Approaching 10 000 hours in the private equity and venture capital industry I came to the realisation that hundreds of business plans have crossed my desk, but I was yet to see an unfeasible plan. So why, if all of these business plans are feasible, are only 1-2% successful in raising funds?
I found that aspiring entrepreneurs who are unable to draw up a feasible business plan would contract a range of consultants who know “the tricks of the trade”. These consultants work their magic, and time and time again the outcome is a feasible business plan.
What is the difference between businesses that are funded and ones that are not?
Most business plans that have crossed my desk cover the following aspects:
· Market and opportunity
· SWOT analysis
· Financial projections for three to five years
· Marketing strategy and budget
· Porter’s Five Forces analysis (sometimes)
· Barriers to Entry (sometimes)
· Deal terms and valuation (sometimes)
This is what we are taught in business schools and investors – therefore expect entrepreneurs to have these aspects as a bare minimum.
Due to the risks associated with investment in start-up businesses, and similar companies that have recently committed to the mind-shift from a lifestyle company to a growth enterprise, investors have to go beyond the call of duty to increase the probability of success.
Investors are looking for companies that go beyond the feasibility threshold to the new minimum standard that many like to call ‘bankability’.
How do you cross the barrier from being just feasible to become a bankable company?
I am assured that every investor has their own opinions of what constitutes a bankable company. After rubbing shoulders with some of the best in the industry, I noted the following as being cardinal to a company being labelled as bankable.
Becoming business partners is sometimes compared with the covenant of marriage. This might sound a bit stark, but the similarities are undisputable. Shareholders have to face the adversities, hardships and excitement of growing a company as a team. Investors want to be certain who they are “getting into bed with”. If you already received an investment from another investor, it might complicate things a little. An investment from certain bureaucratic investment bodies is sometimes affectionately referred to as the “kiss-of-death” in the industry. If you are unaware of these nuances, it might raise a red flag that you were completely unaware of.
Aspirational clarity of the entrepreneur
As an entrepreneur you have to decide whether you are starting a lifestyle business or a growth enterprise – the two approaches are worlds apart.
Investors want to see the various layers of your business model distinguishing you from the competition. If you can prove this to an investor it would rank above traditional important features like “barriers to entry” and “competitors”.
If you are clear about the growth path of your business you should show that with a clearly defined financial roadmap (FRM) that would provide investors with the comfort of the path that they are embarking on with you. The FRM is not a traditional 3 to 5 year financial projection. The FRM sets clear goals for expansion through application of the capital mechanism and identification of exit opportunities.
Potential for investor to add value
Investors do not want to be seen as passive money printing machines. The modern venture capitalist is an active partner in the growth of your company and you must prove that you understand this. Investors have access to information and networks that have the ability to catapult your company into greatness if you would only tap into this source of value.
This might sound like the most boring part of your company, but I have found this to be one of the most important steps to investment. Many entrepreneurs get caught up in the details of the market mechanism without realising the value of transparency and good corporate governance to the growth of their companies. A lack of corporate governance has the ability to reduce the value of your company to as little as one tenth of the perceived value during a due diligence process.
The perceived risk to an investor can be reduced considerably by applying the correct structuring methodologies. Assets should be protected from high risk operations through firewalls and unsuccessful ventures must be culled without affecting core operations.
Are you looking to keep your company for ever and ever or would you be willing to let go if a good offer is received? Investors are looking for returns and you must prove that you are willing to come along if a higher than expected offer is received at a certain point in time.
Before you approach an investor, be sure to understand their investment mandate. If their minimum investment is clearly stated as $10 million, don’t contact them for a $1 million investment. Other investors are very clear about their mandate with regards to IP, which might be stated as “disruptive technology” or the like. Be aware of their mandates and tailor your pitch accordingly.
Investor relationship management
There are various strategies to increase the respectability of your company. I have some friends with the ability to lead investors to fall in love with their companies before they start the fundraising process. Be aware that these strategies exist and that your competition is using them.
OK, maybe you shouldn’t throw away that feasible business plan altogether, but at least be aware that investors are starting to look beyond the minimum standards. Also be aware that you are competing with businesses and entrepreneurs that go beyond the traditional call of duty in order to succeed in their fundraising goals.
A final thought: “All bankable business plans are feasible, but not all feasible business plans are bankable.”
D’Niel Strauss is director of Orientis Venture Capital.