What Serious Investors Want To See From Serious Entrepreneurs
Oct 26, 2009
In his book “Raising Venture Capital for the Serious Entrepreneur”, author Dermot Berkery provides insights into how an entrepreneur can capture the attention of potential investors. His premise is that business plans, if they are to be effective communication tools to investors, must address the most important aspect of a company’s product or service – how it will achieve market power. He defines what market power is and how to produce a well-crafted business plan that truly gets investors attention. Below is a summary of my notes from Chapter 6 of that book - “How to Write a Winning Business Plan”:
§ Business plans aimed at investors must prove the business can achieve market power in market large enough to justify the investment
§ Market power allows the company to extract high return on capital and cast a deep footprint on industry – the only way a company can earn supernormal profit
§ Levers for achieving high return on capital – pricing power, scale, etc.
§ Without market power the product or service is a commodity and can find it hard to earn high return over any sustained period
§ Business plan should be a carefully constructed set of arguments underpinning the investment thesis
§ Every good investment thesis has at its core how company will capture market power, how long the window of opportunity for exploiting it is, and how market power will be monetized
§ Every fact, assertion, or hypothesis included in business plan should crafted in support of investment thesis – like a novel, a plan should tell a story not just convey facts
§ If no market power, value of company will gravitate over time to book value of invested capital and returns will decline – if market power is only fleeting then supernormal return will only exist in short term
§ Evidence to Include in Business Plan
Need to prove six specific propositions to prospective investors (the opportunity and the deal must be right)
§ Value of the Opportunity (why the business is worthy of investment)
1. Potential for accelerated growth in big, accessible market
a. A big, but not too big, market
b. Growth from market growth, not market share gains
c. Capable of being #1 or maybe #2 in market
d. Identifiable access route to customers
2. An achievable position of market power – a sustainable differentiated product or service proposition
a. Huge value to customers relative to competition
b. Patents, know-how, first to market, natural monopolies, step change in reduction in cost
c. Very high gross margins
3. Capable, ambitious, trustworthy management team
a. Balanced team
b. Deep domain knowledge
c. Prior experiences and record
d. Ambition, not oriented to lifestyle
§ The Opportunity is a Good Deal for Investors (why the investors will get a decent return on their investment)
4. Plausible, value-enhancing stepping stones
5. Realistic valuation to allow investor to earn sizable multiple
6. Promising exit possibilities
Before going to market to gain investors capital, to either start or expand your business, contact Bill Wright at (757) 685-2455 or wwright@b2bcfo.com to inquire about how he can assist you in writing or evaluating your business plan.
