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Every year, top VCs receive around 10,000 business plans from
entrepreneurs who are hoping to start technology businesses. Of
that number, they might meet with 250 to 300 and invest in 12 to
15 of them. To attract the attention of venture capitalists like
those, you need more than a great idea. You need a great
business plan.
1. SCORING BIG POINTS
Venture capitalist firms are hard to impress. There are steps
technology business wanna-bes can take to improve the odds.
Shoot for a massive market. To interest a venture capitalist
today, you have to present more than a business plan for
a million-dollar company. Without the possibility of reaching very
high
levels of market value, you’re probably wasting your time.
Team up with strong managers. Technology venture capitalist invest
in people even more than in ideas. Given the fast pace of change in
the technology field, it’s assumed that the direction and focus of
your business are likely to shift several times.
Critical: The team that will run the business must demonstrate an
ability to react to change.
Management skills that VCs look for in a
business plan: experience in a relevant field. Ideally the company’s
leader should have run a similar and successful company, the
marketing chief should have run a similar marketing department etc.
A team that has worked together successfully. This isn’t always
possible, of course, but it’s a big plus because it answers a lot of
questions we would have about team dynamics. Your team’s back-ground
needs to come early in the business plan.
Enthusiasm and passion for the field. VCs have a bias for
entrepreneurs who want to do more than just make quick profits. They
want to change the world. Venture capitalists are getting less and less excited about yet
another company selling widgets over the Web.
Prepare a realistic business model. In most industries, the
business model — the way the business makes a profit — doesn’t need to
be described because it is obvious. In the technology field
(especially the Web), however,
the model often isn’t clear. A great idea and a super management team
won’t be enough if you can’t find a way to make the idea generate
cash. Once you’ve clarified your model, you also must explain why
it’s going to work eventually. Always recognise, however, that
business models change over time.
Example: If you’re starting an on-line service that will charge
consumers a subscription fee, you’d better explain why people are
going to pay $20 a month when Internet users have been unwilling to
pay for just about any service so far except porn.
Establish your company’s big advantage over the competition. It
isn’t enough to be better than everyone else. You must be
significantly better than everyone else-and offer a good reason why
you’ll be able to hold that edge. Unless you can articulate how your
business will sustain its lead, most investors will doubt that your
idea will be successful for long.
Examples of questions to ask yourself: How does my
product/service become more valuable as more people use it? Is my
technology better than my rivals? Do I have a marketing edge?
Supply support for financial projections. Every technology business
plan has projections that start low and shoot up to absurdly high
profit forecast by the third year. Venture capitalist don’t
necessarily believe these projections, but the forecast are useful
to show optimism and growth potential. What’s more important than
the projection, however, are the assumptions used to reach the
conclusions.
Examples: if you say you’ll make a $300 million profit because
you’ll have 20 million customers, explain in detail how you
reached that figure. Or if you are projecting revenue that's out
of line with what other competing firms currently receive you must
defend your thinking.
2. MORE WINNING INGREDIENTS
The structure of a business plan is as important as its content.
Attach a two-page executive summary on top. If VCs are not very
intrigued after two pages, they rarely read on.
Send a hard copy-not an E-mail. E-mailed business plans are easy
to misroute and could fall into the wrong hands. They’re also not in
sight, so they are easy to forget.
Find a connection to someone who knows the venture capitalist.
You want a person who can introduce you and supply a personal
reference. This human touch can move your plan to the top of the
venture capitalist pile.
Where to look: When you hire professionals, such as lawyers,
accountants and consultants, look for those with extensive
backgrounds in the industry. They will almost certainly have worked
with key venture capitalist before.
3. MAKING AN IMPRESSION
If a venture capitalist calls you, he/she obviously believes in
your idea. But of the many meeting that VCs have each year with
entrepreneurs, only a few ideas actually are financed. So the
meeting is as important as the business plan. What you need to know.
Be ready for questions about changing market conditions. The
ability to adapt to market shifts is crucial for an Internet
entrepreneur.
Example: VCs like to ask hypothetical questions about what a new
company’s team would do if certain events occurred. They’ll even ask
about scenarios that are extremely unlikely, just to see how
entrepreneurs react to situations that they couldn’t possibly have
spent much time considering. What’s most important is that you
display adaptability, creativity and intelligence. VCs don’t want
people just to tell them that the situation would never occur and
leave it at that.
Be genuinely enthusiastic. You and your management team must show
that you’re passionate about your argument. Without such intensity,
venture capitalist won’t believe your team will have the drive
necessary to succeed. Enthusiasm can be expressed in many different
ways. The key is to be extremely animated and demonstrate a tireless
passion for what you do now and what your company intends to do.
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