Real-Life Communication
You are a venture capitalist researching a company for a client.
"There is a lot of reading that has to be done," says investment advisor Michelle
Ramsey. She works with venture capitalists. "You have to read legal documents
and understand legal jargon. You have to research companies thoroughly."
You
have an intern working with you, and she wonders how you decide whether to
invest in a company. You tell her that one important research tool is looking
at the company's business plan. She wants to know more about business plans.
Below
are seven questions that an investor should ask about a business plan. Read
the list to help answer the intern's questions at the end:
1. What
is unique about this company or project? The investor or lender is not
necessarily looking for a unique product, but one with growth potential that
sets it apart from other industry members or from other proposals received.
2.
What does the company do? The reader wants to be able to understand the
company's product and services and the operations of the company.
3.
How does or will the company attain profitability? This area entails discussion
of the market and competition as well as an analysis of areas such as revenue
and profit margins.
4. What benefit will be derived from a capital
infusion? In other words, how will the proceeds of the financing be used
and what results benefiting the investor will be achieved?
5. Is
management capable of implementing the business plan? Many investors consider
this the most important element of a business plan. An investor must be comfortable
with the experience and abilities of the management team.
6. Do
the financial projections make sense? Overly optimistic projections reflect
on management's judgment. Projections can be aggressive, but must be within
the realm of the real business world.
7. Is there an exit strategy
for the investor? Does this business have the potential to merge, be acquired,
go public or buy out the investor? This is very important. The investor must
be confident that either the debt payments can be sustained or that their
stock conversion rights have home run potential.
These are the questions
the intern asks:
- Are investors more interested in a unique product, or in the growth potential
of the business?
- What question do most investors feel is the most important?
- What sort of potential is an investor looking for in a company, to make
sure that there is an exit strategy available?
(by David Pierce. Excerpted with permission from the Venture Capital
Resource Library.)