What will the venture capitalist look for in your business plan?

The first step to raising capital or going public is to prepare an attractive business plan. There are many excellent sources on writing business plans and proposals. The following is a list of hot points that investors will focus on. We at FG have seen many excellent businesses fail to raise capital because their plans were not clear on these points. No matter how detailed your report, your potential investor must be satisfied on these issues:

Management

The quality of the management team is the first concern of the venture capitalist. He knows that a poor team can bungle even the best of plans and a dynamic team can make the best of a poor situation.

Marketing

The old saying "Build a better mouse trap and they will beat a path to your door" just is not true. Businesses survive or die based on how well the product or service is sold to the customer. Many talented people become entrepreneurs because they are good at making a product or providing a service, but that is not enough. Every entrepreneur must be three quarters salesman. The investor will want to visualize how the product will sell.

Entrepreneur's Investment

Venture capitalists want to see cash investment by the entrepreneur. They realize that there is value to sweat equity, but they feel the entrepreneur should also make a cash bet on his own venture. If the entrepreneur has none of his own cash at risk, the investors feel he is more likely to walk away if times get difficult. There are cases where venture capitalists will invest where the entrepreneur is unable to put up cash, but the investment will be considered more risky.

High Return

Venture capitalists want obscene profits. If they wanted reasonable returns they would buy treasure bills or blue chip stocks.

Cash Flow

If there is no cash flow, the investor considers the investment a start up and therefor more risky. If there is cash flow he may consider the funding less risky. Venture capitalists will consider both types of investment but the old formula more risk - higher return - will always apply. There is a good argument for scraping up your pennies to get your business to a cash flow situation before trying to raise funds. It could make the difference between giving up 80% of your company and only giving up 10%.

Risk

The venture capitalist does not want to hear that there is no risk, because he knows there is some. He wants to see the risks clearly laid out so that he can asses them.

Exit

Venture capitalists are not long term investors. Their horizon is usually three to six years. Your plan should show how the investors can get back their investment and a handsome return in this time period.

The Control Issue
Many entrepreneurs feel very strongly that they must maintain a controlling interest in their enterprise. There will be cases where an investor will want control to protect his investment but this is not usually an important issue for him. Venture capitalists are not in business to run companies, they invest in good management teams so that they will not have to. The venture capitalist is concerned with return versus risk. He will only insist on owning enough shares to realize the return he needs.

The Sweat Equity Issue
Entrepreneurs usually feel strongly their sweat equity should have value. It may seem unfair, but it is a fact of life that cash is always valued higher than sweat. The venture capitalist appreciates the long days and late nights you have put into your business, but he invests to produce a high return on his money. If too much value is put on sweat equity, his return will be too low.