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This chapter is from the book

Most Important Quality of a Business Proposal

The most important quality of your business proposal is succinctness built around a central compelling story. A business proposal that is longer than 30 pages, excluding the financial exhibits, is probably too long. One that runs over 50 pages is definitely too long. The idea behind a business proposal is to impart the main ideas important to the venture capitalist. Chapter 4 covers the additional information you will need to prepare, and this Chapter covers the key sections of the proposal.

The business proposal format set forth on the following pages has been organized for a traditional, straightforward company. A business proposal can be organized in any manner. Most of the components listed in the following pages should be included in every business proposal; however, some items should be deleted if they are not applicable to your situation. You should not cover those that are not significant. For example, a service company would delete many sections dealing with production. The organization and presentation of the components can be rearranged to place important items first. Some items can be combined under a single heading.

What follows is the description of a complete business proposal. When you read it you might ask why you should do all this work for the venture capitalist. The fact is that if you do not, the venture capitalist will have to do it before the VC invests in your company. By doing the work for the VC, you speed up the process and you make sure it is correctly presented. Also, remember there are many business proposals arriving on the desk of the venture capitalist. If yours is to win out, the proposal should eliminate as much work as possible for the venture capitalist. Make it easy for the venture capitalist to invest in your company and you will be ahead of the pack.

Many venture capitalists will not invest in a company that does not have a strong business proposal. They believe that if the entrepreneur cannot prepare an effective business proposal, the entrepreneur cannot possibly be a competent entrepreneur. Other venture capitalists will not lean that far, but every venture capitalist agrees that a well-prepared business proposal is a sign of an intelligent person that cares about growing their company.

You must look at your business proposal as a legal instrument too. Legally, you want to prepare a complete business proposal. If you leave out material information, then the venture capital investor may have a strong reason to sue you personally if the venture fails. Everyone understands that the venture capitalist is an adult. A venture capitalist has the ability to review proposals and make a professional judgment. The VC is, by every standard, a sophisticated investor. But you should remember that security laws dictate how a private placement of securities must be carried out.

Of course, you cannot include fraudulent or misleading information in your proposal; moreover, you are supposed to fully disclose any material item about your business. The disclosure must be in writing to the purchaser of the securities. If you fail to disclose a material item, the venture capitalist may be able to demand all of his money back; even worse, if the business fails, he could have a legal basis to sue you personally. Therefore, as you prepare your business proposal, begin by including too much information. Later, when you begin to pare it down to size, remember not to delete those items that will be material to a reasonable investor.

In general, the major sections you should cover in your business proposal are

  1. Summary
  2. Description of the business and its future
  3. Management team
  4. Description of the financing you seek
  5. Risk factors of investing
  6. Return on investment and exit
  7. Analysis of operations and projections
  8. Attachment: historical and current financial statements
  9. Attachment: projections
  10. Attachment: illustrative information

Let's discuss each item in turn.


The summary should be the first item a venture capitalist sees. The summary was discussed in Chapter 2. It gives the venture capitalist an initial impression of you and your proposal so it should be typed perfectly and presented clearly. Economy of words and crispness are key here. If the venture capitalist is not captivated by the summary, your business proposal may go in the trash. Hit the compelling story hard.


This section covers a number of key topics that will help the venture capitalist understand your business. Each item is important in its own right, but throughout this section there must also be a general, if not specific, attempt to show how your business is unique. Show the reader what makes your business special in the world of business. While reading this section, the venture capitalist will try to determine the "keys to success" for this industry. In other words, the VC will try to identify these two or three things that must be executed very well in order to be successful in your business situation. Note the numbering system has headings with a single number and subheadings have decimals such as 2.01.

2.01 General.

Begin with a paragraph that starts with the sentence, "The company's principal offices are located...," and put in the address, the telephone number, and the individual who should be contacted, as well as the standard industrial classification (SIC code) for your industry, if you know it. The SlC codes are established by the National Bureau of Standards, and its codebook is available in most libraries.

2.02 Nature of the Business.

In this part give a general synopsis of the business that you are in. For example, you might say, "The company designs, manufactures, markets, and services mini-computer-base software-controlled medical diagnostic equipment used in outpatient monitoring." A pithy sentence describing what your company does is probably the best beginning. Next, you should describe the product or service in general terms. You want to make sure the venture capitalist understands your product or service in as few words as possible.

2.03 Business History.

In this section you should tell when the company was incorporated, specify when it introduced its first product or service, and list the most important milestones (with dates) through which the company has passed. The business history section of the report must be brief and to the point. If it is more than a page, or at the most, two pages, you have included too many historical asides. There may be a special reason for including a long historical section if the company has had a colorful past, but by all means be brief. The venture capitalist will talk to you about the business history section in order to understand your business. At that time, you can go into many details.

2.04 Business of the Future.

Spell out in chronological sequence the plan for the company and indicate critical milestones. In essence, the venture capitalist wants to know how you move from where you are today to where you intend to be in five years. The form of this section of the proposal is open to a great deal of freedom even though it must be brief. You may simply state that you intend to continue producing your two basic products for the next five years and that in year three you will introduce another similar product. In that case, your business of the future would be brief and to the point. On the other hand, if you expect to go through innumerable changes before you reach your final point of stability, you should indicate what changes will take place. The venture capitalist wants to know precisely what the company will have to do to be a success.

2.05 Uniqueness.

Every business proposition to a venture capitalist should have some unique property. Is the management team unique? Is the product or service unique? Is the production process unique? Is it based on unique financing? All these items could be included. The important point is that something should make this company stand out from all the other investment opportunities available to the venture capitalist. Venture capitalists do not like to invest in "me too" companies. They want a company that has a unique business position.

In a separate section such as this, or in various sections throughout the business plan, you should stress the uniqueness of your company. If your business involves a new product, a patent on a process, or some other particularly unusual feature, then it should be covered in a separate section such as this. Besides including this section, the entrepreneur should interlace the business proposal with the strengths of the company.

2.06 Product or Service.

In this section you must describe the product or service precisely, in terms that will leave no doubt in the mind of the reader as to what you produce or plan to produce. If you have several products or services, describe each in a separate paragraph. You should describe the price of the product, how the price was determined, and the amount of gross profit.

Entrepreneurs tend to treat pricing of their product too hastily. Spend enough time to think through all the factors affecting your pricing of the product and make sure that you can explain, in straightforward, logical terms, the rationale behind the pricing. Is it priced because competition has forced prices in that direction? Is it priced high because you can get away with it? You must be prepared to answer these questions.

2.07 Customers or Purchasers of the Product.

Describe in detail the customers of the product: who uses it, what they use it for, and why they buy your product or service. Do they buy your product because of price alone, or are there other considerations? What need does the product or service satisfy for the customer? In this section you also need to list the top three purchasers of your product, along with the dollar volume and unit volume of their purchases. You can do this in columnar form, the first column containing the company, the second the dollar volume, and the third column the number of units purchased. You will be furnishing the venture capitalist with a complete purchaser's list if he or she becomes very interested in your company. This section of your proposal will give the venture capitalist an idea of the business at an early stage in your dealings with him.

2.08 Industry or Market.

Here you should describe the general marketplace for your product: the total dollar volume, the rate it has grown, and the overall demand for this product or service. A projection for the future size of the marketplace is necessary as well as an explanatoin of how you determine those projections. You may use a tabular format such as:


Industry Sales

% Increase

Last Year



This Year



Next Year



2nd Year



3rd Year



In stating industry sales, make sure you don't fall into the trap of stating industry sales for the entire marketplace when, in effect, your product will be sold to only a very small part of that industry. The classic example is the company that is going to manufacture computer disk drives. In its business proposal it lists the entire computer disk drive market as its marketplace. Actually, the computer disk that it is going to manufacture is compatible with only one manufacturer. That manufacturer has only a 10 percent share of the market. Venture capitalists are eager to know the details of industry sales and the penetration of the industry with your product. You will need to be an expert in this area.

2.09 Competition.

Here you must describe all the competing products and the various companies that produce them. Pay particular attention to the dollar volume that they are selling, the percentage of the market that they have, and the financial strength of the company that is your competitor. You should also describe precisely how your product is different from their products. A typical description of a competitor might be:

AJAX MFG. Ajax Mfg. is a $300 million company with one division selling widgets to this industry. The division had sales of approximately $14 million last year, which indicates it has 12 percent of the market. Ajax's other business has suffered, and currently Ajax seems to be draining this division of capital because Ajax has not introduced a new product in four years. Its product is obsolete and lacks many of the features of our machine. Our machine has a three-dimensional matrix, whereas theirs is two-dimensional. Our machine is microcomputer driven; theirs is manual. Ours is only 10 percent more expensive.

If you have no competition, then describe why you do not have competition. A reason for no competition might be your patent position. If you think there might be competition in the future, then you should indicate each probable competitor and when he might enter the market. Most entrepreneurs do not know enough about their competition. A venture capitalist will be leery of your analysis if you do not understand your competition. Be aware, too, that most venture capitalists believe every product has some type of competition.

2.10 Marketing.

This section must contain information about your marketing process and the channels of distribution. That is, how does the product leave your plant and arrive in the hands of the ultimate user? Will you have a direct sales force or use distributors? What brokers or intermediaries are involved in selling your product? What is the relationship of your company to these intermediaries? You must describe any special arrangements you have entered into in order to market your product.

Most venture capitalists are poor market analyzers. They fancy themselves as marketing men, but they are not. In explaining the marketing of your product, you will have to take one step at a time so they can understand the marketing process.

If you are marketing to state, local, or federal government almost exclusively, most venture capitalists will be nervous because your company will be subject to the whim of governmental appropriations. You will need a convincing explanation to overcome the objections to the marketing of most of your products to the government. Further, if you have a sole customer, it may be difficult for the venture capitalist to accept your marketing dependence on one customer. The risks are too high.

2.11 Production.

Here you need to describe all stages of the production process and whatever affects production. A key point here is production costs. How did you arrive at the cost of goods sold?

2.12 Production Characteristics.

This section should focus on the production characteristics. Is it a difficult or a sophisticated production process? Are there many components or just a few? How much value does the company actually add to the product? How much is purchased in subassembly format? What components are crucial to the production process? The venture capitalist wants to determine the difficulty of the production process. Is it a standard production process, or does it have many difficult tasks? If it is a complicated process, will people with special skills be needed to carry it out?

2.13 Labor Force and Employees.

In this section you need to describe the number of employees you have, your relationship with the work force, and whether it is union or nonunion. Also, categorize members of the work force in terms of white collar, blue collar, and so on. If the work force is unionized, you should describe the union contract, the relationship with the union, and when the contract will expire. The venture capitalist will want to determine how difficult it will be to acquire and maintain your employees. If your employees are hard to find, you will have to explain how you intend to attract and keep good employees.

2.14 Suppliers.

In this section describe the companies that supply your company with raw materials or other necessary items. At this point in the proposal, you need to list the three or four top suppliers and the items they supply. You will want to do this in columnar form, the first column listing the suppliers, the second column listing the dollar volume of the supplies, and the third column showing the product supplied to your company. Later, you will be required to provide the venture capitalist with a complete list of suppliers of major components. The venture capitalist will use the list to call suppliers and verify your list.

2.15 Subcontractors.

If subcontractors or other people complete part of the work in bringing the product to the marketplace, describe them and the relationship with them. In this section you should list several of the subcontractors and the dollar volume of work you are contracting with them. Later you will need to supply the venture capitalist with a complete list of subcontractors, names, addresses, telephone numbers, and volumes so the venture capitalist can contact these subcontractors.

2.16 Equipment.

Describe in some detail the equipment that you have or intend to buy. Give a general idea of the fixed assets and their value of resale. Describe the total dollar volume and number of units that you can produce using the existing equipment. Identify any long lead time in acquiring machinery.

In this section, the venture capitalist wants to know if your equipment is difficult to obtain. If it is and you reach capacity, the company will have to wait for a long period of time before it can acquire additional equipment in order to increase capacity. The venture capitalist will want to know if the equipment is complicated and requires a special skill to operate. If so, you will need a special work force in order to operate the machines. The question is, "How difficult is it to find such a special employee to operate the machine?" Finally, if the machinery is used for a special purpose, it will be difficult to sell. Therefore, its collateral value is worth much less. All these points are important to the venture capitalist.

2.17 Property and Facilities.

Describe the real estate that the company owns, or the lease that it has for its offices and plant. Describe the size of the plant in square feet and the price per square foot. You must describe the equipment that you have or intend to buy; describe the fixed assets in detail.

Here the venture capitalist wants to know that the plant is sufficient to take care of the growth of the company. If you will have to move out of the plant in a year, the company will have difficulty continuing to expand at a rapid rate. Some venture capitalists don't like to invest in companies that have to move within a short period of time. They believe such moves are disruptive and can destroy the company's growth.

2.18 Patents and Trademarks.

You must describe in detail any patents or trademarks held by the company or those it intends to apply for. You may wish to describe why a patent has been granted in order to emphasize the product's uniqueness. At some point in the process you may want to give the venture capitalist a copy of your patent so he can read it and determine for himself why you have a unique patent or trademark. You should not put a copy of the trademark in the business plan unless it is key to describing the uniqueness.

2.19 Research and Development.

Here you should indicate the amount of money for research and development, specifically the amount that has been spent in the past, and the amount that you intend to spend in the future. You should describe precisely what you intend to accomplish with the funds spent on research and development.

It is every venture capitalist's nightmare that he will somehow misjudge the entrepreneur and invest in a consummate researcher, rather than an entrepreneur who wants to develop a product. The research entrepreneur will spend millions researching and developing new product variations of the existing product. The venture capitalist wants an entrepreneur who can make the transition into a marketing and production company that is trying to make money.

2.20 Litigation.

Describe any litigation the company may be involved in now, including suits against the company and those the company has filed against others. Be sure to mention any potential litigation that may be contemplated. Venture capitalists are litigation shy. If they find that a company has been involved in a great deal of litigation, they are apt to turn down the request for funds. After all, if everybody is suing you, there must be something wrong with the way you operate your company. On the other hand, if you are the type who sues others at the drop of a hat, there must also be something wrong.

The venture capitalist will have every reason to wonder if you won't end up suing him very soon after he has made his investment. A company with a history of litigation will have to explain the details to the venture capitalist in order to help the venture capitalist overcome his natural reservations about companies with such a background.

2.21 Government Regulations.

Describe the governmental agency that regulates the company and describe the relationship with the government. In this section describe how you plan to comply with regulations set down by the Occupational Safety and Health Administration. Most venture capitalists can tell stories about excruciating experiences with a federal or state agency that had one of their portfolio companies tied in red tape for months or even years and that in some cases destroyed the company. If your business comes under a great deal of governmental regulation—for example, by the Food and Drug Administration—you will have to use extra persuasion to convince the venture capitalist that you know how to operate in a regulated environment.

2.22 Conflicts of Interest.

Describe any potential conflicts of interest, such as a director who is also the owner of one of your suppliers. Describe any transactions with management in which management has sold something to the company for a price that may or may not be reasonable. If you do not reveal conflicts of interest and the venture capitalist uncovers them, you lose credibility instantly. It is better to meet this problem head on and reveal it to the venture capitalist at the outset. Show how the company is better off by being involved in a potentially conflicting situation than it would be otherwise.

2.23 Backlog.

In this section you should indicate the amount of backlog outstanding for the company's products. List the items requested and the size of the order. You can also give the venture capitalist a good idea of the backlog by listing the top three or four customers and their backlog of orders. Do this in columnar form. The first column should contain the name of the company that has placed the order, the second column the dollar volume of the orders, and the third column the number of units ordered. Later in your meeting with the venture capitalist, you should show him a complete list of the backlog so he can see where the orders are coming from and who purchases the product.

2.24 Insurance.

List the insurance carried by the company or intended to be carried by the company, including fire, casualty, product liability, flood insurance, fidelity bond, life insurance on key employees, and so on. However, list only the insurance that is important to the operation of the company, not health insurance, dental plan, or the like.

2.25 Taxes.

Mention any special taxes that are levied against the company. If you are already in business, mention any outstanding taxes, such as payroll taxes or income taxes.

2.26 Corporate Structure.

In this section you should mention whether it is a stock company, a partnership, or a Subchapter S, and whether it is 1244 stock. Tell where the company is incorporated, where it is licensed to do business, and what trade names it uses. You should mention if it is a parent company with a subsidiary. If it is a complex situation in which a parent owns part of or all subsidiaries, you should use block diagrams and show the separate legal entities and draw lines between them with percentages on them as shown below.

2.27 Publications and Associations.

As a point of information, the venture capitalist may be interested in trade associations for your industry. He may also want to know which trade magazines and trade newspapers are good ones, so that he may use back issues to learn more about your business.

Part 3 The Management

In this section you should describe the management, the directors, and all others who are key to the operation of this business. Usually, there are no more than three key people in a very small firm and fewer than six in a larger one. Remember, the venture capitalist is looking for key people. You should refrain from using superlatives to describe the key people, but do not be shy about mentioning achievements.

3.01 Directors and Officers.

List all the officers, directors, and key employees. You should include the full name of each individual, his or her position, and age. An example is as follows:



Joseph Entrepreneur



Donna Dont

Chief Financial Officer


3.02 Key Employees.

In this section you should identify the three or four individuals who are key employees and give a summary, in resume style, of their background and where they have worked. It is important to demonstrate that these key people are achievers.

There is a considerable body of psychological literature on achievers, but not much on entrepreneurs. Some people argue that achievers are born the way they are, whereas others believe the attributes of achievers can be learned. The point is simple in your case. You must present yourself as an achiever to the venture capitalist, or you probably will not be financed. Further, the more you have achieved in your industry, the more the venture capitalist will be motivated to finance your company.

3.03 Management Fidelity.

It is difficult to demonstrate your honesty on paper. But a positive statement like the one that follows will be a big plus.

No member of the management team, no director, or any major investor in the company, has ever been arrested, convicted, or charged in a material crime; and further, not one has been bankrupt personally or has been associated with a bankrupt business of any kind. Personal credit reports will verify that all individuals have excellent credit ratings and have no overdue debt outstanding.

Obviously, what you are trying to communicate to the venture capitalist is that you and your team are as clean as a whistle.

3.04 Remuneration.

In this section you are to list all key employees, directors, or officers who will receive any payment whatsoever. You should list in tabular form the names of the individuals, the capacity in which they will be serving, and the salary or remuneration that they have received or propose to receive. Under the heading of remuneration, you should include all fees, director's fees, consulting fees, commissions, bonuses, salary, and so on—in other words, total remuneration by your company. An example is:




Joseph Entrepreneur



Donna Dont



Sam Smith

Head of Marketing


3.05 Stock Options.

You should tabulate all stock options that are now outstanding. Beside each person's name you should indicate the number of shares that have been granted, the average exercise price, the number of shares that have been exercised since the options were granted, and the number of options still outstanding. Where options are outstanding to a corporation, you may wish to note why they are outstanding at this point. An example is as follows:






Joe Entrepreneur





Donna Dont





3.06 Stock Option Plan.

In this section describe the general stock option plan that exists at the company and how many options the plan has in it or will have in it at some date in the future.

3.07 Principal Shareholders.

In this section list in tabular form the name of the individual, the amount of shares owned beneficially or directly, all shares under option, the percentage this ownership represents with regard to all the shares outstanding, and the percentage of ownership that will exist after the shares have been exercised. Also indicate the price paid for the ownership.



% Ownership Before Financing

% Ownership After This Financing

Price Paid For Ownership

J. Entrepreneur





S. Smith





V. Capitalist





3.08 Employment Agreements.

List in detail any employment agreements that the company has with any of the employees, and state specifically what the arrangement is with each employee. Employment agreements are not appreciated by venture capitalists. Most often they are used to ensure that top management will not be fired and will continue to obtain a high salary. If you have a legitimate reason for employment contracts, state it in this section.

3.09 Conflict of Interest.

This item is listed once again to make sure that any conflict of interest transactions that have transpired are revealed fully. In this section you should reveal transactions that management has had with the company. For example, a director may have contributed services to the company, and in return the director may have received stock or stock options in the company.

3.10 Consultants, Accountants, Lawyers, Bankers, and Others.

In this section you should mention the names of your consultants, if any, and your accountants, lawyers, and bankers, along with their telephone numbers. If a special fee is being paid to any of them or if any of them are on a monthly retainer fee by the company, mention it in this section. The VC will be impressed if you have some good names here.

Part 4 Description of The Financing

In this section you will describe the type of financing you are trying to obtain, along with some related items.

4.01 Proposed Financing.

It is difficult for an entrepreneur to set the price for a new investment; many have made a mistake of setting the price too high. A high price will turn off the venture capitalist. Many writers of business proposals will leave out this section assuming that they would like to get in the door of the VC firm first and negotiate price later. This is an acceptable practice. However, before you meet with the VC you need to think about the items discussed in this section. The subject will be a main topic at some point of your meeting.

If you want to include your discussion of pricing, then you need first to describe the loan, the options, the preferred stock, the common stock—whatever it is you are trying to sell to the venture capitalist. Be sure to provide enough details so that there will be no question about what you are selling.

If you are proposing a loan, explain the term of the loan. Is it five years or ten years? Will there be an interest-only period? What interest rate are you seeking? Will the interest rate be variable or fixed? Will the loan be convertible into common stock or preferred stock? All these items need to be covered. If you are open to suggestions on the structure, then state this important point in this section.

If you are selling preferred stock, what dividend will you pay? Will the dividend be cumulative (meaning that in case you do not pay it one year or one quarter, then you must make it up in some other year or quarter)? What redemption will there be of the preferred stock? For example, after five years will you have to begin redeeming the stock over a number of years to give the investor his money back? Is the preferred stock convertible into common stock? If so, what is the conversion price? What restrictions are there on these shares, and does the preferred stock have voting rights? Does it control the board of directors? What preferential treatment will it have?

If you are selling common stock, will there be a dividend on the common stock? Will the dividend be cumulative in case you miss it? Will a redemption of the common stock be required after a period of time in order to give the investor his or her money back? What price will the investor pay for the common stock? Will there be restrictions on the shares? What voting rights will holders of common stock have? What registration rights will holders of common stock have? That is, can the venture capitalist make you register the stock and in so doing make you become a public company?

If you are offering stock options under any of these conditions, you need to consider the price that the venture capitalist will pay for the option when he purchases the option from your company. You must also consider what price the venture capitalist will pay to exercise the option into common or preferred stock. How many shares will the options exercise into? What is the expiration period of the option? Five years? Ten years? You should spell out all these things about the stock options. If you are flexible as to the type of financing or the terms of the financing, state your willingness to negotiate in this section.

4.02 Capital Structure.

Here you should describe the common stock, preferred stock, and long-term debt that is currently outstanding so that the venture capitalist will know the general capital structure of the company. For example:

Type of Security

Before Financing

After Financing

Bank Debt



Long Term Debt



Preferred Stock VC



Common Stock

$ 600,000

$ 600,000

In the case above, $2 million of the funds raised from the venture capitalist is being used to pay off the bank debt. You need this section only if the financing is complex.

4.03 Collateral for the Financing.

If you are seeking a stock sale, omit this section. If you have gone to a VC that buys subordinated debt, list the debts that will be senior to this subordinated debt. If you are seeking debt that will have some security, explain what will be used to collateralize this debt. For example, the debt could be secured by a patent.

4.04 Guarantees.

Here indicate the personal or corporate guarantees that will be given to the venture capitalist for his investment. If there is to be a personal guarantee, you will be required to supply a personal financial statement on the guarantors. If a separate company is to guarantee the loan, you will need to provide a separate financial statement on the company guaranteeing the investment.

4.05 Conditions.

Describe any conditions of the financing. For example, must the company provide a seat on the board of directors for the venture capital company's representative? Will the company have to live by any ratios? What milestones must the company achieve?

4.06 Reporting.

Describe what reporting you intend to make to the investor with regard to this financing. For example, will you provide a monthly profit-and-loss statement, a balance sheet, and an annual audit?

4.07 Use of Proceeds.

Specify where you intend to apply the funds. Do not use the amorphous name "working capital," but specify how the funds will be spent—for example, purchasing of inventory: $2 million; increase in accounts receivable: $1 million; and meeting payroll: $2 million. Be as specific as possible.

4.08 Ownership.

In this section, indicate the number of shares outstanding and the number that would be owned by the venture firm if this financing occurs. Indicate the price paid for the ownership and the percentage of ownership the venture company will have of the company. Use a tabular format. An example is as follows:











Venture Capital





4.09 Dilution.

Here you want to describe the degree to which the new investor is diluted in terms of book value. Compare the cost per share that the venture capitalist will be paying with the price paid by others.

4.10 Fees Paid.

In this section indicate whether you will pay any brokerage fees and whether you will pay the legal fees of closing the investment. Specify what other fees you will pay or are obligated to pay. Be forewarned that most venture firms expect you to pay all fees.

4.11 Investor Involvement.

The venture capitalist will want to have the right to attend board meetings and in many cases will want to become a member of the board of directors. The VC may want one or two or even three board positions. You may wish to have the venture capitalist more actively involved. This is the section in which you describe the amount of investor involvement that you are seeking or would like to have from the venture capitalist.

There may be other opportunities for the venture capital firm to offer services to your small company. You may wish to set these out in this section. For example, you may want the venture capital firm to provide you with assistance in the area of finance and may offer to pay a fee for this assistance. You may require a particular type of financing, such as an industrial revenue bond. You may offer the venture capitalist a fee for placing the bond—for example, 2 percent of the amount being placed. Generally speaking, this section deals with the type of involvement you expect the venture capitalist to serve in the future.

Part 5 Risk Factors

In this section you want to describe the major risk that an investor will incur by investing in your company. This section spells out all the drawbacks. Do not offer positive comments, except at the end of each paragraph. Some areas you may wish to cover are as follows:

5.01 Limited Operating History.

If the company is new or has recently been organized, then the lack of operating history will be a significant item to discuss.

5.02 Limited Resources.

The company may or may not have enough resources to continue operations for a prolonged period of time if everything does not work out as planned. Mention this as a potential risk.

5.03 Limited Management Experience.

If management is young or new to this industry, you may need to discuss the experience level of management.

5.04 Market Uncertainties.

You may wish to describe the market uncertainties that exist with regard to sales.

5.05 Production Uncertainties.

Here you should describe any production uncertainties that may exist. Perhaps a prototype has never been built on a production assembly line, and therefore there are some uncertainties as to whether it can be built.

5.06 Liquidation.

Here you should present a liquidation analysis of your company. That is, if the company were to get in trouble and had to be liquidated, what might it be worth on the auction block?

5.07 Dependence on Key Management.

You need to explain either on paper or directly to the venture capitalist later what changes you expect when any of the key managers die. Who will step into his place? Who could be designated to run the company if the top person died? If you do not cover the subject here, you can expect the venture capitalist to ask you the favorite question , "What happens if you are run over by a truck tomorrow?" Some entrepreneurs write a corporate "will." In it they describe what is to be done with the company when they die.

5.08 What Could Go Wrong?

Here the venture capitalist wants you to put on his hat and try to look at the business as an investment. He expects you to address the question, "What could go wrong?" The related question to answer here is, "How could the venture capitalist lose his money?" In other words, the venture capitalist wants you to use your objective, analytical skills to analyze your own business situation. He wants you to point out the major problems that can arise. As soon as you have pointed them out, you must indicate how you are going to solve them.

5.09 Other Items.

You should mention such items as your estimated financial reserves, the lack of a public market for the shares, economic controls or other government regulations, control of the company by noninvestor stockholders, and the lack of dividends. You should mention these points if they are material, rather than wait for the venture capitalist to bring up these questions.

Part 6 Return on Investment and Exit

In this section you need to discuss how the venture capital investor will eventually receive cash for the investment the VC makes in your company. Remember, the venture capitalist's objective is to liquidate the investment some day and end up with all cash and no investment in your company. There are three generally accepted methods of giving the venture capitalist liquidity. You should cover all three, but should also indicate which one is the most likely exit for your investor.

6.01 Public Offering.

The first possibility is a public offering—that is, the company could go public by offering its shares in the public marketplace. Part of the shares or all of the shares owned by the venture capitalist would be sold in the public offering. You may wish to discuss this with a brokerage firm before you discuss it with the venture capitalist.

6.02 Sale to Another Company.

Second, the company could be sold to a large company, usually a conglomerate. In the case of this option, you should actually mention some conglomerates or large companies that you believe would have an interest in acquiring your company.

Most businesses are sold either to strategic buyers or to financial buyers. It will be difficult for you to name any financial buyers that would be interested in your company, but you should be able to list a number of strategic buyers. A strategic buyer is a company that is in your business and would like to grow by acquisitions, or a strategic buyer could be a larger company that is in a similar business to yours but is likely to want to branch into your area. In your study of the market for your product and the competition, some of your competitors could be strategic buyers.

6.03 Buyback.

Finally, you may offer the venture capitalist a "put" according to which your company will be required to buy the equity owned by the venture capitalist on the basis of a predetermined formula. Buyback formulas are covered in Chapter 6. In this case you will have to demonstrate that at some point in the future your company will have the ability to buy back the stock owned by the venture capitalist.

6.04 Return on Investment.

Return on investment (ROI) will be important to the venture capitalist. You need to show what return the venture capital fund can expect if it invests the amount you are requesting. For example, you might say, "If an investor buys 30 percent of the company for $3 million and after four years the company is a public company with pretax earnings of $10 million, then $10 million times a price earnings multiple of 12 for our particular industry is $120 million as a value for the company; take 30 percent of that and you have $36 million for the investment of $3 million or about 10 times.

Assume that the 30 percent ownership is sold after four years; then the IRR for investing $3 million and in four years getting back $36 million is 86 percent. If only all the VC's investments gave this high IRR. IRR stands for internal rate of return and most calculators and spreadsheet programs (e.g., Lotus and Excel) will calculate IRR when you input the numbers set out in this paragraph.

Part 7 Analysis of Operations and Projections

Here you will present your own analysis of the company's prior operating history as well as projections for the future.

7.01 General.

In this section you need to start out with some general profit-and-loss information, which will be based on financial data from your company. For example, for the last three years and for the next three years in the future, take net revenues, cost of sales, operating expense, interest expense, and income. Project them forward and give historical information for them so that one can see at a glance where the company has been and where it is going. Most people attach a spreadsheet or include a disk that has a spreadsheet, but you can also give a summary here. For example, the chart below shows the projections:


Prior Yr ($)

This Yr ($)

Next Yr ($)

Year 2 ($)

Year 3 ($)

Revenue % Change


4,000,000 300%

10,000,000 150%

40,000,000 300%

100,000,000 150%

Gross Margin






Operation Expense






Net Income







Current Assets






Municiple and Equities






Land and Building







Current Liabilities






Long-term Debt












7.02 Ratio Analysis.

In this section you should take the net revenue, cost of sale, operating expenses, interest expense, and net income and compute them as percentages. That is, use 100 percent for net sales, then calculate cost of sales as a percentage of sales, and so on. Place these percentages in columnar form so that one can see the percentage ratio. You will want to have this in your spreadsheet.

7.03 Results of Operation.

In this section you should discuss the results of operation and projections. Why have the results increased or declined? Tell why they will go up in the future. Discuss why the percentages might change, and mention any momentous events such as the year a new product was introduced or the year in the future when you will have large research and development expenditures, for example. In other words, you need to explain the numbers that you set out in the preceding section and should mention the attached financials and projections, which you are about to discuss in the next part of the proposal.

7.04 Financial Conditions.

In this section you should discuss in detail the current balance sheet. Describe the liquidity of the company. Tell why there are significant increases in certain items such as accounts receivable, accounts payable, and so on.

7.05 Contingent Liabilities.

Describe the company's contingent liabilities such as an unfunded pension plan, or a lawsuit from a company contending that one of its former employees working for you has brought corporate secrets with him.

Part 8 Attachment: Financial Statements

This is not a section so much as it is a collection of supporting documents. It should consist of complete financial statements. If your financials are not certified by an independent public accountant, they should be reviewed by an independent public accountant. You should have consolidated balance sheets, a consolidated statement of income, a consolidated statement of shareholders' equity, and a consolidated statement of changes in financial position. You should add appropriate notes of explanation to the financial statements. This exhibit should include the last several years of financial statements, as well as current financial statements that may or may not be audited by an accounting firm. These should all be attached as Exhibit 1—Financial Statements, and your business proposal should mention these exhibits.

Whatever you do, don't submit a business proposal that does not include current financial statements. Too many business proposals arrive with old (six months or more) financial statements. If you are to demonstrate that you are operating a stable business, you should present its current financial statements. Some business proposals present financial statements that are a year old. How can anyone make a decision to invest in a company on the basis of financial statements that are history? Some entrepreneurs do not seem to be aware of the fact that financial statements are of prime importance in operating a business. Needless to say, this type of entrepreneur does not receive the backing of venture capital companies.

Part 9 Attachment: Financial Projections

This section, too, contains a spreadsheet exhibit. It should consist of the annual financial projections for the next five years, as well as a detailed monthly cash flow statement for the next twelve months. Anyone looking at the situation should be able to determine precisely the cash flow situation. The cash flow statement should show the inflow of this financing as cash inflow. These statements should be attached to the business proposal and should be marked Exhibit 2—Financial Projections and Exhibit 3—Cash Flows. Appendix 3 shows a typical format you may use for both projections and cash flows.

Please make sure you put a lot of time and energy into this section. You and the venture capitalist will spend a lot of time discussing these projections. In essence the entire business proposal that you described above is translated into numbers in this section. If you have a poor set of projections and cannot explain them you will reduce your chances of raising money from the VC. Clearly, the more detailed your projections, the more it looks as if you know your business. But remember the venture capitalist will do his own projections, so don't be offended if a VC's number differs from yours.

Part 10 Product Literature, Brochures, Articles, and Pictures

You should include pictures of the product and literature about the company that will show off your product or service. Written descriptions in the business proposal are essential, but pictures will also help sell your proposal. A general article about the industry or about competitive products compared to your product is a useful addition. Newspaper articles or magazine pieces on the company are probably unnecessary and do not say much to a venture capitalist. It is advisable to leave them out. Sending along tapes, records, or other promotional audiovisual items is a waste of money and time; do not do it.

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