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A Venture Capitalist’s View: Business plans that net investment

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You only get one chance to make a first impression, and this is particularly true when seeking investment to grow your business. In this guest post, venture capitalist, Dr David Demetrius, sets out how to write a plan that will grab the attention, and the investment, of a potential backer.

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Why do so many promising ventures never get the capital they need?  In the vast majority of cases, it is due to the business plan not having made a good enough case for investment.  So what does a good business plan entail?  Here is what I would be looking for.

It should start with an executive summary, preferably of a single page, but certainly not more than two.  This summary needs to grab the potential investor’s attention in the first five lines.  Don’t start with background waffle.  Make it immediately clear what the products or services of the business are, or are planned to be.  Make the executive summary exactly that: a summary of the whole document including highlights of the market opportunity and the team and ending with a clear statement of what you are looking for and what you are offering in return.  For example, “We are seeking an investment of 100.000 Euros in return for a 30% share of the company”.

After the executive summary, you can go into more detail on the venture.  Excluding appendices, this should run to about 15 to 20 pages.  You need to describe the products or services in some detail, but try not to get bogged down in technical jargon which at best will bore the investor and at worst will totally put him off.  Of more importance is to show clearly what the market opportunity is and what competition exists or could appear in the near future.

You also need to give profiles of the team, their skills and their experience, and indicate what finances they are themselves investing in the venture.  Be honest and point out what gaps there are in the team’s background and skills.  Hopefully the investor will be able to help fill these gaps.  

What investors will be very interested in is what they are likely to see as a return on their investment.  For that you need to have detailed financial projections.  However, there is no point in burying 30 pages of financial spreadsheets into the main body of the document.  By all means have lots of detailed tables as an appendix, but in the main body simply have a page or two showing the key performance indicators (KPIs), such as graphs of projected cashflow, profitability and revenue growth.  Then make it easy for the investors to find the detailed backup to this information, If they so wish, by guiding them to the relevant pages in the appendix.

It is also important that the summary pages on financials includes some “What if?” analysis (preferably displayed graphically).  For example, it can be very reassuring to investors if they can see that, even if actual revenues achieved are only 80% of your projections, the company will nevertheless not run out of cash.  This should not be achieved by simply asking for an overly high injection of funds, but rather by indicating savings in expenditure such as administration costs that would be made in the event of lower sales.   Similarly show the optimistic growth figures for the venture if revenues significantly exceed your projections.

How far ahead should you forecast?  In most cases, I would recommend three years with monthly figures, but in some industries a five-year forecast can be realistic.  (In the oil industry, even 25 year plans are common). Basically you should only project revenue and costs as far forward as you can reasonably see.  Don’t simply take ‘month 1’ and add x% per month to it for 36 months ahead.  Any potential investor will realise that you have no real idea what is going to happen.  Think it through carefully.  For example, will there be months of the year when revenue will be lower due to holiday periods?

I am not saying that following my advice in this post will definitely get you the investment you seek, but I am fairly confident that ignoring these pointers will not improve your chances!

Dr David DemetriusDavid Demetrius is the founder and President of Emadin and specialises in working with companies to achieve strategic growth. He has over 25 years experience in management of and consultancy to companies (from SMEs to large multinationals) throughout Europe, the United States, Middle East, Australia and Asia. With a colleague, he founded a group of companies specialising in management support and consultancy services for complex or large programmes and projects, building it to annual sales of over $ 100 million with approximately 500 professional staff by the time he sold his shareholding in the group.

 

A venture capitalist investor speaks…

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Dr David DemetriusDr David Demetrius is an Australian entrepreneur who has lived in Belgium for over 25 years. One technology company that he created was sold at the height of the tech-boom and he uses the capital to invest in both start-ups and scale-ups. He also provides board-level training programmes.

Over the last few years you’ve been active as a venture capital investor in various businesses and also as a training provider. Could you explain a bit more about what you do and how you operate?

Through the training company that I founded in 2005, Emadin SA, I provide training for company directors in all aspects of corporate direction.  As a result of this, I’m often made aware of opportunities for my colleagues to take an equity stake in young start-ups and early growth companies.

You’re clearly focused on creating profitable partnerships. Can you explain the critical elements you look for?

The key points for me are to find individuals or teams with products or services that clearly fill a gap in the current offerings available and where the individuals or teams clearly believe passionately in what they are doing, and have the drive and commitment to carry it through. It is important that I feel that we can contribute something that the organisation is currently lacking. For example, I find that many young companies are reliant on the technical skills of the founder(s) and that they have little, if any, experience in developing corporate strategies or implementing sound corporate governance procedures.

Over the years, venture capitalists have become well known through television programmes such as Dragon’s Den and its clones across Europe, and it seems they always focus on three things: the business plan, the market and the cashflow. What’s the importance of these three things as far as you’re concerned?

In a sense, the more successful the company is, the more important is its cashflow. A fast growth puts cash under enormous pressure.  

Clearly, the market opportunities are also vital. It’s useless having a wonderful product if no one wants to buy it. Often, young entrepreneurs believe that if they like what they’re selling, then everyone else will obviously want to buy it. This is often not true.  

With respect to business plans, I’m often appalled to see how badly prepared such plans are.  I’m sure that I’ve missed many good opportunities simply because I was presented with such a badly written plan that I threw it away without even getting to page two!

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As you’re based in Belgium, is there anything that you feel the European Commission can do to assist you achieve your objectives as a business investor?

I’d be delighted to see the Commission simplify the procedures for obtaining EU grants and make it easier to know what grants are actually available. At present, most fledgling companies can’t afford to allocate the resources necessary to seek out and apply for grants.

Cash flow is king

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Without a positive cashflow, the business is dead

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What is the singular most important thing a business needs if it is to survive and then go on to scale up its activities? This question has challenged business thinkers and entrepreneurs for a very long time. Some say marketing, some say a great product. Others still say the right timing, but the reality is that, even more important than all those, is positive cashflow.

Cash flow is a simple concept: money in and money out, and it can be tracked from your bank account. Positive cash flow means that more money has already arrived than is needed to pay the bills that are immediately due. The key thing here is that the ‘money has already arrived’ – not promised, not owing, but is already in the bank account. In general, when a business starts, there is period of negative cash flow during which it has to pay its bills before generating income, and it has to do this from the initial start-up funds. The scale of the funding required is determined by the maximum outflow of funds before the inflow of income exceeds the outflow of expenses. This means that an ultra-realistic view has to be taken on the generation of income in terms of amount and timing.

Vanherck_CashflowAnd here’s the most important point: scaling up a business means that more money is required to fund the cash flow and so, if the decision is made to scale up, then the entrepreneur needs to ensure that a new tranche of funding is available. And that means calculating a new cash flow.

“A business does not have to make profit,” says Jan Vanherck, a well-known Belgian businessman and Dean of United International Business Schools, a private business school network with campuses in Belgium, Spain and Switzerland. “But it has to have a positive cash flow if it is to survive. If you can’t pay your bills, then you’re bankrupt.” Vanherck is of the opinion that entrepreneurs need to firmly differentiate between profit and loss, an accountancy concept, and cash flow, which is the lifeblood of the business.

Vanherck, who acts as a consultant and mentor to a wide range of entrepreneurs, observes that those startups that are not going to survive share a common fault: they focus solely on the product and the excitement of the business, and ignore the cash flow until it is too late. “Entrepreneurs often do not understand the concept of cashflow and they have nobody around to tell them about it. Cash flow is so simple to monitor and is not difficult to calculate, providing a realistic income model is used. And cash flow needs to be calculated on a rolling three-to-five-year basis.”

Although calculating and monitoring cash flow is one of the least exciting things about running a business, it is critical for success.

For more information on cash flow, see:

Entrepreneur Encyclopaedia

Understanding Cash Flow Analysis

Additionally, a discussion with your accountancy or financial advisor would be a good idea.

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