In the last two columns, I wrote about the need for a business plan and what a typical plan should contain. In this column, I?ll focus on the aspects of a business plan that VCs will want to delve in great depth and will decide if your venture is going to receive funding.
First and foremost, as mentioned many times before in this series, is the management team. The plan must contain detailed resumes of the management team and show how they?re qualified to handle their responsibilities. Ideally, the team must be experienced and have an understanding of the marketplace, the technology, of running a business. At the very least, the team must demonstrate an understanding of the market and of the technology. The team members must bring complementary skills and experiences and again ideally, should have worked together.
More start-ups are destroyed due to bad chemistry between team members than any other reason. So make sure you focus on building a great team. If a resume cannot be displayed in the plan, at least indicate that you?ve spoken to the people who?d be interested in joining as soon as funding is arranged; or at the very least, you must show that you understand the need for say, a vice-president, sales & marketing and have accordingly made allowances in the plan. Good venture capitalists (VCs) will work with you, and help identify and recruit the right candidate but remember you cannot abdicate the responsibility of identifying the requirements of the job.
Second, you must demonstrate that you understand the market. While it is necessary to have data about the market from various sources, it is not sufficient. Arriving at a share of the market for your business by looking at market research data is something good VCs won?t accept at face value.
This is called the top-down approach and it goes something like this: reports indicate that the market for selling used cars on the Internet is about Rs 100 crore?5,000 cars each at a value of Rs 2 lakh. Assuming 10% market share for my business will result in a business with revenues of Rs 10 crore. Ergo! This is a great opportunity and of course, these are conservative estimates and are in any case, projected over a 5-year, time-frame. Right? Wrong! This conclusion is unlikely to pass the sniff test unless it is supplemented by a bottoms-up approach. The bottoms-up approach goes something like this: I need to sell 500 cars at about Rs 2 lakh each to achieve sales of Rs 10 crore. Where will these 500 customers come from and how will I reach them? How will I acquire my first customers? Will they be willing to pay Rs 2 lakh? Why should customers come to me when there are alternatives?
Do I need to form partnerships within other players in the ecosystem to make the buying of cars from me easy such as insurance, accessories and warranty service? How will I ensure delivery and support? As you can see, the bottoms-up approach ensures that you look at the achieving sales from the customer acquisition standpoint. By following the bottoms-up approach, you will get a better understanding of the market, its segments and opportunities.
By focusing on the market, you will also understand the competitive landscape and how to position your company accordingly. Building of a competitive advantage with barriers to entry is key to having a sustainable and viable business.
Third, you need to demonstrate how your offerings will be delivered to the customers and what your revenue model (such as flat monthly fee, percentage of transactions and licence fee) will be. This is the so-called business model and must be realistic. VCs prefer a predictable revenue model; the model must have strategies that dampen the effect of factors like seasonality.
Try to develop a recurring revenue stream?this will ensure that every sale is not a new sale. For example, the annual maintenance fee charged by computer companies is a source of predictable, recurring revenues.
Execution plan with milestones: this is another factor that VCs will want to get into detail. After all they?re putting their money to work and want to know how and in what time-frames will it get deployed. This is also a useful exercise to get into as it will force you to think about the details of delivering your goods and services to customers within specified time horizons.
This, in turn, will ensure focus. A set of milestones must result in a major goal being achieved such as complete management team in place, site up and running, and business operational in two cities. The achievement of the major goal then becomes a fundable event so you can now plan on raising the next round of capital.
Keep in mind that the above points are not in any specific order of importance but are all equally important. However, the management team is clearly the number one point. So, before rushing off to approach VCs, take a moment to review your plan to see that it covers all these points. Remember, as the saying goes: you do not a second chance to make a first impression. And the first impression has to be the best impression.
All the best!
What do you think?
The author is a passionate advocate of entrepreneurship in India. He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He?s involved with Nasscom, TiE, IIM-Bangalore, and Insead business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. These are his personal views