1 What the Investor is looking for A Workshop for Practitioners in business plan writing presented by Colin Alexander Director, Consultancy and Projects.

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What the Investor is looking for

A Workshop for Practitioners in business plan writing

presented by

Colin Alexander Director, Consultancy and Projects

Alastair Cavanagh Manager, Business Angel Networks

Bicester 22 March 2005

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Before we start

Internal – a management map

External - a sales document

Environment of business

Investors - angels, venture capitalists, banks

Highlight what a prospective investor is looking for

85% rejected; 15% considered

Credibility

No magic formula - your plan and you must own it

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Before we start

Most new business ideas do not get backing

NOT

because the proposition is weak

BUT

Because the entrepreneur has failed to communicate the investment argument effectively.

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Targeting your plan to investors

Identify the investors – angel, venture capitalist, bankImagine you the investor – what would you want to see?Make it easy for investors to understand; (half page product, rest in IP and competitors)Research investors; get feedback, learn from each presentation Be careful with advice from friends

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The Business Angel Investor

• Why?

• Who?

• What?

• Benefits?

Is the entrepreneur willing to ‘sell’ part of the business?

Is the entrepreneur aiming to exit the business?

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Business Angels – why?

• Early stage• No revenue• No profit• No assets (IP driven)

Therefore no debt finance from banks

(incl SFLG)

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Business Angels – who?

• Investing % of own funds (c10-20%)• Serial entrepreneur• Owner / Manager• Recently exited business or cashed in assets• Too young to retire• Most are generalists not specialists• Not all multi-millionaires!

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Business Angels – who? …con’t

• £10K - £500K per deal• Syndication • Looking for high returns• Post-investment role • Tax breaks (EIS)

Looking to recycle knowledge and make money

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Business Angels – who? ...con’t

• Ian Laing – Milton Park, Oxford Asymmetry, Oxford Semiconductors

• Invests with colleague• Up to £1m• Uses contacts for technical due diligence and

build teams• £ 50% : IP 50%• Key: passion + personal chemistry + trust

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Business Angels – who? …con’t

Typical investor

£30k per deal Less than 25%

Future dilution?

How to set valuation? NEGOTIATION

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Business Angels- what?

Χ Lifestyle businessesΧ Dividend

Χ “Me Too”Χ Service based

Χ Features not benefits

Χ New to sectorΧ Part timeΧ No personal risk

High growth potential 10 fold return

Innovation Unique proposition IPR

Growing market Clear need Routes to market Sales strategy

Management Experience Commitment Personal investment

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Business Angels – benefits?

Early stage

- available pre-revenue

- unsecured against family assets

- no fixed repaymentLonger term investment Investors bring skills / contactsShare risk as well as rewardΧ Shareholders!

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Selling the Business (1) The Business Plan

Executive summary

Brief History

Product or service

Market and competitors

Marketing plan – The route to market

Production and operation

Management team and its objectives

Financials

The Offer - return and exit

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Risk is everywhere

Address risk in each section

Summarise major assumptions

Sensitivity analysis must reflect the identified risks

Explain underlying thinking

Build confidence in the management team

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Executive summary

Two pages maximum

Write it last; hardest part to write

Take the reader from opportunity to proposition

Outlines market, business model, key drivers

Inspires confidence in the team’s ability to deliver

Only section you can guarantee will be read

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Finance

Summary

Consistency with the rest of the Business Plan

Investors will look for two moments:

Breakeven (cumulative profit)

Cash flow going positive

Cash flow the key forecast

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Finance

Risk – It is everywhere

List the highest probability risks

List the highest impact risks

Measure sensitivity (worst case/best case)

Be realistic – Don’t be too ambitious

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Finance - The Offer

What we are putting in

What we want you to put in

When do we want it

How much are we giving away

How are we both going to get our money back

Balance the Risk against the Reward

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Finance - The Offer

Ordinary Shares

Preference Shares

Debentures

Loans

Don’t give give away too much too early

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Finance - The Offer

Valuation

Enterprise value = equity value + (borrowings - cash)

Net assets

Multiple of Profits/Sales/Earnings

Off Balance Sheet factors

Bid premium

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Finance - The Offer

How do we get our money back?

Dividends (profit sharing)

Buy back of shares

Trade Sale

Public Offering

Give me the Money

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Selling the Business (2) The Business Plan

Executive summary

Brief History

Product or service

Market and competitors

Marketing plan – The route to market

Production and operation

Management team and its objectives

Financials

The Offer - return and exit

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The product or servicewhat is it and what it will be used for?

Functionality vs technical detail

How is the proposition anchored in a real market opportunity?

What benefits does your product bring to customers? How do you measure these benefits

What problem does it solve?

Why will customers continue to buy it?

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Two rules…

1. Never underestimate how little people understand about science and technology

2. Never assume they want to know

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Markets and competitors

Size of market

Market segmentation and niches

Major customer types – a typical customer

Consumer buying patterns and priorities

Actual/projected growth rates

Geographic breadth and variation

How the market operates

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Market and competitorsWhat you need to write in a business plan

Stage 1

A general description of the market -

size, geographical spread, major customer types

Recent history and future development -

growing or static, how does the market operate, principal axes of competition: price, quality, service and reputation

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Market and competitorsWhat you need to write in a business plan

Stage 2

Analysis of your target market segment…

where the segments are: local, regional, international

the relative sizes and rates of growth

particular characteristics

consumer buying patterns and priorities

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The Market Analysis

Underpins both the sales and financial forecasts Ensure that:• Market opportunities are realistically evaluated

and supported by data eg number of potential customers, target market share

• You show a good qualitative understanding of how the market works, (what your customers want, how to reach them, adjustments they may have to make to support your product or service)

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Competitor analysis What you need to write in a business plan

Who are the potential competitors?

On what basis do my rivals compete: price, sales volume, reputation, product design, quality, reliability, service?

What makes my product superior or different (critical success factor)

What barriers does a new entrant face and how will my rivals react to my entrance

In what area are my competitors vulnerable and how can I exploit this?

How do my potential customers see the competition?

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Marketing plan

You have described the market, identified your target segment and analysed the competition, now state how you will reach the market

Pricing

Promotion

Selling and distribution

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Markets: finding, reaching, satisfying

Definition of ‘customer’ or ‘market’A set of ‘actual’ or ‘potential’ buyers of a product or service

Definition of ‘business model’The method chosen by a company to deploy its resources most effectively

Examples: licensing, joint venture, partnering, merger

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Pricing in your plan explain….

• How is it set (cost plus or demand based);• How does it compare• What margin (price – cost) does it give you• If the target price differs markedly from

prevailing prices, explain why• Common fault is underpricing

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Risk is everywhere

Address risk in each section

Summarise major assumptions

Sensitivity analysis must reflect the identified risks

Explain underlying thinking

Build confidence in the management team

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Selling and distribution straightforward, though often neglected

• What distribution channels exist?• Which will you use: management team selling,

sales force, agents, commission reps• Geographical coverage of sales operation• Not too much detail, but explain the strategy and

why you think it will work

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Writing style tricks

• Explain acronyms NMR, CDMA, ASCI

• Say it out loud, write as you would speak, not like a textbook perfect English

• Avoid passive tense adjectives and adverbs (unique, world-beating) clichés

• Vary sentence length

• Summary: who, what, when, where, why, how

• Specific words (red and blue) not general ones (brightly coloured);

• Concrete words (rain,fog) rather than abstract (bad weather)

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Re-cap

Target business plan to be a sales document for investors not an internal management tool

Avoid infatuation with your product

Show understanding of your target market

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Excite this man

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Case StudyIs this a winning business plan?

What is good?

What is bad?

What is missing?

What is redundant?

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Breakout sessionYou are the investor

• You are a group of investors with £50,000 to invest • Your group decides which company to invest in, and why• Your representative gives a two minute presentation,

telling the workshop which company and why. • A short discussion will follow each presentation

Instructions• Read the four executive summaries• Write down your impressions as you read• Use the questions to help you analyse

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You are the investor - Questions

1. Do you understand what the business is? 2. Is there is a market for this product?3. What is your opinion of those who wrote the plan? What

type of people are they? Are they scientists or business people?

4. Do you feel that your £50,000 is safe with this company?5. Will you get it back?6. What are the main risks as you see it?7. What else would you like to know about the company?8. Which company has the most credibility for you?

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Contact

Colin Alexander

c.alexander@oxin.co.uk

Alastair Cavanagh

a.cavanagh@oxin.co.uk

www.oxin.co.uk

Ralph Baker

ralph.baker@businesslinksolutions.co.uk

www.businesslinksolutions.co.uk