Gateway to funding: Business Plan

The recent turmoil in the market lead to a change in the way business was done and many technology companies sprung to life. Low start up costs of these fast-growing tech companies and the heighted media coverage has created more entrepreneurs than ever. However, many fail to receive Series A and B funding, which is crucial for the growth of the company.  Why?

The first step of starting your own company is to formulate a business plan. Here are few tips on how entrepreneurs should approach a business plan.

Product / Service

Make sure your business plan clearly outlines what your business will be in the most simplistic form possible. E.g. What is Google? Google is a search engine. Whether it is a product or service, the investor also needs to know what are you trying to achieve, E.g. Uber is a better alternative to cabs, and why your business will succeed? The business plan also needs to outline the technology used, the market, competition, and a bird’s eye view from the management perspective.

Team

The team is an important asset and a company must carefully choose a team that complements its vision. With diversity in terms of broad range of skills, the team will be ready for the plethora of challenges a young company faces. The business plan should mention how the team will work together when it comes to decision-making or provide support for running the company.

Revenue Model

Technology can solve a lot of problems but how an entrepreneur plans on turning it into a business is very important. As a for-profit venture, you need to do research and work on your product, marketing strategy, and day-to-day operations to ensure maximum efficiency for revenue generation. Determine pricing models for your business and compare them to your competitors in the industry. In the business plan, you should be able to demonstrate what and how to make your business profitable.

Cash Flow Positive

Before you start your company or look for outside funding, your business plan will need to have a clear timetable for your cash flow. It’s alright to lose money in the initial stages of the business, but in order for your business to succeed, you will need to start making money at some point. This timetable needs to be included in your business plan, not only for your reference, but also as a way for investors to gauge your new company’s financial status.

Execution Strategy

A brilliant strategy can be your ticket to success, but only with execution can you get there. Execution is the small details and decisions that your business will make during its lifetime. After you have determined your business’s strategy, you and your team will need to put it into action. In your business plan, you will need to state HOW you plan on following through on your ideas. It is what your investor wants to see; while you may have the greatest product or idea in the world, without solid execution, your business will not sustain.

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Disruptive Companies

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It takes a trained eye

The best shots to win

The fastest way to green

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Special thanks to Lynn Gentry

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Giving Run to Your Money: Five Things to Look for in a VC Fund

Horse racing could be considered the not-so-distant relative of venture capital. Though containing some differences, both enterprises share the common requisite of experience, evaluation, and prudence. Nearly 550,000 businesses are started each month in the United States[1]. Early-stage venture capitalists seek out the businesses with the most disruptive ideas and the highest growth potential, and as VCs become increasingly adept in doing so, the US Venture Capital Index has generally outperformed the S&P 500.

For much of the 20th century, however, this area of investment was offered exclusively to ultra high-net-worth individuals and their families. Fortunately, with recent policy movements in the venture capital space, such as the JOBS Act, some funds now offer this area of investment to individuals for a relatively low buy-in. With more investors and funds than ever, what should investors look for in a venture capital fund?

     #1. Diversification – Aside from high reward potential, one of the main reasons investors flock to venture capital is diversification. In the world of horseracing, this would be like hedging your bet; backing up a wager with a less risky one. This would look like picking a horse to win, but also betting that the horse will place. This strategy mimics the risk mitigation of portfolio diversification. If your horse falls short in the photo finish, you’ll still cash your “place” bet. While many individual investors will have their portfolio separated into stocks, bonds, and money markets, venture capital provides a new asset class. Venture capital investing can also be used to mitigate risk, as the US Venture Capital Index generally performs inversely to the S&P 500[2].

     #2. Industry – Horse races vary in length, so knowing what horse is best suited for certain races is imperative. Similarly, many venture capital funds are focused on a specific industry, such as healthcare, manufacturing, or technology.  While each industry performs well at different times, technology has consistently delivered returns above the IRR of the US Venture Capital Index[3].

     # 3. Stage – Just as VCs commonly invest in syndicates, most horses are owned in partnerships to lower individual costs and risk. Partners that join later, especially as the horse becomes more successful, will expect to see less in return. Companies require financing at several different stages, including seed, early stage, growth, expansion, and later stage. While returns can be realized by investing in the right company at any stage, early and growth stage investments have generally performed better.

     #4. Strategy – Regardless of their discipline, every successful person or group has a strategy. Every trainer has their own method for guiding horses to success, every investor has his or her own investment strategy, and so does every venture capital fund. A venture fund’s strategy dictates the type of investment it looks to make, be it in a cash-flow-positive business, a rapidly-expanding business, a path-breaking and disruptive business, or one that exhibits some of all three.

     #5. Management – Is it the horse or the jockey that wins the race? No doubt that the jockey serves a vital purpose, but the race winner is ultimately determined by the horse. Of course, this really means the trainer and all those who pay for the horse’s expenses. Making an investment is like giving your horse to a trainer. You expect results in return for the money you spent. In venture capital, your trainers are usually a team of the most senior members of a firm. The general partners of a VC fund are responsible for vetting and executing investments that will earn a successful exit for all investors in the fund. Other facets to consider when evaluating a management team are the managers’ educations, industry experiences, and visions.

Sources:

[1]: Source: Small Business Association

[2]: Source:  Cambridge Associates LLC, Dow Jones Indices, Standard & Poor’s, and Thomson Reuters Datastream. The Cambridge Associates LLC U.S Venture Capital Index is an end-to- end calculation based on data compiled from 1,420 U.S. venture capital funds, including fully liquidated partnership, formed between 1981 and 2012.

[3]: Pooled gross IRR by company initial investment year. Based on data complied from 1,401 US venture capital funds, including fully liquidated partnerships, formed between 1981 and 2011. Returns are net of fees, expenses and carried interest. Vintage year funds formed since 2010 are too young to have produced meaningful returns. Analysis and comparison of partnership returns to benchmark statistics may be irrelevant. Benchmarks with NA (not applicable) have an insufficient number of funds in the vintage year sample to produce a meaningful return.

 * Source: March 31, 2013
   Cambridge Associates LLC
   U.S. Venture Capital Index® and Selected Benchmark Statistics

The Perfect Game of Golf with a Venture Capitalist

The relationship between a company and VC is a symbiotic one. A VC is like the mentor who takes a young and developing golfer and equips him with the necessary skills to succeed. Think of Tiger Woods and his father, or Jack Nicklaus and his mentor, the great Jack Grout.

Inspired by the 18 holes of a golf course, here are the 18 benefits of accepting a venture capital investment.

#1 Financing – Golf is an expensive endeavor and so is running a business. At some point, the mentor may need to buy high quality equipment for his pupil. Similarly, venture capital provides the financing solutions necessary for an entrepreneur to turn their idea into an actual product or service. This financing can be used for marketing, hiring high quality employees, or paying for whatever needs a company has.

#2 Domain expertise – The mentor knows how to navigate a specific golf course. Likewise, most VCs have expertise in multiple industries. Venture capitalists tend to invest in companies they can lend their experience to. For example, many firms look for disruptive companies within a few specific fields, such as financial services technology, cloud computing, education software, etc. in case on NIN Ventures.

#3 Network – Once an entrepreneur accepts a venture capital investment, he can tap into the VC’s larger network. This leads to connections with sales channels, consultants, legal professionals, accountants, and even other companies and VCs.

#4 Talent Recruitment – Talent tends to go where the money is. A VC-backed company will benefit from increased access to high caliber employees. The top golf teachers are able to use their reputation and connections to recruit other instructors or trainers who know how to foster skills in the golfer.

#5 Public Relations - Funding makes news in itself. In 2010, GroupMe, a mobile group-messaging app, raised $10 million in venture capital after their TechCrunch Disrupt presentation. In 2011, Skype acquired the startup for around $80 million.

#6 Marketing – The mentor who wants to show off their prodigy’s skills knows the right tournaments to join and how to build a following. When a company’s ideas are flowing but resources are limited, accepting venture capital gives an entrepreneur access to the VCs portfolio, which can help build marketing and sales channels.

#7 Experience – An entrepreneur might have a great idea, but VCs have experience from multiple deals that can help the company while making critical decisions. 

#8 Exit Strategy – The mentor eventually wants to retire, but in order to do so he must lead his pupil to success. Likewise, a VC is result-oriented, and will help an entrepreneur in planning a successful exit via sale or public offering.

#9 Goodwill/Credibility – Having Tiger Woods as your mentor would establish credibility before you even play. A venture capital investment is a sign that a company’s product is worthwhile. This adds credibility and brand value to an entrepreneur’s idea or product.

#10 Gaining a Friend with Mutual Interests – Both the mentor and the golfer want to win tournaments. Both the venture capitalist and the entrepreneur want success for the company, and this mutual interest helps the entrepreneur earn a friend in the process.

#11 Scalability –VCs provide capital, experience, and means, which are necessary for a company to scale and grow a faster rate.

#12 Motivation – Every golfer gets in a slump and every company has its own set of challenges. The VC supports the entrepreneur in challenging times and motivates him to continue on his journey to success.

#13 Follow On Financing –VCs can provide follow on financing, which is used to grow a company by hiring quality talent, marketing, or further developing products.

#14 Guidance – The golfer cannot see his own swing, so many flaws can go unnoticed. VCs act as a trusted guide to an entrepreneur who can help to spot and solve problems before the company has to learn about them the hard way.

#15 Long Term Strategy – It’s easy to lose sight of long-term strategies in the day-to-day operations of a company. VCs help companies stay on track to reach long-term success by achieving milestones and goals. This is like Jack Grout keeping a calendar of the days leading up to the PGA Tour.

#16 Focus – With many distractions, it’s easy for an entrepreneur to lose focus on their core business. VCs help entrepreneurs focus on the products that will grow the company. All great golfers are reminded of maintaining and perfecting the fundamentals: grips, aim, swing.

#17 Strategic Acquisition (due to deal flow partnerships) – VCs are in the market for deal flow, and can suggest a strategic acquisition that help the company maintain a lead in its marketplace.  

           #18 Greater odds of Success – Just like how in golf, a perfect shot is derived from the right technique, clubs, weather, and a little bit of luck, a venture capital investment gives greater odds of success to a company. Some venture-backed companies with successful exits include YouTube, Whatsapp, and Nest, to name a few.

Taking off against the Wind

Venture capitalists and pilots possess similar traits - both are required to go against the current to achieve success. Henry Ford noted that a pilot’s best choice is to take off against the direction of the wind, because it’s easier for the aircraft to reach the necessary amount of lift. When the wind is going in the same direction as the airplane, it becomes more difficult for the wings to produce lift. Similarly, VCs like to invest in companies that have a product or service that goes against the norms and disrupts the current ecosystem to make the market / process more efficient for the customer, entrepreneur, and everyone involved.

VCs like to invest in path breaking companies that disrupt their current market. This is seen in the common progression of technological advancements; the printing press replaced the scribe, the light bulb replaced the candle, the email replaced the letter, iTunes replaced the CD, etc.

In a recent Econ Talk Podcast, Marc Andreessen, the co-founder of Netscape and a venture capitalist, says that there are “about 4,000 tech startups a year that want to raise venture capital. Of those maybe 400 of those will get funded by top venture capital firms. Of those [400] about 15 will be responsible for over 90% of the profits for that entire year of companies.” Realistically, most companies won’t be a massive success, so the biggest returns, as a whole, come from companies that grow at a rapid pace. Andreessen remarks that most of these successful companies go under the VC radar because they are “non-consensus,” which means that a company is apparently destined to crash and burn because its product is so radical, or its market has a high barrier of entry, or its management is questionable, or sometimes all those and more! But this is why it’s called venture capitalism; venture being the shortening of the word adventure.
If you’re a company or a CEO with a disruptive service or product, visit us at nin.vc to submit a business plan. Taking off against the wind is difficult, the end is unknown, and potential for disaster is evident. Regardless of the success during flight simulation and knowledge of the manuals, there’s always a risk, BUT WE CAN HELP!

Five Things Venture Capitalists Look For In Their Investments

Venture Capital is similar to how the music industry works. A record label wants to find artists with potential, a promising start, and a bright future. Likewise, a VC looks for a company that’s going to become the equivalent to: The Beatles, Michael Jackson, or Justin Timberlake. So what do venture capitalists look for in their next investment?

01. The Founder

A Founder is the biggest and the most important asset a startup has. The foremost question to ask is why did s/he decided to start the firm. Next, they’ll examine if the founder has a college degree in the related field, and how many years of experience they have in that industry. VCs are more inclined towards a seasoned entrepreneur as opposed to a rookie tech virtuoso with no track record. In the end, a VC wants to see a creative and driven leader who is highly knowledgeable and well-versed in their industry. VCs need to have trust in the artist (the founder), the management (the team) the album (the product), and their potential chart performance (the market). Another trait that VCs look for in a founder is perseverance or “grit”. Many studies and articles go so far as to say that a founder’s level of grit is more important than their IQ.

02. The Team

The biggest asset an entrepreneur has is the team. A team often compliments the founder and the business. Related to the quality of the founder is the quality of the team. A good team knows their market and is committed to stick to their vision; like a collective grit. A good team works effectively to produce innovative ideas or solutions to obstacles by making use of their diverse collection of skill sets. Every great musical group knows how to unite the individual skills of each band member to produce the highest quality product. Of course, like an upcoming band, a startup will most likely have deficiencies, besides money, like network, sales channel, hiring needs, PR and marketing, etc. The team (also in the form of other portfolio companies) can add value in the form of beneficial connections or aid in decision making.

03. Technology & Innovation

If founder is the heart of the company, technology is the lifeline that keeps it alive. VCs see hundred and sometimes thousands of companies every year, so innovation is the most elemental feature in the success of a startup. It’s simple but difficult; just think of an idea, or improvement to an idea, that nobody has thought of and then market it! Most startups are derivative of others, so when a good idea breaks, VCs will pay attention.

In 2010, Anthony Goldbloom founded Kaggle which established a massive community of data scientists who compete with each other to solve data science problems. Kaggle was appealing to VCs because it carved out a somewhat unexplored market. In a different way, another startup called Dwolla was appealing because it disrupted an existing market. Dwolla resembles a service like PayPal but it doesn’t use credit or debit cards. By going around those, they keep their fees low. Regardless of the size of the transaction, Dwolla takes only 25 cents. A similar service like Google Wallet allows a user to send money, though there’s a fee of 2.9% per transaction. Sometimes innovation is finding a new road or cutting a new path in a commonly traveled road.

04. Market

A venture capitalist is interested in an idea that will change a particular industry. In addition to that, they also look for companies with tremendous growth opportunity. VCs don’t just want to know how big of a market there is, or can be, for an idea, they also look for strategies on how to achieve that growth potential.

Ideally, a company should have defined their target market and acknowledged their place within it. Likewise, a company should have established goals and sensible means to get there. Investors are interested in momentum. This is found in a company’s current statistics such as: revenue, user numbers, or customer feedback, but VCs are also going to forecast growth assumption and inspect the quality of management. Momentum demands maintenance of a solid foundation.

05. Competition

The final facet VCs look at before investing is competition and barriers to entry. These barriers could be due to government regulations, high research and development cost, initial investment, or due to an over penetrated market. E.g., If your company provides a social networking service, it needs to compete and distinguish itself from Pinterest, Facebook, Google+, Twitter, Tumblr, Instagram, to name a few. A VC is most confident in funding something that is groundbreaking and disruptive when it comes to changing an industry. An investor’s ideal scenario would involve a technology that could be trademarked or patented. Once a market gets filled, like social networking, the difficulty to innovate skyrockets. There are an abundance of companies out there, but the venture capitalist wants to sift and sort for the most promising companies.

Six Things Venture Capitalists Look for in an Entrepreneur

NIN Ventures (or NIN.VC), an early stage Venture Capital firm, sponsored the Harvard Business School Private Equity and Venture Capital Group of Chicago’s “Pre-Holiday Bash!” on November 21st. The event was at Bentley Gold Coast and featured several panelists who discussed the question “Is it the Car or the Driver?” from the Private Equity and Venture Capital perspective.

Nin Desai (CEO, NIN Ventures), who led the discussion, was joined by co-panelists Matt Moog (Founder and CEO, Wavetable Labs) and Mark Koulogeorge (Managing Partner, MK Capital). The panelists shared their unique experiences in the technology, venture capital, and private equity space. They went on to debate the importance of the entrepreneur (the driver) versus the significance of the core business idea (the car) from a stage and sector perspective. At the end of the evening, the general consensus was that the entrepreneur was more important to the overall performance of the company. So how do venture capitalists identify great entrepreneurs when they examine potential portfolio companies?

It is often believed that the single most important thing that venture capitalists look for in an entrepreneur is “passion”. How much does the entrepreneur love the idea? Does the entrepreneur truly care about the underlying problem they are attempting to solve with their business opportunity or merely looking to cash out for quick profit? While passion is an important trait that VCs indeed look for in an entrepreneur, here are six things we think may be more important:

1. BIG DREAM! - Venture capitalists look for big ideas that are scalable with the leverage they provide in the form of funding, domain expertise, and managerial experience. A new and innovative small business may be extremely profitable for its founders, however, VCs need to see massive growth potential in order to invest. They love entrepreneurs who dare to dream big!

2. Personality Traits - Along with a big dream, VCs look for individuals with focus, tenacity, hard work, and persistence. How hard and long will this person work to make the company (and dream) a success? The most important quality a VC looks for in an entrepreneur is they must be a good individual and ethical person. A socially responsible business and mindset is very attractive to VCs.

3. Expertise & Experience - What does this entrepreneur know that the industry expert doesn’t? Specialized knowledge is just as powerful as an innovative product when it comes to a sustainable competitive advantage. Also, how well does the the value of that expertise translate across to other companies that the VC is associated with? For example, a VC may invest in a company to gain access to superstar programmers they can then add to their network when the need arises to develop other companies within the VC’s portfolio. Or, perhaps, the management team of a potential portfolio company has successfully developed and executed a strategy to enter a specific foreign market. That experience could be invaluable to other companies the VC is connected to.

4. Choices - Entrepreneurship can be seen as a series of choices made by a company and its founders. VCs like to look at some of the key choices made by entrepreneurs when evaluating whether or not to invest in the company. How did the entrepreneur chose the management team? Strong managers hire well to address strategic areas of a growing company’s needs. They set aside ego and look for people who are better than themselves in some identifiable way. There is nothing like a single, “perfect” entrepreneur that could handle any given situation. However, there are strong teams that come awfully close. Also, how have they used their limited resources up until now? Have they burned through cash like there was no tomorrow in the hopes of finding more, or have they deliberately managed cash flow in ways that directly influenced positive growth?

5. Communication - VCs like entrepreneurs who can effectively communicate. It may be their ability to summarize complex code or algorithms into terms understandable to a non-expert. More often though, it is the case that VCs want to work with entrepreneurs who can be extremely candid about problems they are currently facing and potential bottlenecks in the future. Save the sugar coating for the PR team. VCs need an entrepreneur to call a spade a spade - as quickly as identifiable. No surprises. Entrepreneurs who are forthright about issues allow the VCs to adjust expectations or to step up with an insightful solution.

6. Flexibility - While steadiness of vision is important to keep a growing company on track, changing circumstances may require an entrepreneur to deviate from their initial business strategy. These inflection points really show the adaptability of an entrepreneur and how success is not always defined by moving in the same direction regardless of external circumstances. The risk here though, is that the entrepreneur is TOO adaptable which may be an indication another thing that VC’s look for is missing: passion…