Tag Archives: Business Plan

Venture Capital Criteria

Most venture capital firms concentrate primarily on the competence and character of the proposing firm’s management. They feel that even mediocre products can be successfully manufactured, promoted, and distributed by an experienced, energetic management group. They know that even excellent products can be ruined by poor management.

Next in importance to the excellence of the proposing firm’s management group, most venture capital firms seek a distinctive element in the strategy or product/market/process combination of the firm. This distinctive element may be a new feature of the product or process or a particular skill or technical competence of the management. But it must exist. It must provide a competitive advantage.

After the exhaustive investigation and analysis, if the venture capital firm decides to invest in a company, they will prepare an equity financing proposal. This details the amount of money to be provided, the percentage of common stock to be surrendered in exchange for these funds, the interim financing method to be used, and the protective covenants to be included.

The final financing agreement will be negotiated and generally represents a compromise between the management of the company and the partners or senior executives of the venture capital firm. The important elements of this compromise are ownership and control.

Ownership

Venture capital financing is not inexpensive for the owners of a small business. The venture firm receives a portion of the business’s equity in exchange for their investment.

This percentage of equity varies, of course, and depends upon the amount of money provided, the success and worth of the business, and the anticipated investment return. It can range from perhaps 10% in the case of an established, profitable company to as much as 80% or 90% for beginning or financially troubled firms. Most venture firms, at least initially, don’t want a position of more than 30% to 40% because they want the owner to have the incentive to keep building the business.

Most venture firms determine the ratio of funds provided to equity requested by a comparison of the present financial worth of the contributions made by each of the parties to the agreement. The present value of the contribution by the owner of a starting or financially troubled company is obviously rated low. Often it is estimated as just the existing value of his or her idea and the competitive costs of the owner’s time. The contribution by the owners of a thriving business is valued much higher. Generally, it is capitalized at a multiple of the current earnings and/or net worth.

Financial valuation is not an exact science. The compromise on owner contribution’s worth in the equity financing agreement is likely to be lower than the owner thinks it should be and higher than the partners of the capital firm think it might be. Ideally, the two parties to the agreement are able to do together what neither could do separately:

1. grow the company faster with the additional funds to more than overcome the owner’s loss of equity, and

2. grow the investment at a sufficient rate to compensate the venture capitalists for assuming the risk.

An equity financing agreement with an outcome in five to seven years which pleases both parties is ideal. Since the parties can’t see this outcome in the present, neither will be perfectly satisfied with the compromise reached. The business owner should carefully consider the impact of the ratio of funds invested to the ownership given up, not only for the present, but for the years to come.

Control

The partners of a venture firm generally have little interest in assuming control of the business. They have neither the technical expertise nor the managerial personnel to run a number of small companies in diverse industries. They much prefer to leave operating control to the existing management.

The venture capital firm does, however, want to participate in any strategic decisions that might change the basic product/market character of the company and in any major investment decisions that might divert or deplete the financial resources of the company.

Venture capital firms also want to be able to assume control and attempt to rescue their investments, if severe financial, operating, or marketing problems develop. Thus, they will usually include protective covenants in their equity financing agreements to permit them to take control and appoint new officers if financial performance is very poor.

John B. Vinturella, Ph.D has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.

The Strategic Plan

Small businesses are not scale models of big businesses; they are characterized by resource poverty and dependence on a fairly localized market. Their greater vulnerability to the consequences of a lack of focus stresses the importance of their strategic plan.

The strategic plan defines the company’s “competitive edge,” that collection of factors that sets the business apart from its competitors and promotes its chances for success. It requires a clear evaluation of the competitive business climate and an intimate knowledge of the market for the entrepreneur’s product.

The foundation for the strategic plan is a clear mission statement for the venture. Addressing the following questions can assist in developing this statement:

What business am I in? The answer to this question is not as simple as it seems. A good example of an industry group that failed to take a broader view is the railroads. If they had viewed their business as transportation rather than trains-and-tracks, then the airlines would be named Union Pacific and Illinois Central.

Who is our product intended to satisfy? What customer needs are being satisfied? How are these needs being satisfied, that is, by which of our methods or products?

An important strategic option is in how we price our product (as a price leader, value leader, or prestige product). Other options include the way in which we differentiate ourselves from the competition and the particular “niche,” or subset of the market, we seek to serve.

Once we have set internal objectives, we must examine the external and competitive environments in which we will be trying to achieve them.

The external environment consists of those factors that are largely outside our control, but affect the market for our product. Examples of these factors include general economic conditions, regulations, technological developments, and consumer demographics and attitudes. This environment is very dynamic, but some attempt must be made at projecting its changes.

Analysis of the competitive environment must begin with consideration of whether there are any barriers to the entry of a new competitor into the market. How strong is consumer loyalty to existing brands? How important are economies of scale; can a small independent firm compete? Are capital requirements prohibitive? Is there some proprietary technology that puts prospective entrants in a serious competitive disadvantage? Is access to raw materials or to distribution channels limited in some way? Are new entrants limited by permit restrictions or regulations?

The competitive structure of the industry is another important consideration. Are there a few dominant firms, or is the industry fairly fragmented? Will current competitors attempt to “punish” new entrants, such as through a price war, heavy advertising, or exercising their clout with key suppliers? Is there some geographic niche we can serve? What factors create cost advantages or disadvantages? How important is a firm’s position on the learning and experience curves? How are prices set? Is demand rising, even, or falling? Are there exit barriers that raise the risk of entry?

Relative strengths of our strategic partners must also be considered. What is the bargaining power of suppliers? How wide is our choice of suppliers? Is it costly for us to switch? Can our suppliers compete with us for the same customers? How important is our industry to our suppliers?

Do buyers have a wide choice of vendors? Can they make our product themselves? Are there less expensive or superior substitutes to our product in some segments of the market?

These are certainly not easy questions to answer, but performing the research to make better informed decisions, and addressing these questions “head-on” can improve our chances of success.

John B. Vinturella, Ph.D has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.

Evaluating Business Planning Software

Abstract: Once a business idea is selected, it is highly recommended that we sharpen the concept by a detailed planning process. While this may seem a daunting task to first-time entrepreneurs, many “veterans” have found that there are software packages that can help to organize and format the material required for a comprehensive plan.

Once a business idea is selected, it is highly recommended that we sharpen the concept by a detailed planning process. The result of this step is a comprehensive business plan, with its major components being the marketing “mix,” the strategic plan, operational and logistical structures, and the financial proposal. The purpose of the business plan is to recognize and define a business opportunity, describe how that opportunity will be seized by the management team, and to demonstrate that the business is feasible and worth the effort.

While this may seem a daunting task to first-time entrepreneurs, many “veterans” have found that there are software packages that can help to organize and format the material required for a comprehensive plan. These packages are particularly helpful to those who are intimidated by starting from a blank piece of paper.

So is there a downside to purchasing software that has most of the text “in place?” The text is not always well-written, “fill-in the blanks” tends not to produce very fluid copy, and the parts you write may be in a different style than the words surrounding it. Some experts suggest that the real usefulness of such packages lies in the examples, when they are in a business similar to yours.

The sales leader in “plan-ware” is Palo Alto Software’s Business Plan Pro (BPP, paloalto.com). We have tried several packages that are comparable to BPP; you should evaluate a few to find which might fit your unique style best. Figure a price point of about $120 for standard versions of all. Others to consider would be:

 Planware’s PlanWrite (planware.org)

 PlanMagic’s Business (planmagic.com)

In addition to BP software, you may want to consider online services.

 Fundable Plans (fundableplans.com); $40 per use

Some of the factors that you would want to consider in your evaluation are:

User-friendliness – easy to get productive quickly; self-guiding, not having to go back-and-forth with instruction manual or help screens; “wizards available for some functions.

Interface – the package works with the other software that you will need in the process, such as Word, Excel, and PowerPoint.

Support – free technical support by telephone or email; useful help screens; program updates; and, resources such as articles and links that assist in the business planning process.

Features – functions beyond the basic “fill-in-the-blanks” templates, such as PowerPoint templates; market research data; industry codes; lots of rich examples; and, assistance with the more technical aspects of the plan, such as finance and strategy.

One of the dangers of using such packages is that your focus may shift from producing a complete and convincing plan to simply filling out the templates. Their real value lies in their support of getting it in writing.

Many entrepreneurs insist that their business concept is so clear in their heads that the written plan can be produced after start-up; this attitude “short-circuits” one of the major benefits of producing the plan. The discipline of writing a plan forces us to think through the steps we must take to get the business started, and, to “flesh out ideas, to look for weak spots and vulnerabilities,” according to business consultant Eric Siegel.

A well-conceived business plan can serve as a management tool to settle major policy issues, identify “keys to success,” establish goals and check-points, and consider long-term prospects. The plan must realistically assess the skills required for success of the venture, initially and over the long run, and match the skills and interests of the team to these requirements. Test the plan, and an accompanying oral presentation, on friends whose business judgment you value. Let them assume the role of a prospective investor or lender.

John B. Vinturella, Ph.D has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business,” available on Amazon.

Market Research Plan Consultant

Market Research Plan Consultant

From an ad for Ground Floor Partners (https://groundfloorpartners.com/market-research/ )

Accurate market research is the foundation for every business or marketing plan (https://groundfloorpartners.com/marketing-plans/) Ground Floor Partners can help you gain a much deeper understanding of:

• market opportunities

• existing customers

• prospects

• competitors

• employees

• industry trends

• environmental or regulatory risks

We Help You Focus

Large market research firms research specific industries and generate standardized industry reports. The problem for most small businesses is that very few of them fit neatly into these industry categories. That’s where we come in. Instead of generating canned industry reports, everything we do is customized for each client.

• Effective marketing is all about targeting and focus. Better targeting means less waste, lower expenses, and higher profits. Some more examples of the kinds of market research we do for our clients:

• Conduct a comprehensive market opportunity assessment – Assess your markets and current market positions (market size and share of market, channels, growth trends, threats, and opportunities)

• Identify customer needs and determine which market segments hold the most, and least, attractive profit potential.

• Find out what customers and prospects think about your new customer service procedures, your sign-up process, your newest product, your new tag-line, your invoicing process, etc.

• Identify regulatory, political, and demographic trends that could create problems – and opportunities – for your business.

• Develop a thorough understanding of competitors – Who leads and who follows in this space? How much market share does each player have? What are their strengths and weaknesses? How do they differentiate themselves? How does their pricing strategy compare with yours? How do they market their products and services? How does their brand equity compare to yours?

• Identify opportunities to use your strengths and exploit competitor weaknesses.

Business Planning Overview

The purpose of the business plan is to recognize and define a business opportunity, describe how that opportunity will be seized by the management team, and to demonstrate that the business is feasible and worth the effort.

The successful entrepreneur is generally more inclined, once a business idea is selected, to sharpen the concept by a detailed planning process. The result of this step is a comprehensive business plan, with its major components being the marketing “mix”, the strategic plan, operational and logistical structures, and the financial proposal. The purpose of the business plan is to recognize and define a business opportunity, describe how that opportunity will be seized by the management team, and to demonstrate that the business is feasible and worth the effort.

The business plan is the “blueprint” for the implementation process. It focuses on the four major sub-plans: marketing, strategy, operational/logistic, and financial. While the business plan often goes through some revision, it generally represents a rather advanced stage in the planning process. The primary product or service to be offered, based on the results of the market research, should be determined.

Whether the business will be a start-up, purchase of an existing business or a franchise should certainly be firm at this point. Often, a specific business location is indicated, or at least a rather specific area.

Time estimates in a business plan should allow for meeting all the necessary regulatory requirements and acquisition of permits to get to a “customer-ready” condition. The amount of funding required and a general approach to raising these funds should be determined. Marketing mix issues focus on how the product or service is differentiated from the competition.

A business can differentiate itself on any of what are often referred to as the “four P’s” of marketing: product characteristics, price structure, place or method of distribution, and/or promotional strategy.

Strategic issues relate broadly to the company’s mission and goals. Every venture must continually assess its strengths and weaknesses, the opportunities to be seized, and any threats to the success and plans of the business. Operational issues relate to company structure, and the scope of the business. The operational plan addresses tangible items such as location, equipment, and methods of distribution. Decisions on these issues largely determine startup costs.

The financial proposal includes an estimate of the amount of money needed to start the venture, to absorb losses during the start-up period, and to provide sufficient working capital to avoid cash shortages. It projects sales and profitability over some period into the future, generally 3 to 5 years. Where outside funding is sought, it also describes distribution of ownership of the venture and methods of debt repayment and/or buyback of partial ownership.

Where implementation of the plan requires participation of lenders and/or investors, the plan must clearly and convincingly communicate the financial proposal to the prospective stakeholders: how much you need from them, what kind of return they can expect, and how they can be paid back. Many entrepreneurs insist that their business concept is so clear in their heads that the written plan can be produced after start-up; this attitude “short-circuits” one of the major benefits of producing the plan. The discipline of writing a plan forces us to think through the steps we must take to get the business started, and, to “flesh out ideas, to look for weak spots and vulnerabilities”, according to business consultant Eric Siegel.

A well-conceived business plan can serve as a management tool to settle major policy issues, identify “keys to success”, establish goals and check-points, and consider long-term prospects. The plan must realistically assess the skills required for success of the venture, initially and over the long run, and match the skills and interests of the team to these requirements. Test the plan, and an accompanying oral presentation, on friends whose business judgment you value. Let them assume the role of a prospective investor or lender.

John B. Vinturella, Ph.D. has over 40 years’ experience as a management and strategic consultant, entrepreneur, and college professor. He is a principal in the business opportunity site www.jbv.com and its associated blog. John recently released his latest book, “8 Steps to Starting a Business”, available on Amazon.

How to Write an Irresistible Business Proposal

1. Find out about your potential partner by talking to them, reading their mission statement and researching them – as well as learning how they make decisions. This will reveal the “buttons” that you’ll need to press as you describe the benefits of the partnership (i.e. more profits, something new to offer their clients, giving their business a new edge on competition, etc.).

2. Make an offer they can’t refuse. Again, this will also take some research, but within reason, you should bend over backwards to accommodate your potential partner and make it as profitable for them as possible. Remember that the clients you acquire from a joint venture will purchase from you again and again – and it’s usually the “back end profit” after the JV where the real money gets made…

3. Make it as easy as possible for them to say “yes”. People in general are obnoxiously lazy. Many of proposals have been rejected simply because they either seem too complicated – or it sounds like too much work, regardless of how lucrative they are. Simplify your proposal, and if necessary, take on the majority of the workload – remember that you’re sitting on a goldmine!

4. Show them the money. Don’t be vague when it comes to potential earnings. Logically explain to your prospect how much they could reasonably earn from the partnership. It is very important that you do not simply make an “educated guess” – base your predictions entirely on your current marketing stats, sales conversion rates and other real data. This is likely the most overlooked – yet crucial – part of any given JV proposal.

5. Be personal. A “canned” or impersonal proposal likely won’t even make it more than ten seconds before getting tossed in the garbage. Relate to your prospect and emphasize their values by validating their interests, goals and passions. Also, if you want to really make an impact, send your proposal as a hard copy via FedEx. Email is simply too easy to ignore, erase or forget about.

6. Add a real sense of urgency. You want to subtly hint to your potential partner that you won’t wait long to hear back from them – which is true, because if they say “no you’ll have to find someone else anyway. Word this in such a way that it compels them to action either way – but don’t be overbearing, deceptive or unrealistic.

7. Build rapport with your prospect. You must understand that the majority of business people – especially those that are very successful – would much rather work with someone that they know, like and trust than a complete stranger. In fact, it’s crucial that you do this before you even send them a proposal…