'Venture Capital' is an important source of finance for those small and medium-sized firms,

which have very few avenues for raising funds. Although such a business firm may possess a
huge potential for earning large profits in the future and establish itself into a larger enterprise.
But the common investors are generally unwilling to invest their funds in them due to risk
involved in these type of investments. In order to provide financial support to such
entrepreneurial talent and business skills, the concept of venture capital emerged. In a way,
venture capital is a commitment of capital, or shareholdings, for the formation and setting up of
small scale enterprises at the early stages of their life cycle.

Venture capitalists comprise of professionals of various fields. They provide funds (known as
Venture Capital Fund) to these firms after carefully scrutinizing the projects. Their main aim is
to earn huge returns on their investments, but their concepts are totally different from the
traditional moneylenders. They know very well that if they may suffer losses in some project, the
others will compensate the same due to high returns. They take active participation in the
management of the company as well as provide the expertise and qualities of a good banker,
technologist, planner and managers. Thus, the venture capitalist and the entrepreneur literally act
as partners.

The venture capital recognises different stages of financing, namely:-

 Early stage financing - This is the first stage financing when the firm is undertaking
production and need additional funds for selling its products. It involves seed/ initial
finance for supporting a concept or idea of an entrepreneur. The capital is provided for
product development, R&D and initial marketing.

 Expansion financing - This is the second stage financing for working capital and
expansion of a business. It involves development financing so as to facilitate the public
issue.

 Acquisition/ buyout financing - This later stage involves:-

i. Acquisition financing in order to acquire another firm for further growth

ii. Management buyout financing so as to enable the operating groups/ investors for
acquiring an existing product line or business and

iii. Turnaround financing in order to revitalise and revive the sick enterprises.
The Business Plan

Venture capitalists view hundreds of business plans every year. The business plan must therefore
convince the venture capitalist that the company and the management team have the ability to
achieve the goals of the company within the specified time.

The business plan should explain the nature of the company’s business, what it wants to achieve
and how it is going to do it. The company’s management should prepare the plan and they should
set challenging but achievable goals.

The length of the business plan depends on the particular circumstances but, as a general rule, it
should be no longer than 25-30 pages. It is important to use plain English, especially if you are
explaining technical details. Aim the business plan at non-specialists, emphasising its financial
viability.

Avoid jargon and general position statements.   Essential areas to cover in your business plan
Executive Summary This is the most important section and is often best written last. It
summarises your business plan and is placed at the front of the document. It is vital to give this
summary significant thought and time, as it may well determine the amount of consideration the
venture capital investor will give to your detailed proposal.

It should be clearly written and powerfully persuasive, yet balance "sales talk" with realism in
order to be convincing. It should be limited to no more than two pages and include the key
element of the business plan.

1. Background on the company Provide a summary of the fundamental nature of the company
and its activities, a brief history of the company and an outline of the company’s objectives.

2. The product or service Explain the company's product or service. This is especially important
if the product or service is technically orientated. A non-specialist must be able to understand the
plan.

 Emphasise the product or service's competitive edge or unique selling point.

 Describe the stage of development of the product or service (seed, early stage,
expansion). Is there an opportunity to develop a second-generation product in due
course? Is the product or service vulnerable to technological redundancy?
 If relevant, explain what legal protection you have on the product, such as patents
attained, pending or required. Assess the impact of legal protection on the marketability
of the product.
3. Market analysis The entrepreneur needs to convince the venture capital firm that there is a real
commercial opportunity for the business and its products and services. Provide the reader a
combination of clear description and analysis, including a realistic "SWOT" (strengths,
weaknesses, opportunities and threats) analysis.

 Define your market and explain in what industry sector your company operates. What is
the size of the whole market? What are the prospects for this market? How developed is
the market as a whole, i.e. developing, growing, mature, declining?
 How does your company fit within this market? Who are your competitors? For what
proportion of the market do they account? What is their strategic positioning? What are
their strengths and weaknesses? What are the barriers to new entrants?
 Describe the distribution channels. Who are your customers? How many are there? What
is their value to the company now? Comment on the price sensitivity of the market.
 Explain the historic problems faced by the business and its products or services in the
market. Have these problems been overcome, and if so, how? Address the current issues,
concerns and risks affecting your business and the industry in which it operates. What are
your projections for the company and the market? Assess future potential problems and
how they will be tackled, minimised or avoided.

4. Marketing Having defined the relevant market and its opportunities, it is necessary to address
how the prospective business will exploit these opportunities.

 Outline your sales and distribution strategy. What is your planned sales force? What are
your strategies for different markets? What distribution channels are you planning to use
and how do these compare with your competitors? Identify overseas market access issues
and how these will be resolved.
 What is your pricing strategy? How does this compare with your competitors?
 What are your advertising, public relations and promotion plans?

5. The management team

Demonstrate that the company has the quality of management to be able to turn the business plan
into reality.

 The senior management team ideally should be experienced in complementary areas,

such as management strategy, finance and marketing, and their roles should be specified.
The special abilities each member brings to the venture should be explained. A concise
curriculum vitae should be included for each team member, highlighting the individual’s
previous track record in running, or being involved with, successful businesses.
 Identify the current and potential skills gaps and explain how you aim to fill them.
Venture capital firms will sometimes assist in locating experienced managers where an
important post is unfilled - provided they are convinced about the other aspects of your
plan.
 List your advisers and board members.
 Include an organisation chart.
6. Financial projections

The following should be considered in the financial aspect to your business plan:

 Realistically assess sales, costs (both fixed and variable), cash flow and working capital.
Produce a profit and loss statement and balance sheet. Ensure these are easy to update
and adjust. Assess your present and prospective future margins in detail, bearing in mind
the potential impact of competition.
 Explain the research undertaken to support these assumptions.
 Demonstrate the company's growth prospects over, for example, a three to five year
period. • What are the costs associated with the business? What are the sale prices or fee
charging structures?
 What are your budgets for each area of your company's activities?
 Present different scenarios for the financial projections of sales, costs and cash flow for
both the short and long term. Ask "what if?" questions to ensure that key factors and their
impact on the financings required are carefully and realistically assessed. For example,
what if sales decline by 20%, or supplier costs increase by 30%, or both? How does this
impact on the profit and cash flow projections?
 If it is envisioned that more than one round of financing will be required (often the case
with technology based businesses in particular), identify the likely timing and any
associated progress "milestones" or goals which need to be achieved.
 Keep the plan feasible. Avoid being overly optimistic. Highlight challenges and show
how they will be met.

Relevant historical financial performance should also be presented. The company’s historical
achievements can help give meaning, context and credibility to future projections.

7. Amount and use of finance required and exit opportunities State how much finance is required
by your business and from what sources (i.e. management, venture capital, banks and others) and
explain the purpose for which it will be applied.

Consider how the venture capital investors will exit the investment and make a return. Possible
exit strategies for the investors may include floating the company on a stock exchange or selling
the company to a trade buyer.  
Selecting the VC investors

The members of the Indian Private Equity and Venture Capital Association comprise a number
of venture capital firms in India. The IVCA Directory of Members provides basic information
about each member's investment preferences and is available from the Association.

Prior to selecting a venture capitalist, the entrepreneur should study the particular investment
preferences set down by the venture capital firm. Often venture capitalists have preferences for
particular stages of investment, amount of investment, industry sectors, and geographical
location.

An investment in an private, unlisted company has a long-term horizon, typically 4-6 years. It is
important to select venture capitalists with whom it is possible to have a good working
relationship. Often businesses do not meet their cash-flow forecasts and require additional funds,
so an investor's ability to invest in additional financing rounds if required is also important.

Finally, when choosing a venture capitalist, the entrepreneur should consider not just the amount
and terms of investments, but also the additional value that the venture capitalist can bring to the
company. These skills may include industry knowledge, fund raising, financial and strategic
planning, recruitment of key personnel, mergers and acquisitions, and access to international
markets and technology. Entrepreneurs should not hesitate to ask for references from investors.  

What do VC's look for

Venture capitalists are higher risk investors and, in accepting these risks, they desire a higher
return on their investment. The venture capitalist manages the risk/reward ratio by only investing
in businesses which fit their investment criteria and after having completed extensive due
diligence.

Venture capitalists have differing operating approaches. These differences may relate to location
of the business, the size of the investment, the stage of the company, industry specialization,
structure of the investment and involvement of the venture capitalists in the companies activities.

The entrepreneur should not be discouraged if one venture capitalist does not wish to proceed
with an investment in the company. The rejection may not be a reflection of the quality of the
business, but rather a matter of the business not fitting with the venture capitalist's particular
investment criteria. Often entrepreneurs may want to ask the venture capitalist for other firms
that might be interested in the investment opportunity.   Venture capital is not suitable for all
businesses, as a venture capitalist typically seeks : Superior Businesses Venture capitalists look
for companies with superior products or services targeted at large, fast growing or untapped
markets with a defensible strategic position such as intellectual property or patents.

Quality and Depth of Management Venture capitalists must be confident that the firm has the
quality and depth in the management team to achieve its aspirations. Venture capitalists seldom
seek managerial control, rather they want to add value to the investment where they have
particular skills including fund raising, mergers and acquisitions, international marketing,
product development, and networks.

Appropriate Investment Structure As well as the requirement of being an attractive business

opportunity, the venture capitalist will also seek to structure a deal to produce the anticipated
financial returns to investors. This includes making an investment at a reasonable price per share
(valuation).

Exit Opportunity Lastly, venture capitalists look for the clear exit opportunity for their
investment such as public listing or a third party acquisition of the investee company.

Once a short list of appropriate venture capitalists has been selected, the entrepreneur can
proceed to identify which investors match their funding requirements. At this point, the
entrepreneur should contact the venture capital firm and identify an investment manager as an
initial contact point. The venture capital firm will ask prospective investee companies for
information concerning the product or service, the market analysis, how the company operates,
the investment required and how it is to be used, financial projections, and importantly questions
about the management team.

In reality, all of the above questions should be answered in the Business Plan. Assuming the
venture capitalist expresses interest in the investment opportunity, a good business plan is a pre-
requisite.