VC funding for early stage concepts

Understanding the concept of venture capital

Prajakt RautEntrepreneur & Entrepreneurship Evangelist

Collateral free financial capital –

investor takes equity in the

company

Investor shares risks

Typically for funding early-stage

concepts/companies

venture capital

venture capital is not just about the money

Value that a good investor delivers:

•Knowledge

•Access

•Resources

•Operational guidance

Three classes of investors

1.Angel investors

2.Venture Capitalists

3.Private Equity Funds

venture capital

Stage

Scale

Different stages of the venture carry different risks

Risks at early stage

•Concept risk

•Execution risk

•Scale-up risk

Risks at early stage

•Concept risk

•Execution risk

•Scale-up risk

Risks at growth stage

•Execution risk

•Scale-up risk

Risks at early stage

•Concept risk

•Execution risk

•Scale-up risk

Risks at growth stage

•Execution risk

•Scale-up risk

Risks at mature stage

•Scale-up risk

Risks at early stage

•Concept risk

•Execution risk

•Scale-up risk

Risks at growth stage

•Execution risk

•Scale-up risk

Risks at mature stage

•Scale-up risk

• Proving concept

• Jugaad

• Flexibility

• Fine-tuning offering

• Processes

• Focus

• Operational efficiencies

• Increasing profitability

• New markets/new

capabilities/new concepts

Angel Investors/Seed Stage

Funds

Venture Capitalists

Private Equity Funds

A document to convince investors/stakeholders that

1)What you want to do is sensible

2)How do you plan to do it is sensible

3)You are better than others at doing it

What is a Business Plan?

What do investors look for in a business plan?

1) Will this team deliver

2) Does the concept address a real customer need

3) Is the market size large

4) Who is the competition

5) Is there a Sustainable Competitive Advantage

What should you include in a business plan?

1) Concept overview/business description

2) Team – current and ‘in discussion’

3) What issue / pain point are you solving

4) What is the size of the opportunity

5) Product / Service Overview

6) What is the value proposition/positioning

7) Business model / financial model

8) Competitive landscape

9) Risk factors

10) Funding objective and use of funds

11) Exit potential

Concept overview/business description

• No more than one short, unambiguous paragraph

– Reader should not need to read it again to understand

– Capture the essence in a one crisp line

• Use simple language

• Sell the potential

Team - the most important ingredient for VCs

• “VCs prefer A-Class teams with mediocre business plans over

B-Class teams with great business plans”

• Diversity of skills, domain expertise critical but with similarity

of passion

• Include profiles of those who are ‘sort of willing to join’ too

What issue / pain point are you solving

• Are you addressing a real consumer problem?

– Don’t force fit your solution to a problem

• All ‘what if’ scenarios need to be thought through

• Get your friends and well-wishers to ask you hard questions

What is the size of the opportunity

• Break it down to last detail

– Total market size

– Addressable market size

• What price point and how does that translate into revenue

• Test the assumptions

Product / Service Overview

• KEEP THIS SIMPLE – VERY, VERY SIMPLE

– Assume that the reader does not know your domain at all

• Critical points to highlight

– Uniqueness

– Specific benefits

• Other criteria

– Scalability

– IP protection

– Replicability

Value proposition

• What are you positioning this as

• Why will the consumers buy it

• Do a ‘Benefits Barrier’ exercise

Business/financial model

• Three key questions– How much will you sell at

– How many will you sell

– Where will you sell… and how

• Who will pay for it – [user and buyer could be different]

• Translate the above questions into a financial model – Entrepreneurs should focus on the questions

– Get experts to do the financial modeling

Competitive landscape

• Who will you compete with? [current or in future]

• Why would someone choose you over them?

• Why do you have a chance to be a dominant player?

Risk factors

• Market risks?

• Financial risks?

• Competitive risks?

• Business model risks?

• Execution risks?

Funding objective

• What do you need the money for

• How much do you need

Also mention any fund raising history, if any

Exit Potential

• How is the investor going to earn a good return?

Sale to a strategic investor

Exit by selling stake to a growth stage investor

IPO?

[Note: Exit does not mean that the entrepreneurs has to

Exit]

In conclusion

• This is not easy

• This is not a one time exercise – iterative process

• Share it with friends, get feedback, rework

Different documents for different uses

Summary Plan (8 - 10 pages)

• Initial presentation to showcase concept and business case

Full Business Plan (15-40 pages)

• Typically for financing purposes

• Operations and projections presented in greater detail

• Usually presented after the investor(s) have indicated initial interest

Operational Business Plan (usually in excess of 40 pages)

• Usually the business plan on which entrepreneur & investor will agree before

funding

• Blueprint for company operations

• Source of guidance to top managers

Prajakt Raut

prajakt.raut@gmail.com

Prajakt has over 23 years of experience as an entrepreneur, marketing

professional and business strategy consultant. Prajakt primarily consults

early stage companies on strategy, focusing on business model &

monetization and on creating processes to prepare the company for

growth.

Prajakt is the co-founder of Orange Cross, a healthcare services

management company and an internet based venture, currently in stealth

mode.