Why have a plan when everything is uncertain? It’s even truer for startups. They thrive even more on unbaked ideas driven largely by their passion.
But things are more organized now, thanks to the VC culture . It’s much easier to get startups funding compared to early days. Despite this there are many confusions related to preparing business plan for the VC funding phase. There are many myths and confusions regarding this stage. We have tried to answer these queries in a systematic manner:
Do you need to prepare a great business plan to secure VC funding?
Some of the great business heroes, such as Steve Jobs, Sam Walton, Larry Page and Michael Dell succeeded because of their business acumen and passion.
They had hardly prepared extensive business plans when they started charting out their own territory. However, it’s important to understand that those were different times, and now the business scenario has completely changed.
If you want funding from angel investors, they would certainly like to know about your idea, vision, and strategy. No one will put their money just to satiate your passion?
Researchers from the University of Maryland studies have revealed that VCs don’t really give much importance to business plan. Researchers found that since venture capitalists screen thousands of business proposals every year, they don’t really attach importance to business plans. They rely more on their instincts or gut feeling since they operate under conditions of high degree of uncertainty.
Robert H. Smith School of Business, David A, Kirsch, an associate professor at the school, and Azi Gera, a doctoral student reaches on the conclusion: “In general, business plans don’t matter and nobody really bothers to read them.”
The situation may be even more daunting if you are in the idea phase. Nobody will give you a damn if you pitch for funding without having customers.
Noam Kaiser, venture capitalist in Gemini Israel Ventures, which is an early stage VC jokingly says, “If the VC is on drugs, maybe you got a shot. The basic fallacy is that you are expecting a VC to risk their limited money on your untested idea when you have not taken any risk: money, time, or sweat.”
Alexander R. Last, Founder SportsHedge, a sports analytics firm, does not fully agree with the outcome of the study. He stresses on the importance of a business plan for startups, “A majority of VCs need traction, even at the earliest of stages, before they put their hard-earned money. They want to understand your business before making their mind.”
There may be some inkling of truth in the study and the basic argument also seems right, but it does not underscores the need of having a business plan, especially if you are a startup firm.
The idea is you should not waste a lot of energy on creating a lengthy business plan, but at the same time you should not ignore it altogether. You should prepare a short and effective business plan that directly addresses their concerns.
How to prepare a winning business plan?
Creating an effective business plan may seem an uphill task for many startup founders. However, you gain a lot of insight about your business in the process. You gain understanding of your business, improve your chances of success and decrease the risks of a failure as a startup owner.
Khosla Ventures, which is a Vinod Khosla venture, advises to prepare a short business plan, “The plan does not need to be long or fancy but should address the main points we’ve articulated. We like concise, four-to-six page summaries that address our key questions in the form of a business plan or presentation.”
Sequoia Capital, one of the most famous venture capital’s in the world, has presented a framework for writing a business plan. It advises to avoid a lengthy business plan on its website, “We like business plans that present a lot of information in as few words as possible. The following business plan format, within 15–20 slides, is all that’s needed.” You just need to create a proper business plan outline. Here are the components:
- Company purpose: Define the purpose of the company in a single sentence without elaborating it too much.
- Problem: Explain the problems faced by customers and tell them how customers addresses the issue currently
- Solution: Explain how your company solves the existing problem.
- Show where your product really sits: Explain briefly what is the real status of your product.
- Provide real examples: Give 2-3 instances on how your product has been able to solve problems of people.
- Why now: Explain in short why it needs fund now and also define recent trends that make your solution
- Market size Calculate the market size of your business which is also about how scalable is your business. Be realistic and make practical assumptions.
- Explain the profile of your the customer .
- Competition: Make a list of competitors in your domain and analyze your competitive advantage.
- Product: Explain about functionality, features, architecture, intellectual property and also briefly discuss your development roadmap
- Business model: Discuss revenue model, pricing, average account size and/or lifetime value, sales and distribution model, and customers
- Team: Make a brief mention about founders and management and board of directors/board of advisors
- Financials: Here are the following components in the financial section:
- Balance sheet
- Cash flow
- Cap table
- The deal
The projections are always projections. You should also explain the logic behind your assumptions when you calculate the market size or expected revenue.
Jessica Oman, Business Plan Writer and Strategy Expert, sounds a caution“ You should also explain your assumptions so that VCs could easily understand the logic behind your projections.
In short, your business plan should answer these following questions:
- What is the market opportunity you want to tap?
- What is your unique selling point or differentiator?
- What are your revenue and gross margin projections?
- Do you have your prototype ready?
- How much fund do you need now?
- Why your team of founders have what it takes to be successful
Should you press to sign a non-disclosure agreement with VCs?
Many startup owners fear the fact that VCs can steal your idea and pass it to someone, thus you will lose your competitive advantage.
The fear is totally unwarranted and misplaced. David S. Rose, Managing Partner, Rose Tech Ventures; CEO, Gust, says, “ In the real world, there are thousands of ideas, but the real challenge is the execution. VCs and angels job is to identify great entrepreneurs and they invest in their vision.”
Therefore, pressing them to sign on the NDA will only harm you. They would hardly agree to sign on such documents as it exposes them to the threat of being sued later.
Stealing an idea is a misnomer. An idea which is just on papers is useless. Kai Stinchcombe, Protects grannies from scams, cites an interesting argument on Quora discussion about such possibility, “Most venture capitalists love their jobs, and if they wanted to establish companies instead they would have no shortage of ideas.”
“They hardly have time to setup a team and then build your idea into a product. But they won’t sign any NDAs either. Its always good to talk to established VCs and Angels, “ says Utkarsh Sinha, a VC based in India also refutes such fears.
Auren Hoffman, LiveRamp CEO. started and sold 5 companies has an interesting take on the matter, “Signing such an agreement means you want to stop the VC in your competitor company. It’s unfair. The idea that they can steal your data or information and will put this in your competitor company is exaggerated and unwarranted.”
It’s not that the role of NDA does not exist, but at least it does not exist in the early stage. Pressing to sign VC on NDA in the first meeting is not a good idea as VCs loathe such moves.
4 Things to consider when you pitch VCs for funding?
Here are the following tips for you when you prepare to pitch for venture capitalists:
- Use maximum 10-12 slides max. You can use the supporting documents in an appendix.
- Tell a story that gets investors excited and emotionally connected, but don’t be too obsessed about telling your story. Make a fine balance.
- Focus on providing a solution before dissecting the nuts and bolts of your market-size projections.
- Try to connect the dots between their investment and your business goals
An attractive business plan certainly impresses VCs and it increases your chance to get the funding. It’s more art than a science. There is no fixed formula to prepare a perfect business plan. Following above things in mind will certainly be helpful.