Elements of a Venture Proposal
Summary of the What and Why of the Project
Purpose and Objectives
Proposed Financing: You must state the amount of money you
will need from the beginning to the maturity of the project
proposed, how the proceeds will be used, how you plan to structure
the financing, and why the amount designated is required.
Describe the market segment you've got or plan to get, the
competition, the characteristics of the market, and your plans (with
costs) for getting or holding the market segment you're aiming at.
History of the Firm:
Summarize the significant financial and organizational
Description of employees and employee relations,
explanations of banking relationships, recounting of major services
or products your firm has offered during its existence, and the
Description of the Product or Service:
Include a full description of the product (process) or service
offered by the firm and the costs associated with it in detail.
Include statements for both the past few years and pro forma
projections (balance sheets, income statements, and cash flows) for
the next three to five years, showing the effect anticipated if the
project is undertaken and if the financing is secured. (This should
include an analysis of key variables affecting financial
performance, showing what could happen if the projected level of
revenue is not attained.)
Provide a list of shareholders, how much is invested to date, and in
what form (equity/debt).
Describe the work histories and qualifications of key owners and
Principal Suppliers and Customers,
Problems Anticipated and Other Pertinent Information
Provide a candid discussion of any contingent liabilities,
pending litigation, tax or patent difficulties, and any other
contingencies that might affect the project you're proposing.
List the names, addresses and the
telephone numbers of suppliers and customers; they will be
contacted to verify your statement about payments (suppliers) and
Provisions of the Investment Proposal.
What happens when, after the exhaustive investigation and analysis, the
venture capital firms decides to invest in a company? Most venture firms
prepare an equity financing proposal that details the amount of money to
be provided, the percentage of common stock to be surrendered in
exchange for these funds, the interim financing method to be used and
the protective covenants to be included.
This proposal will be discussed with the management of the company. The
final financing agreement will be negotiated and generally represents a
compromise between the management of the company and the partners or
senior executives of the venture capital firm. The important elements of
this compromise are: ownership, control, annual charges, and final
The Size of Your Venture
Most venture capital firms are interested
in investment projects requiring an investment of $250,000 to $1,500,000.
Projects requiring under $250,000 are of limited interest because of the
high cost of investigation and administration; however, some venture capital
firms will consider smaller proposals if the investment is intriguing
Passing the First Gate
Financing: Key Documents
The typical venture capital firm receives over 400 proposals a year.
Probably 90% of these will be rejected quickly because they don't fit the
established geographical, technical or market area policies of the firm – or
because they have been poorly prepared.
The remaining 10% are carefully investigated. These investigations are
expensive. Firms may hire consultants to evaluate the product, particularly
when it is the result of innovation or is technologically complex. The
market size and competitive position of the company are analyzed by contacts
with present and potential customers, suppliers, and others. Production
costs are reviewed. The financial condition of the company is confirmed by
an auditor. The legal form and registration of the business are checked.
Most importantly, the character and competence of the management are
evaluated by the venture capital firm, normally via a thorough background
These preliminary investigations may cost a venture firm between $2,000 and
$3,000 per company investigated. They result in perhaps ten to fifteen
proposals of interest. Then, second investigations, more thorough and more
expensive than the first, reduce the number of proposals under consideration
to only three or four. Eventually, the firm invests in one or two of these.
Evaluating Your Track Record and Potential
Most venture capital firms' investment interest is limited to projects
proposed by companies with some operating history, even though they may not
yet have shown a profit. Companies that can expand into a
new product line or a new market with additional funds are particularly
To Win: 3 Strategies
Blue Ocean vs. Red Ocean Strategy
The venture capital firm can provide funds to enable such companies to grow
in a spurt rather than gradually as they would on retained earnings.
Companies that are just starting or that have serious financial difficulties
may interest some venture capitalists, if the potential for significant gain
over the long run can be identified and assessed. If the venture firm has
already extended its portfolio to a large risk concentration, they may be
reluctant to invest in these areas because of increased risk of loss.
Although most venture capital firms will not consider a great many proposals
from start-up companies,
there are a small number of venture firms that will do "start-up" financing.
The small firm that has a well thought-out plan and can demonstrate that its
management group has an outstanding record (even if it is with other
companies) has a decided edge in acquiring this kind of seed capital.
Evaluating Your Management Team
Most venture capital firms concentrate primarily on the competence and
character of the
management. They feel that even mediocre products can be successfully
manufactured, promoted, and distributed by an experienced, energetic
They look for a group that is able to work together easily and productively,
especially under conditions of stress from temporary reversals and
competition problems. Obviously, analysis of managerial skill is difficult.
A partner or senior executive of a venture capital firm normally spends at
least a week at the offices of a company being considered, talking with and
observing the management to estimate their competence and character.
Venture capital firms usually require that the company under consideration
have a complete management group. Each of the important functional areas
product design, marketing, production, finance, and control - must be under
the direction of a trained, experienced member of the group.
Responsibilities must be clearly assigned. And, in addition to a thorough
understanding of the industry, each member of the management team must be
committed to the company and its future.
Evaluating Your Competitive Advantage
Next in importance to the excellence of the management group, most venture
capital firms seek a distinctive element in the strategy or
product/market/process position of the company. This distinctive element may
be a new feature of the product or process or a particular skill or
technical competence of the management. But it must exist. It must provide a
Sustainable Competitive Advantage