Business Planning, Business Plans and Venture Funding

- Venture Captial -

Venture capital investing is generally the most well-known type of start-up investment services available in the market. Although many entrepreneurs are aware of venture capitalists and associated venture funding, many are not aware of the process, issues, and concerns that arise when engaging with venture capitalists. As a way of an introduction, the table below outlines some of the basic differences between angel investors and venture capital firms.

Angel Investors Versus Venture Capital

As noted in the above table, the underlying characteristics that delineate angel investors are much different than that of venture capital firms. This is primarily a function of nature of the organizations and background of the two types of investors. Where angel investors generally invest small amounts of money with the goal of facilitating the start-up company’s move to the next level of third-party investment from venture capital firms, venture firms generally invest large sums of money with the goal of cashing out in three to five years through an initial public offering (IPO) or through an acquisition by a large corporation. The following table provides a comparison of the investment statistics between angel investors and institutional venture capital financing sources.

Comparison of Angel and Venture Capital Financing Sources

Accordingly, the interaction between the angel investor and the start-up company versus that of the venture capital firm and the start-up company are generally very different. Where the angel investor(s) are more nurturing and patient toward the start-up company, the relationship between venture capitalists and the start-up firm can many times be better characterized as an “adversarial” relationship based on meeting financial projections with unrealistic expectations. It has been my experience that the underlying difference between the two relationships is that many venture capitalists are MBAs from top business schools with little or no experience in developing a start-up from the ground up. They concentrate on the “should be projections” of the financial statements, as opposed to the realistic issues in developing a business. Given this difference, and the necessity of working with the venture capital community, it is highly recommended that entrepreneurs and their start-ups work with venture capitalists that have “hands-on” start-up experience. This will facilitate a much more mutually beneficial relationship between the two parties, the entrepreneur and the investor.

As can be expected for start-up companies, venture capital financing is much harder to secure. Most venture capital firms receive from several hundred to more than 1,000 business plans each year. As one can imagine, many of these plans are not reviewed or even looked at. Of the business plans that are reviewed, one can expect the following:

• Sixty percent were rejected after a 20- to 30-minute scanning.

• Another quarter was discarded after a lengthier review.

• Approximately 15% were investigated in depth, and two-thirds of those were dismissed because of serious flaws in the management team or the business plan could not be easily resolved.

• Of the 5% that were viable investment opportunities, terms acceptable to the entrepreneur(s) and other existing stockholders were negotiated only 3% of the time.

Therefore, as an entrepreneur with a comprehensive business plan being the ticket for consideration, one has only: 1) a 15% chance of being seriously considered for an investment, and 2) a 3% chance of securing capital from the venture capital community. Also, as a rule of thumb, it takes approximately 150 to 300 hours (21) to develop a comprehensive business plan. As outlined, venture capital funding is not for the faint of heart.