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through the next five years, but if they cannot survive the first 18 months,
further talk becomes immaterial. So before investors even look at anything
else, the entrepreneur has to convince them that the company will survive.
294 UNDERSTANDING THE ANGEL INVESTMENT PROCESS


CAVEATS FOR THE ENTREPRENEUR

There is, however, a caveat attached to selling investors on the survival of
your company. It is this: Watch the fine line between a straightforward sales
job and overselling, because you are not walking away from this transac-
tion. You are going to be partners with this individual. The critical thing in
obtaining the fairest price for both of you is to emphasize your strong
areas”without hoopla, without hype. Then you must justify, not hide,
the weak areas of the venture. Concede”to yourself as well as to others”
that every deal has weak areas; otherwise, it would not become a high-re-
turn opportunity.
Many entrepreneurs do not want to confess weaknesses. They will claim
that everything is great. “There is no competition; people are grabbing this
thing off the shelves.” This attitude is not only unrealistic; it is unfair, not
only to the investor, but to the entrepreneur as well. You are dealing with
smart people who want you for a partner. They understand conditions that
surround the process; they understand that the opportunity presents itself be-
cause there are holes in the deal, and because unknowns lurk everywhere.
So talk about the holes; talk about the unknowns. Do it up front. Maybe
your investor can see something he or she can help you with. But if you gloss
over them rather than reveal them, the investor will question your ability”
if not your integrity”and whether your feet hover anywhere near the
ground. Of course, such common sense should pervade the whole process,
not just valuation.
Part of having your feet on the ground involves a realistic view of the
market size and growth rate, two things entrepreneurs seem to have, under-
standably, an inveterate desire to inflate. With no intention of fooling any-
one, they talk about huge markets, entering the worldwide telephone
business, perhaps, instead of focusing on the narrow market they will serve.
Entrepreneurs must realize the market segment they are after.
Because many entrepreneurs have heard that investors want to invest
only in areas containing huge markets, many entrepreneurs express them-
selves globally, or in billions of dollars. But the global nature of the venture
depends on the deal. Recall the diversity among investors. Not all in-
vestors”perhaps very few”are globally motivated. Again, when talking
about your project, be realistic. To the sensible investor, realistic assessment
has a circumference narrower than the globe yet worth more than a billion
fantasy dollars.
Other, but no less important, subjective factors enter into the valuation
mix”the sales cycle, for example. It always takes longer than you think
to bring a product to market. You may have great customer market research
that proclaims how much people are going to love the product, but nobody
295
Valuation of the Early-Stage Company


has written a check yet. Distributors may rave, but no one is talking floor
space.
So you have to understand what point of the cycle your product is in, an
understanding that results in having to walk a fine line: You do not want to
be too early and have to spend all your money educating the market on why
it needs your product. Nor can you afford to be too late, behind everybody
else. This is why you have to understand the length of time the sell cycle for
the product is going to take. Entrepreneurs can become dazzled by their vi-
sion, overlooking this aspect of the process.
Another pitfall awaits even the best product. In three years, the company
may be producing the world™s greatest product, but not selling it. If educating
the marketplace and educating prospective competitors soak up too much
time and energy, the venture will die. This scenario captures a company ex-
hausting its capital in educating the market without being able to sell the
product. Three years later that company is out of business. Survivability
dries up, vividly clarifying the critical nature of the sell cycle.
Although no hard figures have been tracked, a reasonable guess would
suggest that 90 percent of the deals worked out will need more money than
had been originally thought. Then what you have is dilution. The investor is
diluted when he or she has to put more money in to maintain their percent-
age ownership. Come liquidity, how much of the company will the investor
own? The answer is that the investor will own less than when he or she
started out. This illustrates the problem created by needing more money than
was originally thought. This constitutes dilution, something investors seri-
ously consider in the valuation process.
All these considerations influence perceived risk. So to the extent that
you can convince an investor that less risk is involved in the deal, he or she
will raise the valuation. To the degree the investor cannot be convinced of
low risk, one of two things will happen: The investor will walk away be-
cause of too much risk for the desired rate of return, or the investor will
write a check but the valuation will sink because the need for a higher rate of
return rises.
A
APPENDIX

How to Write and Present an
Investor-Oriented Business Plan

Charles Roedel
Roedel and Company
San Jose, CA
(408) 265-5235




THE TARGET AUDIENCE
Presenting your business to investors is essential in building business success.
Your business plan must offer a desirable opportunity that encourages the in-
vestor to take the next step”just based on written pages. When you have the
opportunity to make a presentation on your business, you are the focus of at-
tention and your presentation material provides images to enhance under-
standing. In both cases, you must understand your audience and provide the
right information in a manner that will help investors develop a reasonable
understanding of your business.
Investors present an experienced audience with a vast array of skills.
You must carefully consider how your information will be received and plan
accordingly. Our observations spanning many years provide the following
insights.
Investors:

– Are very intelligent.
– Are entrepreneurs themselves.
– Have worked many long hours building a young company, just like you.
– Have struggled with too many action items and no resources.
– Have mortgaged their home and possessions to make ends meet.


297
298 APPENDIX A


– Have painfully experienced the time and effort necessary to develop
their product or service.
– Have painfully experienced the time and effort necessary to win early
customers.
– Have painfully experienced the time and effort necessary to ramp sales.
– May not be experts in your particular field and are not looking to be-
come experts.

The business plan must focus on why your solution provides a very de-
sirable customer benefit.

– Understand that an entrepreneur must begin with a laser focus on your
core business.
– Have learned that creating and executing against a well-devised business
plan is key to success.

Investors are looking for a business plan that:

– Presents the opportunity in an honest, believable manner.
– Doesn™t talk down to the reader.
– Covers the appropriate information with a minimum of fluff.
– Provides an executive summary that provides a crisp overview.
– States points using clear statements with minimum embellishment.
– Presents specific information in an organized manner without repetition.
– Is presented in a readable, eye-pleasing way.

Considerations to optimize the acceptance of your plan:

– Place your logo on title page and use a tiny version on each page.
– Your title page should include company name, date, address, plus con-
tact name, title, phone, fax, e-mail, and web site.
– Provide a disclaimer paragraph on the title page.
– Provide a footnote to show that the business plan is proprietary and con-
fidential and note DO NOT DUPLICATE on each page.
– Use a table of contents with section numbers and page numbers.
– Consider dividing the executive summary into two columns: left column
entitled “Overview” and the right column entitled “Details.”
– If appropriate, show a picture of the product in the executive summary.
– If you are offering more than one product/service, or more than one mar-
keting approach, or more that one business model, carefully distinguish
each and maintain differentiation throughout the document. Business
plans that try to combine different approaches in broad generalizations
often result in confusion and loss of credibility.
299
How to Write and Present an Investor-Oriented Business Plan


– Use graphics, such as market segment pie charts, to attract attention.
– As appropriate, use photos of your team, products, and facilities, as di-
viders between chapters.
– Use tables, charts, and bulleted lists to present information in an easy-to-
read form.
– Tables should have clearly defined titles, legends, label rows, and
columns so that information in the table is understandable without the
need for support text.
– Provide footnote sources for references such as market survey reports.
– Consider using an expanded timeline chart that combines time frame
and assumptions for different elements, e.g., development, marketing,
operations, and financial.
– Providing thumbnail photos of officers adds a personal touch.
– Present financials using standard practice formats. Trying to invent new
ways to present financials will become a diversion for the investor.
– Be consistent. If a numerical example is presented in two different por-
tions of the document, be sure they match.
– Details on product technology can often be discussed in a white paper
placed in the appendix rather than in the plan body.
– Use a binding method that makes page turning easy.
– Use a standard text format. Some plans have been created in a landscape
presentation format, but the result doesn™t provide the investor the
stand-alone, explanatory text with expected detail information. Save the
presentation format for your live presentation to investors.

Rewrite a business plan that:

– Starts by presenting grandiose statements without defining the real busi-
ness.
– Overwhelms the reader with so many pages it looks like an unabridged
textbook.
– Presents information in a disorganized or incoherent manner.
– Presents information based on “current status,” which is already several
months old.
– Provides the same topic in multiple sections with contradictory informa-
tion.
– Uses improper grammar or misspelled words.
– Presents a title page that is missing contact information and business
plan version date.

As your team works to create business plans and presentations, be
aware of these points and strive to provide information in a manner consis-
tent with the Private Investor Criteria in Chapter 6.
300 APPENDIX A


INTRODUCTION TO THE BUSINESS PLAN

This question-and-answer format is designed to guide you in the develop-
ment of your business plan.
The probing questions will assist you in collecting the information you
will need to make informed business planning decisions. This is a compre-
hensive workbook and, as such, explores all aspects of different types of
businesses. Answer the questions appropriate to your company or venture.
As you proceed, the questions will stimulate your thinking about your busi-
ness, providing you with new insights into the planning process.
Remember that the business plan is not only a compilation of answers
to a series of questions but a written reflection on the conclusions that
you draw from going through the questioning, research, analysis, and an-
swering process.


WHAT DOES YOUR BUSINESS PLAN NEED TO CONTAIN?
The process outlined here is based on more than 15 years of experience; on
more than 200 major planning-related assignments for start-ups, small busi-
nesses, and large companies; on interviews with investors and lenders; and
on review of hundreds of successful and unsuccessful business plans. We ad-
vise you to include the following sections in your business plan:


CREATING A BUSINESS PLAN

I. Executive summary
II. Mission or charter
III. Description of the business
IV. Ownership structure and equity
V. Description of product/service
VI. The market
VII. Description of industry and trends
VIII. Marketing strategy
IX. Marketing plan
X. Sales plan
XI. Operations, research and development strategies, and plans
XII. Management, organization, personnel, and information systems
XIII. Objectives and milestones
XIV. Financial projections
XV. Supporting documents
301
How to Write and Present an Investor-Oriented Business Plan


I. Executive Summary
Your objectives in this section are to create a readable, credible, brief over-
view of your business plan. A second, equally important, objective is to
demonstrate appreciation of investor or lender needs. From a funding acqui-
sition perspective, the executive summary may be the most important tool
for introducing your offering to lenders and investors. A final objective of the
executive summary is to motivate and entice the reader to review the docu-
ment in its entirety.

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