Venture capital is money provided by an outside investor to finance a new, growing, or

troubled business. The venture capitalist provides the funding knowing that theres a
significant risk associated with the companys future profits and cash flow. Capital is
invested in exchange for an equity stake in the business rather than given as a loan, and the
investor hopes the investment will yield a better-than-average return.

Venture capital is an important source of funding for start-up and other companies that have a
limited operating history and dont have access to capital markets. A venture capital firm
(VC) typically looks for new and small businesses with a perceived long term growth
potential that will result in a large pay-out for investors.

A venture capitalist is not necessarily just one wealthy financier. Most VCs are limited
partnerships that have a fund of pooled investment capital with which to invest in a number
of companies. They vary in size from firms that manage just a few million dollars worth of
investments to much larger VCs that may have billions of dollars invested in companies all
over the world. VCs may be a small group of investors or an affiliate or subsidiary of a large
commercial bank, investment bank, or insurance company that makes investments on behalf
clients of the parent company or outside investors. In any case, the VC aims to use its
business knowledge, experience and expertise to fund and nurture companies that will yield a
substantial return on the VCs investment, generally within three to seven years.

The Business Plan

The business plan is the most important document for a company seeking to raise finance
from private equity investors. It should demonstrate what the business opportunity is, the
amount of funds required to deliver the business plan and a management team capable of
implementing it. Venture Capitalists read numerous business plans from a wide range of
sources and they must invest in the best projects. Their first impression of your business plan
will determine whether they take their interest any further. It is absolutely essential that your
business plan demonstrates an 'investor ready' project. The following section is intended to
give you a summary of what the business plan should include:



Executive Summary

This is the key part of the document which must immediately and clearly articulate the
investment opportunity for the reader. The Executive Summary should make a potential
investor believe that your unique proposition has the potential to make a good return on their
investment and that you and your team have the ability to deliver what the plan says. If this
part of the Business Plan is not presented with conviction and in clear language, you may
miss the opportunity of ensuring that a potential investor takes the time to read your entire
plan. The detailed plan should give full details under the following headings:

1. The Product / Service
2. The Market
3. Management Team
4. Business Process / Operations
5. Financial Projections
6. Proposed Investment Opportunity


1. The Product / Service

In simple language, this should explain what exactly the product / service offering is. This
will clearly demonstrate the unique selling point of your offering, differentiation from other
products, barriers to entry etc. and how your product /service will add value to the purchaser.

2. The Market

A common mistake that entrepreneurs make is to express their market in terms of a global
figure representing all activity within their sector. The private investor requires comfort that
there is a commercial opportunity for your product/service and that the management team has
the ability to exploit this opportunity. The marketing section should demonstrate who the
customer base is likely to be, how the product / service will be priced, how it will be
distributed to customers, an analysis of competitors and how you will deal with competing
goods and services.
It is unlikely that there will be no rivals in your market sector and you should avoid
comments like 'there is no competition' or, 'our product is totally new'. If no one has thought
of offering a similar or competing product, is it conceivable that there is no demand for your
product or that customers do not realise that they need it?

3. Management Team

Most venture capitalists will tell you that they invest in people not ideas. The management
team must sell their experience to investors as well as their understanding of the market
which they are targeting. This section must convey the message that the team has the full
complement of skills required to deliver the plan. Indeed, it is prudent to identify skill gaps
which must be addressed in order to deliver the plan as new investors in a business can utilise
their networks to fill the gaps. Non-Executive Directors (NEDs) are an obvious source of
expertise for early stage companies to address this issue and and Venture Capital Fund
managers usually appoint a NED to investor companies to help them avoid the pitfalls of
growing a business. Further details on NEDs can be found in the next section of the guide.

4. Business Processes / Operations

This section explains how the business operates, be that manufacturing products, delivering a
service, or both. It should demonstrate that any necessary R&D can be fully undertaken and
that an appropriately skilled workforce is available. The location of the business and the
physical infrastructure will also be detailed. Care should be taken to demonstrate that there is
sufficient flexibility within systems, facilities and human resources to expand the business in
line with its projected growth. Whilst there may be a market for the product/service being
offered, you must ensure that the proposed location, process and utilisation of resources
(human and physical) are the best available to exploit this opportunity.

5. Financial Projections

An investor will always wish to review a detailed set of integrated financial projections which
encompasses profit and loss accounts, balance sheets and cashflow statements. These figures
will be supported by detailed assumptions which reflect the content of the business plan .The
projections must be realistically achieveable, but they must also be sufficiently ambitious to
demonstrate that there is an attractive investment opportunity. These projections will form the
basis of any term sheet which an equity investor may issue. Negotiation with the Venture
Capitalist over valuation, future milestones and ultimate exit opportunities will be influenced
by the delivery of the financial projections. Much consideration should be given to this
section to produce realistic projections and indicate openness to work with the investor in the
future to deliver a common goal the maximising of value.

6. Proposed Investment Opportunity / Exit

This is the opportunity to identify the level of funds required, how and when they will be
spent, and an outline showing how investors will receive a return on their investment. As
with the financial projections the exit opportunity should be realistic and take account of
current market conditions. It cannot be stressed too much that the Business Plan is the single
most important document that you will provide for potential private equity investors. It must
be coherent, well presented and of a length which maintains the interest of the reader. It is
essential that you strike a balance between providing the investor with sufficient information
to evaluate the investment opportunity while not overloading them with technical
information.

PROCESS OF VENTURE CAPITAL FINANCING

Step 1: Business Plan Submission

The first step in approaching a VC is to submit a business plan. At minimum, your plan
should include:

1. A description of the opportunity and market size;
2. resumes of your management team;
3. A review of the competitive landscape and solutions;
4. Detailed financial projections; and
5. A capitalization table.

You should also include an executive summary of your business proposal along with the
business plan. Once the VC has received your plan, it will discuss your opportunity internally
and decide whether or not to proceed. This part of the process can take up to three weeks,
depending on the number of business plans under review at any given time. Dont be passive
about your submission. Follow up with the VC to check the status of your proposal and to
find out if theres additional information you could be providing that might help the VC with
its decision. If you are asked for further information, respond quickly and effectively. If
possible, always try to get a face-to-face meeting with the VC.

Keep in mind that most VCs receive an average of 200 business plans each month. Of those,
less than five per cent will be invited to meet with the VCs partners. Just two per cent will
reach the due diligence phase, and less than one per cent will be offered a term sheet. Some
0.3 per cent of those submitting a business plan will ultimately obtain VC funding.

Step 2: Introductory Conversation/Meeting

If your firm has the potential to fit with the VCs investment preferences, you will be
contacted in order to discuss your business in more depth. If, after this phone conversation, a
mutual fit is still seen, youll be asked to visit with the VC for a one to two hour meeting to
discuss the opportunity in more detail. After this meeting, the VC will determine whether or
not to move forward to the due diligence stage of the process.

Step 3: Due Diligence

The due diligence phase will vary depending upon the nature of your business proposal. The
process may last from three weeks to three months, and you should expect multiple phone
calls, emails, management interviews, customer references, product and business strategy
evaluations and other such exchanges of information during this time period.

Step 4: Term Sheets and Funding

If the due diligence phase is satisfactory, the VC will offer you a term sheet. This is a non-
binding document that spells out the basic terms and conditions of the investment agreement.
The term sheet is generally negotiable and must be agreed upon by all parties, after which
you should expect a wait of roughly three to four weeks for completion of legal documents
and legal due diligence before funds are made available.