The Hindu Business Line : Clinching VC funding

Having ambitions of becoming an entrepreneur? Do you have a commercial idea that you think is viable? Venture Capitalists (VCs), who provide money for nascent businesses, are the people you should get in touch with.

All that you need to do is to convince them of your business idea by presenting the necessary facts and figures. And your dream will turn into reality.

VCs usually analyse the feasibility of a business idea and a project’s risk-return potential before they fund it. Once they are convinced, they provide you with the necessary funds.

When the business gets going, besides returning the money advanced, you will need to give them a share in the profits generated. Some firms seek a share in the ownership of the business as well.

Project proposal report

The first step in approaching a VC is to prepare a comprehensive project proposal report. This is where the entrepreneur needs to defend the feasibility of his business idea and substantiate it with projections on market size, targeted business turnover, profits and the time the project may take to break even.

Key questions to which VCs usually seek answers are — who the target consumer for the product/service is, what is the market size, and how the entrepreneur proposes to reach out to them.

Hence put down your idea clearly with supporting statistics. The financials, being the most crucial part of the report, must cover the following aspects.

Size and turnover

Your business’s turnover would depend on the number of customers it is capable of drawing and the price of your product. The turnover projections need some homework. At first, you need to study the size of your target market, verified by independent sources. Once the target group is identified, find the group’s broad income levels and spending patterns. Delve into all such aspects that will let you design your product/service custom-made to their needs. The pricing is crucial and competitor’s pricing strategies may provide good insight.

Cost estimates

You will need to find out the cost for all inputs that go into the product from suppliers or industry sources and arrive at a realistic profit margin for your venture. Both capital (infrastructure, machinery, etc) and revenue expenses (input costs, salaries, other overheads) need to be outlined.

Note that VCs are core professionals, you just can’t talk to them with figures that you have assumed all by yourself. All numbers have to be cross-verified by independent sources of research or industry information.

Breakeven Point

Apart from a projection of cash flows that you expect from ‘day one’ a projection of the breakeven levels and when you expect to achieve it, are important facets.

The level of sales at which your entire costs are recovered and you are left in a ‘no loss, no gain’ position, is when the business breaks even. Once you determine that point of sales you can estimate the number of days the project will take to break even.

The shorter the breakeven period, the higher the project efficiency and hence, its attractiveness. Estimation of BEP will let you work backwards to identify the amount of sales you would need to meet your costs. Don’t forget to evaluate some of the risks to your sales and profit projections and what could delay the breakeven.

You would also be expected to project the returns on investments with a projected profit and loss statement and balance sheet for a three-year period. This is to evaluate a business’s continuing prospects and to quantify the future plans, both on operations and financing, for his business.

The process of getting a project proposal approved by VC usually involves these steps:

Getting introduced

Reference checks

Scanning of the proposal

Legal terms agreed upon

Signing the deed and fund transfer

If you get introduced to the VC by a trusted source, then half your problem is solved. If not, reference checking in itself may take considerable time. Then the VC and his team will ponder over your project report to understand the industry, the target market and business idea better.

Apart from the financial projections, some of the intangibles that a VC usually looks for are: the innovativeness of the business idea itself, the degree of competition it may face and the credentials and execution capability of the management team that intends to steer the business.

They can also be expected to counter check the figures presented in the proposal. You will then be called for a detailed discussion about the proposal you had given.

Once you make the needed clarifications, you move to the crucial stage — negotiation.

When you sit down to thrash out the terms of the deed, make sure that you have a clear idea of the extent of control that you are willing to cede to obtain funding.

Terms on profit sharing with the VC and also between the partners of your team should be clearly spelt out. By accepting funds from a VC, you are also giving them a say in the control of the business, so do be cautious!

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