The following is an unedited draft of a regular column – Neely Ready – that I write for Australian Anthill, a new-ish magazine with a focus on innovation, commercial enterprise and breakthrough technologies. I will post articles or article excerpts from time to time, as well as other pointers to great content in the magazine or its web site.
Are you ready for it?
The statistics are disturbing: a typical venture capital (VC) firm receives around 1000 business plans a year, and quickly rejects 90% without a detailed review.
The problem is not a shortage of investment funds – money will always be available for promising investment opportunities. Rather, most entrepreneurs do not understand the expectations and requirements of VC investors and are unable to communicate their business proposals as attractive investment opportunities.
Talking the VC’s language
Reviewing business plans is time consuming. Most business plans received by VCs are unsolicited, sent by entrepreneurs with whom they have had no contact. Accordingly, VCs tend to review business plans “defensively”, looking for telltale signs that they will not be interested.
In the “first pass” glance through your investment proposal, a VC will be looking for answers to key investment criteria:
Your market research should provide credible data demonstrating clear market demand for your product. However, raw figures will not be enough. VCs expect to see letters from potential customers indicating their interest in purchasing your product when it becomes available.
It is extremely rare that a product will have no competitors. Your analysis of the competitive landscape should highlight how your product differs to existing offerings, and explain how this differentiation is sufficient to provide a competitive advantage. It is equally important to detail your strategy for sustaining that competitive advantage, such as via intellectual property protection, an innovative business model or a unique service offering.
The larger the market, the greater the opportunity. Pointing to a domestic market worth tens of millions is not sufficient. The market must global, and be worth hundreds of millions (preferably billions) to gain VC interest.
The quality of the management team – the range of complimentary skills and experience – is often the deciding factor. VCs would rather invest in an A-Team management with a B-level idea, than a B-Team management with an A-level idea. Your management team should also demonstrate commitment to the venture, having invested their own funds and be working on the venture full time.
Do not go into excessive detail about the technology, innovation or product that forms the basis of your venture. While VCs will require sufficient technical detail to understand the product and its benefits, they are more interested in the market, your financial requirements, the commercialisation strategy and investment returns.
It is imperative that you address the key issues mentioned earlier succinctly and clearly in the executive summary of your business plan. VCs will not wade through your plan looking for the answers. If you have not demonstrated a match with their investment criteria in the executive summary, it is unlikely they will read further
VC firms typically have a specific investment focus, including a geographic area/region, industry sector(s) and investment stage. Details of their investment profile will generally be available on their web site
Making sure there is a good fit works both ways. A VC firm with experience in the sector that you are targeting will bring more than money to your venture. They will bring a wealth of knowledge, industry contacts and know-how that is often instrumental in the first stages of launching a venture
Most VCs will not consider investments smaller than $1 million. If you are seeking less than this, you should focus instead on family and friends, angel investors or government grants
Before you approach a VC, you should ensure your venture is ‘investment ready’.
Your product should be ready (or at advanced prototype stage), with promising customer feedback. Revenue generation (i.e. sales) should be near-term, with a clear path to profitability (optimally within two years) and a firm ‘exit strategy’ for investors.
Do not send your business plan to every VC firm in town. Identify potential firms whose investment criteria match your needs and, where possible, speak to them first about their review process and whether they are actively seeking investment opportunities. Ideally, you should arrange an introduction by a friend or colleague known to the firm
Unless the VC indicates otherwise, it is generally advisable to forward only your executive summary, with a covering letter indicating that a full business plan is available for review upon request. Do not waste money using fancy paper, binding or other presentation ‘tricks’ – substance beats form every time.
If your initial approach is unsuccessful, do not despair. Attempt to learn as much as possible about why your proposal was declined. Do not be defensive and be prepared to act upon the feedback you receive.