Funding: What do venture capitals want

Hello. This is Irino, a strategy consultant.

I am going to summarize the important points to remember regarding not only VC investments, but accommodation loans and subsidies.
 
 
 

The positioning of fundraising when you make your business plans.

I have explained about fundraising in a subsection of “15.Financial plans”.

1. Executive summary
2. Background
3. Management team
4. Company overview
5. Management and business principles
6. Product/service overview
7. How your profits are made
8. Analysis of the market and the competitors
9. Marketing and sales strategies
10. Operation plans
11. Personnel strategies
12. Start-up strategies
13. Growth strategies
14. Exit strategies
15. Financial plans :
    – Sales forecast
    – Cost plans
    – Financing forecast
    – Capital policies
16. Risk management
17. Project management

There are occasionally some companies that do not prioritize the fundraising sources from the standpoint of the actual probability of obtaining them. I believe this is not very good. Fundraising involves preparing application forms and business plan documents and it requires time and man-hours. Not only is it costly, there are cases which banking institutions “don’t even bother to take them seriously” when it comes to evaluating the forms submitted to them. There are a number of ways in which venture companies can fund-raise, but it is not wise to approach funds that are not likely to bear fruit. You might end up wasting all the time, man-hours and money you have put into it. So, let’s remember to prioritize sensibly.

The first thing you need to ask yourself before going about fund-raising is, “How much time will you have until you lose all your cash if the income and expenses continue the way they are as of now?” When you start a venture company, it is very unlikely that you will have enough cash flowing in as revenue right away. It is very common to go through a period in which you have to live off of the capital fund. Let me point out that there are not so many business managers who can answer immediately to the question, “When will your cash be reduced to zero?” We will use “When your cash and deposits might be reduced to zero” as a criterion to figure out “the time limit until burning out”. It is important to have calculated “Current cash and deposits ÷ monthly minus cash flow”

I often come across business plan documents that have PL/BS forecasts that were calculated using Excel and only the results are documented. These are not very desirable. That is because even the real pros of finance can’t completely understand and grasp the whole picture just by looking at the calculation results to be honest. It is very likely that the readers will misinterpret the numbers and more often than not, the interpretations turn out to be of negative nature. Therefore, it is advisable to include the following information.

• The level of milestone achievement which is the premise of the numbers
• Hypothesis which the numbers are based on
• Not only the calculation results, but the logic behind them
• Interpretation of your calculation results

There are sometimes those who ask for 80 million yen, yet cannot provide a clear breakdown of it. Be sure to prepare yourself so that you can provide clear answers for the following points.

• The breakdown amount for each loan purpose
• The most costly item :
  After all, what aspect of the business plan requires most money?
• Items you can cut :
  If you cannot be granted the entire amount as a loan, what would be the items to cut in order to receive the money?
• Margin :
  How much extra money do you need just in case your cost estimate has been exceeded or for you to feel secure? Getting plenty of funds for your business plan is a necessary thing to do. Prepare yourself mentally so you can reply with confidence and honesty when you’re asked for the reason of the amount.

So, here is an ideal way of answering when you’re asked, “What is the breakdown of 80 million yen?” 40 million will be spent on capital investment, 20 million is spent as working capital. The biggest expense of capital investment for this plan is getting the store space and finishing the interior work which will cost 20 million. As far as working capital goes, the biggest cost is personnel expenses. It will be 500,000yen × 6 every month.

There are many subsidies available which start-up or small-and-medium-sized companies can make use of. However, the problem with subsidies is,

• Cash has to be spent first :

  The company has to cover the initial cash necessary temporarily for facility investment and overheads.

• It is really time-consuming :

  It takes at least 3 to 4 months for subsidies to be deposited into your bank account. Some subsidies take more than half a year.

• It is troublesome as well :

  Man-hours will be spent for paperwork and attending interviews. There is a risk that you won’t be able to spend enough time for core tasks that will lead to generating profits like sales or technological developments. Ideally, it is best to have someone who is not involved in sales or technological developments take charge in applying for subsidies. However in reality, I assume the top salesman of the company is the only one who can actually take on this task for many venture companies.

Therefore, subsidies are not suitable for raising funds for the sake of a short period of only 1 to 3 months.

There are some companies that seek equity investments from VC or Angels when the capital is just about to run out. I believe this is not a good idea. VCs simply don’t even bother to take time for companies that are running out of working capital, so you could end up wasting your time. Even if you get the help of Angel, there are many cases in which you would have to accept disadvantageous conditions for your stock’s issue prices and ownership. Essentially, equity finance should be considered in the context of medium and long term business tie‐ups and dealing with the company’s management rights. Therefore, you need to treat the temporary fundraising for 1 to 2 months as a different matter. Otherwise, you could jeopardize your company’s medium and long term future for the temporary short-term pinch you’re facing.

There are some business managers who have a poor sense and understanding of the interest rates in the world and either overly fears debts and miss out on business opportunities or get into excess debts or equity investments. Here is a rough comparison of interest rates of loan rate and equity investments with various types of financial products.

• When compared to various financial products, how money-saving is the loan rate of People’s Finance Corporation.
• When home mortgages and business loans are compared, salaried employees are more credible than small-and-medium-sized enterprises.
• How VC have high expectations for venture companies when VC funds’ interest rate is considered.
• When tax avoidance effect (≒you can write off interest expenses) is considered, there are times when capital cost (≒WACC) is cheaper for the whole enterprise when you borrow money than receiving equity investments.

These are some of the understandings you need to have regarding interest rates.

For example, there are 3 minimum requirements when Japanese affiliated venture capital companies make investments.
1. You can rationally explain to the investment committee that IPO levels can be achieved

   For example, the logic like “if you extend the straight line of the sales amount graph for the recent 6 quarters, the expected sales amount will reach IPO levels”. Being straight line (≒The growth rate of sales amount is constant) is significant. Curved line (≒The growth rate of sales amount continues to increase) is not logically possible, therefore not good.

2. The planning scale of operation exceeds the IPO level

   In reality, there are some companies that meet the listing requirements of each market and get listed even if the current earnings are 200 million yen. However, at the planning phase, you should aim for the current earnings of more than 500 million yen (the level in which stockbrokerage firms would consider accepting your company). Plans usually end up with downturns, so you need to set a higher hurdle than that for the investment committee to even start considering your plans.

3. To be aiming for IPO within the time limit of your funds

   The operational time limit is usually 5 years and 7 if it is extended. Plans usually tend to run behind, so you should fudge the count for 2 years and state flatly that you will achieve IPO within 3 to 5 years.

Besides the points already mentioned, the important behavioral principle of VC is as follows.

• It’s easier for companies that show high level of synergy with the companies that are already receiving funds from VC tend to make it into the investment portfolio.
• Who the business plan was introduced from does affect the judgment of whether to invest or not.
• There’s no such thing as an absolute answer for stock market stock price calculation.

Experienced business managers understand these points well and they

• investigate which companies are receiving investments from VC.
• make creative efforts for prerelease so the person in charge from VC who have a lot of knowledge about the industry will want to contact you.
• ask a consultant who has connections with VC to introduce you to them.
• even if the business manager himself doesn’t have much understanding of finance, he doesn’t hold back at the time of negotiation for evaluation.

There are certainly some companies that end up going bankrupt even when the financial condition is in black because of bad cash flow balance. However in realty, it is rare for companies to go bankrupt just because they fail to raise enough funds. If the business model and the structure for making profits are solid, then fundraising somehow always tend to work out. Many venture companies that go bankrupt because of running out of cash are notfailing because of their inability to raise funds, but because

• they have a week money collection system.
• their structure for finding a good quality customer base is week.
• they aren’t good at bringing forth small proto types.

In short, these companies have failed to construct the structure for making profits. When you run a venture company, there will come a time or two when you wouldn’t know how to prepare the money for the end of next month, for example. But at times like that, experienced business managers don’t waste their time by running around to raise funds, but they concentrate their efforts on creating the system for making profits instead.

That’s it for today.

Irino

• A celebrity entrepreneur
• A managing director in a listed company
• A professor
• A rocket scientist

Looking forward to working with excellent leaders.

Please contact:
iphone: 090-6497-4240
irino@linzylinzy.com (Irino)

A strategy consultant

• One-two finish in the largest business plan contest in Japan


• One-two finish in Asian Entrepreneurship Award


• No.1 in google "business plan"


• Judge in the Cloud-Computing Awards


• Write/Review +100 business plans a year


• Meet +300 entrepreneurs a year


• Large-scale project management
  e.g. +15,000 man-months post merger integration


• Expertise: business planning, financing, IT, project management


• Fortune Global 500 companies:
    bank, brokerage, card, SIer, etc


• Startups:
    IT, cloud, bio, cosmetics, minor metals, aerospace, etc


• Tokyo University -> University of British Columbia -> Oracle -> Headstrong -> Independent

Twitter

PowerPoint of business plan documents

I have exchanged information of templates for business plan documents with a number of venture capital companies. In the end, my clients and I use a really simple business plan document when applying for funds. Please register and download the Power Point of our business plan document.

Donwnload Business Plan PowerPoint Template