Attracting Equity Investors: Positioning, Preparing, and Presenting the Business Plan
This book is designed to help entrepreneurs understand how to obtain funding from an investor for the creation or development of a new business venture. It discusses how to evaluate a business concept from an investor's perspective before moving onto an examination of the practical issues involved, such as writing a compelling business plan and making a convincing presentation.
- Front Matter
- Back Matter
- Subject Index
- Chapter 1: Sources of Early-Stage Financing
- Debt versus Equity
- Categories of Early-Stage Financing
- Sources of Early-Stage Funding
- Self-Funding with the Help of Family and Friends
- Venture Capitalists
- What Else Can Venture Capitalists Offer?
- The Special Preferences of Venture Capitalists
- How to Approach a Venture Capitalist
- Keeping Your Options Open
- Business Angels
- The Preferences of Business Angels
- How to Contact Business Angels
- Chapter 2: Roles and Equity Shares in the New Venture
- Entrepreneurial Roles
- The Holder of the Strategic Assets
- The Manager
- The Investor
- The Basis for Equity Allocation in a New Business
- Conflicts Arising from the Allocation of Equity
- The Inventor
- The Business Planner
- The Management Team
- The Investor
- Recommendations on Equity Allocation
- Draw Up an Ownership Plan
- Sequential Allocation of Sweat Equity
- Develop an Explicit Protocol for Financial Calls
- Establish the Criteria for External Investors
- Incentive Contracting with other Stakeholders
- Let the Market Work for You
- Agree on the Investor's Involvement in the Business
- Consult an Attorney
- Chapter 3: Evaluate the Business from the Investor's Perspective
- What are Investors Looking for?
- New Ventures within the Investor's Domain
- New Ventures That Provide Superior Value
- New Ventures That Serve a Long-Felt Need
- A “Proprietary” Position
- Follow-Up Products
- Points on the Scoreboard
- The Liability of Newness
- Novelty to the Customer
- Novelty to the Producer
- Novelty to Management
- The Impact of Risk Reduction Strategies on Consumer Ignorance
- The Impact of Risk Reduction Strategies on Producer Ignorance
- Chapter 4: Evaluate the Managers from the Investor's Perspective
- The Quality of the Management Team
- Diverse and Complementary Skills
- Relevant Experience
- Hurt Money
- The Principal-Agent Problem
- Boards of Directors
- Advisory Groups
- Novelty to Management
- The Impact of Risk Reduction Strategies on Novelty to Management
- Chapter 5: The Three-Stage Communication Strategy
- A Strategic Approach to Achieve Your Objective
- How to Get There: The Three-Stage Communication Approach
- The Purpose of Each Stage
- Stage I—The Business Plan
- Stage II—The Presentation
- Stage III—The Question-and-Answer Period
- Brevity and Parsimony
- The Logical Flow of Ideas
- Building and Maintaining Investor Interest
- Target the Intended Audience
- Chapter 6: Write a Compelling Business Plan
- The Virtues of Parsimony and Persistence
- Persistence—Keep Revising until You Run out of Time
- Critical Review by an outside Party
- The Use of Visual Aids in the Business Plan
- Content and Structure of the Business Plan
- The Executive Summary
- Company Description
- What Business is the New Venture in?
- The New Product or Service Concept
- Window of Opportunity and Distinctive Competence
- Market Environment and Competitor Analysis
- Industry Attractiveness
- Overall Market and Target Segment(s)
- Competitive Positioning
- Customers' Decision-Making Process
- Marketing Mix
- Growth Strategy
- Research and Development
- Manufacturing and Operations
- Organizational Structure, Management, and Ownership
- Organizational Structure
- Quality of the Management Team
- Complementarity of the Management Team
- Ownership Structure
- Risk Recognition and Risk Reduction Strategies
- Financial Details
- Sensitivity and Scenario Analysis
- Financial Details
- The Deal—The Ask and the Offer
- What Should Go in the Appendixes?
- Chapter 7: Successfully Presenting and Defending Your Business Plan
- What Should Be Presented?
- The Presentation Team
- Dress and Demeanor
- Who Should Participate?
- A Suggested Plan for the Presentation
- Who Should Do the Talking?
- Get the Investor Excited about Your Product or Service Concept
- Multimedia Presentation
- Convince the Investor That the Management Team Adds Value
- Communicate the Financial Viability of the New Venture
- Pitch the Deal and Begin the Negotiation Process
- The Q&A Session
- Answer the Question Asked
- Treat All Questions with Respect
- Brevity is a Virtue
- Responsibility for Particular Questions
- Let the Leader Lead
- Don't “Add on” to a Team Member's Answer
- Common Questions You May Be Asked
- Questions on Proprietary Intellectual Property and Its Protection
- Questions on Your Market, Target Customer, and Market Research
- Questions on Your Marketing Strategy
- Questions on Your Sustainable Competitive Advantages
- Questions on Your Financial Projections
- Questions on the Deal
- Chapter 8: Valuing the Business and Negotiating the Deal
- The Valuation of the Business
- Net Present Value Analysis
- The Internal Rate of Return Method
- “I Want X Times My Money Back in Y Years.”
- Assumptions Underlying the Valuation
- Revenue Projections
- Cost Assumptions
- Accounting Conventions
- Time Horizon Selected
- The Price/Earnings Ratio Selected
- Reconciling the Assumptions and Negotiating the Deal
- The Negotiation Process
- Creative Financing
- Funding in Stages as Needed
- Debt versus Equity
- Voting versus Nonvoting Stock
- Management Contracts and Performance Criteria
- Taking Options on Management's Share of Equity
- Sliding Scale Agreements for Management's Share
- Chapter 9: Summary and Conclusions
- Sources of Early-Stage Venture Capital
- Roles and Equity Shares in the New Venture
- Evaluate the Business Concept from the Investor's Perspective
- Evaluate the Management Team from the Investor's Perspective
- The Three-Stage Communication Strategy
- Write a Compelling Business Plan
- Successfully Presenting and Defending Your Business Plan
- Valuing the Business and Negotiating the Deal
Entrepreneurship and the Management of Growing Enterprises[Page ii]
A Sage Publication Series
THE ENTREPRENEURSHIP AND THE MANAGEMENT OF GROWING ENTERPRISES series focuses on leading edge and specialized ideas important to the creation and effective management of new businesses. Each volume provides in-depth, accessible, up-to-date information to graduate and advanced undergraduates students, investors, and entrepreneurs.
Jerome A. Katz
Saint Louis University
Jefferson Smurfit Center for Entrepreneurial Studies
D. Ray Bagby, Baylor University
Donald F. Kuratko, Ball State University
Justin Longnecker, Baylor University
Ian C. MacMillan, University of Pennsylvania
Howard H. Stevenson, Harvard University
Frederick C. Scherr, West Virginia University
Jeffry A. Timmons, Babson College
BOOKS IN THIS SERIES
Methods for Consulting to Small and Startup Businesses
Lisa K. Gundry and Aaron A. Buchko
NEW VENTURE STRATEGY:
Timing, Environmental Uncertainty, and Performance
Dean A. Shepherd and Mark Shanley
ATTRACTING EQUITY INVESTORS:
Positioning, Preparing, and Presenting the Business Plan
Dean A. Shepherd and Evan J. Douglas
Copyright © 1999 by Sage Publications, Inc.
All rights reserved. No part of this book may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the publisher.
Sage Publications, Inc.
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Sage Publications Ltd.
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Sage Publications India Pvt. Ltd.
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Printed in the United States of America
Library of Congress Cataloging-in-Publication Data
Shepard, Dean A.
Attracting equity investors: Positioning, preparing, and presenting the business plan / Dean A. Shepherd, Evan J. Douglas.
p. cm. — (Entrepeneurship and the management of growing enterprises)
Includes bibliographical references and index.
ISBN 0-7619-1476-5 (cloth)
ISBN 0-7619-1477-3 (pbk.)
1. Business planning. I. Douglas, Evan J., 1946- II. Title. III. Series.
HD30.28 .D685 1998
99 00 01 02 03 04 8 7 6 5 4 3 2 1
Acquiring Editor: Marquita Flemming
Editorial Assistant: MaryAnn Vail
Production Editor: Diana E. Axelsen
Editorial Assistant: Nevair Kabakian
Typesetter/Designer: Danielle Dillahunt
Cover Designer: Candice Harman
List of Tables and Figures[Page xi]
- Table 1.1. Categories of Early-Stage Financing 3
- Table 1.2. Primary Sources of Early-Stage Funding 3
- Table 1.3. Considerations in Selecting Venture Capitalists 9
- Table 1.4. Profile of the Typical Business Angel 10
- Table 2.1. Reasons for Allocating Equity in Your Business 21
- Table 2.2. The Ownership Plan 29
- Table 2.3. Sequential Allocation of Sweat Equity to Managers 31
- Table 6.1. A “Page Budget” for Your Business Plan 84
- Table 6.2. Risk Recognition and Risk Reduction Strategies for Oceanic Products 109
- Table 6.3. Assumptions Underlying the Scenarios for Oceanic Products 110
- Table 7.1. Suggested Outline and Time Budget for the Presentation 120
- Table 7.2. Suggested Layout for a PowerPoint Slide 123
- Figure 7.1. Sample Graph of Financial Performance 126
- Table 8.1. NPV Calculations to Evaluate the New Venture 141 [Page xii]
- Table 8.2. RRR Implied by Various Investment Multiples 142
- Table 8.3. Share of Equity Required to Achieve Several RRRs Under Different P/E Ratios 147
- Table 9.1. Checklist—Sources of Early-Stage Financing 157
- Table 9.2. Checklist—Roles and Equity Shares in the New Venture 159
- Table 9.3. Checklist—Evaluate the Business From the Investor's Viewpoint 160
- Table 9.4. Checklist—Evaluate the Management Team From the Investor's Perspective 161
- Table 9.5. Checklist—Devising Your Three-Stage Communication Strategy 162
- Table 9.6. Checklist—Write a Compelling Business Plan 162
- Table 9.7. Checklist—Successfully Presenting and Defending Your Business Plan 164
- Table 9.8. Checklist—Valuing the Business and Negotiating the Deal 165
We wish to acknowledge past Bond University MOOT CORP teams, in particular, Andrew Maxwell, Prue Kellahan, and Kim Goriss (Ecoclear); Richard Sachs, Nicole Martin, David Johnston, and Michael Levens (Decklock); Robert Brough, Tim Zwemer, and Peter Homan (Breeze Technology); and Ed Gordon and Mark Speding (Commercial Marine Products).
[Page xiv]Dean A. Shepherd dedicates this book to his best mates: Susie Leggett, Justin Parer, Brent and Kerrie Shepherd.
Evan J. Douglas dedicates this book to his family: Shelly, Andrew, and Meghan.
Introduction[Page xv]The Purpose of This Book
This book is designed to help entrepreneurs gain funding for the launch and/or expansion of their new business venture. It recognizes that the supply of funding for new ventures is scarce, relative to the need for funding from millions of would-be entrepreneurs. Thus, there is very real competition for the funds that are available. The entrepreneur must “stand out” in such competition to obtain funding. He or she must tell a very compelling story in a very convincing manner and be able to answer confidently all questions posed by the potential investor. But more than simply obtaining the funding, the entrepreneur's objective should be to obtain the funding on the best terms possible.
In any market, if the seller provides exactly what the buyer wants and better serves the buyer's needs while pricing competitively, gaining the sale should be a straightforward matter. The same goes for selling part of your business to an investor. You need to understand what the investor is looking for in an investment, qualitatively and quantitatively, and offer that investor a large enough share in the business such that he or she perceives that the investment opportunity is personally interesting, not excessively risky, and sufficiently lucrative.
No venture capitalist will support a business or a management team unless he or she believes in the viability of the business and the competence of the management team. Thus, this book is about organizing your business and then writing and presenting a business plan to convince the investor that the business is a desirable and sufficiently lucrative investment [Page xvi]and that the management team is the right group of people to be taking that business opportunity forward toward fruition.What is Different about This Book?
There are dozens of books available on “how to write a business plan,” so why buy this one? Those other books, and there are many good ones,1 focus on the mechanics of the business plan. That is, they are primarily concerned with the structure and content of the business plan, such as what items or elements should be in it, what the best order of presentation of these elements should be, what market research results should be provided, and so on. We address such concerns in Chapter 6.
This book is about the broader issue of how to raise equity capital for a new business venture. It is more concerned with issues prior to and following the submission of the business plan to a prospective investor than with the actual business plan itself. This book is designed to help the entrepreneur clear the hurdles to obtaining funding (only one of which is the absence of a good business plan). In a nutshell, this book is about making your new venture “investor ready” so that an investor will be attracted to your business and be willing to invest in it now, with minimal changes or disruptions necessary before such investment takes place.Overview of This Book
In Chapter 1, we discuss the sources of funding for new ventures. After a brief discussion of the disadvantages of debt funding, we examine the three main sources of equity funding—personal contacts, venture capitalists, and business angels. Strategies for identifying and approaching these sources are outlined and discussed.
Chapter 2 addresses the importance of “getting the house in order” in terms of equity allocation and other agreements among the existing owners and managers, before any investor is approached with an offer of an equity share and a financing role in the business. The importance of specifying roles and performance expectations of all parties is stressed. [Page xvii]The concept of an “ownership plan” is introduced, and a variety of related recommendations follow.
Chapter 3 asks the entrepreneur to view the business through the critical eyes of the investor and consider changes in the business that will make it more attractive to potential investors, before submitting the business plan. Investors have strong preferences for the type of project they will invest in, and the entrepreneur should seek to identify and understand these preferences, select the target investors appropriately, and pitch the business plan and presentation accordingly.
Chapter 4 encourages the entrepreneur to look at him- or herself, and the management team, the way an investor would. That is, the entrepreneur should carefully scrutinize the management team from the investor's viewpoint and be prepared to make changes to themselves, the management team, or both before submitting the business plan.
In Chapter 5, we discuss the business plan as stage I of a three-part communication process that will take place between the entrepreneur and an interested investor. Stage I is the business plan itself, stage II is the presentation, and stage III is the question-and-answer (Q&A) session. The entrepreneur should strategically consider which issues should be presented in the business plan, which in the presentation, and which should be left for the Q&A session.
In Chapter 6, we discuss the first stage of the communication process, which is the business plan. We discuss what should and should not be in the business plan, and how the plan should be structured and written. Suggested topics and space budgets for each of these are provided. Examples from other business plans are shown to illustrate the power of careful word choice and idea sequencing.
In Chapter 7, we consider the second and third stages of the communication process with a potential investor, namely, the presentation and the Q&A session. Based on our experience, we provide a number of hints and suggestions for the structuring of the presentation and the conduct of these sessions, to help the investor learn what he or she needs to know to be comfortable about investing in your business.
Chapter 8 is concerned with valuing the business properly and negotiating an appropriate share of the equity in exchange for the funding received. If the entrepreneur fully understands the basis on which the investor will want to value the business, he or she will be prepared for [Page xviii]the negotiation session that will take place if the investor is interested in buying equity in the business.
Chapter 9 presents a summary of the most important issues and provides a checklist for the entrepreneur to consider before submitting the business plan to an interested investor.
So, what are you waiting for? Life is short, and there is much to be achieved. Read on!Note
1. See, for example, the following:
Arkebauer, J. B. (1995). The McGraw-Hill guide to writing a high-impact business plan. A proven blueprint for entrepreneurs. New York: McGraw-Hill.
Bangs, D. H. (1995). The business planning guide. Creating a plan for success in your own business (7th ed.). Chicago, IL: Upstart.
DeThomas, A., & Fredenberger, W. B. (1995). Writing a convincing business plan. Hauppage, NY: Barron's.
Kars, K. (Ed.). (1995). Business plans handbook. New York: Gale Research, Inc.
For more such books and a brief synopsis of some of them, see Ryans, C. C. (1997). Resources. Journal of Small Business Management, 35(2), 95–98.
About the Authors[Page 173]
Dean A. Shepherd is Assistant Professor in Entrepreneurship and Strategy at the Lally School of Management and Technology, Rensselaer Polytechnic Institute and was 1997 Visiting Scholar in Entrepreneurship at the J.L. Kellogg Graduate School of Management, Northwestern University. His research has resulted in papers to be published in the Journal of Business Venturing and the Journal of Small Business Management as well as papers published in the Academy of Management Best Papers Proceedings. He also has published another book in the Sage Series on Entrepreneurship and the Management of Enterprises, namely, New Venture Strategy; Timing, Environmental Uncertainty and Performance. He has presented papers at Frontiers of Entrepreneurship Research conferences, Academy of Management meetings, and the 1997 ICSB meeting, where his paper won best theory paper of the conference.
Dr. Shepherd received his doctorate and MBA from Bond University (Australia) and a Bachelor of Applied Science from the Royal Melbourne Institute of Technology. He was a member of the Bond team that placed second in the MOOT CORP competition in 1993, and in the following years he assisted the Bond University team as co-academic advisor. These teams placed first in 1994, second in 1995, and first in 1996. He has established two family businesses and has taken an equity stake and advisory role in the footwear technology venture that emanated from the 1994 MOOT CORP team. Dr. Shepherd's research interests include new venture strategy, venture capital, and the decision making of entrepreneurs. His teaching fields include entrepreneurship, strategy, and management.
[Page 174]Evan J. Douglas is Professor and Head of the Graduate School of Business at Queensland University of Technology, Brisbane, Australia. His teaching and research interests include entrepreneurship, new venture planning, new venture funding, international business, competitive strategy, strategic pricing, quality and warranty decisions, and managerial economics. His publications include two university textbooks and a variety of papers on applied microeconomic issues. He has owned and operated small businesses in Canada and in the United States, and currently is director and/or has equity in several start-up companies. His Bachelor and Master of Commerce degrees are from the University of Newcastle, Australia, and his PhD is from Simon Fraser University, Canada. He has won excellence-in-teaching awards in his 25 years of experience in business education at eight universities in Australia, Canada, and the United States. In the past 4 years, he has acted as academic advisor to MBA teams that have finished first, twice and second, twice in the annual International MOOT CORP Entrepreneurship competition.