Raising Venture Capital for Developing IT Products

raising venture capital for developing IT products Altaf Khan University of Management & Technology Would you persuade, speak of interest, not of reason. Benjamin Franklin. Assumptions 1. Software product or Internet-based business 2. Pre-seed, seed, or startup stage • Own funds • Friends and family • Angel investors – Local – Overseas • Venture capital companies • Banks • Other – PSEB ??? – International organizations Sources of Capital GICT (IFC - World Bank) Global Information & Communication Technology Dept • Stage-independent investments • Typical investment $2-10M • Value-added services: – Participation on boards of directors – Co-investors – Introductions to strategic partners – Follow-on financings • Business plans can be submitted online GICT Investment Examples • Provide IT services to developing countries, such as locally based systems integrators and SW developers • Deliver SW solutions or new technologies from a base in the emerging markets • Deliver ITES, such as offshore SW development and BPO, to global markets from emerging markets • Provide solutions for e-governance applications • Design and manufacture IT components & products to get what you want, you have to know what the investor wants The investor wants … … to assist the entrepreneurs in transforming their great ideas into world-class businesses … So that the investor … … can make lots of money Chances of making lots of money increase if the proposed business is based on … • An innovative idea • Unbounded target market • Entry barriers • A reasonable execution strategy • A persistent, energetic, smart team Moreover, the investor also requires … an exit strategy Exit Strategy • IPO • Merger/Acquisition to get the investment, you have to outline a reasonable scenario in which the investor ends up making a lot of money to get the investment, you have to outline a reasonable scenario in which the investor ends up making a lot of money Write a Business Plan One Page Business Plan Vision Mission Objectives Strategies  Within the next five years grow Innofy into a $47 million provider of quality assurance services that cover the complete life-cycle of financial and telecommunications software  Innofy – headquartered in Dubai – will have sales and support offices in Singapore, Washington and London, and engineering centers in Dubai, Lahore, Karachi and Islamabad  Enable the client companies get premium rates for their services by measurably enhancing the quality of he software they develop  Cultural Mission: Speed through innovation; Craftsmanship  Grow revenue-per-SQA-engineer from $30k to $36k to $47k to $56k to $62k during the first five years  Grow the number of professionals from 50 to 130 to 262 to 513 to 800 during the first five years  Grow revenue from $0.63M to $3.9M to $11M to $26M to $47M during the first five years  Achieve profits before tax of $4.0M and $13M in the fourth and fifth years, respectively  Raise investments amounting $1.4M, $2.1M and $1.4M during the first, second and the third years  Sell to Asian operations of US businesses; Leverage those relationships to get work from their parents  Focus on: i) Small-to-medium sized projects. ii) Companies in a hurry. iii) Telecom and finance sectors  Focus on verification assurance initially; Expand into higher value-adding validation assurance later  Attract, retain excellent individuals by ensuring their professional growth, equity sharing  Hire non-computing graduates with analytical skills or domain expertise  Leverage the under-utilized, attractively-priced HR available in Pakistan  Train, tirelessly; Ensure an expanding supply of SQA-engineers through a separate training operation  Give new clients the assurance of working with a world-class player through certifications  Build an organizational culture rooted in shared-values, and keep on enhancing it  Recruit a chief sales/marketing officer (2002)  Establish a temporary headquarters and the main engineering center in Lahore (2002)  Establish a sales & support offices in Singapore (2002) and Washington (2003)  Move headquarters to Dubai and establish a engineering center there (2003-4)  Establish a sales & support office in London (2003-4)  Establish engineering centers in Islamabad (2004-5) and Karachi (2005-6)  Hire 90% of SQA-engineers with analytical training or domain expertise, e.g. engineering, finance  Focus on verification assurance services initially, then expand into validation assurance in 2006  To ensue continuous improvement of training, spin it off into a separate business-unit (2003)  ISO9000 quality certification (2003); CMM-L3 (2005); CMM-L4 in (2006); CMM-L5 (2007) Plans onepagebusinessplan.com Conventional Business Plan Write the biz plan that includes: 1. 2. 3. 4. 5. 6. 7. 8. 9. Executive summary Company description Product/service Market analysis Competitive analysis Execution of biz plan Management team Capital requirements Financial analysis Contents of the Biz Plan Write the biz plan that includes: 1. 2. 3. 4. 5. 6. 7. 8. 9. Executive summary Company description Product/service Market analysis Competitive analysis Execution of biz plan Management team Capital requirements Financial analysis A concise summary of the entire business plan Contents of the Biz Plan Write the biz plan that includes: 1. 2. 3. 4. 5. 6. 7. 8. 9. Executive summary Company description Product/service Market analysis Competitive analysis Execution of biz plan Management team Capital requirements Financial analysis Background info about the company, including capital structure Contents of the Biz Plan Write the biz plan that includes: 1. 2. 3. 4. 5. 6. 7. 8. 9. Executive summary Company description Product/service Market analysis Competitive analysis Execution of biz plan Management team Capital requirements Financial analysis What will the company provide its customers? How will customers benefit from the company's product/ services compared to what they currently use/have? Contents of the Biz Plan Write the biz plan that includes: 1. 2. 3. 4. 5. 6. 7. 8. 9. Executive summary Company description Product/service Market analysis Competitive analysis Execution of biz plan Management team Capital requirements Financial analysis How many potential customers benefit from the company's product/ services compared to what they currently use/ have? Growth rate? Marketing strategy? Contents of the Biz Plan Write the biz plan that includes: 1. 2. 3. 4. 5. 6. 7. 8. 9. Executive summary Company description Product/service Market analysis Competitive analysis Execution of biz plan Management team Capital requirements Financial analysis Who are the key competitors? In what areas are you stronger/weaker than them? Are there barriers to entry that can stop others enter the market? Contents of the Biz Plan Write the biz plan that includes: 1. 2. 3. 4. 5. 6. 7. 8. 9. Executive summary Company description Product/service Market analysis Competitive analysis Execution of biz plan Management team Capital requirements Financial analysis How will the business plan be implemented? Strategies? Timeline? Budget? Tactics? Alliances? Contents of the Biz Plan Write the biz plan that includes: 1. 2. 3. 4. 5. 6. 7. 8. 9. Executive summary Company description Product/service Market analysis Competitive analysis Execution of biz plan Management team Capital requirements Financial analysis Who are the people in the company? What experience, track record, expertise do they bring? Contents of the Biz Plan Write the biz plan that includes: 1. 2. 3. 4. 5. 6. 7. 8. 9. Executive summary Company description Product/service Market analysis Competitive analysis Execution of biz plan Management team Capital requirements Financial analysis How much does the company require to implement the plan? How does the company value itself to investors? Expected burn-rate? Contents of the Biz Plan Write the biz plan that includes: 1. 2. 3. 4. 5. 6. 7. 8. 9. Executive summary Company description Product/service Market analysis Competitive analysis Execution of biz plan Management team Capital requirements Financial analysis Financial projections, including cash-flow analysis What’s your current valuation How much are you seeking Company Valuation • An art; not a science • May vary drastically from one investor to another; do shop around What do investors look for in a team? • Do they share a common vision, values? • Are they flexible about their roles? • Are they smart, energetic, persistent? • Do they work with a sense of urgency? • Are they worthy of my trust? how to build trust? Be very open with the investor about the risks involved and your weaknesses Try to develop strategies for overcoming/minimizing each You are developing something that will come to market 1-5 years down the road. During that time: • The targeted market may disappear • Someone may come up with the same product, first! Things to look for in investors • Their track record • Their contacts • Their people Mentor-Investors • Individual investors who bring added value to your venture due to their: – Inside knowledge of the target industry – Industry contacts • They can: – Lower your risk – Reduce your time-to-market Improving the Odds • • • • • • • • • • • Actively seek value-adding partners & affiliates Build an unfair advantage Look for smart capital, mentor-investors Leverage Pakistani expatriates Focus on the customer Outsource non-core tasks Successful marketing is critical Stay focused on your business objective Be flexible; change your biz plan, if required Create a high-energy organizational culture Form a core team which is: – Homogeneous in terms of the vision – Heterogeneous in terms of skills and experiences network tirelessly be business-driven, not technology-driven investors fund people, not ideas! Reward excellent failures Punish mediocre successes Phil Daniels, Sydney exec Would you persuade, speak of interest, not of reason. Benjamin Franklin.