Questions

How do VC analysts evaluate the business model, numbers and financial plan of a venture? What tools, frameworks and methods do you use?

For the sake of parsimony, I’ll start by simply agreeing with others in this thread in terms of the difficulties associated with obtaining VC and the propensities to support established businesses versus a start-up or good idea. I’d also add that they will want considerably more ownership than an originator or team would expect up front as well as control in most cases. The old adage is that no one wants to support you unless you already have the resources on your own.
Appreciate too that your pitching your own capabilities just as if you were in a job interview. Ideas and potential opportunities are great, but can you (and partners) actually get the job done? Moreover, as can be seen across answers here, developing business and marketing plans are a highly reiterative process. As you face critiques and new ideas, you’ll gain a better idea about what to include and what to refine over time. It can be a year or more of effort from an initial idea to a detailed plan based on extensive due diligence and 100’s of conversations with people across areas of expertise.
Give the open-ended nature of your question, it’s difficult to give specific advice, but there are some obvious considerations that must be addressed. You’ll first need to establish demand based on your targeted markets. If you’re in an established industry, then it’s fairly straight forward to discern some base demand and revenue benchmarks. For example, in a scenario where I was establishing demand for a bar-restaurant, we relied on cash register totals and other financial info from nearby comparable establishments.
Then, using info from a range of sources (industry/trade reports, market assessments, etc.), those initial revenue numbers could be tweaked over time to reflect market predictions. I/We typically generated 5- and 10-year analyses and don’t forget that it must convey the initial transition into the market; how soon before the business is operating at full capacity? If you’re in a new market, then you’ll be forced to argue more by analogy, using the closest comparable businesses or low-ball generic heuristics (i.e. .5-1% marketing response rates).
Once you have an idea about potential revenues, you’ll need to build a general and then operational budget. You’ll have to factor in every detail as if in the real world. For example, what are the personnel/staffing, property, equipment, manufacturing, marketing, distribution, legal, accounting, financial, insurance costs and so forth? As previously noted by others, this will require considerable due diligence and associated interactions with a plethora of potential supporters. Expect an emphasis on softer numbers such as marketing costs and response rates and your reasoning/defense of them. No one will even consider you if you don’t convey detailed realistic marketing plans that demonstrate reasonable efficiencies/returns per each promo method and media, given the potential target markets.
At this point, you should have some idea about the potential profitability and thus whether to continue or not? The next and critically important step is to then build up models that show an operational budget and cash flows. Usually conveyed via weekly and/or monthly time units, you’ll be simulating costs and revenues that occur each week/month over at least the first 3 to 5 years of operations. You’ll be answering important investor question such as when “break-even” status and positive cash flows occur. Cash flow is a biggie in that many businesses fail because they can’t last long enough to overcome an early cash flow deficit.
Finally, have a range of best- and worst-case scenarios and reflect their direct impact on your daily financials. What happens if revenues are 20% less than expected or marketing efforts are half as effective as expected? These impacts might look reasonable in terms of general or static budgets, but even nominal reductions could have big impacts on your monthly cash flow. All this knowledge also conveys a reasonable assessment of risk and the subsequent boundaries and pitfalls, all of which are key investor questions.
As you build up this numeric model of the business, you’ll need to weave it into a compelling, coherent and detailed business/marketing plans to share with potential investors and pertinent 3rd parties. Even a more generic plans may be a 100 pages long. Visuals are paramount in both your written and meeting presentations; use a professional artist for key renderings or diagrams. Supporting research should be clearly conveyed to defend your ideas. Have resumes in the bibliography of you, any potential partners and employees, general supporters and organizations, and business/chain alliances. Have two plan versions prepared, one long/detailed and one very brief/ general. You don’t want to give away the farm to a person/organization until they’ve shown interest, spent time with you and otherwise identified themselves as a legitimate potential investor, but then be prepared to bare all.
It’s a lot to tackle and it’s an uphill battle for those not financially endowed, but I hope this gives you some important considerations and of course I’m here if you need the help.


Answered 5 years ago

Unlock Startups Unlimited

Access 20,000+ Startup Experts, 650+ masterclass videos, 1,000+ in-depth guides, and all the software tools you need to launch and grow quickly.

Already a member? Sign in

Copyright © 2024 Startups.com LLC. All rights reserved.