Making Initial Funding Determinations

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What should you include in a business plan

– A central element to the entire process of raising capital is having a business plan to present to investors. So, let’s quickly go over what a business plan is and what it should include. This is a very large topic, and I’ll just present briefly what a business plan contains. A business plan is a document that you can either share in printed version or electronically, which provides not only an overview of your business but all the elements required for someone completely external to your business to be able to understand it.

It’s a complete overview of your business, both from the inside and the outside. The inside, of course, is about you and your team, your product and services, your strengths and weaknesses, your strategy and your ambitions. From the outside, it’s the market you’re in, what your customers need, what problems they have and that you’re going to solve. It’s also who your competitors are, what they’re offering, and how they answer to the problems you’re trying to solve, if they actually do.

There are sections that are common to all business plans, and those are an executive summary, which is a two pages max document that is very well written and sums up all the key elements of your business, but more important, who creates the excitement of investors, so that they want to get in contact with youto get you to present your business in more detail.Investors usually first review executive summariesbefore they ask for a complete business plan.

A company description, which explains who your company is, what it stands for, and where it is on the path to its mission. Is it still just a project on paper or have you started? Are you alone or with a team? Have you started doing real business? You need to bring the investor here up to speed on where you are with this company. You also need a market analysis. Let’s be clear on what the market is. The market is where customers and companies meet and is materialized by the sale of products and services.

You can represent the market with words, by describing the profile of your customers. Are they teenagers, in the workforce, senior citizens, a minority?Who your competitors are. Are they proposing low-end products or high-end ones? Are they selling another version of your product or an alternative product, such as tea, for example, when you compare it to coffee? And it can be represented in numbers,through total number of dollars spent by customersover a full year buying that product.

You could be targeting, for example, a one billion dollar market, which would mean that over a full year all of the people who buy your product, or a similar product, have spent together one billion dollars. Then describe the product or service you’re going to offer.What problem it solves, why customers will need it,how is it different from what already exists. Once you have covered all of those elements, comes the time to talk about yourself and your team, who you are, what skills you have, why you will be the right person to make this project successful.

Ideally, be able to show that you’re not doing this for the first time, but if you are, what shows that you will be successful at it. Then, you’ll have to present your sales and marketing strategy. What concrete actions you will be taking to make things happen and ignite sales and show that you won’t be waiting for customers to come in. And last, a business projection showing the financial impact of your entire plan,which, by the way, will have to show why you need the money you’re trying to raise.

If you want to know more about that topic in particular, there is a course you can follow on Lynda.com called Making Business Projections, which shows in detail how to build such a plan. In any case, preparing a business plan has many virtues. It will help you define the building blocks of your plan and assess what it takes to be successful. You should prepare it just as much for yourself as for the purpose of raising capital. It actually is the first step of your journey.

What is valuation?

– In this course and when you are raising capital in general, you’ll be talking non-stop about the value of your company. This is a critical element of raising capital, and especially when you are raising capital with equity. When doing so, you are, in short, selling shares of your company in exchange for the capital you need. By doing so, you therefore are left with less shares and are not anymore the only owner of the company. For example, you could be raising one million dollars for 35 percent of your shares. That would mean that after you’ve successfully raised those one million dollars, you will be owning 100 percent minus 35 percent of the company, or in other words, will be left with 65 percent of your company, and your investor will own 35 percent of the company.

The big question then is how many shares will you be giving for the money you want? And that question is answered with the valuation of your company. Once you and the investor agree on the value of your company, then you know the value of 100 percent of your shares. If you divide it by 100, then you know the value of one percent. If, for example, you agree that your company is worth one million dollars, then if you divide it by 100, then you know that one percent of your company is worth 10,000 dollars.

In that case, if you need to raise 100,000 dollars, then all you need to do is give away as many percentagesas needed until you get to that amount. In this particular example, you need to give 10 percent. So the more your company is worth and the more shares you keep, and the process of estimating the value of your company is called the valuation of your company.So everyone is interested in the valuation of your company. And the entrepreneur, you, and the investorneed to agree on the value.

There is no one way to value a company. There are many ways, and everyone has a different opinion on the best way to do it. So be ready to negotiate, exchange opinions, verify numbers, because that’s going to take some time. As you might guess, it’s in the best interest of the entrepreneur to have a high value for his company, and in the interest of the investor to value it low. At the end this needs to be a win-win, so it’s important to debate and find a value for the company that seems realistic for both the entrepreneur and the investor.

Organizing milestones

– Milestones are another big thing that you need to put in place in your plan. It is critical to the process of raising capital but on top of that it’s an excellent way to match development of your company. The concept of Milestones is to break down the development of your company. Let’s say for example, the next three to five years, into phases and the end of each of those phases would be one of your milestones. For example, if you have a software company then you could imagine that the phases could be Phase One, getting the basics together to start the company.

During which you would define how your company will operate in its earliest stage. How you will test your market and get the elements you need to determinethat it’s worth your while to dive into the project. The end of that phase is your first Milestone. Phase Two, would be product development. In that phase you will focus all your efforts and those of your team, if you have one, on the development of a version of the software that is advanced enough that it can hit the market. It doesn’t mean that you’re not doing all the smaller things that need to happen within your company but the big thing of the moment is getting your software ready.

The end of that phase is your second Milestone. Phase Three, would be a sales and marketing plan. Now that you have the basics together, you have a software or an app to sell, you should definitely have a strong planto get people to buy it, to get excited about it, talk about it, and make it financially successful. The end of that phase is your third Milestone. In this example, there are three phases and three milestones. The reasons why phases and milestones are so important to raising capital is that it will enable you to raise capital to fund those phases one by one.

By splitting the company’s development into phases,ended by milestones, you actually package your company and its development in a way into individual companies that help investors know when he is supposed to exit and sell his shares to potentially another investor who will fund the next phase. And therefore, the milestone is the time at which the investor is expecting to sell his or her share. So, break down your plan into milestones so that you can be specific with your investors about what they’re funding with their capital.

How it will change the value of the company and what is the exact time at which they will have the opportunity to exit this investment opportunity.

Understanding debt and equity investing

– In this course, we will talk a lot about debt and equity and it’s important to understand the difference.Debt is simply what you know it is. It’s borrowing money from an individual or an institution and pay back that amount with interest. Once the loan is paid back, you and the lender can each go your own way and never meet again. No strings attached. It’s a way of course, to raise capital, since raising capital, despite the fancy name, is just about getting the money you need to be able to do the things you need to be done.

Equity is quite a different way to raise capital. In this case, you get money all the same from people or institutions that you’re giving in exchange, a portion of your shares, and therefore, a portion of the ownership of the company. The immediate upside is that there is nothing to pay back, not now, not later but the flipside is that your new business partner can have a say in the management of the company and get a share of the profits.

Only know, it can be much more costly than a loan,since you hopefully will make a lot of profits which you will have to share. There is no limit to the profits you will be sharing whether it is one dollar or $1 million or even more, the investor will get a percentage of it all the same. There are upsides though, to this, such as getting a business partner or a mentor, someone who will bring advice and his network and even potentially customers.

Based on the percentage of the company he owns, he will have a smaller or bigger say into the company decisions. Someone owning only 10% of the companywill not have much of a say or any ability to make decisions but if that person has 50% of the company, this person can pretty much decide what the company will be doing. The only way to part with an investor is if he sells his shares back to you or to another investor.

Another important note is that, when you sell shares to investors to get capital, you can define what those shares entitle the investor to do. This is for example, important when selling shares to someone close to you such as friend or family. Those are people who might not necessarily bring the advice and mentorship, network and customers you would expect from regular investors along with the money they give you. You can therefore sell them shares that give no voting rights, which means, that they can claim a portion of the profits of the company as every other investor but will have no way to make decisions for the company or participate in its strategy other than trying to convince you to do something.

A great thing with equity is that you can do a lot of things with it and define exactly what the investor is entitled to. But don’t be fooled, investors know exactly what they should be getting, so you need to be just as savvy on the subject.

 

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