Description
During this detailed elucidation around yale school of management creating a business plan.
Yale School of Management Lecture 3.1
_______________________________________________________________________
Creating a Business Plan
Why Write A Plan?
O “ Business Plan” and “ business planning” are fuzzy terms. They mean different
things to different people:
A business plan for a new company not yet started (a “startup”.)
A plan for an existing company, seeking to grow.
A plan for a group within a larger company, such as a division or department.
A product plan, either for a new product or for an existing product.
O Within each of these categories, there are large variations in the content of a plan,
depending upon the purpose:
To guide management in running the business: emphasize measurable goals.
To raise money (equity or debt) or to sell the business: emphasize selling points.
Miscellaneous other reasons: to comply with regulations, define job duties, etc.
O Entrepreneurial Planning is all about starting and running a new business. Starting a
new business is similar in many ways to starting a new group within a larger company.
Or to creating and launching a new product for an existing company. But a stand-alone
new business has unique characteristics. Plans include a company description.
Raising money usually is a key objective. Such plans tend to be promotional in nature.
O Business plans for new ventures are management tools. Effective plans:
Help entrepreneurs focus ideas and convert them into realistic courses of action.
Create a specific, defined path for management to follow in the early stages.
Identify targets for performance measurement (or “milestones”.)
Provide a persuasive basis for attracting equity and debt financing, or people.
O Entrepreneurs often find that raising equity money for their startup venture is one of the
major obstacles to success. To raise capital from angel investors or from professional
venture capitalists, you must have a great business plan.
O Professional venture capital investors see a huge number of business plans from
entrepreneurs seeking to raise money. At J PMorgan & Co., we received over 4,000
business plans every year. We invested only in about 1% of the incoming situations.
J PM’s “deal flow” versus the rate of investment is typical for venture capital investors.
Not many startups can attract venture capital investment -- and probably should plan to
find the needed money somewhere else.
______________________________________________________________________
Yale School of Management Lecture 3.2
_______________________________________________________________________
O Venture investors think they are busy people. Instead of trying to find a reason to
pursue a new investment opportunity, most VCs try to find a reason to kill it ASAP:
Annual Deal Flow at JPMorgan Number Percent
Attention Span of Plans of Plans
Read 3-Page Executive Summary 4,000 100%
Read Full Business Plan 1,200 30%
Call Sponsors, Ask Simple Questions 600 15%
Visit Management Once 320 8%
Intensive Due Diligence, Research 160 4%
Make Offer, Negotiate Price & Terms 80 2%
Close Deal, Make the Investment 40 1%
O A professional investor’s decision to pursue a proposed new opportunity will turn on the
quality of the business plan and the accompanying materials. There is no chance
whatsoever of raising the needed financing without a business plan. Even with a plan,
the content and packaging must be excellent. Concise, hard-hitting, comprehensive.
O The business plan is management’s first, best, and probably only chance to capture the
attention of investors. Investors need assurance that management has thought about
its corporate goals, management team, products, strategies, competition, and the need
for capital. Investors want to know that the sponsors have considered weaknesses as
well as strengths, problems as well as opportunities.
O Many businesses only write a plan when they must, for an external audience such as a
lender or an outside investor. “I’m too busy running the business.” Big mistake.
“ Failure to plan is planning to fail.”
O Contrary to myth, business plans do not generate financing. Although financing
proposals require a business plan, nobody invests in a business plan. Investors use
the document to understand ideas and to gather information. Investors invest in
people and in their perceived ability to implement the plan, not in the plan per se.
O The three most important considerations for professional investors in financing a new
venture are (1) people, (2) people, and (3) people. More about this later.
______________________________________________________________________
Yale School of Management Lecture 3.3
_______________________________________________________________________
O Raising money from professional venture capitalists is only one possible source of
finance for your business venture. Most business startups are not even candidates
for professional venture capital financing. VC’s invest only when there is a rare
combination of product and market opportunities, coupled with proven management.
O In the year 2000, venture capital funds invested in a record number of companies,
roughly 6,000 of them. In the same year, about one million new businesses were
incorporated and started up. Note the percentage that received VC financing? Less
than 1/100
th
of one percent!
O The most common source (2/3) of equity financing for new ventures is the
entrepreneur’s own savings and personal ability to borrow money.
O The entrepreneur’s “friends & family” finance about 10% of startups.
O Another source is “angels”, who are wealthy individuals who occasionally invest a small
part of their assets in startup companies. Angels typically invest $100,000 to $250,000
in local, early stage ventures.
O Friends & family, plus Angels finance 20 times more startups than professional VC’s.
O But Avoid friends & family if you can. Startup businesses are risky investments for
everyone involved. Many new ventures will fail, and everyone will lose their time and
money. Entrepreneurs who finance their startups with money from friends & family risk
losing their friends, family and their business -- all at the same time! Not much fun.
O Some angels are an excellent source of financing. Others are not.
Handle angel financing with extreme caution.
Check their references, do your homework on the people in the same depth that
you would -- if you were going to loan them the family heirlooms.
Never spend angel money without first doing proper legal contracts.
Never spend money that someone has promised to you but has not yet delivered.
Investment commitments have a nasty habit of falling through at the last moment.
Take the potential angels out to dinner, have a beer. Make sure you like them as
people and that you and they seem compatible.
______________________________________________________________________
Yale School of Management Lecture 3.4
_______________________________________________________________________
Creating A Business Plan
The Plan
O The business plan should reflect the nature of the specific business, its industry,
its stage of development (R&D stage vs. startup, vs. expansion stage.) The plan will
reflect the physical, human and financial resources available to the entrepreneur.
O For this class, most of our plans will be for startups. Most such plans will be for
business concepts that, if they work, could result in the company growing to a large
size -- say, 100+employees or $20 million or more in annual sales. (The vast majority
of startups are businesses that plan to stay small, even if they succeed.)
O Most of our plans will target potential investors. Senior lawyers call a business
plan aimed at equity investors, “a Private Placement Memo”. J unior lawyers who must
proofread the document call it, “the Book”.
O The text of a private placement memo is 25-30 pages long, excluding attachments.
The Book must be crisp and easy to read. It must persuade investors to want to learn
more about the Company and its management. Pick up their phone. Ask questions.
O Writing an effective Book is time-consuming and not easy. You will need the
active participation of your whole team. Your team must work together in an organized
manner to complete and deliver a good Book within just one school semester of time.
O In the real world, most Books are absolutely terrible, awful and ineffective!
O After a couple of years of practice (in reading Books), professional investors learn how
to kill maybe 1/3 of all proposals within the first two minutes, or less. Investors will kill
something like 2/3 of all Books within five minutes or so. Investors will read the whole
Book in only a small minority of cases.
O A large number of publications are on the market, readily available, about “How to
Write a Winning Business Plan”. It almost seems as if many wannabe entrepreneurs
do not bother to do their homework and learn about how to write a plan. Or they read
an instructional piece, then ignore what it says! In any case, most real Books are badly
conceived, badly written and incomplete. These go straight into the wastebasket.
O For this course, the sponsors will not launch all of the new business ventures on which
we work. Of those that do, not all will succeed. But some will.
O Whether or not a proposed business venture is a good bet for investors, the professor
intends to ensure that all Books are 100% complete and professional in quality.
O The following is an outline of a “standard plan”. Many variations of the layout are OK,
so long as coverage of the topics is complete. One of the most common mistakes
that entrepreneurs make is a failure to provide comprehensive coverage.
______________________________________________________________________
Yale School of Management Lecture 3.5
_______________________________________________________________________
Outline of a “ Standard” Plan
Cover Page & Disclaimer o Including “who to contact” information
Executive Summary o 1,400 Words or less, 3-4 pages.
Terms of the Financing o Amount of financing needed
o Price, key terms and conditions
Company Summary o History
o Ownership
o Location and facilities
Product / Services o Product or service description
o Features and benefits
o Competitive comparisons
o Production or other sourcing
o Technology & patents
o Future products & services
Market Analysis Summary o Market segmentation
o Industry analysis – size and growth
- Industry participants
- Distribution patterns
- Competition and buying patterns
- Main competitors
o Market analysis, size and expected growth
Strategy and Implementation o Marketing strategy
- Pricing
- Promotion
o Sales strategy
- Sales forecasts
- Sales programs and techniques
o Costs, services and support
o Milestones
Management Summary o Management team, plans to fill gaps
o Organizational structure
o Board of Directors
o Personnel plan and philsophy, incentives
Financial Plan o Key assumptions
o Projected financial statements
o Projected cash flows & break-even analysis
o Key financial indicators and ratios
______________________________________________________________________
Yale School of Management Lecture 3.6
_______________________________________________________________________
Outline of Work Flow
o What are our products / services -- features and benefits? What is unique?
o Market: Nature and size, segments, growth rate, special factors.
o Who are the customers? (Demand) What do they think about our product?
o Who are the competitors? (Supply) Our comparative advantage is?
o Production – how do we make our product / service? What does it cost?
o Sales & Marketing – how do we get customers? Salesforce? Advertising?
o Devise a Strategy -- comparative strengths and weaknesses, scope, timing.
o Business “model” -- How do we make money? Volume / Pricing / Costs.
o Legal, accounting, tax and finance, insurance, administrative support needs.
o Technical -- patents, licenses, other.
Personnel Plan
o Management skills required -- versus skills already in hand. Fill the gaps?
o Who, how many, job duties, when, where do we get them?
o Compensation, stock incentives, costs, fringe benefits (health care, etc.)
Financial Plan
o Base Case (Main focus); Upside/downside cases.
o How much money do we need? Now versus later.
o Identify sources of capital -- founders, friends & family, angels, VC firms
o Exit for investors: IPO, sell out to strategic buyer, buyback?
Equity Valuation
o Comparable companies -- research, Bloomberg, Yahoo
o Valuation -- “trading multiple” model, VC method.
Deal Structure
o Articles of Incorporation, By-Laws, Shareholders Agreement, etc.
o Negotiate initial equity (Founders, other investors); incentive stock option plan.
o Structure terms of the financing offer to investors.
Write Business Proposal
o Cover Page & Disclaimer.
o Summary (1,400 words or less) Write this first!
o Main Text. (20-25 pages.) Edit and re-edit for reading ease.
o Financial statements and financial projections.
o Shareholders list, management résumés, contracts, other appendices, pictures.
Mail Proposal to Target Investors
Practice and Deliver Oral Presentation
______________________________________________________________________
Yale School of Management Lecture 3.7
_______________________________________________________________________
Venture Investor’s “ Dream Deal”
Mission
O Build a highly profitable and industry-dominant company.
O Go public or merge within 4-7 years, at a high price / earnings multiple.
Complete Management Team
O Led by industry superstar.
O Possess proven entrepreneurial, general management and P&L experience.
O Includes leading innovator or an experienced head of technology marketing.
O Complementary, diverse and compatible skills.
O Reputation for complete honesty and high integrity.
Proprietary Product
O Has significant competitive lead and “unfair” advantages.
O Has product or service with high valued-added properties, with early user payback.
O Has or can gain exclusive contractual or legal rights
Large and Rapidly Growing Market
O Will accommodate at least one $50 million player within five years.
O Market already has sales of $100 million or more, growing at 25%+per year.
O Has no dominant competitor now.
O Clearly identified customers and distribution channels.
O Has forgiving and rewarding economics:
Gross margins of 40%-50%, or more
10% or more net income/sales
Early positive cashflow and break-even on modest volume of sales.
Deal Valuation and IRR
O Has a digestible, first-round equity capital need ($2 million to $10 million).
O Able to return ten times original investment in five years @ P/E of 25 or more.
O Has possible additional rounds of equity financing -- at a substantial markup.
O Has anti-dilution protection and IPO subscription rights.
______________________________________________________________________
Yale School of Management Lecture 3.8
_______________________________________________________________________
VENTURE CRITERIA Highest Potential Lowest Potential
Industry & Market Changes way people live and work Incremental improvement only
Market Market driven; identified; recurring Unfocused; one-time revenue
Customers Reachable; purchase orders Loyal to others or unreachable
Value added High; advance payments Low; minimal impact on market
Market size $100 million to $1 billion sales Under $100 million sales potential
Growth rate Growing 25%-50% annually, or more Declining, or growing less than 10%
Market capacity At or near full capacity Under-capacity
Market share attainable 20% or more by Year 5; leadership Less than 5% by Year 5
Cost structure Low-cost provider; cost advantages Declining cost; high cost provider
Economics Highest Potential Lowest Potential
Time to positive cash flow Under two years More than four years
ROI Potential 25% or more, high value Under 15%, low value
Capital financing requirements Low to moderate; fundable Very high; not-fundable
Free cash flow character Sustainable, 20%+of sales Less than 10% of sales
Sales growth Moderate (25%) to high (50%) Less than 10% p.a.
Asset intensity Low – sales / assets $ ratio High asset intensity
Working capital Low, incremental requirements High requirements
R&D/capital expenditures Low requirements High R&D requirements
Gross margin Over 40%+/ sales and durable Under 20% of sales
After tax profits Greater than 10% of sales Low
Break-even profit & loss Within 2 years, not creeping out Over 4 years, creeping out longer
Harvest Issues Highest Potential Lowest Potential
Value-added potential High strategic value to acquirer Low strategic value
Valuation multiples Price/Earnings =25x or more Price/Earnings =15x or less
(vs. comparable firms) Price/EBIT =15x to 18x or more Price/EBIT =5x or less
Price/sales =1.75 to 2.5 or more Price/sales =0.4x or less
Exit mechanism/strategy Present/clear options Undefined, fuzzy; illiquid position
Capital market context High valuations, good timing Low valuations, credit crunch
______________________________________________________________________
Yale School of Management Lecture 3.9
_______________________________________________________________________
Competitive Advantage Highest Potential Lowest Potential
Fixed & variable costs Lowest; high operating leverage High costs; low operating leverage
Control over prices, costs Moderate to strong Weak control
Control over distribution Moderate to strong Weak control or unknown
Barriers to entry Have/can gain proprietary protection No proprietary protection or patents
Ease of entry/lead time Competition slow or napping Unable to gain lead time edge
Legal or contract advantage Proprietary or exclusive None
Pricing attitude At or near market/nitche leader Undercut competitor; low prices
Contacts or networks Well-developed; accessible Crude, ill-defined, limited
Key personnel Top talent; an "A" team Unproved talent or clear "B" players
Management Team Highest Potential Lowest Potential
Entrepreneurial team All-star combination; free agents Solo entrepreneur, no track record
Industry/technical experience Top players in their field; track records Underdeveloped, new to industry
Integrity and honesty Highest standards; no doubts Questionable
Intellectual honesty Know what they don't know Know everything, no room to learn
Goal and role clarity Know the vision and their own roles Confused goals, overlapping roles
Upside vision/risk
management
Sets attainable goals; risks limited Unattainable goals; risks be
damned
Fatal flaw None apparent One or more visible
Willingness to sacrifice Will take salary cut, work long hours Likes status quo
Stress tolerance Thrives under pressure, bounces back Cracks under pressure, casts
blame
Lifestyle fit Fits with "normal", preferred lifestyle Gambling, seeking big money only
Management Attitudes Highest Potential Lowest Potential
Service management Superior customer service concept Perceived as not very important
Teamwork Develops & encourages depth/breath Lone ranger
Timing Rows with the tide, goes with flow Resists reality, likes hopeless
cause
Technology attitude Groundbreaker, unique Many substitutes or competitors
Flexibility Able to adapt; commit and decommit Slow, stubborn persistence
Opportunity orientation Always searching for opportunities Content, not looking around
Room for error Forgiving strategy Unforgiving, rigid strategy
______________________________________________________________________
Yale School of Management Lecture 3.10
_______________________________________________________________________
______________________________________________________________________
doc_909951169.pdf
During this detailed elucidation around yale school of management creating a business plan.
Yale School of Management Lecture 3.1
_______________________________________________________________________
Creating a Business Plan
Why Write A Plan?
O “ Business Plan” and “ business planning” are fuzzy terms. They mean different
things to different people:
A business plan for a new company not yet started (a “startup”.)
A plan for an existing company, seeking to grow.
A plan for a group within a larger company, such as a division or department.
A product plan, either for a new product or for an existing product.
O Within each of these categories, there are large variations in the content of a plan,
depending upon the purpose:
To guide management in running the business: emphasize measurable goals.
To raise money (equity or debt) or to sell the business: emphasize selling points.
Miscellaneous other reasons: to comply with regulations, define job duties, etc.
O Entrepreneurial Planning is all about starting and running a new business. Starting a
new business is similar in many ways to starting a new group within a larger company.
Or to creating and launching a new product for an existing company. But a stand-alone
new business has unique characteristics. Plans include a company description.
Raising money usually is a key objective. Such plans tend to be promotional in nature.
O Business plans for new ventures are management tools. Effective plans:
Help entrepreneurs focus ideas and convert them into realistic courses of action.
Create a specific, defined path for management to follow in the early stages.
Identify targets for performance measurement (or “milestones”.)
Provide a persuasive basis for attracting equity and debt financing, or people.
O Entrepreneurs often find that raising equity money for their startup venture is one of the
major obstacles to success. To raise capital from angel investors or from professional
venture capitalists, you must have a great business plan.
O Professional venture capital investors see a huge number of business plans from
entrepreneurs seeking to raise money. At J PMorgan & Co., we received over 4,000
business plans every year. We invested only in about 1% of the incoming situations.
J PM’s “deal flow” versus the rate of investment is typical for venture capital investors.
Not many startups can attract venture capital investment -- and probably should plan to
find the needed money somewhere else.
______________________________________________________________________
Yale School of Management Lecture 3.2
_______________________________________________________________________
O Venture investors think they are busy people. Instead of trying to find a reason to
pursue a new investment opportunity, most VCs try to find a reason to kill it ASAP:
Annual Deal Flow at JPMorgan Number Percent
Attention Span of Plans of Plans
Read 3-Page Executive Summary 4,000 100%
Read Full Business Plan 1,200 30%
Call Sponsors, Ask Simple Questions 600 15%
Visit Management Once 320 8%
Intensive Due Diligence, Research 160 4%
Make Offer, Negotiate Price & Terms 80 2%
Close Deal, Make the Investment 40 1%
O A professional investor’s decision to pursue a proposed new opportunity will turn on the
quality of the business plan and the accompanying materials. There is no chance
whatsoever of raising the needed financing without a business plan. Even with a plan,
the content and packaging must be excellent. Concise, hard-hitting, comprehensive.
O The business plan is management’s first, best, and probably only chance to capture the
attention of investors. Investors need assurance that management has thought about
its corporate goals, management team, products, strategies, competition, and the need
for capital. Investors want to know that the sponsors have considered weaknesses as
well as strengths, problems as well as opportunities.
O Many businesses only write a plan when they must, for an external audience such as a
lender or an outside investor. “I’m too busy running the business.” Big mistake.
“ Failure to plan is planning to fail.”
O Contrary to myth, business plans do not generate financing. Although financing
proposals require a business plan, nobody invests in a business plan. Investors use
the document to understand ideas and to gather information. Investors invest in
people and in their perceived ability to implement the plan, not in the plan per se.
O The three most important considerations for professional investors in financing a new
venture are (1) people, (2) people, and (3) people. More about this later.
______________________________________________________________________
Yale School of Management Lecture 3.3
_______________________________________________________________________
O Raising money from professional venture capitalists is only one possible source of
finance for your business venture. Most business startups are not even candidates
for professional venture capital financing. VC’s invest only when there is a rare
combination of product and market opportunities, coupled with proven management.
O In the year 2000, venture capital funds invested in a record number of companies,
roughly 6,000 of them. In the same year, about one million new businesses were
incorporated and started up. Note the percentage that received VC financing? Less
than 1/100
th
of one percent!
O The most common source (2/3) of equity financing for new ventures is the
entrepreneur’s own savings and personal ability to borrow money.
O The entrepreneur’s “friends & family” finance about 10% of startups.
O Another source is “angels”, who are wealthy individuals who occasionally invest a small
part of their assets in startup companies. Angels typically invest $100,000 to $250,000
in local, early stage ventures.
O Friends & family, plus Angels finance 20 times more startups than professional VC’s.
O But Avoid friends & family if you can. Startup businesses are risky investments for
everyone involved. Many new ventures will fail, and everyone will lose their time and
money. Entrepreneurs who finance their startups with money from friends & family risk
losing their friends, family and their business -- all at the same time! Not much fun.
O Some angels are an excellent source of financing. Others are not.
Handle angel financing with extreme caution.
Check their references, do your homework on the people in the same depth that
you would -- if you were going to loan them the family heirlooms.
Never spend angel money without first doing proper legal contracts.
Never spend money that someone has promised to you but has not yet delivered.
Investment commitments have a nasty habit of falling through at the last moment.
Take the potential angels out to dinner, have a beer. Make sure you like them as
people and that you and they seem compatible.
______________________________________________________________________
Yale School of Management Lecture 3.4
_______________________________________________________________________
Creating A Business Plan
The Plan
O The business plan should reflect the nature of the specific business, its industry,
its stage of development (R&D stage vs. startup, vs. expansion stage.) The plan will
reflect the physical, human and financial resources available to the entrepreneur.
O For this class, most of our plans will be for startups. Most such plans will be for
business concepts that, if they work, could result in the company growing to a large
size -- say, 100+employees or $20 million or more in annual sales. (The vast majority
of startups are businesses that plan to stay small, even if they succeed.)
O Most of our plans will target potential investors. Senior lawyers call a business
plan aimed at equity investors, “a Private Placement Memo”. J unior lawyers who must
proofread the document call it, “the Book”.
O The text of a private placement memo is 25-30 pages long, excluding attachments.
The Book must be crisp and easy to read. It must persuade investors to want to learn
more about the Company and its management. Pick up their phone. Ask questions.
O Writing an effective Book is time-consuming and not easy. You will need the
active participation of your whole team. Your team must work together in an organized
manner to complete and deliver a good Book within just one school semester of time.
O In the real world, most Books are absolutely terrible, awful and ineffective!
O After a couple of years of practice (in reading Books), professional investors learn how
to kill maybe 1/3 of all proposals within the first two minutes, or less. Investors will kill
something like 2/3 of all Books within five minutes or so. Investors will read the whole
Book in only a small minority of cases.
O A large number of publications are on the market, readily available, about “How to
Write a Winning Business Plan”. It almost seems as if many wannabe entrepreneurs
do not bother to do their homework and learn about how to write a plan. Or they read
an instructional piece, then ignore what it says! In any case, most real Books are badly
conceived, badly written and incomplete. These go straight into the wastebasket.
O For this course, the sponsors will not launch all of the new business ventures on which
we work. Of those that do, not all will succeed. But some will.
O Whether or not a proposed business venture is a good bet for investors, the professor
intends to ensure that all Books are 100% complete and professional in quality.
O The following is an outline of a “standard plan”. Many variations of the layout are OK,
so long as coverage of the topics is complete. One of the most common mistakes
that entrepreneurs make is a failure to provide comprehensive coverage.
______________________________________________________________________
Yale School of Management Lecture 3.5
_______________________________________________________________________
Outline of a “ Standard” Plan
Cover Page & Disclaimer o Including “who to contact” information
Executive Summary o 1,400 Words or less, 3-4 pages.
Terms of the Financing o Amount of financing needed
o Price, key terms and conditions
Company Summary o History
o Ownership
o Location and facilities
Product / Services o Product or service description
o Features and benefits
o Competitive comparisons
o Production or other sourcing
o Technology & patents
o Future products & services
Market Analysis Summary o Market segmentation
o Industry analysis – size and growth
- Industry participants
- Distribution patterns
- Competition and buying patterns
- Main competitors
o Market analysis, size and expected growth
Strategy and Implementation o Marketing strategy
- Pricing
- Promotion
o Sales strategy
- Sales forecasts
- Sales programs and techniques
o Costs, services and support
o Milestones
Management Summary o Management team, plans to fill gaps
o Organizational structure
o Board of Directors
o Personnel plan and philsophy, incentives
Financial Plan o Key assumptions
o Projected financial statements
o Projected cash flows & break-even analysis
o Key financial indicators and ratios
______________________________________________________________________
Yale School of Management Lecture 3.6
_______________________________________________________________________
Outline of Work Flow
o What are our products / services -- features and benefits? What is unique?
o Market: Nature and size, segments, growth rate, special factors.
o Who are the customers? (Demand) What do they think about our product?
o Who are the competitors? (Supply) Our comparative advantage is?
o Production – how do we make our product / service? What does it cost?
o Sales & Marketing – how do we get customers? Salesforce? Advertising?
o Devise a Strategy -- comparative strengths and weaknesses, scope, timing.
o Business “model” -- How do we make money? Volume / Pricing / Costs.
o Legal, accounting, tax and finance, insurance, administrative support needs.
o Technical -- patents, licenses, other.
Personnel Plan
o Management skills required -- versus skills already in hand. Fill the gaps?
o Who, how many, job duties, when, where do we get them?
o Compensation, stock incentives, costs, fringe benefits (health care, etc.)
Financial Plan
o Base Case (Main focus); Upside/downside cases.
o How much money do we need? Now versus later.
o Identify sources of capital -- founders, friends & family, angels, VC firms
o Exit for investors: IPO, sell out to strategic buyer, buyback?
Equity Valuation
o Comparable companies -- research, Bloomberg, Yahoo
o Valuation -- “trading multiple” model, VC method.
Deal Structure
o Articles of Incorporation, By-Laws, Shareholders Agreement, etc.
o Negotiate initial equity (Founders, other investors); incentive stock option plan.
o Structure terms of the financing offer to investors.
Write Business Proposal
o Cover Page & Disclaimer.
o Summary (1,400 words or less) Write this first!
o Main Text. (20-25 pages.) Edit and re-edit for reading ease.
o Financial statements and financial projections.
o Shareholders list, management résumés, contracts, other appendices, pictures.
Mail Proposal to Target Investors
Practice and Deliver Oral Presentation
______________________________________________________________________
Yale School of Management Lecture 3.7
_______________________________________________________________________
Venture Investor’s “ Dream Deal”
Mission
O Build a highly profitable and industry-dominant company.
O Go public or merge within 4-7 years, at a high price / earnings multiple.
Complete Management Team
O Led by industry superstar.
O Possess proven entrepreneurial, general management and P&L experience.
O Includes leading innovator or an experienced head of technology marketing.
O Complementary, diverse and compatible skills.
O Reputation for complete honesty and high integrity.
Proprietary Product
O Has significant competitive lead and “unfair” advantages.
O Has product or service with high valued-added properties, with early user payback.
O Has or can gain exclusive contractual or legal rights
Large and Rapidly Growing Market
O Will accommodate at least one $50 million player within five years.
O Market already has sales of $100 million or more, growing at 25%+per year.
O Has no dominant competitor now.
O Clearly identified customers and distribution channels.
O Has forgiving and rewarding economics:
Gross margins of 40%-50%, or more
10% or more net income/sales
Early positive cashflow and break-even on modest volume of sales.
Deal Valuation and IRR
O Has a digestible, first-round equity capital need ($2 million to $10 million).
O Able to return ten times original investment in five years @ P/E of 25 or more.
O Has possible additional rounds of equity financing -- at a substantial markup.
O Has anti-dilution protection and IPO subscription rights.
______________________________________________________________________
Yale School of Management Lecture 3.8
_______________________________________________________________________
VENTURE CRITERIA Highest Potential Lowest Potential
Industry & Market Changes way people live and work Incremental improvement only
Market Market driven; identified; recurring Unfocused; one-time revenue
Customers Reachable; purchase orders Loyal to others or unreachable
Value added High; advance payments Low; minimal impact on market
Market size $100 million to $1 billion sales Under $100 million sales potential
Growth rate Growing 25%-50% annually, or more Declining, or growing less than 10%
Market capacity At or near full capacity Under-capacity
Market share attainable 20% or more by Year 5; leadership Less than 5% by Year 5
Cost structure Low-cost provider; cost advantages Declining cost; high cost provider
Economics Highest Potential Lowest Potential
Time to positive cash flow Under two years More than four years
ROI Potential 25% or more, high value Under 15%, low value
Capital financing requirements Low to moderate; fundable Very high; not-fundable
Free cash flow character Sustainable, 20%+of sales Less than 10% of sales
Sales growth Moderate (25%) to high (50%) Less than 10% p.a.
Asset intensity Low – sales / assets $ ratio High asset intensity
Working capital Low, incremental requirements High requirements
R&D/capital expenditures Low requirements High R&D requirements
Gross margin Over 40%+/ sales and durable Under 20% of sales
After tax profits Greater than 10% of sales Low
Break-even profit & loss Within 2 years, not creeping out Over 4 years, creeping out longer
Harvest Issues Highest Potential Lowest Potential
Value-added potential High strategic value to acquirer Low strategic value
Valuation multiples Price/Earnings =25x or more Price/Earnings =15x or less
(vs. comparable firms) Price/EBIT =15x to 18x or more Price/EBIT =5x or less
Price/sales =1.75 to 2.5 or more Price/sales =0.4x or less
Exit mechanism/strategy Present/clear options Undefined, fuzzy; illiquid position
Capital market context High valuations, good timing Low valuations, credit crunch
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Yale School of Management Lecture 3.9
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Competitive Advantage Highest Potential Lowest Potential
Fixed & variable costs Lowest; high operating leverage High costs; low operating leverage
Control over prices, costs Moderate to strong Weak control
Control over distribution Moderate to strong Weak control or unknown
Barriers to entry Have/can gain proprietary protection No proprietary protection or patents
Ease of entry/lead time Competition slow or napping Unable to gain lead time edge
Legal or contract advantage Proprietary or exclusive None
Pricing attitude At or near market/nitche leader Undercut competitor; low prices
Contacts or networks Well-developed; accessible Crude, ill-defined, limited
Key personnel Top talent; an "A" team Unproved talent or clear "B" players
Management Team Highest Potential Lowest Potential
Entrepreneurial team All-star combination; free agents Solo entrepreneur, no track record
Industry/technical experience Top players in their field; track records Underdeveloped, new to industry
Integrity and honesty Highest standards; no doubts Questionable
Intellectual honesty Know what they don't know Know everything, no room to learn
Goal and role clarity Know the vision and their own roles Confused goals, overlapping roles
Upside vision/risk
management
Sets attainable goals; risks limited Unattainable goals; risks be
damned
Fatal flaw None apparent One or more visible
Willingness to sacrifice Will take salary cut, work long hours Likes status quo
Stress tolerance Thrives under pressure, bounces back Cracks under pressure, casts
blame
Lifestyle fit Fits with "normal", preferred lifestyle Gambling, seeking big money only
Management Attitudes Highest Potential Lowest Potential
Service management Superior customer service concept Perceived as not very important
Teamwork Develops & encourages depth/breath Lone ranger
Timing Rows with the tide, goes with flow Resists reality, likes hopeless
cause
Technology attitude Groundbreaker, unique Many substitutes or competitors
Flexibility Able to adapt; commit and decommit Slow, stubborn persistence
Opportunity orientation Always searching for opportunities Content, not looking around
Room for error Forgiving strategy Unforgiving, rigid strategy
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Yale School of Management Lecture 3.10
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