Raising Entrepreneurial Capital

SUMMARY

A well-thought-out business plan is the first step in starting your business,

as well as in securing financing. The business model should be summarized

passionately and succinctly in the executive summary. The vision statement

should describe the problem the business is being formed to solve and lay out

the framework for success. The body of the plan should include a discussion

of the management team, the market and competitive analysis, an overview

of operations and sales, and a financial analysis that will form the basis for

valuation of the company.

The financial section of the business plan should include historical finan-

cial statements for the past 3 to 5 years, as well as projected statements for

the next 5 years. The pro forma financial statements are the income state-

ment, the balance sheet, and the statement of cash flows. Most items in the

income statement and balance sheet are a function of sales, so great care

should be taken in estimating the sales number. In addition, a capital

expenditure budget and a capitalizati on table, establishing who owns what

stock, are part of the financial section.

The analysis of the financial statements should include a break-even

analysis, as well as a scenario analysis describing the best- and worst-case

scenarios. You should be sure the relationships in your statements are in line

with industry averages to pass the reasonableness test.

DISCUSSION QUESTIONS

1. Check several business plan sites on the Internet and draft the outline for

a sample business plan. Are there differences in your sample sites?

2. How would you go about forecasting sales for your start-up? Be specific.

3. Why do investors frown on a capitalization table that includes many

owners?

4. Think abo ut the Amazon.com case. Amazon ca nnot survive many more

years of negative cash flow. What viable options are open to Amazon to

improve its cash flow?

CASE 4.1 NEW TECH (H): IS MANAGEMENT READY?

T

HE CHALLENGE:IS MANAGEMENT READY?

. Do New Tech’s managers have the skills and experience to take the business

to a new level?

. Is the management team up to the task?

136 Determining the Amount Needed—The Business Plan

The Team

Investors will only be interested in New Tech Distributors Corp. if the

company is led by a skilled, professional management team. That is the

message Grant Argent delivers to Stuart Chip. Grant, New Tech’s financial

advisor, tells Stuart, the company’s owner and president, that investors will

be looking for management that can achieve New Tech’s ambitious growth

objectives. That means a team with the right experience, skills, and qualifi-

cations—and the commitm ent to succeed.

What Investors Want

Grant explains that the management team’s past track record is very

important to investors. They will want to scrutinize the management

team’s business credentials and qualifications. Also, they will ask how the

company resolved earlier busines s and management problems. Investors will

be looking for evidence of a strong and cohesive management team that

compares favorably to its competitors.

Grant suggests that New Tech perfor m an audit of management capabil-

ities that will identify both strengths and weaknesses. Grant argues that

highlighting weaknesses will push the team to take the necessary steps to

improve. It will also provide investors with convincing evidence that New

Tech is fully committed to its growth potential and objectives.

THE CHALLENGE:AUDITING THE MANAGEMENT TEAM

Grant Argent, New Tech’s advisor on growth capital, carries out an

assessment of the management team’s capabilities using a Management

Audit tool to guide him. He reviews the job descriptions of all members of

the management team and all key employees. He then interviews each

member of the management team.

Finance

Elizabeth Pratt, 37, is the company’s in-house accountant. She is good at

her job, but Grant is concerned that she may not have the skills required to

take New Tech to the next stage of development. She obtained a general arts

degree from a local university and is now taking evening courses in account-

ing. Her previous employment was with a software company where she

worked in the controller’s department.

Elizabeth may not have the skill or experience needed in three key areas:

cost accounting, financial analysis, and equity financing. First, her lack of

knowledge in cost accounting may be a problem for New Tech when the new

product line is launched. Second, other members of the management team

have commented on her lack of experience in providing them with useful

Determining the Amount Needed—The Business Plan 137