Part 6: How to Write a Business Plan to Raise Capital - Research & Development
Len McDowall asked:
In this continuing series of articles on how to write a Business Plan or Information Memorandum to raise capital, Part 6 discusses business plan content specifically ‘Research and Development’.
Research and Development
If the product or service of the business requires any design or development before it is marketable the extent of this work needs to be disclosed in your business plan. Similarly, if future prospects depend on the successful development and introduction of new products it is important to state the nature and extent of such work and the time scales involved. Although existing products will be of considerable interest, venture capital investors will be equally if not more concerned with product succession, given the likely length of their involvement with the company and hence will expect to have the R&D strategy outlined in the plan.
The points for consideration to include in your business plan:-
• Current status of the development program.
• The in-house expertise the company has in the area and whether any development work is to be sub-contracted.
• The person responsible for overseeing development and his experience/expertise in this field.
• Identify any major anticipated problem areas and the approaches to their solution. State what effects these may have on the development timetable.
• Outline future development work on new products.
• Present a design and development budget both on a cost and time basis. Allow some contingency as costs are often underestimated.
• Clearly state the accounting policy with respect to R&D and if costs are capitalized present the case for this.
The content of Business Plans will be covered further in subsequent articles by Len McDowall.
© Len McDowall, Integral Capital Group 23rd October, 2007
www.integralcapital.com.au
Health Insurance Quotes
In this continuing series of articles on how to write a Business Plan or Information Memorandum to raise capital, Part 6 discusses business plan content specifically ‘Research and Development’.
Research and Development
If the product or service of the business requires any design or development before it is marketable the extent of this work needs to be disclosed in your business plan. Similarly, if future prospects depend on the successful development and introduction of new products it is important to state the nature and extent of such work and the time scales involved. Although existing products will be of considerable interest, venture capital investors will be equally if not more concerned with product succession, given the likely length of their involvement with the company and hence will expect to have the R&D strategy outlined in the plan.
The points for consideration to include in your business plan:-
• Current status of the development program.
• The in-house expertise the company has in the area and whether any development work is to be sub-contracted.
• The person responsible for overseeing development and his experience/expertise in this field.
• Identify any major anticipated problem areas and the approaches to their solution. State what effects these may have on the development timetable.
• Outline future development work on new products.
• Present a design and development budget both on a cost and time basis. Allow some contingency as costs are often underestimated.
• Clearly state the accounting policy with respect to R&D and if costs are capitalized present the case for this.
The content of Business Plans will be covered further in subsequent articles by Len McDowall.
© Len McDowall, Integral Capital Group 23rd October, 2007
www.integralcapital.com.au
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We have an outstanding, professional business plan. What is the best way to market it to get funding?
Ablefundsablr asked:
We’d like to avoid venture capital as much as possible.
The Project is developed by excellent people with many good years of successful business experience. The know how and ability to develop and manage the project is present.
We’d like to avoid venture capital as much as possible.
The Project is developed by excellent people with many good years of successful business experience. The know how and ability to develop and manage the project is present.
Understanding Advisory Capital
Sam Huleatt asked:
What is Advisory Capital?
“Advisory capital is an investment of experience, expertise, social capital, and public authority into a company in return for some form of equity in the company”
Advisory Capital, a new variation of venture capital investing, is the direct result of a changing landscape among venture capitalists and entrepreneurs. This landscape has seen a flux of startups that are able to bootstrap on the cheap, forsaking traditional venture rounds while still achieving tremendous market success. Examples of such successes include many web 2.0 companies such as Flickr, JotSpot and Weblogs. Even traditional venture capital firms have acknowledged this shift in financing requirements. Guy Kawasaki has a fascinating post on how he built Truemors for $12,107.09. Charles River Ventures recently launched its Quick Start Program, offering up to $250,000 in the form of convertible note loans to promising entrepreneurs.
States George Lipper of the National Association of Seed and Venture Funds:
“The [issue] is the mismatch between the needs of worthy start-up entrepreneurs for relatively small amounts of venture funding and institutional venture capitalists who cannot dedicate the time to justify dealing with small investments. Hence, we’ve watched a steady erosion of the share of venture capital (and therefore VC’s time) directed to the seed and start-up stage to about 2% of available capital…while expansion and later stage investments claim 80%+”
For startups, advisory capital can be the best of both worlds: the ability to eliminate cash investment (resulting in significantly less dilution for founders) while issuing minimal equity, sufficient to recompense the benefits of the “advisory” portion of a VC or angel relationship. I believe that advisory capital can also be thought of as a “bridge investment,” helping young companies to build their valuations prior to an angel or series A round of investment once initial market traction is obtained.
However, the role of advisory capital consultants is questioned by some. One major concern with such a model is the absence of what Union Square Ventures calls, “capital at risk.” The argument is that the risk of monetary investment “provides the foundation for all the other roles that the VC plays - advice, oversight, connections, etc. Without it you won’t get close to what you get with a VC.” However, Stowe Boyd, the inventor of the advisory capital phrase combats the USV position,
“As some of my existing portfolio of advisory capital clients are acquired, go public, or start paying me dividends, I might start investing hard, cold cash on top of the hard, cold advice I am doling out.”
Returning to my position that advisory capital is best used as a “bridge,” working with the right AC individual or firm should result in connections to and desire for angel investors. Unless a company is simply developing a lightweight application, the need for outside capital will likely always be there. Venture capitalists should ultimately look to develop relationships with these AC firms who can act as a filter, helping to vet investments and implement early-stage best practices; the foundation for long term success.
Ultimately, the advisory capital role is a catalyst to the next stage, an opportunity at the most favorable cost to the founders and a risk-minimizing technique for future investors - a win, win for everyone.
Car Insurance Quotes
What is Advisory Capital?
“Advisory capital is an investment of experience, expertise, social capital, and public authority into a company in return for some form of equity in the company”
Advisory Capital, a new variation of venture capital investing, is the direct result of a changing landscape among venture capitalists and entrepreneurs. This landscape has seen a flux of startups that are able to bootstrap on the cheap, forsaking traditional venture rounds while still achieving tremendous market success. Examples of such successes include many web 2.0 companies such as Flickr, JotSpot and Weblogs. Even traditional venture capital firms have acknowledged this shift in financing requirements. Guy Kawasaki has a fascinating post on how he built Truemors for $12,107.09. Charles River Ventures recently launched its Quick Start Program, offering up to $250,000 in the form of convertible note loans to promising entrepreneurs.
States George Lipper of the National Association of Seed and Venture Funds:
“The [issue] is the mismatch between the needs of worthy start-up entrepreneurs for relatively small amounts of venture funding and institutional venture capitalists who cannot dedicate the time to justify dealing with small investments. Hence, we’ve watched a steady erosion of the share of venture capital (and therefore VC’s time) directed to the seed and start-up stage to about 2% of available capital…while expansion and later stage investments claim 80%+”
For startups, advisory capital can be the best of both worlds: the ability to eliminate cash investment (resulting in significantly less dilution for founders) while issuing minimal equity, sufficient to recompense the benefits of the “advisory” portion of a VC or angel relationship. I believe that advisory capital can also be thought of as a “bridge investment,” helping young companies to build their valuations prior to an angel or series A round of investment once initial market traction is obtained.
However, the role of advisory capital consultants is questioned by some. One major concern with such a model is the absence of what Union Square Ventures calls, “capital at risk.” The argument is that the risk of monetary investment “provides the foundation for all the other roles that the VC plays - advice, oversight, connections, etc. Without it you won’t get close to what you get with a VC.” However, Stowe Boyd, the inventor of the advisory capital phrase combats the USV position,
“As some of my existing portfolio of advisory capital clients are acquired, go public, or start paying me dividends, I might start investing hard, cold cash on top of the hard, cold advice I am doling out.”
Returning to my position that advisory capital is best used as a “bridge,” working with the right AC individual or firm should result in connections to and desire for angel investors. Unless a company is simply developing a lightweight application, the need for outside capital will likely always be there. Venture capitalists should ultimately look to develop relationships with these AC firms who can act as a filter, helping to vet investments and implement early-stage best practices; the foundation for long term success.
Ultimately, the advisory capital role is a catalyst to the next stage, an opportunity at the most favorable cost to the founders and a risk-minimizing technique for future investors - a win, win for everyone.
Car Insurance Quotes
What are commodity futures, and how can you trade them?
Georgia F asked:
Also - if you know the answer to any of the following. Thank you very much.
Also - if you know the answer to any of the following. Thank you very much.
2) What does it mean when the government “pluggs” tax loopholes for employees?
3) Is is possible to get a list of the SEC’s “sanitized investments”?
4) What are non-regestered security investments, or private placement memorandum?
5) A person lost millions in an investment deal, and had to pay the tax department for untaxed income that went into the deal. *What is the “untaxed income”?
*Is there anyway to avoid this?
6) What does it mean for the p/e to be high or low in an investment?
7) What are venture capital investments?
Why do investors build biusnesses in order to buy assets?
Auto Insurance Quotes
How can I get a chain restaurant to build a location in my town?
JamesDean asked:
Our town doesn’t have a single “sit down” supper type of chain restaurant. We have a decent sized college, 5 or 6 bars that get packed every night, a computer software company that employs over a hundred people, but no one to really finance purchasing an entire franchise.
Are there restaurants that will just place a business in a town much like WalMart does? I’m pretty sure you can’t buy a “WalMart franchise”…
Is there a group of, like, venture capital people who will consider investing in restaurants?
Online Insurance Quotes
Our town doesn’t have a single “sit down” supper type of chain restaurant. We have a decent sized college, 5 or 6 bars that get packed every night, a computer software company that employs over a hundred people, but no one to really finance purchasing an entire franchise.
Are there restaurants that will just place a business in a town much like WalMart does? I’m pretty sure you can’t buy a “WalMart franchise”…
Is there a group of, like, venture capital people who will consider investing in restaurants?
Online Insurance Quotes
An Alternative to Venture Capital Financing
Marco Terry asked:
Funding a business in the current environment has been a challenge for company owners. The business financing environment has not been friendly business owners, in part because many funding companies had problems of their own. Because of this, they have tightened their commitment requirements.
Some companies have tried a different approach and opted to look for business loans. Unfortunately, trying to get a business loan in the current environment is also very difficult. Most institutions are being very cautious and only lending money to companies that meet very strict criteria. For example, you may need to show that they have been profitable for a number of years, have seasoned managers, include audited financial statements and have other assets. This puts business loans out of the reach of most businesses, at least at this time. So, is there an alternative? In fact, there is.
If your company has commercial or government clients, you may want to consider accounts receivable factoring. Most companies with commercial or government clients share the common problem of having to wait up to 60 days to get their invoices paid. Waiting this long will certainly impact your cash flow, especially if your company does not have substantial cash reserves. Factoring your invoices provides you with a solution to this problem. It provides capital to cover your business expenses without having to wait for your customers to pay you. It also enables you to take on new clients, as you no longer have to worry about net 30 or net 60 day payments.
There are several advantages to using accounts receivable factoring. The most important one is that it is easy to obtain, since the most important qualification criteria is that you have solid customers. Aside from that, it offers a dynamic form of financing. Dynamic financing lines adapt to your sales volume, and increase as your sales increase. This makes receivable factoring a great solution for growing companies that need different levels of financing as their business grows.
Accounts receivable financing can be a great alternative way to finance your company, especially in a tough credit environment.
Car Insurance Quotes
Funding a business in the current environment has been a challenge for company owners. The business financing environment has not been friendly business owners, in part because many funding companies had problems of their own. Because of this, they have tightened their commitment requirements.
Some companies have tried a different approach and opted to look for business loans. Unfortunately, trying to get a business loan in the current environment is also very difficult. Most institutions are being very cautious and only lending money to companies that meet very strict criteria. For example, you may need to show that they have been profitable for a number of years, have seasoned managers, include audited financial statements and have other assets. This puts business loans out of the reach of most businesses, at least at this time. So, is there an alternative? In fact, there is.
If your company has commercial or government clients, you may want to consider accounts receivable factoring. Most companies with commercial or government clients share the common problem of having to wait up to 60 days to get their invoices paid. Waiting this long will certainly impact your cash flow, especially if your company does not have substantial cash reserves. Factoring your invoices provides you with a solution to this problem. It provides capital to cover your business expenses without having to wait for your customers to pay you. It also enables you to take on new clients, as you no longer have to worry about net 30 or net 60 day payments.
There are several advantages to using accounts receivable factoring. The most important one is that it is easy to obtain, since the most important qualification criteria is that you have solid customers. Aside from that, it offers a dynamic form of financing. Dynamic financing lines adapt to your sales volume, and increase as your sales increase. This makes receivable factoring a great solution for growing companies that need different levels of financing as their business grows.
Accounts receivable financing can be a great alternative way to finance your company, especially in a tough credit environment.
Car Insurance Quotes
Seeking Credit For Your Venture Backed Business
John Siegler asked:
Throughout my career I have raised and deployed tens of millions of dollars in venture capital to build out products and infrastructure and expand our marketing reach for various ventures. As a business owner there are a series of important questions to answer as you continue to pursue greater market opportunities:
Question 1
When should we supplement our ability to internally fund growth with additional capital infusions? Considerations include business focus, valuation issues, and the availability of various capital sources.
Question 2
What are the implications of the various funding alternatives to important constituents (investors, management and our customers)? For example, debt takes a senior position in the capital structure to equity holders, and you will have various loan covenants and triggers relative to financial plans and balance sheet ratios. Make sure these are well understood as you are aggressively chasing market growth.
Question 3
How do you balance the competing interests of your stakeholders?
Question 4
What is the true cost of each potential source of capital?
Given our stage of development (post revenue, several successful products, positive cash flow), we’re able to consider securing a somewhat traditional bank line of credit. I say “somewhat” because, being a technology and content provider, we don’t have a lot of traditional assets to collateralize, and until recently, we haven’t had the cash flow to justify a bank line from commercial banks.
Fortunately, there are some great lenders for companies like us, including Silicon Valley Bank, Comerica, and a relatively new entrant that we’re quite impressed with, Square One.
These banks are looking to make a premium over traditional lenders through warrants and fees, and in establishing a long term banking relationship with a
hopefully growing new company.
In return, they are providing lower cost capital in the $500k-$2mm range to allow you to stretch into better valuation milestones. They are not a substitute for larger venture financing or in
situations where current cash flow can’t meet line repayment obligations.
In the “fixing to get ready” category, the banks will suggest putting together the following materials for your initial discussions:
- 2 years historical and YTD Financial Statements
- 2 Year (Current plus Next Year) Forecast Financials (Income statement, Balance Sheet, and Cash Flow Statement)
- Aged listings of A/R and A/P
- Current Capitalization Table
- Most recent Power Point Deck used in connection with fund-raising or Board communication (to gather a sense for the market opportunity, the competitive landscape, the technological differentiator(s), the Management Team, etc.) In addition to these, I’d add a few more (some obvious, some not so much):
In the obvious category, take care of the general housekeeping. Make sure you’re all caught up with tax and corporate compliance issues. These deals are all about credibility, and potentially they can be time sensitive.
As much as it can seem like it’s all about the numbers, the good ones in the venture-backed technology lending space are looking to the following in evaluating the application (in some order):
- Your venture partners. Are they excited about your growth prospects, or are they getting tired? And why do they feel that a line is more appropriate at this time than another venture round?
- The management team. Is it seasoned, well grounded and reasonable? Do the financial projections make sense, or do they look like an enormous hockey stick?
- Understanding the business opportunity. Your venture backers got in, but is it something the bankers can get excited about? And how much of a banking opportunity is it? As an entrepreneur, you need to be able to succinctly talk about your business, and you’re always selling. This is no exception. Again, with your feet firmly planted on the ground, be able to present this as an exciting opportunity. Start building those relationships early.
The longer they have to get to know you and watch the business, the more comfortable they will be.
One of our challenges is to value the true price of the line relative to other potential sources of credit. In addition to the hard costs (application fees, interest expense, etc.), the line has a finite life and must be repaid.
Assuming it is not refinanced, against a $500k line that is fully drawn down in the first year, you might
have about $150-200k in costs over the 4 year period (the draw down, plus say a 3 year repayment) for temporary access to $500k in Yrs 1-2, $300k in Year 3, and $150k in Year 4.
Surprising? Look at the breakdown:
Application fee - $15-25k (including legal)
Warrants - 3% of line ($45k in exercise price - value is up to you)
Interest costs - 12-14%/yr, or $60-75k in years 1-2, $40-50k in year 3, and $25k in year 4. True, you’re ideally providing your venture investors with a 35-40% ROI over that period, which compounds very quickly, and there are plenty of other strings attached.
But at least you’re not repaying that money over what might be a cash-constrained period, and your venture investors are all about value creation, not loan repayments. Oh, and if you secure a new venture round, new money is generally not fond of paying off prior obligations.
Life Insurance Quotes
Throughout my career I have raised and deployed tens of millions of dollars in venture capital to build out products and infrastructure and expand our marketing reach for various ventures. As a business owner there are a series of important questions to answer as you continue to pursue greater market opportunities:
Question 1
When should we supplement our ability to internally fund growth with additional capital infusions? Considerations include business focus, valuation issues, and the availability of various capital sources.
Question 2
What are the implications of the various funding alternatives to important constituents (investors, management and our customers)? For example, debt takes a senior position in the capital structure to equity holders, and you will have various loan covenants and triggers relative to financial plans and balance sheet ratios. Make sure these are well understood as you are aggressively chasing market growth.
Question 3
How do you balance the competing interests of your stakeholders?
Question 4
What is the true cost of each potential source of capital?
Given our stage of development (post revenue, several successful products, positive cash flow), we’re able to consider securing a somewhat traditional bank line of credit. I say “somewhat” because, being a technology and content provider, we don’t have a lot of traditional assets to collateralize, and until recently, we haven’t had the cash flow to justify a bank line from commercial banks.
Fortunately, there are some great lenders for companies like us, including Silicon Valley Bank, Comerica, and a relatively new entrant that we’re quite impressed with, Square One.
These banks are looking to make a premium over traditional lenders through warrants and fees, and in establishing a long term banking relationship with a
hopefully growing new company.
In return, they are providing lower cost capital in the $500k-$2mm range to allow you to stretch into better valuation milestones. They are not a substitute for larger venture financing or in
situations where current cash flow can’t meet line repayment obligations.
In the “fixing to get ready” category, the banks will suggest putting together the following materials for your initial discussions:
- 2 years historical and YTD Financial Statements
- 2 Year (Current plus Next Year) Forecast Financials (Income statement, Balance Sheet, and Cash Flow Statement)
- Aged listings of A/R and A/P
- Current Capitalization Table
- Most recent Power Point Deck used in connection with fund-raising or Board communication (to gather a sense for the market opportunity, the competitive landscape, the technological differentiator(s), the Management Team, etc.) In addition to these, I’d add a few more (some obvious, some not so much):
In the obvious category, take care of the general housekeeping. Make sure you’re all caught up with tax and corporate compliance issues. These deals are all about credibility, and potentially they can be time sensitive.
As much as it can seem like it’s all about the numbers, the good ones in the venture-backed technology lending space are looking to the following in evaluating the application (in some order):
- Your venture partners. Are they excited about your growth prospects, or are they getting tired? And why do they feel that a line is more appropriate at this time than another venture round?
- The management team. Is it seasoned, well grounded and reasonable? Do the financial projections make sense, or do they look like an enormous hockey stick?
- Understanding the business opportunity. Your venture backers got in, but is it something the bankers can get excited about? And how much of a banking opportunity is it? As an entrepreneur, you need to be able to succinctly talk about your business, and you’re always selling. This is no exception. Again, with your feet firmly planted on the ground, be able to present this as an exciting opportunity. Start building those relationships early.
The longer they have to get to know you and watch the business, the more comfortable they will be.
One of our challenges is to value the true price of the line relative to other potential sources of credit. In addition to the hard costs (application fees, interest expense, etc.), the line has a finite life and must be repaid.
Assuming it is not refinanced, against a $500k line that is fully drawn down in the first year, you might
have about $150-200k in costs over the 4 year period (the draw down, plus say a 3 year repayment) for temporary access to $500k in Yrs 1-2, $300k in Year 3, and $150k in Year 4.
Surprising? Look at the breakdown:
Application fee - $15-25k (including legal)
Warrants - 3% of line ($45k in exercise price - value is up to you)
Interest costs - 12-14%/yr, or $60-75k in years 1-2, $40-50k in year 3, and $25k in year 4. True, you’re ideally providing your venture investors with a 35-40% ROI over that period, which compounds very quickly, and there are plenty of other strings attached.
But at least you’re not repaying that money over what might be a cash-constrained period, and your venture investors are all about value creation, not loan repayments. Oh, and if you secure a new venture round, new money is generally not fond of paying off prior obligations.
Life Insurance Quotes