.


  • Cite credible sources when describing the size and growth of your market.


  • Use independent research. If possible, source research through an independent research firm to enhance your credibility. For general market sizes and trends, we suggest citing at least two independent research firms.


  • Focus on the “relevant” market size. For example, if you sell a portable biofeedback stress relief device, your relevant market is not the entire health care market. In determining the relevant market size, focus on the products or services that you will directly compete against.


  • It’s not just a research report – each fact, figure, and projection should support your company’s prospects for success.


  • Don’t ignore negative trends. Be sure to explain how your company would overcome potential negative trends. Such analysis will relieve investor concern and enhance the plan’s credibility.


  • Be prepared for due diligence. It’s critical that the data you present is verifiable, since any serious investor will conduct extensive due diligence.



Customer Analysis

Goal of customer analysis section: Convey the needs of your customers and show how your company’s products/services satisfy those needs.

 

  • Define your customers precisely. For example, it’s not adequate to say your company is targeting small businesses, since there are several million of these.


  • Detail their demographics. How many customers fit the definition? Where are these customers located? What is their average income?


  • Identify the needs of these customers. Use data to demonstrate past actions (X% have purchased a similar product), future projections (X% said they would purchase the product), and/or implications (X% use a product/service which your product enhances).


  • Explain what drives their decisions. For example, is price more important than quality?


  • Detail the decision-making process. For example, will the customer seek multiple bids? Will the customer consult others in their organization before making a decision?



Competitive Analysis

Goal of the competitive analysis section: Define the competition and demonstrate your competitive advantage.

 

  • List competitors. Many companies make the mistake of conveying that they have few or no real competitors. From an investor’s standpoint, a competitor is something that fulfills the same need as your product. If you claim you have no competitors, you are seriously undermining the credibility of your plan.


  • Include direct and indirect competitors. Direct competitors serve the same target market with similar products. Indirect competitors serve the same target market with different products, or different target markets with similar products.


  • List public companies (when relevant, of course). A public company implies that the market size is big. This gives the assurance that if management executes well, the company has substantial profit and liquidity potential.


  • Don’t just list competitors. Carefully describe their strengths and weaknesses, as well as the key drivers of competitive differentiation in the marketplace. And when describing competitors’ weaknesses, be sure to use objective information (e.g. market research).


  • Demonstrate barriers to entry. In describing the competitive landscape, show how your business model creates competitive advantages, and – more importantly – defensible barriers to entry.



Marketing Plan

Goal of the marketing plan: Describe how your company will penetrate the market, deliver products/services, and retain customers.

 

  • Focus on the 4 P’s. They are: Products, Promotions, Price, and Place.

    • Products. Detail all current and future products and services – but focus primarily on the short-to-intermediate time horizon.


    • Promotions. Explain exactly which marketing/advertising strategies will be used and why.


    • Price. Be sure to provide a clear rationale for your pricing strategy.


    • Place. Explain exactly how your products/services will be delivered to your customers.


  • Detail your customer retention plan. Explain how you will retain your customers, whether through customer relationship management (CRM) applications, building network externalities, introducing ongoing value-added services, or other means.


  • Define your partnerships. From an investor’s perspective, what partnership you have with whom is not nearly as important as the specific terms of the partnership. Be sure to document the specifics of the partnerships (e.g. how it will work, the financial terms, the types of customer leads expected from each partner, etc.).



Operations Plan

Goal of the operations plan: Present the action plan for executing on your company’s vision.

 

  • Concept vs. reality. The operations plan transforms the business plan from concept into reality. Investors do not invest in concepts; they invest in reality. And the operations plan proves that the management team can execute on your concept better than anybody else.


  • Everyday processes. Detail the short term processes and systems that provide your customers with your products and services.


  • Business milestones. Lay out the significant long-term business milestones for the company, and prove that the team will execute on the long-term vision. A great way to present the milestones is to organize them into a chart with key milestones on the left side and target dates on the right side.


  • Be consistent. Make sure that the milestone projections are consistent with the rest of the business plan – particularly the financial plan.


  • Be aggressive but credible. Presenting a plan in which the company grows too quickly will show the naiveté of the management team, while presenting too conservative a growth plan will often fail to excite an early stage investor (who typically looks for a 10X return on her investment).



Financial Plan

Goal of the financial plan: Explain how your business will generate returns for your investors.

 

  • Detail all revenue streams. Be sure to include all revenue streams. Depending on the type of business, these may include sales of products/services, referral revenues, advertising sales, licensing/royalty fees, and/or data sales.


  • Be consistent with your pro-forma statements. Pro-forma statements are projected financial statements. It is critical that these projections reflect the other sections of your business plan.


  • Validate your assumptions and projections. The financial plan must detail your key assumptions, and it is critical that these assumptions are feasible. Be sure to use competitive research to validate your projections and assumptions versus the reality in your market place. Assessing and basing financial projections on those of similar firms will greatly validate the realism and maturity of the financial projections.


  • Detail the uses of funds. Understandably, investors want to know what, specifically, you plan to do with their money. Uses of funds could include expenses involved with marketing, staffing, technology development, office space, among other uses.


  • Provide a clear exit strategy. All investors are motivated by a clear picture of your exit strategy, or the timing and method through which they can “cash in” on their investment. Be sure to provide comparable examples of firms who have successfully exited. The most common exits are IPOs or acquisitions. And while the exact method is not always crucial, the investor wants to see this planning in order to better understand the management team’s motivation and commitment to building long-term value.



Above all, the business plan is a marketing document that helps to sell the investor on the business opportunity, the management team, the strategy, and the potential for significant return on investment.

Raising venture capital is a difficult and time-intensive challenge. There is no easy shortcut or silver bullet. However, you can greatly improve your chances of raising venture capital by writing a business plan that speaks directly to the investor’s perspective.

Ready to get started? Download Growthink's business plan template and finish your business plan today.

 

 

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About Growthink

Since 1999, Growthink's professional business plan writers and investment bankers have assisted more than 2,000 clients in launching and growing their businesses, and raising more than $1 billion in growth financing.

 

Need help with your business plan?

Speak with a professional business plan writer today.


Raising money from individual "angel" investors?


Contact our private placement memorandum experts.

Or, if you're developing our own PPM, consider using Growthink's new private placement memorandum template.


Secrets of Investing in Startups and Emerging Companies


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We just released a white paper titled "Secrets of Investing in Startup and Emerging Companies." It provides tips and advice for those looking to make early stage investments in private companies.

We're releasing the report in the midst of strong "angel" investing activity in the United States. According to the University of New Hampshire's Center for Venture Research, in 2006, there were approximately 234,000 active individual angel investors and approximately 49,500 private companies which received funding from individual investors.


Early stage angel investment can produce stratospheric returns on investment. Our report cites the famous example of Google's first private investor, Andy Bechtolsheim, who wrote a $100,000 check to Google in 1998 when it was an early stage private company. That $100k investment grew to be worth $1.5 billion.

And, according to more than 20 years of data collected by Thomson Financial, early and seed stage private company investing has over the long-term, outperformed all other investment classes -- with average annual returns of over 20.6%.

The report provides an overview of private investing, including its benefits and risks, and key advice for successfully investing in early stage private companies, including:

- How to Find, Evaluate, and Profit from Early Stage Investment Opportunities
- How to Position Yourself to Earn Outsized Returns
- How to Mitigate Your Risk Through Diversification and Investment Monitoring

To download the report, please follow this link: Secrets of Investing in Startups and Emerging Companies.


Growthink Client in the News: DCIP


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Last week, several theater chains and studios announced they were nearing an estimated $1.1 billion financing deal to upgrade cinemas to digital technology. This investment is expected to boost attendance and save Hollywood billions of dollars in various annual print and delivery costs.

"We're hopeful that in the second quarter we will get it all arranged," said Travis Reid, chief executive of Digital Cinema Implementation Partners (DCIP).

DCIP is a joint venture between Regal Entertainment Group, Cinemark Holdings Inc and AMC Entertainment Inc.

Growthink assisted in the development of the strategic business plan for the joint venture.

Read more about DCIP and digital cinema technology here and here.


How to Find Angel Investors and VCs Online: Follow Their Blogs


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Entrepreneur.com has published an interestingarticle reporting that entrepreneurs are connecting with venturecapitalists on VCs’ blogs – and some start-ups are attracting funding throughthese new online relationships. For example, Paul Edmondson contacted Will Price of Hummer Winblad via his blog, and this communicationresulted in a $2 million investment in his online publishing company, HubPages.

Here’s another sign of theimportance of blogging in the venture capital world. When looking for a newanalyst, early stage VC and prolific blogger Fred Wilson specifically requested“no phone calls, no resumes, no emails” – candidates should only provide a linkto their web presence.

Social media is having – and willcontinue to have – a significant impact on the shape of venture capitaland angel investment in the months and years to come.

 

Update:  

Are you an entrepreneur looking to find angel investors to fund your company? Learn proven strategies and tactics when you download Growthink's Step-By-Step Angel Investor Guide.

 


3/3/08 Recap: Hollywood Teams Up With Silicon Valley


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The NYTimes broke the news that Silicon Valley has teamed up with Hollywood to launch a digital media fund. More specifically, Accel Partners and Venrock have joined the William Morris Agency -- and AT&T -- to invest in digital media start-up companies in Southern California. The fund will be capitalized with tens of millions of dollars and investments may be as small as $250,000. The focus will be on online technology including social networking, advertising and mobile games.

We’re thrilled to see Southern California venture capital investment continue to grow.


Other interesting stories from around the web:


3/2/08 Recap: Opportunity Costs, "Free" Business Models, Angel Outlook for 2008 -- and More


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This past week saw several interesting blog entries, articles, and reports from the world of entrepreneurship, management, and venture capital.

  • John Tierney of the NY Times wrote an excellent article on opportunity costs and decision making, regarding research on the risks associated with keeping too many options on the table. An interesting observation from Professor Dan Ariely of MIT: “Closing a door on an option is experienced as a loss, and people are willing to pay a price to avoid the emotion of loss.”

  • Chris Anderson wrote a fascinating article, The Rise of the “Free” Business Model. “Once a marketing gimmick, free has emerged as a full-fledged economy,” he writes, citing the success of Radiohead and Google as prime recent examples. Read the article here.

  • Thanks to Jeff Cornwall for pointing us to the Angel Capital Association’s outlook for 2008. Despite recent news about the slowdown in the U.S. economy, nearly half of angel groups expect deal flow to improve in both quantity and quality in 2008. However, angel groups’ expectations for positive exits in 2008 were not as optimistic. More information about the Angel Capital Assocation’s report can be found here and here.

  • Fred Wilson of Union Square Ventures wrote about the importance of conviction and discipline -- specifically, the importance of careful, deliberate planning in order to achieve conviction in one’s strategy, plus the necessary discipline to adhere to that strategy.

  • He also provided great advice on choosing board members, including avoiding “big names” and making sure you get people who have enough time to commit to the job – it’s not a “retirement perk,” he says.

  • imagine it! is a new documentary about Stanford students building companies solely from Post-It notes (available for download here, once you fill out the form). As Anthony Ha of VentureBeat wrote: “Watching the students at work is a great illustration of an important point: even if you’re facing substantial constraints, you can still produce something valuable.” (You can listen to him interview the executive producer of the film, Richard Tavener, here).

  • Is there such a thing as a “born” entrepreneur? Scott Shane examines whether a person’s genetic makeup could affect their inclination to start a business.

  • Michael McDerment of ThinkVitamin recently posted a great article with advice on How To Name Your Company. Evan Carmichael of YoungEntrepreneur.com also provided a few business naming tips of his own.

  • Mashable introduced us to Fundability – a website that matches startups seeking seed capital with investors. While many websites also serve this general purpose, Fundability claims to match startups with investors’ preferences with an algorithm. Entrepreneurs looking to find investors can use the service for a $50 fee (though there is a 30-day free trial).

  • Last week, Mashable also polled its readers, asking “What Would You Want to Invest in Online? Mobile applications, social networking, and online advertising topped the list.

  • Inc published The Nuts and Bolts of Entrepreneurship. A key insight from the article:
    “Real entrepreneurs grab an idea and start moving—and adapt their vision of the business as they go.”

  • And finally – courtesy of VentureCyclist – we got a laugh from VCWear.com’s venture capitalist parody t-shirts.

The U.S. Hispanic Market: Untapped Opportunity for Los Angeles Business


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The U.S. Hispanic market, combined with the number of successful small businesses in Los Angeles, means that regardless of the fluctuations of the stock exchanges, opportunities continue to germinate on our doorstep.

Companies that create products and services for the U.S. Hispanic Consumers will continue to enjoy impressive growth, increasing revenues and expanding markets.

Our optimism on the potential of U.S. Hispanic consumers to be promising partners to enterprises astute enough to provide a range of solutions—from credit cards to Internet connectivity—which embrace the needs and aspirations of U.S. Hispanics, is based on three powerful trends which have transformed 44.3 million U.S. Hispanics from a group long ignored by the majority of American businesses into an empowered and emerging market.


1. The U.S. Hispanic Economy – An Emerging Market Right Here At Home

Together, 44.3 million U.S. Hispanics constitute their own sizeable, secure and financially empowered domestic emerging market that the 245,000 businesses based in greater Los Angeles businesses should be serving today. U.S. Hispanic consumers possess several important advantages typically seen in consumers in foreign emerging markets: rapidly rising incomes, which are fueling a surge in demand for consumer goods and services.

The average age of U.S. Hispanics is a young 27.4 years, giving this group the advantage of time to build wealth—and for companies to develop lifelong loyal customer bases – loyalty being a hallmark of the Hispanic consumer. In 2007, Hispanic consumers will spend $800 billion dollars, a figure that is on track to reach $1.5 trillion by 2012.

And this particular emerging market enjoys an additional asset that consumers in foreign emerging markets can as of now, only dream about: U.S. Hispanics are creating economic opportunity in a nation where laws governing employment, financial transactions, private and intellectual property are strongly enforced. These advantages provide entrepreneurs with a level of security crucial to making investment decisions, which develop new products, expand capacity and provide high levels of services to their customers.

Clearly all companies—here in Los Angeles and throughout the U.S—must develop strategies and services appealing to a group, which is moving en masse, from aspiration to affluence.


2. Capital: The Cornerstone of Success

Providing entrepreneurs who are leading early and middle stage companies with access to the appropriate types of investment capital – especially in the $2 million to $5 million range – and the advice critical to building successful businesses — rather than a slowdown in consumer spending—presents the greatest challenge to growth.

Even those beginning stage companies with deep and proven knowledge of their markets have difficulty raising the investment capital needed for establishing a strong consumer presence and market share. Growthink’s expertise in providing capital and counsel to early and expansion stage companies has been vital to the success of Los Angeles-based, early stage enterprises such as Authenticlick, a developer of fraud detection software and Xcom Wireless, a creator of wireless routing technologies.

Growthink’s involvement with both companies was comprehensive. First we helped each enterprise identify a profitable but unrecognized opportunity to serve their target markets. Then, working with their leadership teams, we developed a business structure adaptable to potential changes in the target market and a range of capital solutions, which transformed Authenticlick and Xcom from promising ideas into thriving, venture-backed enterprises.


3. Plan and Prosper Now

Between 2005 and 2006, fifty-percent of the people added to the U.S. population were of Hispanic origin. Today 13.1 million Hispanics call California home. By 2050 Hispanics will make up twenty-four percent of America’s population.

Can you name one business that succeeded by ignoring one-quarter of its potential customers? Neither can we.

For Los Angeles businesses, Hispanic consumers present a rich opportunity for growth—and a vital shelter from the possibility of recession we’re seeing in the statistics and signals coming from Washington and Wall Street. Business cycles are a natural component of free markets. But so is opportunity. And the opportunities available to Los Angeles companies embracing the potential of the domestic U.S. Hispanic market will only grow stronger, more diverse and profitable.


Recent Venture Capital Investing Trends


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Goldman Sachs recently came out with a report analyzing recent venture capital investing trends. Key takeaways from the report include:

Strong current investment interest in:

  • Software as a Service business models focusing on consumers and small and medium business, aka the Salesforce.com, 37 Signals, and SuccessFactors models.
  • Next generation mobile - including mobile GPS/navigation, television, and advertising.
  • Video-related investments, ranging from web video tools to enterprise video conferencing.
  • An increase in global (specifically India & China) focused investments

 

Concurrently, previous hot sectors of enterprise software, storage, and security software have and forecasted to see a cooling of interest.

It is important to note that the VC investment marketplace tends to move in waves - large crests of interests in certain investment spaces that as quickly crash and fall out of favor. Above all else, it is NOT advisable to start or re-focus a business based solely on "hot" investment interest in that sector. A chameleon business strategy of this nature is usually transparent, and almost always unsuccesful.

Good posts on the Goldman report can be seen here and here.


Southern California Passes Boston in Venture Capital Funding


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In 2007, for the first time Southern California passed the Boston area as the 2nd largest venture capital market in the country. According to Dow Jones Venture One, Southern California saw a 12 percent increase in amount of funded deals - to $3.8 billion. Venture funding in general was up 8 percent in 2007 - and VC's raised over $35 billion in fresh capital from limited partners to invest.

A few takeaways:

  • While the 2007 funding numbers for Boston and Los Angeles are still way behind the Bay Area's $9.9 billion in funding in 2007, it is encouraging to see VC funding continue to be more diversified around the country versus being so Bay Area centric.

  • The early stage, private company equity markets are probably the most insulated arena in the investment world these days. Other than psychologically, the fallout from the real estate credit crunch and generally soft economic numbers on a macro level have not effected the consistent, year-over-year uptick in VC funding.

  • There is a move in private equity and venture capital investing back to more traditional startup and seed investing. Later stage investing remains extremely competitive, with a LOT of VC's chasing relatively few deals. Because a number of larger funds, simply because of fund size, find it diffiicult to invest in smaller deals (say less than $5 million), there is a move to these funds actually investing in startup and seed FUNDS to give them early stage and seed equity positions. This is encouraging for entrepreneurship.

  • Having said this, raising money for a startup remains, as it always has been and probably always will, VERY, very challenging. Doable for sure, and more doable in these solid VC investment conditions, but still a complex, multi-faceted, and arduous process.

Raising Capital: Why Is It So Difficult?


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Raising capital for a startup or small business is without question one of the most challenging aspects of growing a business. The stories are manifold of entrepreneurs and small business owners becoming both frustrated and discouraged by the amount of time it takes to secure capital, the rejections they endure, and the lack of linearity and progress checkpoints over the course of the fundraising process. Complaints we hear repeatedly from entrepreneurs regarding fund raising include the following:


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