The first essential is to set out a convincing case for financing. Before contacting any Venture Capital operator, entrepreneurs should draw up a clear and solid Business Plan, and inform themselves of the precise nature of Venture Capital. The INNOVATION/SMEs Programme has published a number of practical guides on sources for Financing Innovation, including Venture Capital, and on How to Prepare a Technology Business Plan. These can be ordered from the publications section.
The Business Plan is a detailed statement of where the company is today and of its strategy for the future. It must explain why the business will be successful and convey what is unique about it. It should examine in the minutest detail the basic assumptions of the business, in order to clarify management thinking and to establish milestones for future development. Typically, the Plan will cover a five-year planning horizon.
The Business Plan must demonstrate in a rigorous manner the commercial viability of the proposed venture and its high growth potential. It should cover all aspects of the business: from its marketing strategy, its competitors and its potential customers, to the management and finances of the business, and its forecast annual sales and targets. The Business Plan should be prepared, to the highest standards, by management (a Venture Capital investor wants to learn about you, not discover how well others can write for you), and should cover the following areas:
- An exEurotive summary
- The market
- The product, process or invention
- Intellectual property rights
- The business and its trading position
- Marketing strategy
- Manufacturing
- Forecast of sales, cash flow and break-even
- Management and control of the business
- The required financing package
The Venture Capital investment process will generally proceed along the following lines:
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First contact
A letter to the Venture Capital fund enclosing the ExEurotive Summary from the Business Plan.
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Interview
Key members of the team should be present and ready to discuss their roles.
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Examination of the Business Plan
The Venture Capital fund managers may now examine the Business Plan very carefully - especially the financial projections, the cash flow forecasts and the potential returns.
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Due diligence
The Venture Capital fund managers may now proceed to make a thorough evaluation of the Plan.
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Valuing the opportunity and Investment
An offer may be made to the company. Normally, no Venture Capital fund will want to buy more than around 35% of the company. The details of the investment will be embodied in a legal document called the Shareholders' Agreement.
Checklist for Technology Entrepreneurs Seeking Venture Capital:
- An absolute mission to create a New Force in their chosen industry.
- A "balanced team" of entrepreneurial managers lead by a "doer", and embracing technical, commercial and marketing skills and related industry experience.
- A "track record" of success in the targeted industry and technology.
- Selection of an attractive market segment exhibiting continued revenue and profit growth.
- Evidence that the project has a "significant and defensible competitive advantage" against existing and/or new competitors.
- A working prototype of the technology/product application.
- Ownership of the key Intellectual Property Rights.
- A significant commitment of personal resources, including finance, by the entrepreneur and his/her team.
- A comprehensive (25 pages max.) and well thought out Business Plan
- True Grit - an implacable and unreasonable determination to succeed against all odds.
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