Does Your Business Plan Attract VCs?

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Written by Sanjay Anandaram

Monday, 09 March 2009 22:57

The business plan is one of the most important documents for an enterprise in search of venture capital (VC) funding. Here's a look at the key factors that make it attractive.
a lot of importance is attached to the contents of a business plan, and rightly so. There's a fair chance that the contents of your business plan will determine, to a large extent, whether VCs get attracted to your idea and agree to fund it. In order to make sure you do not trip up while composing this important document, here are a few points that you must keep in mind.
The credentials of the management team
The plan must contain detailed profiles of the management team and show how its members are qualified to handle their responsibilities. Ideally, the team must be experienced and have an understanding of the marketplace, of technology, and of running a business. At the very least, the team must demonstrate an understanding of the market and of technology. The team members must bring in complementary skills and experiences, and it would be perfect if they have worked together before. More start-ups are destroyed due to the bad chemistry between team members than any other reason. So make sure you focus on building a great team. If a profile cannot be displayed in the plan, at least indicate that you have spoken to people who would be interested in joining as soon as funding is arranged. At the very least, you must show that you understand the need for say, a VP, sales and marketing, and have accordingly made allowances in the plan for such a person. Good VCs will work with you and help identify and recruit the right candidate. Just remember that you cannot abdicate the responsibility of identifying the requirements of the job!

Knowledge of your business domain

You must demonstrate that you understand the market. While it is necessary to have data about the market from various sources, this in itself is not sufficient. Arriving at a potential market share for your business by looking at market research data is something that good VCs will not accept at face value. This is called the top-down approach and it normally goes on these lines: "Reports indicate that the market for selling used cars on the Net is about Rs 1,000 million (Rs 100 crores -- 5,000 cars each at an approximate value of Rs 2,00,000). Assuming a 10 per cent market share for a business, results in a business worth Rs 100 million (Rs 10 crores). So the projected sales for my business will be Rs 100 million as I'll target a 10 per cent market share!" Such a conclusion is unlikely to impress VCs unless it is supplemented by a bottom-up approach. This could be as follows: "I need to sell 500 cars at approximately Rs 2,00,000 each to achieve a sales of Rs 100 million. Where will these 500 customers come from? How? Will they be willing to pay Rs 2,00,000? How many of these 500 have Internet access..." and so on.

As you can see, the bottom-up approach ensures that you look at achieving sales from the customer acquisition standpoint. By following this approach, you will get a better understanding of the market, its segments, and opportunities.
Focusing on the market will also enable you to understand the competitive landscape and how to position your company accordingly. Building a competitive advantage is key to having a sustainable and viable business.

Project your business model
You need to also state how your offerings will be delivered to the customers and what your revenue model (i.e., flat monthly fee, percentage of transactions, licence fee, etc) will be.
These projections should be realistic, and not exaggerated in any manner. VCs prefer a predictable revenue model, and also factor in strategies that will tackle matters like seasonality. Try to develop a recurring revenue stream-this will ensure that every sale is not a new sale. For example, the annual maintenance fee charged by computer companies is a source of predictable, recurring revenues.

Lay down milestones with clear timelines
This is another factor that VCs will look at closely. After all, they are putting their money to work and want to know how and in what timeframe it will get deployed. This is also a very useful exercise as it will force you to think about the details of delivering your goods and services to customers, within specified time intervals, thus ensuring focus. A set of milestones must result in a major goal being achieved (for example, complete management team in place, site up and running, business operational in two cities, etc). The achievement of this major goal then becomes a fundable event and you can then plan on raising the next round of capital.

The above points are all equally important. However, details on the management team are clearly the most crucial of all aspects. So, before rushing off to approach VCs, take a moment to review your plan and check if it covers all these points. Remember: You don't get a second chance to make the first impression. So, your first impression has to be the best!