On InvestorsMGT 709 New Venture Creation

Agenda
Adams Thoughts on Business Plans Business Model Analysis Room for Dessert Walnut Venture Associates

Adams On Investors
The business plan is not the be-all and
end-all for getting funded
Sometimes investors dont even read plans

Writing a business plan is not the problem

Viewing the business plan as your primary goal is the problem More evidence of output rather than execution
orientation

Myth: Investors fund business plans

The Work
Dont focus on the plando the work
Put together a great team Execution intelligence Great idea, poor team = no Great team, so-so idea = maybe Great advisors and directors are crucial for legitimacy and
guidance

Presentation and executive summary may be all

you need (and the pitch)

Validate the market Get to market fast Define value inflection points

The Pitch
Cater your message to the audiences needs Clearly articulate features and benefits Relationships rule
Who can influence the investors? One or two good referrals cuts through the noise

Supplement the pitch with collateral

Treat the plan as a brochure it has about the same effect on investor decision making

Ideal: twelve slide PowerPoint, an executive

summary, and team/advisor bios

The Pitch
Contents
Company Overview Customer pain/problem What problem are you solving? Why is it a problem? How severe? How big is the market? What segments have the worst pain? How have you validated the needs? Solution Competition Team Business Model How will you make money? Revenue model, distribution model, milestones Financials When will you be profitable? How much capital?

The Pitch
Process
Have as many team members participate as you can Investors want to assess your team Project energy, enthusiasm, confidence Malleability You have to be comfortable not keeping your
sacred cows Do you want to be king or rich? You dont need to have all the answers but you must be able to respond thoughtfully

Thoughts on Business Plans

On a scale from 1 to 10, business plans rank no
higher than a 2 Four components that must fit
People, opportunity, external context, deal

Three questions
What can go wrong? What can go right? How can management make more go right than wrong?

The role of management is to increase the fit

People
Adages
Successful founders have two characteristics: they are known and they know Id rather back an A team with a B idea than a B team with an A idea Citing the need to recruit experienced people is like wishing to draw 4 cards to make a straight a low prob. Event!

Questions:
Who are the founders? What have they accomplished in the past? What directly relevant experience do they have? What skills do they have? Whom do they know and who knows them? What is their reputation? How realistic are they? Can they adapt? Who else needs to be on the team? Can they make hard choices? How will they respond to adversity? What are their motivations? How committed?

Opportunity
Adages
Is the total market large and/or growing? Is the industry attractive? Use analogies to describe what the venture will look like if it is successful the next Walmart Invest in industries where growth can overcome the shortcomings of management Buy low, sell high, collect early, pay late, have growth options

Questions
Who is the customer and how do they make decisions? is the product a compelling purchase for them? how will you reach the customer? at what price? How much does it cost to acquire a customer? How much does it cost to deliver the product? How much does it cost to support a customer? How easy is it to retain a customer? Who are your competitors? How will they respond? Abnormal profits will go away.

Context & Deals

Context Deals
A shift in context can turn an unattractive business into an attractive one From whom you raise capital Is often more important than the deals How much money to raise and in what stages? Money is time time to discover the right team, opportunity, and context Investors have to decide whether to give you more time Deals are fair, simple, robust, reflect trust rather than legalese What new information would change the likelihood of success? How much time and money are required to buy that information? To what degree would more money increase the rate of growth? Without extra money will you lose a winner takes all market? From whom should the money be raised? How much is needed? What deal terms are fair?

Questions

Risk/Reward Management
Myth of entrepreneur as risk seeker
All sane people want to avoid risk True entrepreneurs want to capture all of the reward and give the risk to others I hardly ever look at the numbers any more They are most likely wrong I like to see the team has thought through the key business drivers Due diligence is important for investors

Business Model Analysis

A business model is a profit engine or
cash generating machine
Revenue drivers Cost drivers Investment size Critical success factors

Revenue
Types
Single stream, multiple streams, interdependent, loss leader

Models
Subscription, volume or unit-based, advertising-based, licensing/syndication, transaction fee

Fishbone model

Fishbone Revenue Model

Avg. tuition rate Student mix Curriculum

Tuition

# of students
Rate of return

COB Revenue

Endowments

Reputation

Size of endowments
Grants Grant applications Quality of faculty

Executive education

Costs
Types
Fixed, variable, semi-variable, non-recurring

Structures
Payroll-centered (direct) Payroll-centered (support) Inventory Space/rent Marketing/advertising

Fishbone Cost Model

# of faculty Faculty Salaries (80%) Productivity Market rates

COB Expenses Support Salaries (10%)

# of staff
Salary rates

Support ratio

Operating Expenses (10%)

Teaching resources
Research resources

Investment Size
Maximum financing needs (lowest point) Positive cash flow Cash breakeven Cash flow diagram is useful
cash balance over time

Cash is needed for infrastructure, salary,

inventories etc.

Critical success factors

Which factors have the greatest impact on
profitability? Sensitivity analysis

Room for Dessert

How well do you rate the plan? The idea? Does the plan address its audiences
needs? What are the strengths and weaknesses of the idea? What are the economic drivers? What would you like to see before committing funds to this venture?

Walnut Venture Associates

Who are angel investors? Why are they
investing in startups? Why would you seek an angel investor? Evaluate the potential investment from Walnuts point of view
What issues require more investigation? What needs to be resolved before you write a check?

What issues does Bob OConnor have with

Walnut? How should they be resolved?