Elements of a Good Venture Proposal

Purpose and Objectives

Include a summary of the what and why of the project.

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.

Marketing:  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 milestones,

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 like.

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.

Financial Statements: 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.)

Capitalization: Provide a list of shareholders, how much is invested to date, and in what form (equity/debt).

Biographical Sketches: Describe the work histories and qualifications of key owners and employees.

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 products (customers).

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 objectives.

Ownership

Venture capital financing is not inexpensive for the owners of a small business.  The partners of the venture firm buy a portion of the business' equity in exchange for their investment.

This percentage of equity varies, of course, and depends on the amount of money provided, the success and worth of the business, and the anticipated investment return.  It can range from perhaps 10% in the case of an established, profitable company to as much as 80 or 90% for beginning or financially troubled firms.

Most venture capital firms, at least initially, don't want a position of more than 30 to 40% because they want the owner to have the incentive to keep building the business.  If additional financing is required to support

business growth, the outsiders' stake may exceed 50% but investors realize that small business owner/managers can lose their entrepreneurial zeal under those circumstances.  In the final analysis, however, the venture firm, regardless of its percentage of ownership, really wants to leave control in the hands of the company's managers because it is really investing in that management team in the first place.

Most venture firms determine the ratio of funds provided to equity requested by a comparison of the present financial worth of the contributions made by each of the parties to the agreement.  The present value of the contribution by the owner of a starting or financially troubled company is obviously rated low.  Often it is estimated as just the existing value of his or her idea and the competitive costs of the owner's time.  The contribution by the owners of a thriving business is valued much higher.  Generally, it is capitalized at a multiple of the current earnings and/or net worth.

Financial valuation is not an exact science.  The final compromise on the worth of the owner's contribution in the equity financing agreement is likely to be much lower than the owner thinks it should be and considerably higher than the partners of the capital firm think it might be.  In the ideal situation, of course, the two parties to the agreement are able to do together what neither could do separately: 1) the company is able to grow fast enough with the additional funds to do more than overcome the owner's loss of equity; and 2) the investment grows at a sufficient rate to compensate the venture capitalists for assuming the risk.

An equity financing agreement with an outcome in five to seven years which pleases both parties is ideal.  Since the parties cannot see this outcome in the present, neither will be perfectly satisfied with the compromise reached.

It is important, though, for the business owner to look at the future.  He or she should carefully consider the impact of the ratio of funds invested to the ownership given up, not only for the present, but for the years to come.

Control 

Control is a much simpler issue to resolve.  Unlike the division of ownership over which the venture firm and management are likely to disagree, control is an issue in which they have a common interest.  While it is understandable that the management of a small company will have some anxiety in this area, the partners of a venture firm have little interest in assuming control of the business.  They have neither the technical nor the managerial personnel to run a number of small companies in diverse industries.  They much prefer to leave operating control to the existing management.

The venture capital firm does, however, want to participate in any strategic decisions that might change the basic product/market character of the company and in any major investment decisions that might divert or deplete the financial resources of the company.  They will, therefore, generally ask that at least one partner be made a director of the company.

They also want to be able to assume control and attempt to rescue their investment if severe financial, operating or marketing problems

develop.  Thus, they will usually include protective covenants in their equity financing agreements to permit them to take control and appoint new officers if financial performance is very poor.

Once you have Determined what type of Company you want to start and The investment requirements, you are prepared to decide on a
location. The number of aggressive businesses already in the area should affect your choice of location. Some regions are
overloaded with service channels or certain forms of restaurants. Check on the number of your type of company from Census figures,
the yellow pages, or by personally checking out the place.

Factors other than the potential market, availability of Workers And number of aggressive companies must be considered in
selecting a location. For instance, how adequate are utilities - sewer, water, electricity, gas? Parking facilities? Police and
fire protection? What about home and environmental factors like colleges, cultural and community actions for employees? What's the
normal price of this location in taxes and rents? Assess on zoning regulations. Assess the enterprise of the neighborhood
business-people, the aggressiveness of civic organizations. In short, what's the city soul? Such factors should give you a clue
into the city or city's future.

Chambers of Commerce and local universities usually have created or Are familiar with local surveys that may provide answers to
these questions and the a number of other questions which will happen to you.

Then you must decide in what part of town to find. If the city is Very little and you're establishing retail or service business,
there will probably be little option. Just one shopping place exists. Cities have outlying shopping centers along with the central
shopping area, and shops spring up along main thoroughfares and neighborhood streets.

Think about the shopping centre. It is different from other locations. The shopping centre building is pre-planned as a
merchandising unit. The site has been deliberately selected by a programmer. On-site parking is a frequent feature. Customers may
drive in, park and do their buying in comparative speed and safety. Some facilities offer weather protection. Such amenities make
the shopping centre a valuable site.

Additionally, there are some limitations you should know about. As a renter, You become a part of a merchant team and has to pay
your pro rata share of the budget. You must keep store hours, light your windows, and place your signs based on established rules.
Many communities have restrictions on evidence and the middle management may have additional limitations. Moreover, if you're
thinking about a shopping centre for your first store you may have an extra problem. Developers and owners of shopping facilities
start looking for successful retailers.

The kind and Wide Range of merchandise that you take helps determine the Kind of shopping place you select. For example, clothing
stores, jewelry shops and department stores are more likely to be more successful in shopping districts. On the flip side, grocery
stores, drug stores, filling stations, and bakeries usually do better on principal thoroughfares and local streets outside the
shopping districts. Some sorts of shops customarily pay a low rent per square foot, while others cover a high rent. In the"low"
class are furniture, grocery and hardware stores. At the"high" are cigar, drug, women's furnishings, and department stores.
There's not any hard and fast rule, however it is helpful to see in what kind of area a store like yours most often seems to
flourish.

After determining an area best suited to your type of business, Obtain as many facts as possible about it. Check the competition.
How many similar companies are located nearby? What exactly does their sales volume seem to be? If you're establishing a store or
support trade, how far is it that people come to exchange in the region? Are the visitors patterns positive? If most of your
clients will be local inhabitants, research the population trends of the region. Is population increasing, stationary or
declining? Are the folks native-born, mixed or chiefly foreign? Are fresh ethnic groups coming in? Are they predominantly
laborers, clerks, executives or retired persons? Are they all ages or mostly retired, middle aged, or young? Judge buying power by
assessing average home rental, typical real estate taxes, number of phones, number of cars and, even if the amount is available,
per capita income. Bigger shopping centers have this sort of information available, and will ensure it is available to serious
potential tenants.

Zoning ordinances, parking availability, transport facilities And natural barriers - such as hills and bridges - are important
considerations in finding any kinds of business. Possible sources for this information are Chambers of Commerce, trade
associations, real estate businesses, local newspapers, banks, city officials, local merchants and personal monitoring. In the
event the Bureau of the Census has developed census tract information for the particular area in which you're interested you'll
find this especially valuable. A census tract is a small, permanently established, geographical place within a large city and its
environs. The Census Bureau provides population and housing characteristics for each tract. This information can be valuable in
measuring your marketplace or service potential.

Choosing the actual site in a area may well be accepting what you May get. Very few buildings or plants will be suitable and at
precisely the exact same time, available. If you do have a choice, be sure to consider the possibilities carefully.

For a production plant, think about the condition and suitability Of the construction, transport, parking facilities, and the type
of lease. For A store or service establishment, check out the nearest competition, traffic Leak, parking amenities, road location,
physical aspects of the construction, Type of lease and cost, and the rate, cost and quality of transport. Also Look into the
history of the site. Find answers to these questions as: Has the Building remained vacant for any amount of time? Why? Have
various types of Stores occupied it for brief periods? It might have proved unprofitable for them. Websites where many enterprises
have failed ought to be avoided. Vacant buildings Do not attract traffic and are usually regarded as poor neighbors, so check on
nearby unoccupied buildings.