The investment evaluation process typically begins with a detailed, written business plan (typically about 40-50 pages) created by the key people who will actually be involved in the proposed enterprise. While every situation is different and calls for variations in emphasis in the business plan, typical successful business plans provide as complete a description as currently known of the following major areas of concern for a new venture:
The description of the people involved is especially important and
should specify the role of each currently known key individual in the proposed
enterprise, provide references for each such individual, and provide a
biography that makes clear why each such individual is well-suited for his or
her proposed specific role in the proposed enterprise.
The description of the proposed product (hardware, software, goods, services, etc.) should clearly define what the product is, provide specifications and features, and, most importantly, should make clear what the real need the proposed product will fill for actual customers.
The description of the proposed business should make clear what the business is (e.g. manufacturing the proposed product, selling it, leasing it, providing a service incorporating it, receiving license fees or royalties, etc).
The description of the market is especially important and should clearly specify proposed pricing for the product and estimate (preferably in several different ways) the likely size of the market over a period of several years at the proposed pricing levels. This part should describe the characteristics of likely users of the product (and buyers, if different),the process by which the buyer makes the purchase decision, the factors the buyer uses in making the purchase decision, and how the product's specific features lead to a favorable purchase decision.
The description of the competition should identify existing known competition as well as likely future competition. This description should not ignore totally different alternative approaches by which the customer might meet his needs. It should describe the competing companies, their products, their market size, their users and buyers, their product's specific features, and your view of their product's shortcomings. Your description should clearly show, from the point of view of the customer, why a purchase decision will be made in favor of buying your product (coming from a new company with relatively few resources and track-record) versus the competitors, versus totally different alternative approaches, and versus doing nothing.
The marketing plan should cover the proposed pricing, distribution channels, strategic relationships, positioning of the product in the marketplace, initial customer support or training, advertising, public relations, warranties ,and ongoing customer service after the sale.
The manufacturing plan should identify the proposed methods and costs of creating the goods or services involved, It should discuss the alternatives. Capital equipment required should be identified. Unit cost estimates should be supported with specific costs appropriate for the quantities involved.
The organizational structure should specify the number and organization of people who will perform various functions over a period of time (including titles, head counts, job descriptions, compensation levels, recruitment methods, availability, training required, overheads, etc.). Any existing corporate or organizational structure should be identified and described.
The timetables should identify the major milestones in the creation of the proposed enterprise (with greater detail and attention to the areaswith greater perceived risk).
The description of the technology should clearly identify the current state of development of the product and what research and development (if any) is yet to be done in terms of time, money, and people required. The intellectual property rights (patents, copyrights, etc.), if any, that maybe available should be identified. At this stage, the initial business plan submitted should merely discuss the proposed technology in general terms and contain your claims of the overall capabilities for the technology without including any confidential or proprietary information at this time.
The section on the investment being sought should clearly identify the proposed amounts, timing, and use of the proceeds.
Finally, the financial projections provide the opportunity to integrate all of the previously provided information about market size, pricing, manufacturing costs, overheads, timetables, capital equipment, and investment sought into a consistent overall whole. A pro forma financial projection should project sales, expenses, and profits in terms of time. The pro forma cash flow statement is especially important and a pro forma balance sheet should also be provided. The financial projections should be accompanied by a detailed narrative stating the assumptions used in constructing the financial projections and showing the reasoning used in creating the projection. Depending on the current stage of your business plan, it should cover areas such as capital equipment, facility lease commitments, discounts, bad debt reserves, cost of disputes, accounts receivables aging, interest, inflation, taxes other than income taxes, income taxes, etc.
In addition, it is important to present one or more major alternative financial scenarios reflecting the likely effects of a major adverse deviation from the basic projection (e.g. a major delay in time to first sales, significantly lower sales levels, customer requirements involving providing a significantly different package, market factors allowing sales to be closed only at substantially lower prices, etc.) along with a discussion of whether and how the company's proposed managers could deal with such problems.
References for existing attorneys, accountants, commercial or investment bankers, consultants, directors, existing investors or partners, suppliers, customers, contract parties, strategic partners, or other representatives and associates should be identified.
It should be emphasized that a business plan is not merely a mass of spread-sheet numbers, but rather a way to provide insight into the reasoning and decision-making processes that the actual key individuals of the proposed enterprise would use to translate the many interrelated factors affecting a business into action.
The investment decision process includes
If a decision to invest is made, this is followed by a negotiation by both parties of a detailed written contract specifying the details of the agreed investment. A commitment to invest occurs only upon execution of this detailed written contract by both parties. Our general policy is not to agree to non-disclosure agreements as part of the process of receiving an initial business plan (and we specifically disavow non-negotiated agreements purporting to be binding on us merely upon our receipt of an initial business plan). If the evaluation of the initial business plan indicates sufficient interest and disclosure of particular actual proprietary information is required as the next step of the investment decision process, a specific non-disclosure agreement can be mutually negotiated and executed by both parties at that time.
Please send identical copies of the business plan (and any other
materials)via U.S. mail to each of the two addresses shown. Copies will not be returned.
Dr. John R. Koza
Third Millennium Venture Capital Limited
Los Altos, California 94023 USA
E-MAIL at Genetic Programming Inc.: firstname.lastname@example.org
Dr. Martin A. Keane
Third Millennium Venture Capital Limited
5733 West Grover
Chicago, Illinois 60630 USA
Page created: July 7, 1996
Last updated: August 7, 1999