Business Plan Flashcards
Purpose of the Business Plan
Benchmark Progress
Attract Finance
Attract personnel
Can have different plans for different purposes but need consistency
Different parties interest different informations
- Bankers focus on financials risk cashflow and security
- VCs will look at financials market characteristics and entrepreneurial quality
- Business Angels will also look at fit with own experience and opportunity to become involved
The content of a business plan
Background & purpose Market Analysis Products and services Development plans ; time line milestones Organisation & management Ownership and control Financial Information –current Financial Projections – milestones again
Why Planning/performance is a paradox?
Forecasting the performance of new ventures is even harder than predicting the weather
Few if any entrepreneurs correctly anticipate how much capital and time will be required to accomplish their objectives. Typically they are wildly optimistic …Investors know about the padding effect and therefore discount the figures…This creates a vicious cycle of inaccuracy (Sahlman)
What is essential in a business plan
As outlined by Sahlman
The people Background , Character, Combination The Opportunity Large Market or rapidly growing market? The context Economy Regulation Technology Sentiment Risk and reward Realism , Contingencies; Exit
What do Investors look for?
Evidence that the Entrepreneur understands the technology
Evidence of the abilities of the people involved
Evidence of commitment of key personnel
Problems with Valuation methods
Comparable firm and comparable transaction data are rare
Discount rates should not be based on total risk
Different cash flows can differ in risk
Risk can vary across time
Consider the value of embedded options
How VC calculate their share?
Step 1- the VC decides on the appropriate hurdle rate for the investment
Step 2 – The VC decides on the likely holding period
Step 3 – The Entrepreneur decides on the cash requirement
Step 4 –calculate the terminal value required to give the desired return on the VC’s investment
Step 5- Estimate what the company will be worth at exit –by agreement
This gives the share to be assigned to the VC
The VC having assessed the risk of the Investment decides on a return of 35%
The VC also decides that the most likely exit time is 5 years (often pre-second stage funding)
The entrepreneur requires $2m
The more the entrepreneur looks for the more they will have to give as a stake to the VC
In return the VC requires $9m at exit
Estimated value of the company after 5 years is $20m
The entrepreneur will have an incentive to overstate the projected value of the company as this impacts directly on the VCs share
This potential overstatement is recognized by the VC
The VC buys a 45% stake for $2m
