Keys to obtaining venture capital

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Keywords:entrepreneurial resource center, pricewaterhousecoopers llp, creating a business plan, professional services organisation, step tool, investment sources, three keys, time entrepreneurs, global presence, sources of funds, qxd, realistic expectations, global technology, center web, industry group, business problems, venture capital, technology industry, private equity, capital markets

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Date Added:Jun 15 2009 3:46PM

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Three Keys to Obtaining Venture Capital To an entrepreneur seeking venture capital financing for the first time, an understanding

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#font 956 "DHAMPK+Optima 188 0" l Your worlds Our people 2001 PricewaterhouseCoopers LLP. PricewaterhouseCoopers refers to the US firm of PricewaterhouseCoopers LLP and other members of the world wide PricewaterhouseCoopers organisation. Thought Leadership On The Web GCT401 N #font 951 "DHAMOK+Optima Bold 185 0" www.telecomdirect.pwcglobal.co m is our Web site specifically for telecommuni cations professionals. From here you can access: www.pwcglobal.com NHTTHR0199 #font 900 "DHAMNK+Optima DemiBold 182 0" www.pwcglobaltech.com is our portal site highlighting the Firms commitment and services to technology companies.From here you can link to the microsites below. E NTREPRENEUR R ESOURCE C ENTRE PricewaterhouseCoopersguidance and insight on business plans,valuation and raising money N EXTWAVE TM Quarterly nextwave TM newsletter.Ideas for investors and entrepreneurs M ONEY T REE TM PricewaterhouseCoopersMoneyTree TM Survey, tracking private equity investments T RENDSETTER B AROMETER Looks at how fast growth companies are planning for the future and what obstacles theyre facing S OFTWARE Software Business Practices Survey A Study of Compensation in Software Companies I NTERNET A Study of Business Practices in Public Internet Companies Internet Compensation Surveys 2000 S EMICONDUCTORS The Fabless Semiconductor Association PwC Wafer Demand Survey Millennium Semiconductor Survey in Supply Chain Management Editors Choice Content news and feature articles from more than 50 premier business and trade sources covering wireless,wireline, Internet,information technology,policy anal ysis and much more Research Analysis from PricewaterhouseCoopers surveys,forecasts, case studies and business solutions from our InfoComm practice Related Reading Suggestions State of the Art Archives Search Industry Links Stock Quotes Web Select inks to articles from editor selected industry specific Web sites. Free Registration for daily articles sent to you via e mail;a weekly e mail newsletter recap ping news and highlights of the week; InfoComm Inc.,a mailed monthly newsletter and InfoComm Review a mailed quarterly journal on recent industry trends and developments. www.emdirect.pwcglobal.com ,our Web site specifically for Entertainment Media professionals.It offers the following features: Headlines and business information from premier industry publications Article recommendations based on your interests Searchable archives using the latest in concept based technology Stock quotes for Entertainment,Media,and Internet Media companies Links to the industrys top publications,all in one resource center Free registration for daily e mail updates tailored to your industry interests and a weekly electronic newsletter Entertainment Media Direct:Week in Focus recapping recent news and highlights of content and recommended reading. #font 61 "Optima 10 0" To an entrepreneur seeking venture capital financing for the first time, an understanding of the venture capital process is essential. The venture capital industry includes many firms with substantial funds to invest; however, it is often a challenge for an entrepreneur to tap into this vital source of financing. This booklet is designed to ease the challenge by providing insights into obtaining venture capital financing. The venture capital process begins with an introduction to a venture capitalist. Cold calling on venture capitalists is a long shotventure capitalists see many over the transom deals, very few of which become investments. Introductions to venture capitalists through referral sources they respect improve the odds of securing financing. PricewaterhouseCoopers, with a leading position in serving the venture capital community, has this respect. Choosing the right venture capital firms is an important part of the fundraising process. An entrepreneur who has not researched and targeted venture firms runs the risk of lengthening the search and overshopping the plan. Venture capitalists readily exchange information, so rejection from one firm may influence others. The criteria for selecting the right venture capitalists to approach include their geographic, industry special ization, stage of development, and size of investment preferences. Also important are whether the fund will act as a lead investor and whether there are complementary or competing investee ventures within the funds portfolio. The research of a funds preferences can be done by obtaining literature from the funds directly, talking to venture backed entrepreneurs, visiting the PricewaterhouseCoopers MoneyTree web site at www.pwcmoneytree.com, and by obtaining our quarterly NextWave publicationa digest of ideas and investment trends for entrepreneurs. See the back of this report for ordering information. You can also contact PricewaterhouseCoopers directly at 1 877 PwC TICE. Our professionals are active in the venture community and welcome the opportunity to talk with you. Often the first step in dealing with venture capitalists is to forward them a copy of the business plan . And, because venture capitalists have to deal with so many business plans, the plan must immediately grab the readers attention. The executive summary will either entice venture capitalists to read the entire proposal or convince them not to invest further time. A good plan is crucial for two reasons: first, as a management tool; and second, as a means to obtain financing. While the plan is an essential element in securing financing, it should also be an operating guide to the businesswith the goals, objectives, milestones and strategies clearly defined and well written. This is the best way to demonstrate the viability and growth potential of the business and to showcase the entrepreneurs knowledge and understanding of what is needed to meet the companys objectives. The first reading of a plan is the venture capitalists initial opportunity to evaluate the individuals who will manage the business and to measure the potential for return on this investment. The plan should also address the following business issues from the perspective of the venture capitalist: Is the management team capable of growing the business rapidly and successfully? Have they done it before? Is the technology fully developed? Is the product unique, and what value does it create so that buyers will want to purchase the product or service? Is the market potential large enough? Does the team understand how to penetrate the market? Do significant barriers to entry exist? How much money is required and how will it be utilized? What exit strategies are possible? If the plan is of interest, the entrepreneur will be contacted for the first of what will generally be several meetings, and the venture capitalist may begin the due diligence process. Since venture firms are in the business of making risk investments, one can be certain a thorough analysis of the companys business prospects, management team, industry, and financial forecasts will precede any investment. Following due diligence, the successful venture will then enter into the negotiation process, where the structure and terms of financing will be determined. The entrepreneur must carefully prepare for this next step by becoming familiar with the various structures of venture capital financing and preparing a bargaining position after consulting with an attorney who has extensive venture capital experience. Attorneys will give guidance on the issues worth fighting for. Issues to consider are: vesting, salary, stock restrictions, commitment to the venture, debt conver sion, dilution protection, downstream liquidity and directors. The negotiation will involve most or all of these issues in addition to price per share. However, price per share concerns should not be the overriding interest; the end result of this process must be a win win situation in order for the relationship to progress successfully. The last step is to document and close the transactionresulting in a term sheet, investment agreement s and, finally, the closing. Realistic financial forecasts within the business plan are important to attract investors and retain their interest to participate in future rounds of financing. The financials must accurately reflect the various product devel opment, marketing and manufacturing strategies described in each section of the plan. Professionally managed venture capital funds provide seed, start up and expansion financing as well as manage ment leveraged buyout financing. In addition to these distinctions, funds may also specialize in technology sectors such as life scienceswhile others invest in a wide array of technology and non technology arenas. Venture capital firms are typically established as partnerships that invest the money of their limited partners. The limits are usually corporate pension funds, governments, private individuals, foreign investors, corporations, insurance companies, endowment funds, and even other venture capital funds. When venture capital firms raise money from these sources, they group the money committed into a fund. A typical fund might close at ,75 ,200 million and actively invest for three to five years. Since investors in venture capital funds have specific return on investment requirements, a venture capitalist must evaluate potential investments with a similar return on investment consideration. Since the return on investment is critical, venture capitalists invest with certain criteria in mind. Many funds invest between ,4 ,8 million in any one venture over a three to five year period and look for companies with market potential of ,75 ,200 million. Since a venture fund typically invests in only 20 30 companies, each investment must be screened carefully. Venture capitalists will be looking for a 30 percent to 40 percentor moreannual return on investment and for total return of 5 to 20 times their investment. Venture capitalists are not passive investors and become involved as advisors to management, usually as members of the companys board of directors. By actively participating in investments, venture capitalists seek to maximize their return. Just as venture capitalists perform due diligence, an entrepreneurmust evaluate the benefits that a particular venture firm can provide the company. Do the venture capitalists have experience with similar types of investments? Do they take a highly active or passive management role? Are there competing companies in their portfolio? Are the personalities on both sides of the table compatible? Does the firm have strong syndication ties with other venture firms for additional rounds of financing? Can they help provide contacts for distribution channels and executive search? It is critical for an entrepreneur seeking venture capital to assess the value of the company from the perspective of the venture capitalist and to appreciate the dynamics of the entrepreneur venture capitalist relationship. This relation ship revolves around a trade off. Funds for growth are exchanged for a share of ownership. The entrepreneur will be asked to give up a large share of ownership of the company, possibly a majority stake. The venture capitalist seeks to value the venture to provide a return on investment commensurate with the risk taken. Entrepreneurs seek to raise as much money as they can while giving up as little ownership as possible. Venture capitalists strive to maximize their return on investment by putting in as little money as possible for the largest share of ownership. Through the negotiation process, the two parties come to agreement. Entrepreneurs understand that excess funding costs them equity. Venture capitalists must leave company founders with enough ownership to provide incentive to make the business succeed. To balance their individual goals, both parties should agree on one mutual goalto grow a successful enterprise. The first step in the negotiation process is to determine the current value of the company. The most important factor in determining this pre money valuationor the value of the venture prior to fundingis the stage of development of the company. A business with no product revenues, little expense history, and an incomplete management team will usually receive a lower valuation than a com pany with revenue that is operating at a loss. This is because the absence of one or more of these elements increases the risk of the ven tures not succeeding. Each successive stage commands higher valuations as the business achieves milestones, confirms the ability of the management team, and progresses in reducing fundamental risks. N A = investment would not be made if the present value of the companys estimated future market value is less than the investment requested. ,248 24 16 12 10 ,496 48 32 24 19 ,6N A72 48 36 29 ,8N A96 64 48 38 ,10N AN A80 60 48 Millions of Dollars Invested The best way to build value in a company is to achieve the goals and milestones within the timeframes designated in the plan. As milestones are achieved, risk is reduced and subsequent rounds of financing can usually be raised at more attractive valuations. Pricing venture capital deals involves the estimated future values of the entity being financed and is highly subjective. Theoretical approaches can be used to estimate the companys future value and the corresponding percentage ownership that the investor requiresin other words, estimated future value based on the ventures expected profitability and estimated earnings multiples. The esti mated percentage ownership the investor must receive can then be calculated to derive the desired return on investment. As noted, venture capital investors expect an annual rate of return of 30 percent to 40 percent or more. The table below shows the percentage investment a venture capitalist would need to realize to support a 30 percent return on invest ment at various estimated market values. As shown, to realize a 30 percent return on an investment of ,4 million, a venture capitalist would need to own 32 percent of a company with an estimated future market value of ,60 million after six years. If the estimated future market value is higher,100 million for examplea smaller percentage ownership 19 percent will provide the required rate of return. A quality business plan is an important first step in convincing investors that the management team has the experience to build a successful enterprise. The plan also provides measurable operating and financial objectives for management and potential investors to measure the companys progress. Business plans should be summarized into a short two to three page synopsis called the executive summary. The summary is used to capture the essence of the plan and generate interest so the reader further studies the full proposal. It is the most important section of the business plan and should be written last, ensuring that only vital information is included. At many of the largest venture capital firms, fewer than five percent of the hundreds of plans received are reviewed beyond the executive summary. While sometimes this is because the business does not fit the type of investment favored by that firm, more often it is because the executive summary is not written convincingly or clearly enough. The summary must stand out and be noticed, and to do this it must be of the highest quality. The summary must be persuasive in conveying the companys growth and profit potential and managements prior relevant experience. The effort taken in researching investor preferences and preparing a quality summary will set the plan apart and assure that it receives further consideration by venture capital firms. Generally, the investor wants to knowin a hurrywhat product the company is developing, the market industry it serves, a brief history, milestones completed with dates , and a statement on the companys future plans. If the company is an ongoing business seeking expansion capital, the entrepreneur must summarize the companys financial and market performance to date. List the key members of the management team and technical advisorsincluding their age, qualifications, and work history. It is important to emphasize the teams relevant, proven track record. Note key open positions and how you intend to fill them. Provide a short description of the product or service and highlight why it is unique. Discuss any barriers to entry that prevent further competition e.g., patents .Mention the products direct or indirect competition. If possible, briefly mention future product development plans such as upgrades or product line extensions in order to show the investor that the venture is not a one product service company. Define the target market to be served using recent market data and analysts estimates of current and projected size and growth rates. Also note what percent of the market the company plans to capture. Mention the names of your largest current, well known customers who have either purchased your product or given you letters of intent. It is important to discuss who will buy the product and why. Briefly note the distribution selling strategies used in the industry and explain which one s you plan to use to penetrate the market. State the amount of money required and be specific in the description of the uses of the funds sought. Avoid such general terms as working capital. This section should summarize key financial projections through breakeven. Only projected revenues, net income, assets and liabilities should be listed. It is also useful to note additional expected rounds of financing needed. In this section one should fully describe the reason for founding the company and the general nature of the business. The investor must be convinced of the uniqueness of the business and gain a clear idea of the market in which the company will compete. The entrepreneurs vision for the companys future production and operations strategy should also be described. An investor needs to be assured that the company is built around more than a product idea. The entrepreneur needs to demonstrate that a profitable business can be built based on the strategies detailed in the plan. The business plan must convey to the reader that the company and product truly fill an unmet need in the market place. The characteristics that set the product service and company apart from the competition need to be defined. It is also important to describe each of the end user segments that will be targeted. A full profile of the end users and the key potential applications of the product will demonstrate to an investor that the entrepreneur has done his her marketing homework. A description of the status of patents, copyrights and trade secrets is very important. It is equally imperative to describe barriers to entry. Keep in mind that patents are only as good as they are defensible. The plan should list all the major product accomplishments achieved to date as well as remaining milestones. This will give an investor a comfort level, knowing that the entrepreneur has tackled several hurdles and is aware of remaining hurdles and how to surmount them. Specific mention should be made of the results of alpha internal and beta external with potential customers product testing. If alpha or beta tests are upcoming, mention how these tests will be conducted. Single product companies can be a concern for investors. It is always beneficial to include ideas and plans for future products services. If the plan demonstrates the viability of several products, an investor will see an opportunity to grow a successful business. The analysis of market potential separates the inventors from entrepreneurs. Many good products are never success fully commercialized because their inventors dont stop to understand the market or assemble the management team necessary to capitalize on the opportunity. This section of the business plan will be scrutinized carefully; market analysis should therefore be as specific as possible, focusing on believable, verifiable data. should contain a thorough analysis of the companys industry and potential customers. should include growth rates, size of the market, recent technical advances, government regulations and future trends. should include the number of potential customers, the purchase rate per customer, and a profile of the decision maker. This research drives the sales forecast and pricing strategy, which relates to all other strategies in marketing, sales and distribution. Finally, comment on the percentage of the target market the company plans to capture. Venture capitalists invest in peoplepeople who have run or who are likely to run successful operations. Potential investors will look closely at the members of the companys management team. The team should have experience and talents in the key disciplines: technological development, marketing, sales, manufacturing, and finance. This section of the plan should therefore introduce the members of your management team and what they bring to the business. Detailed resumes should be included in an appendix. The management team in most start up companies includes only a few founders with varied backgrounds and an idea. If there are gaps in the team it is important to mention them and comment on how the positions will be filled. Glossing over a key unfilled position will raise red flags. Often, because venture capital investors have access to networks of manage ment talent, they can provide a list of proven candidates appropriate for these crucial positions. Include a list of the board of directors or advisors: key outside industry or technology experts who lend guidance and credibility. This is another area where empty positions may be filled from suggestions of a well networked investor. The primary purpose of the marketing section of a business plan is to convince the venture capitalist that the market can be developed and penetrated. The sales projections made in the marketing section will drive the rest of the busi ness plan by estimating the rate of growth of operations and the financing required. The plan should include an outline of plans for: Pricing, Distribution channels, and Promotion. The strategy used to price a product or service provides an investor with insight for evaluating the strategic plan. Explain the key components of the pricing decisioni.e., image, competitive issues, gross margins, and the discount structure for each distribution channel. Pricing strategy should also involve consideration of future product releases and future products. A manufacturers business plan should clearly identify the distribution channels that will get the product to the end user. For a service provider, the distribution channels are not as important as are the means of promotion. Distribution options for a manufacturer may include: Direct Salessuch as mail order, direct contact through salespeople, and telemarketing; Original Equipment Manufacturers OEM , integration of the product into other manufacturers products; Distributors or Wholesalers; or Retailers. Each of these methods has its own advantages, disadvantages and financial impact, and these should be clarified in the business plan. For example, assume the company decided to use direct sales because of the expertise required in selling the product. A direct salesforce increases control, but it requires a significant invest ment. A venture capitalist will look to the entrepreneurs expertise as a salesperson, or to the plans to hire, train and compensate an expert salesforce. If more than one distribution channel is used, they should all be compatible. For example, using both direct sales and wholesalers can create channel conflict if not managed well. Fully explain the reasons for selecting these distribution approaches and the financial benefits they will provide. The explanation should include a schedule of projected prices, with appropriate discounts and commissions as part of the projected sales estimates. These estimates of profit margin and pricing policy will provide support for the decision. The marketing promotion section of the business plan should include plans for product sheets, potential advertising plans, Internet strategy, trade show schedules, and any other promotional materials. The venture capitalist must be convinced that the company has the expertise to move the product to market. A well thought out promotional approach will set the business plan apart from the competition. It is important to explain the thought process behind the selected sources of promotion and the reasons for those not selected. A discussion of the competition is an essential part of the business plan. Every product or service has competi tion; even if the company is first to market, the entrepreneur must explain how the markets need is currently being met and how the new product will compete against the existing solution. The venture capitalist will be looking to see how and why the firm will beat the competition. The business plan should analyze the competi tion, giving strengths and weaknesses relative to the product. Attempt to anticipate competitive response to the product. Include, if possible, a direct product comparison based on price, quality, warranties, product updates, features, distribution strategies, and other means of comparison. Document the sources used in the analysis. The operations section of the business plan should discuss the location and size of the facility. If one location is selected over another, be sure to include justification. Factors such as the availability of labor, accessibility of materials, proximity to distribution channels, and tax considerations should be mentioned. Describe the equipment and the facilities. If more equipment is required in response to production demands, include plans for financing. If the company needs international distribution, mention whether the operations facility will pro vide adequate support. If work will be outsourced to subcontractorseliminating the need to expand facilitiesstate that, too. The investor will be looking to see if there are inconsistencies in the business plan. If a prototype has not been developed or there is other uncertainty concerning production, include a budget and timetable for product development. The venture capitalist will be looking to see how flexible and efficient the facility plans are. The venture capitalist will also ask such questions as: If sales projections predict a growth rate of 25 percent per year, does the current site allow for expansion? Are there suppliers who can provide the materials required? Is there an educated labor force in the area? These and any other factors that might be important to the investor should be included. The sales projections will determine the size of the operation and thereby the funds required both now and in the future. Include the sources and uses of financing in the business plan, and be certain the assumptions are realistic. The timing and the amount of funds will be derived from the sales estimates. Developing a detailed set of financial forecasts demonstrates to the investor that the entrepreneur has thought out the financial implications of the companys growth plans. Good financial forecasts integrate the performance goals outlined in the plan into financial goals so that return on investment, profitability and cash flow milestones can be clearly stated. Investors use these forecasts to determine if a the company offers enough growth potential to deliver the type of return on investment that the investor is seeking, and b the projections are realistic enough to give the company a reasonable chance of attaining them. Investors expect to see a full set of cohesive financial statementsincluding a balance sheet, income statement and cash flows statementfor a period of three to five years. It is customary to show monthly statements until the breakeven point or profitability is reached. Thereafter, quarterly statements should be prepared for two years, followed by yearly data for the remaining timeframe. It is also imperative that the forecasts include a footnote section that explains the major assumptions used to develop revenue and expense items. It is not advisable to ramp up sales and expenses in sequential fashionthis gives the impression that the financial implications of the plan have not been fully thought out. Prepare the financial projections as the final step in putting together the plan. The following section contains some helpful hints on how to develop sound assumptions from which to base projections. Preparing the sales forecasts can be a difficult process, especially in a developing or niche market. Typically, the plan should state an average selling price per unit along with the projected number of units to be sold each report ing period. Sales prices should be competitive with similar offerings in the market and should take into consideration the cost to produce and distribute the product. Investors will expect accurate unit cost data, taking into consideration the labour, material, and overhead costs to produce each unit. Be sure to have a good grasp on initial product costing so it is protected against price pressure from competitors. This data will also be important for strategic make versus buy decisions. Product development expenses should be closely tied to product introduction timetables elsewhere in the plan. These expenses are typically higher in the early years and taper off because product line extensions are less costly to develop. Investors will focus on these assumptions because further rounds of financing may be needed if major products are not introduced on time. A detailed set of expense assumptions should take into consideration headcount, selling and administrative costs, space, and major promotions. It is useful to compare final expense projections with industry norms. All expense categories should be considered. The balance sheet should agree with the income and cash flows statement. Consideration should be given to the level of inventory and capital expenditures required to support the projected sales level. It is important to limit capital expenditures at the outset to current requirements because cash will be harder to come by if fiscal restraint is not demonstrated to investors. It is generally better to rent or lease capital equipment in the first few years in order to conserve cash for marketing and selling expenses that will generate sales. The cash flows statement must correlate to the balance sheet and income statement and should mirror the timing of the funding requirements stated in the plan. Investors will study the cash flows statement to determine when cash flow breakeven is expected and when periodic needs are anticipated. Venture capital firms set aside a certain percentage of their funds for follow on financing to address these periods of need by their portfolio companies, but the cost in lower valuations for unanticipated financings can be high. This is why it is important to set realistic fore casts so that the initial request covers the capital needs until the business can complete milestones leading to higher valuations in future rounds. The financial forecasts illustrated on the next page represent a fast growth, technology oriented manufacturing com pany. The forecasts are shown on a yearly basis. An actual business plan, however, should show monthly figures until breakeven and then quarterly statements for subsequent years. The assumptions are included as a guide and may not apply to all start up companies. Be sure to consult your financial advisor. Product Sales,1,197,3,699,7,500,16,685,37,349 Service Revenue815721,5092,4993,934 Direct Materials4749952,4344,53211,674 Overhead1647059001,8602,708 Service Cost412867551,2501,967 Engineering2704626181,1581,958 Marketing Sales3518291,6053,1095,968 Administration1,4651,6602,1542,8054,179 Income Before Int. and Tax 1,487 666 5434,47012,829 Interest Expense00000 Interest Income332144118340 Current Assets Cash,365,657,548,363,2,332 Accounts Receivable, Net2561,4522,1525,52210,991 Inventory2119091,3122,7756,753 Property, Plant and Equipment64137248430690 Less Accumulated Depreciation1450115215366 Other Long Term Assets Organization Costs55500 Less Accumulated Amortization24500 Short Term Liabilities Accounts Payable1142824739992,609 Accrued Expense1913295038481,398 Salaries Payable1020314283 Taxes Payable0003081,317 Long Term Liabilities Long Term Debt00000 Reserve for Warranty2474150333747 Common Stock500500500500500 Preferred Stock1,5004,0004,0004,0004,000 Retained Earnings 1,454 2,099 1,512 1,8459,746 Cash Flows From Operating Activities Net Income loss , 1,454 , 645 ,587,3,357,7,901 Add: items not requiring cash in the current period Depreciation Amortization163866100151 Changes in Operating Assets and Liabilities Accounts Receivable 256 1,196 700 3,370 5,469 Inventory 211 698 403 1,463 3,978 Accounts Payable1141681915261,610 Accrued Expense191138174345550 Salaries Payable1010111141 Taxes Payable0003081,009 Reserve for Warranty245076183414 Other Long Term Assets 5 0000 Cash Flows From Investing Activities Capital Expenditures 64 73 111 182 260 Cash Flows From Financing Equity Investment2,0002,500000 Cash, Beginning of Year0365657548363 This footnote section will summarize the assumptions developed in Section 3. It should highlight key points of the plan that relate to cash flows and requirements for funds, as well as assumptions used to develop the forecasts. The sales forecast for product reflects the following unit and pricing assumptions: * 000s omitted: small rounding adjustments included Product revenue is recognized at time of shipment Declining unit prices reflect savings from economies of scale as well as a more competitive environment beginning in year two Total revenue reflects the companys target of owning 10 percent of the market by year five Service revenue increases are due to growing product installed base Salaries are based on competitive compensation Operating expenses include estimates for supplies, travel and telephone Accounts receivable are collected 72 days from sales turnover rate of five times a year The reserve for warranty is 2 percent of product sales Organizational costs are amortized over three years Inventory is assumed to turn on average three times a year Fixed assets include both purchased equipment and leasehold improvements Depreciation is based on three to five year lives Accounts payable reflect a 60 day payment cycle Accrued expense includes overhead cost, service cost and operating costs for one month Salaries are paid bi monthly Taxes are paid in the month following each fiscal quarter and are assumed to be at a combined rate of 40 percent Income tax expense assumes that losses will carry forward until income is earned. Years three and four tax expenses are reduced by the net loss carryforwards of prior years Preferred and common stock are issued as shown The cash flows statement is based on the spending and payment decisions of the income and balance sheets Equity investment includes founders and initial investors common stock of ,500,000, plus the venture capitalists investment of ,1,500,000 Accounts Receivable, Net = Sales Average Accounts Receivable* Accounts Payable for Year 1 = Purchases + Ending Inventory x Payment Cycle 360 days For Following Years =Purchases + Average Inventory x Payment Cycle 360 days Inventory Turns =Cost of Goods Sold Average Inventory Accrued Expenses =Overhead + Service Cost + Total Operating Expense 12 months *Average Accounts =Beginning Accounts Receivable + Ending Accounts Receivable Receivable2 Spend time writing a succinct and persuasive executive summary, but write the body of the business plan first. Create a professional, graphically pleasing document. Make sure that it is well indexed for easy reference. Number copies sequentially so that investors will know that only a select few copies are being distributed. Include a cover letter addressed to a specific contact person in the firm and follow up with a phone call. Include a phone number and e mail address so the investor can reach you with questions. Use references or introductions from sources respected by venture capitalists. Have your plan referred through an accountant or attorney with a strong venture capital practice. Spend time researching potential venture capital investors so that you send the plan only to those who special ize in making investments to companies in your industry. This research may also help you discover something about the investor that you can use to get your plan noticed. Plan the fundraising strategy through several rounds. The initial financing will typically lead to subsequent rounds, and presenting a realistic timeline demonstrates to an investor that the plan is carefully prepared. Many companies have financed their development stages through the help of friends and relatives. Points to consider include: 1 how much equity to give to these early investors; 2 how to keep family relationships intact if the venture fails; and 3 involvement of family members in the daily operation of the business. Be sure to consult an attorney specializing in venture backed deals for guidance on proper structuring to avoid possible hang ups later. Angels are generally wealthy individuals who are former entrepreneurs or executives who invest in entrepreneurial companies. There are many investment clubs across the country that serve as a network for such individuals. If the business opportunity you are pursuing is the purchase expansion of an existing business, you may want to consider various debt instruments. Advantages include retaining equity, fixed interest payments and flexible payment payback terms. Convertible debt is useful for companies that have a high degree of risk but do not want to give up a large portion of equity. The conversion feature of convertible debt is attractive to investors or banks who typically make loans but require equity for their added risk. These have become increasingly popular for medical biotechnology companies in the past few years, but any company can benefit from having a strong corporate partner. Joint venture agreements must be carefully structured to avoid relinquishing major shares of royalties or marketing rights to the partner. Expectations for both sides should be carefully documented. Many public companies have either a venture fund or business development group for strategic alliances and acquisi tions, or both. Generally the venture arm of a public company will only invest behind a venture capitalist, leaving the due diligence and active management involvement to the venture capital investor. As noted earlier, your network of advisors are an important referral source to venture professionals and are another means to identify theright venture firms to approachleading to possible direct referrals. While there are no comprehensive guides to locate corporate investors, most participate actively in venture conferences and local industry organizations and associations. Whether your company is an emerging business seeking venture capital, or an established company seeking to expand through a merger, acquisition, joint venture, or strategic alliance, you can rely on PricewaterhouseCoopers for a full range of support services. Since PricewaterhouseCoopers is the first choice for accounting services among the nations top 100 technologybased venture capital firms, we are knowledgeable about the issues that arise between entrepreneurs and venture capitalists. We excel at: Assisting you in identifying financing sources Serving as your advisor as you prepare for an IPO or position yourself to be acquired Providing due diligence and valuation services for acquisitions With global resources, deep perspectives and experienced insight, we bring a wide range of innovative and essential products and services to the Technology, InfoComm and Entertainment Media TICE industries through all our lines of service. For more information on how PricewaterhouseCoopers TICE practices can help your company, or to get in touch with a TICE partner in your area, please call our TICE Hotline at 1 877 PwC TICE in the US or 01 617 478 5292 out side the US. Or visit www.pwcerc.com, our Entrepreneur Resource Centre, and click on Consult a Professional. #font 52 "Helvetica 14 0" 011585 PWC.qxd 08 09 2001 11:30 AM Page Cov2 011585 PWC.qxd 08 09 2001 11:30 AM Page 1 011585 PWC.qxd 08 09 2001 11:30 AM Page 2 011585 PWC.qxd 08 09 2001 11:30 AM Page 3 011585 PWC.qxd 08 09 2001 11:30 AM Page 4 011585 PWC.qxd 08 09 2001 11:30 AM Page 5 011585 PWC.qxd 08 09 2001 11:30 AM Page 6 011585 PWC.qxd 08 09 2001 11:30 AM Page 7 011585 PWC.qxd 08 09 2001 11:30 AM Page 8 011585 PWC.qxd 08 09 2001 11:30 AM Page 9 011585 PWC.qxd 08 09 2001 11:30 AM Page 10 011585 PWC.qxd 08 09 2001 11:30 AM Page 11 011585 PWC.qxd 08 09 2001 11:30 AM Page 12 011585 PWC.qxd 08 09 2001 11:30 AM Page 13 011585 PWC.qxd 08 09 2001 11:30 AM Page 14 011585 PWC.qxd 08 09 2001 11:30 AM Page 15 011585 PWC.qxd 08 09 2001 11:30 AM Page 16 011585 PWC.qxd 08 09 2001 11:30 AM Page 17 011585 PWC.qxd 08 09 2001 11:30 AM Page 18 011585 PWC.qxd 08 09 2001 11:30 AM Page 19 011585 PWC.qxd 08 09 2001 11:30 AM Page 20 011585 PWC.qxd 08 09 2001 11:30 AM Page 21 #font 48 "ZapfDingbats 29 0" q q q s s s s s s s s s s s s s s s q q q q q s s s s s s s q s s s s s s s s s s s s s s s s s q q q q q q q s s s s q s s s s s s s s s s s s s s s s q s s s s s q s s s q #font 46 "Optima DemiBold 27 0" PricewaterhouseCoopers LLP Three Keys to Obtaining Venture Capital PricewaterhouseCoopers LLP Three Keys to Obtaining Venture Capital PricewaterhouseCoopers LLP Three Keys to Obtaining Venture Capital R ISKSAND C ONTROLS T AX S TRATEGIES C ONTACT U S PricewaterhouseCoopers LLP Three Keys to Obtaining Venture Capital PricewaterhouseCoopers LLP Three Keys to Obtaining Venture Capital PricewaterhouseCoopers LLP Three Keys to Obtaining Venture Capital PricewaterhouseCoopers LLP Three Keys to Obtaining Venture Capital PricewaterhouseCoopers LLP Three Keys to Obtaining Venture Capital PricewaterhouseCoopers LLP Three Keys to Obtaining Venture Capital PricewaterhouseCoopers LLP Three Keys to Obtaining Venture Capital PricewaterhouseCoopers LLP Three Keys to Obtaining Venture Capital PricewaterhouseCoopers LLP Three Keys to Obtaining Venture Capital PricewaterhouseCoopers LLP Three Keys to Obtaining Venture Capital PricewaterhouseCoopers LLP Three Keys to Obtaining Venture Capital PricewaterhouseCoopers LLP Three Keys to Obtaining Venture Capital PricewaterhouseCoopers LLP Three Keys to Obtaining Venture Capital PricewaterhouseCoopers LLP Three Keys to Obtaining Venture Capital PricewaterhouseCoopers LLP Three Keys to Obtaining Venture Capital PricewaterhouseCoopers LLP Three Keys to Obtaining Venture Capital I NSIGHT I LLUMINATEDBY E XPERIENCE An 8 page complimentary overview of the PricewaterhouseCoopers solutions for the technology industry N EXT W AVE A quarterly 16 page periodical that delivers ideas for private equity investors and entrepreneurs in the technology industry. Includes quarterly MoneyTree report, tracking private equity investments in the technology industry. Complimentary. T HE C HALLENGESOF G ROWTH : T ECHNOLOGY I NDUSTRY IN 2001+ A 16 page briefing on issues and insights from the PricewaterhouseCoopers annual CEO roundtable A CHIEVINGTHE D REAM A 12 page brochure on PricewaterhouseCoopers services to European fast growth technology companies. Send request to mark.s.johnson@uk.pwcglobal.com R OADMAPTOAN IPO An 85 page detailed guide to going public. Complete with tips and best practices. Available for ,10. T HREE K EYSTO O BTAINING V ENTURE C APITAL A 20 page complimentary report on the steps of finding private equity U SER F RIENDLY G UIDETO U NDERSTANDING S OFTWARE R EVENUE R ECOGNITION A 270 page complimentary guide to assist companies with this technical issue M ACRO T HINKINGFORA M ICRO W ORLD : S OLUTIONSFORTHE L IFE S CIENCES I NDUSTRY A 4 page overview of PricewaterhouseCoopers expertise in serving life sciences companies A S TUDYOF B USINESS P RACTISESIN P UBLIC I NTERNET C OMPANIES A 6 page highlight of our survey of more than 120 Internet companies. Includes instructions on how to download the complete survey from our web site. I NTERNET C OMPENSATION S URVEYS A 6 page summary of studies of compensation in pre and post IPO Internet companies A S TUDYOF C OMPENSATIONIN P UBLIC B IOTECHNOLOGY C OMPANIES A 6 page summary of compensation practices in biotech companies T HE F UTUREOF C REATING V ALUE A 12 page review of driving issues in the medical device and diagnostic industry M ILLENNIUM S EMICONDUCTOR B EST P RACTICES S URVEYIN S UPPLY C HAIN M ANAGEMENT An executive summary probing industry trends A S TUDYOF C OMPENSATIONIN P UBLIC S OFTWARE C OMPANIES An 8 page highlight of compensation trends in the software industry S EMICONDUCTOR W AFER D EMANDAND P ACKAGING S URVEY A 6 page overview highlighting key trends I NFO C OMM R EVIEW PricewaterhouseCoopers quarterly journal for telecom executives showcases some of the best global practices and leading edge thinking regarding management and financial issues in the communications industry T ELECOMS 2000: C OUNTDOWNTOTHE G REAT D IVIDE A white paper presenting the results of research by our consul tants into the future of the industry, where focus will be the key to success. B ETTER G ROWTH T HROUGH R EVENUE I NTEGRITY This paper outlines how telcos can become revenue responsible organisations through the deployment of auto mated tools, robust revenue assurance practices, and the use of key performance indicators. G LOBAL T ELECOMS T AX P ROFILES 2000 This global publication provides an overview of the telecom munications marketplace and profiles the tax structure for conducting business and assessing foreign investment opportunities in over 40 countries. G LOBAL E NTERTAINMENT M EDIA O UTLOOK A complimentary 10 page executive summary providing the highlights of our analysis and five year international growth projections for every major sector of the Entertainment Media market. Please note the full 400 page report is also available at a cost of ,995. R EAL W ORLD I NTELLIGENCE T HE P RICEWATERHOUSE C OOPERS C ONSUMER T ECHNOLOGY S URVEY 2000 A complimentary executive summary with brief results from a survey of 2,500 consumers in the US, UK, France, Germany and Australia concerning the Internet, Digital TV and communica tions technology. Please note the full survey results report is also available at a cost of ,300. T HE F UTUREOFTHE E NTERTAINMENT M EDIA I NDUSTRIES : 2005 A 10 page executive summary outlining the major trends that will shape the industries over the next four five years. Please note the full report is also available at a cost of ,500. PricewaterhouseCoopers LLP Three Keys to Obtaining Venture Capital All printed copies can be obtained by calling 1 888 609 7117 unless otherwise noted. #font 41 "Optima BoldItalic 25 0" Tracy T. Lefteroff #font 37 "Optima BoldOblique 23 0" You have a vision. PricewaterhouseCoopers helps bring that vision to reality. Our global presence, extensive knowledge of capital markets, and network of financing relationships provides access and introductions to many sources of fundsboth domestic and internationally. Weve helped hundreds of venture backed companies secure financing, execute their plan, build value and recognize that value through a successful IPO or trade sale. Three Keys to Obtaining Venture Capital For the PricewaterhouseCoopers technology or venture capital leader nearest you, call the Technology Industry Hotline at 1 877 PwC TICE or visit our entrepreneurial resource center Web site at www.pwcerc.com and click on Consult a Professional. Market Research Industry Data Customer Research #font 35 "Optima Bold 19 0" A Message to Entrepreneurs is designed to help first time entrepreneurs understand the venture capital process and provides a useful step by step tool for creating a business plan. Through this understanding, and armed with a comprehensive and thorough business plan, an entrepreneur will have realistic expectations and can concentrate on targeting the financing search for the most promising investment sources. Global Managing Partner, Private Equity PricewaterhouseCoopers LLP Global Technology Industry Group Introduction to the Three Keys 1. Understand the Process pages 3 4 Target a Venture Capital Partner 2. Write the Business Plan pages 5 10 1 Prepare for the Negotiation Process 3. Prepare the Financials pages 11 18 2 Helping Companies Manage Fast Growth Fast growth companies with extraordinary potential move from vision to reality in a very short period of time. PricewaterhouseCoopers can help navigate through hazardous areas. Accelerated life cycles create a number of stresses and traumas within a companys infrastructure. PricewaterhouseCoopers helps companies address these growing pains and pave the way for clear growth. We offer modular and scalable diagnostic tools that identify risk hazards and opportunities around financial controls and procedures; e business; information technology; and other key areas. We deliver recommendations based upon control benchmarks and best practices. Companies with extraordinary potential also pursue strategic tax planning early on as they ready for fast growth. PricewaterhouseCoopers helps tax optimize the areas of R D, intellectual property ownership, manufacturing, sales and marketing, and global expansion early in a companys growth cycle. For more information on PricewaterhouseCoopers and our services to help fast moving companies, please visit www.pwcglobaltech.com or contact a PricewaterhouseCoopers partner in your area by calling 1 877 PwC TICE. 1. Profile of a Typical Venture Capital Fund 2.The Valuation Process The First Key: Understanding the Process 3 4 Ownership Required to Support a 30 Return Estimated Future Market Value of a Company in Six Years in millions of , ,20,40,60,80,100 Stage I Ventures have no product revenues to date and little or no expense history, usually indicating an incomplete team with an idea, plan, and possibly some initial product development. Stage II Ventures still have no product revenues, but some expense history suggesting product development is underway. Stage III Ventures show product revenues, but they are still operating at a loss. Stage IV Companies have product revenues and are operating profitably. Pricing and Control: The Investors Perspective 1. Why Is a Business Plan Needed? 2. Executive Summary 3. Executive Summary Outline Company Overview Management Team Products and Services 5 The Second Key: Writing the Business Plan Market Analysis Funds Requested and Uses Summary of Five Year Financial Projections 6 1. Company Overview 2. Products and Services 3. Market Analysis Body of the Plan 7 4. Management and Ownership 5. Marketing Plan Pricing Distribution Channels 8 Promotion 6. Competition 7. Operations 9 Visit the PricewaterhouseCoopers Entrepreneur Resource Center for more insights Join us at www.pwcerc.com and discover a wealth of tools and insights we offer to help bring your vision to reality. Download sample plans and templates. Review financial models. Explore your financial alternatives. Find out how valuations are determined. Link to the MoneyTree web site and other useful sites. DO be brief. Begin with a two to three page executive summary. Then, limit the body of the plan to seven to ten type written pages. Note that internal business plans and bud gets are normally more detailed than those presented to external investors. Include everything important to the business and financing decision, but leave sec ondary issues and information, such as detailed financial infor mation, for discussion at a later meeting. DO let the reader know, early on, what type of business the company is in. While this may seem obvious, many plans tell the reader this information on page 20, for example, and with other plans, the reader is never certain. DO state the companys objectives. DO describe the strategy and tactics that will enable the com pany to reach those objectives. DO cite clearly how much money the company will need, over what period of time, and how the funds will be used. DO have a clear and logical explanation about the investors exit strategy. DONT use highly technical descriptions of products, processes and operations. Use common terms. Keep it simple and complete. DO be realistic in making esti mates and assessing market and other potentials. DO discuss the companys business risks. Credibility can be seriously damaged if existing risks and problems are discovered by outside parties. DONT make vague or unsub stantiated statements. For example, dont just say that sales will double in the next two years or that new product lines will be added without supporting details. DO be specific. Substantiate statements with underlying data and market information. DO summarize and properly structure internal budgets and plans to facilitate review by outside parties. DO enclose the proposal business plan in an attractive but not overdone cover. DO provide extra copies of the plan to speed the review process. 10 Business Plan DOs and DONTs 1. The Purpose of Financial Forecasts 2. Content of Financial Forecasts 3. Assumptions to Use in Forecasts Sales Cost of Sales Product Development The Third Key: Preparing the Financials 11 13 Other Expenses Balance Sheet Cash Flows 4. Examples of Financial Forecasts 14 Total Revenue 1,2784,2719,00919,18441,283 Cost of Sales Total Cost of Sales6791,9864,0897,64216,349 Gross Margin5992,2854,92011,54224,934 Operating Expenses Total Operating Expense2,0862,9514,3777,07212,105 Income loss Before Taxes 1,454 645 5874,58813,169 Tax Expense0001,2315,268 Net Income loss , 1,454 , 645 ,587,3,357,7,901 Fast Track, Inc. Income Statement 000s omitted Year 1Year 2Year 3Year 4Year 5 Fast Track, Inc. Balance Sheet 000s omitted 15 Assets Total Current Assets8323,0184,0128,66020,076 Net Property, Plant and Equipment5087133215324 Total Other Long Term Assets31000 Total Assets,885,3,106,4,145,8,875,20,400 Liabilities Total Short Term Liabilities3156311,0072,1975,407 Total Long Term Liabilities2474150333747 Total Liabilities3397051,1572,5306,154 Equity Total Equity5462,4012,9886,34514,246 Liabilities and Equity,885,3,106,4,145,8,875,20,400 Year 1Year 2Year 3Year 4Year 5 16 Net Cash Provided by used in Operating Activities 1,571 2,135 2 3 2,229 Net Cash Used in Investing Activities 64 73 111 182 260 Net Cash Provided by Financing Activities2,0002,500000 Change in Cash365292 109 185 1,969 Cash, End of Year,365,657,548,363,2,332 Fast Track, Inc. Statement of Cash Flows 000s omitted Year 1Year 2Year 3Year 4Year 5 17 Fast Track, Inc. Summary of Forecast Assumptions Summary of Financial Assumptions Sales: YearUnitsUnit PriceProduct Service Total Revenues*RevenuesRevenues 142,28,500,1,197,81,1,278 213727,0003,6995724,271 330025,0007,5001,5099,009 471023,50016,6852,49919,184 51,69022,10037,3493,93441,283 18 Expenses: Balance Sheet: Cash Flows Statement: Tips for the Plan PreparerFinancial Calculations 1. Tips to Separate Your Plan From the Rest 2. Alternative Financing Sources Friends and Relatives Angels Debt Instruments Joint Ventures Corporate Venture Capital 19 Beyond the Three Keys 20 Business Advisors How PricewaterhouseCoopers Can Help Technology InfoComm Entertainment Media Thought Leadership Reports in Print #font 32 "Optima Black 17 0" About PricewaterhouseCoopers PricewaterhouseCoopers www.pwcglobal.com is the worlds largest professional services organisation. Drawing on the knowledge and skills of more than 150,000 people in 150 countries, we help our clients solve complex business problems and measurably enhance their ability to build value, manage risk and improve performance in an Internet enabledworld. #font 18 "DJDMLN+Optima 157 0" Three Keys to Obtaining Venture Capital 9th Edition