What the Investor is looking for

1. What the Investor is looking for A Workshop for Practitioners in business plan writing presented by Colin Alexander Director, Consultancy and Projects Alastair Cavanagh Manager, Business Angel Networks Bicester 22 March 2005

2. Before we start Internal – a management map External - a sales document Environment of business Investors - angels, venture capitalists, banks Highlight what a prospective investor is looking for 85% rejected; 15% considered Credibility No magic formula - your plan and you must own it

3. Before we start • Most new business ideas do not get backing • NOT • because the proposition is weak • BUT • Because the entrepreneur has failed to communicate the investment argument effectively.

4. Targeting your plan to investors • Identify the investors – angel, venture capitalist, bank • Imagine you the investor – what would you want to see? • Make it easy for investors to understand; (half page product, rest in IP and competitors) • Research investors; get feedback, learn from each presentation • Be careful with advice from friends

5. The Business Angel Investor • Why? • Who? • What? • Benefits? • Is the entrepreneur willing to ‘sell’ part of the business? • Is the entrepreneur aiming to exit the business?

6. Business Angels – why? • Early stage • No revenue • No profit • No assets (IP driven) • Therefore no debt finance from banks • (incl SFLG)

7. Business Angels – who? • Investing % of own funds (c10-20%) • Serial entrepreneur • Owner / Manager • Recently exited business or cashed in assets • Too young to retire • Most are generalists not specialists • Not all multi-millionaires!

8. Business Angels – who? …con’t • £10K - £500K per deal • Syndication • Looking for high returns • Post-investment role • Tax breaks (EIS) • Looking to recycle knowledge and make money

9. Business Angels – who? ...con’t • Ian Laing – Milton Park, Oxford Asymmetry, Oxford Semiconductors • Invests with colleague • Up to £1m • Uses contacts for technical due diligence and build teams • £ 50% : IP 50% • Key: passion + personal chemistry + trust

10. Business Angels – who? …con’t • Typical investor • £30k per deal Less than 25% • Future dilution? • How to set valuation? NEGOTIATION

11. Lifestyle businesses Dividend “Me Too” Service based Features not benefits New to sector Part time No personal risk High growth potential 10 fold return Innovation Unique proposition IPR Growing market Clear need Routes to market Sales strategy Management Experience Commitment Personal investment Business Angels- what?

12. Business Angels – benefits? • Early stage • - available pre-revenue • - unsecured against family assets • - no fixed repayment • Longer term investment • Investors bring skills / contacts • Share risk as well as reward • Shareholders!

13. Selling the Business (1) The Business Plan • Executive summary • Brief History • Product or service • Market and competitors • Marketing plan – The route to market • Production and operation • Management team and its objectives • Financials • The Offer - return and exit

14. Risk is everywhere • Address risk in each section • Summarise major assumptions • Sensitivity analysis must reflect the identified risks • Explain underlying thinking • Build confidence in the management team

15. Executive summary • Two pages maximum • Write it last; hardest part to write • Take the reader from opportunity to proposition • Outlines market, business model, key drivers • Inspires confidence in the team’s ability to deliver • Only section you can guarantee will be read

16. Finance • Summary • Consistency with the rest of the Business Plan • Investors will look for two moments: • Breakeven (cumulative profit) • Cash flow going positive • Cash flow the key forecast

17. Finance • Risk – It is everywhere • List the highest probability risks • List the highest impact risks • Measure sensitivity (worst case/best case) • Be realistic – Don’t be too ambitious

18. Finance - The Offer • What we are putting in • What we want you to put in • When do we want it • How much are we giving away • How are we both going to get our money back • Balance the Risk against the Reward

19. Finance - The Offer • Ordinary Shares • Preference Shares • Debentures • Loans • Don’t give give away too much too early

20. Finance - The Offer • Valuation • Enterprise value = equity value + (borrowings - cash) • Net assets • Multiple of Profits/Sales/Earnings • Off Balance Sheet factors • Bid premium

21. Finance - The Offer • How do we get our money back? • Dividends (profit sharing) • Buy back of shares • Trade Sale • Public Offering • Give me the Money

22. Selling the Business (2) The Business Plan • Executive summary • Brief History • Product or service • Market and competitors • Marketing plan – The route to market • Production and operation • Management team and its objectives • Financials • The Offer - return and exit

23. The product or servicewhat is it and what it will be used for? • Functionality vs technical detail • How is the proposition anchored in a real market opportunity? • What benefits does your product bring to customers? How do you measure these benefits • What problem does it solve? • Why will customers continue to buy it?

24. Two rules… • 1. Never underestimate how little people understand about science and technology • 2. Never assume they want to know

25. Markets and competitors • Size of market • Market segmentation and niches • Major customer types – a typical customer • Consumer buying patterns and priorities • Actual/projected growth rates • Geographic breadth and variation • How the market operates

26. Market and competitorsWhat you need to write in a business plan • Stage 1 • A general description of the market - • size, geographical spread, major customer types • Recent history and future development - • growing or static, how does the market operate, principal axes of competition: price, quality, service and reputation

27. Market and competitorsWhat you need to write in a business plan • Stage 2 • Analysis of your target market segment… where the segments are: local, regional, international • the relative sizes and rates of growth • particular characteristics • consumer buying patterns and priorities

28. The Market Analysis • Underpins both the sales and financial forecasts • Ensure that: • Market opportunities are realistically evaluated and supported by data eg number of potential customers, target market share • You show a good qualitative understanding of how the market works, (what your customers want, how to reach them, adjustments they may have to make to support your product or service)

29. Competitor analysis What you need to write in a business plan • Who are the potential competitors? • On what basis do my rivals compete: price, sales volume, reputation, product design, quality, reliability, service? • What makes my product superior or different (critical success factor) • What barriers does a new entrant face and how will my rivals react to my entrance • In what area are my competitors vulnerable and how can I exploit this? • How do my potential customers see the competition?

30. Marketing plan • You have described the market, identified your target segment and analysed the competition, now state how you will reach the market • Pricing • Promotion • Selling and distribution

31. Markets: finding, reaching, satisfying • Definition of ‘customer’ or ‘market’ • A set of ‘actual’ or ‘potential’ buyers of a product or service • Definition of ‘business model’ • The method chosen by a company to deploy its resources most effectively • Examples: licensing, joint venture, partnering, merger

32. Pricing in your plan explain…. • How is it set (cost plus or demand based); • How does it compare • What margin (price – cost) does it give you • If the target price differs markedly from prevailing prices, explain why • Common fault is underpricing

33. Risk is everywhere • Address risk in each section • Summarise major assumptions • Sensitivity analysis must reflect the identified risks • Explain underlying thinking • Build confidence in the management team

34. Selling and distribution straightforward, though often neglected • What distribution channels exist? • Which will you use: management team selling, sales force, agents, commission reps • Geographical coverage of sales operation • Not too much detail, but explain the strategy and why you think it will work

35. Writing style tricks • Explain acronyms NMR, CDMA, ASCI • Say it out loud, write as you would speak, not like a text • book perfect English • Avoid passive tense • adjectives and adverbs (unique, world-beating) • clichés • Vary sentence length • Summary: who, what, when, where, why, how • Specific words (red and blue) not general ones (brightly coloured); • Concrete words (rain,fog) rather than abstract (bad weather)

36. Re-cap • Target business plan to be a sales document for investors not an internal management tool • Avoid infatuation with your product • Show understanding of your target market

37. Excite this man

38. Case StudyIs this a winning business plan? • What is good? • What is bad? • What is missing? • What is redundant?

39. Breakout sessionYou are the investor • You are a group of investors with £50,000 to invest • Your group decides which company to invest in, and why • Your representative gives a two minute presentation, telling the workshop which company and why. • A short discussion will follow each presentation • Instructions • Read the four executive summaries • Write down your impressions as you read • Use the questions to help you analyse

40. You are the investor - Questions • Do you understand what the business is? • Is there is a market for this product? • What is your opinion of those who wrote the plan? What type of people are they? Are they scientists or business people? • Do you feel that your £50,000 is safe with this company? • Will you get it back? • What are the main risks as you see it? • What else would you like to know about the company? • Which company has the most credibility for you?

41. Contact • Colin Alexander • c.alexander@oxin.co.uk • Alastair Cavanagh • a.cavanagh@oxin.co.uk • www.oxin.co.uk • Ralph Baker • ralph.baker@businesslinksolutions.co.uk • www.businesslinksolutions.co.uk