In the current economic and investment environment, where capital providers remain cautious, it is more critical than ever that management are able to provide compelling reasons why an investor should risk capital and why now is the best time to invest in their business.
These reasons should be clearly outlined and fully substantiated in the company’s business plan. This is the essential document that investors will use to base their decision on whether to further pursue the opportunity. A venture capital or private equity firm focus on the following critical aspects:
- Does the product or service offer a real commercial opportunity? All profit and growth projections are ultimately driven by sales and margins. Management need to convince investors that a market exists, that the company’s product or service meets customer demands and that the business can generate a sustainable competitive advantage.
- Is the company able to maintain sustained growth? Given their return objectives, private equity providers are typically only interested in investment opportunities that offer significant growth potential. The company must convey that the business is in a growth sector and that it possesses the management, planning and technical resources to exploit these opportunities.
- Is the potential return in line with the perceived risk? Equity investing carries the highest level of risk in a capital structure. While venture capital firms are highly focused on potential return, they will only commit their funds if management can provide convincing evidence that the venture has a high probability of success. Extensive market and competitive analysis, sound financial assumptions and projections and management track records are therefore all key elements in the business plan.
- Does the investment opportunity meet the capital provider’s investment criteria? Provided the business stage and industry and geographic focus are perceived as a good fit, management must then convince investors that the growth potential and exit opportunities will likely meet the investor’s required return over the desired time frame. While the fulfillment of exit strategies cannot be guaranteed, an equity provider will want to be confident that management is committed to achieving the same investment goals.
- What are the unique qualities of the company and management that will maximize potential for success? This may include proprietary intellectual property that can be protected, exceptional management qualifications and experience, unique products or selling propositions, or the identification of untapped market potential.
- Why is this the most opportune time to invest in the company? Management will need to clearly outline the current stage of business development and future growth prospects based on substantiated market research and justifiable projections. The company must further demonstrate that the achievement of these projections will result in the desired investment return.
Venture capital firms, and other private equity providers, are only interested in companies that can demonstrate a high potential for growth and are managed by highly competent and ambitious individuals who are capable of realizing the business potential. The business plan is the key document for management to convince capital providers that these critical elements are in place.