Business Plan Formulation Professor Rajendra K. Lagu

Business Plan Formulation

Professor Rajendra K. Lagu

Department of Electrical Engineering

e-mail: [email protected]

Webpage: http://www.ee.iitb.ac.in/~rklagu

mailto:[email protected]

April 13, 2023 R.K. Lagu Lecture 4 2

Outline of the Presentation

• Business Plan basics: What? For whom?

• Fund raising process

• Venture Capital firms

• Structure of a business plan

• Details of the individual sections

• Final checklist


Business Plan and its Target Audience

• Spouse??• VCs / Angels• Potential senior employees• Bankers• Attorneys and accountants• Leasing companies

BP is a “document” and not a Power point presentation !!

It is targeted at:


Stages in the Growth of a Company

• Idea / Concept

• Prototype / Proof of the concept

• Incubation / Product development

• Organization building

• Scale up (alliances, partnerships)

• IPO: Initial Public Offer


Funds Requirements

• Idea / Concept: USD 10K

• Prototype: USD 50K

• Product development: USD 0.5M – 2M

• Organization building: USD 8M-10M

• Scale up: USD 50M

• IPO: Initial Public Offer


Sources of Funds

• Idea / Concept: Personal savings• Prototype: Loan from friends and relatives• Incubation: Angel / Early stage fund• Organization building: VC, first round• Scale up: Second round / growth/ scale up

funds • IPO: Investment bankers, underwriters


Cost of Equity

• Angels would expect higher rate of returns than VCs

• Typical VC expectations is 40-50% compounded annual return

• Risk-return curve: New venture increasingly reduces its risk as it goes through stages


Types of Risks

• Technology risk: Platform does not succeed

• Product risk• Market risk: Competitor, price-performance

• Management risk: Scale-up, team building

• Product liability risk• Image risk: Cultural, socio-economic factors (mostly

for pharma / biotech)


Venture Capital Firms

• VCs and Angels provide private equity for young companies

• Angels / High net worth individuals• Early stage VC firms• Scale-up VC firms• Technology / “Space” specific

Biotechnology Networking Chips and hardware E Commerce


Structure of a VC Firm

• General partners 3-5 (themselves successful entrepreneurs): put about 2-3% of the corpus

• Limited partners (Pension funds, Retirement plans): Put 97% corpus

• Corpus = Fund, typically ranges between USD 50M to 2B

• Management fee is about 2-3 % per year

• Funds about 5-30 new companies per year

• Employs junior managers for due diligence(associates)

• After IPO/Acquisition, general partners keep 20% of gains, limited partners get Principal+80%


VC Firm’s Annual Throughput

• 10,000 qualified business plans

• 1000 meetings

• 400 company visits

• 25 new investments


Role of the VC in the Portfolio Company

• Negotiate aggressive terms• Select strong co-investor• Help in constituting the Board of Directors• Assist in

Recruitment Market validation Strategic relationships

• Pursue liquidity aggressively


Valuation: Bargaining Point

• Causes of mismatch Asymmetry of information Ego Greed

• Factors that drive the valuation– Technology, ESOP rates, management– Orders in hand, scalability, brand strength


Difficulties in Valuing Start-up Companies

• Immediate earnings are negative

• No past history

• No comparable companies

• No market prices


VC Fund Raising Process

• Introduction (phone call, e-mail, referral)• Submit business plan / executive summary• Presentation• Company visit• Due diligence (management reference checks,

customer calls, market analysis)• More meeting(s)• Term sheet• Legal / Closing


The Deal: Capital Structure

• Equity allocation Founders (20 %) Future employees (Option pool) (40 %) Investors (40 %)

• Number of investors / firms• Imbalance, Dilution

• Serious investors ask for 20% or more of ownership

• Pre and post-finance valuations


Term Sheet

• Agreement to agree or to work towards investment• Captures key terms of the final legal contract• Seat on the Board, Founder vesting• Key terms

Equity allocation, type (preference, convertible) Liquidity, conversion


New Oak Communications, Inc.

Round Date Share Price (USD)

Total Finance

Post-money Valuation

Seed 9/96 1.00 120K 1.2M

First 11/96 3.75 4.25M 7.0M

Second 8/97 5.67 7.50M 48.0M

Acquisition *

1/98 30.05 NA 156M

* Acquired by Bay Networks, Inc.


What is the financer looking for?

• Basic value proposition• Market size, segmentation, target customers,

competitors• Entry barriers, IP protection, Unique Selling

Points• Technology expertise and domain knowledge• Alliance and strategic partnerships• Promoters, Board of Directors, Top management

(VPs)


Checklist continued…

• Team (Project management, execution capabilities)• Scalability and growth potential• Marketing and selling plan: channels, distributors,

customer acquisition costs• Milestones and deliverables (prototype, proof-of-

concept, beta customers)• Requirement and application of funds: Setting

offices, where, how many?• Equity/Capital structure, Financing policies

(debt/equity ratio)


Checklist continued…

• Revenue model: Sources of revenue (service/product mix)

• Profitability, break even point, growth estimates (revenue, team size)

• Risks and contingencies: De-risking/risk management/risk containment plan

• Projected (pro-forma) financial statements • Exit strategy (IPO, equity buyer, strategic buyer,

Merger & Acquisition)• Valuation and offer (equity price, number of

shares)


Business Plan Document

• Agreed program of expectations, actions, and results to which the whole team is willing to commit

• Description of why, how, and when the firm will accomplish economic viability

• Economic viability comes from sustained positive cash flows


Business Plan Structure

• CEO is perpetually writing a business plan!!

• BP should be limited to about 30-35 pages

• Subject matter should have graphs and pictures

• Must have a 3-4 page executive summary

• Allied material should go to the appendix


Business Plan Sections

1. Executive summary

2. Introduction / Company Overview

3. Concept / Proposition / Product description

4. Market opportunity

5. Competition survey

6. Development Plan and milestones

7. Marketing Plan

8. Management

9. Financials

10. Offer

11. Appendix


Introduction / Company overview

• History of the company, when incorporated

• Founders and their brief profiles

• Form of the organization: C, S corp, LLC

• Product / Service

• Current revenues and profits (if any)


Concept / Proposition

• Description of the product / service

• Intellectual property protection

• Unique selling points – differentiators

• Unfair advantage over competitors ?


Market Opportunity

• What unfulfilled need the product satisfies

• Market size, segmentation

• Target customers, demographics

• Is it a new market, growth market, or established market ?


Competition Survey

• Identify existing competitors

• Substitute products

• Potential competitors

• SWOT analysis


Development Plan and Milestones

• Prototype : How will it look

• What will be version 1 – what features

• Precise description of the milestones and dates

• Initial team scale-up


Marketing Plan

• Strategy – direct or through channels

• Quantitative marketing goals (revenues, team size)

• Branding strategy, Co-branding, if any

• Distribution and alliances

• Pricing and promotion


Management

• Team structure – CEO, CFO, CIO, CTO

• Vice Presidents (marketing, finance, engineering)

• Organizational chart

• Letters of intent from potential senior team members


Financials

• Pro forma (Projected) and existing financial statements

• Balance sheet

• Profit and loss statement (Income statement)

• Cash flow statement

• Break even analysis


Offer

• Valuation

• Basis for valuation (P/E, Revenue multiples)

• Percent of the company for investment

• Exit routes for the investors

• Capitalization structure


Appendix

• Endorsement from reference customers

• Letter of Intents from potential customers

• Product block diagrams


Executive Summary

• Company name , address, contact person, email, phone

• Brief history of the company: date founded, headcount

• Management summary: Promoters, senior staff

• Brief description of product/service and its strengths and weaknesses (Elevator pitch)

• Market – existing and projected (industry, competition), focus area, revenue model (sources of revenue)

• Growth potential, projections

• Milestones – achieved and projected (prototype, beta)

• Finance – needs and applications, offer, pre-money valuation, financials, current round, cap table


Final Checklist !!

• Look for spelling mistakes• Provide a table of contents• Check page number consistency• Do not bind in a hard folder• Write a nice covering letter• Do not use too many colours and fonts• Explicitly add confidentiality clause in the

beginning


References: Books

• John L. Nesheim, “High Tech Startup: The Complete Handbook for Creating Successful New High Tech Companies”, Free Press, 2000.

• Steven C. Brandt, “Entrepreneuring: The Ten Commandments for Building a Growth Company”, Third Edition, McMillan Press, 1997.


Material available on the Internet

• Venture Finance http://www.newspringventures.com http://www.vfinance.com

• Small Business Issues http://www.sba.gov http://startupjournal.com–

http://www.sba.gov/

http://startupjournal.com/


Summary

• Business Plan preparation is a serious process which takes 2-4 months

• Fund raising itself takes 4-7 months

• Business Plan is a dynamic document

Business Plan Formulation Professor Rajendra K. Lagu

Economy & Finance

product risk market

vc fund

business plan document

business plan details

equity price

funds ipo

round scale

new companies