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									CHAPTER 11

PUTTING THE BUSINESS PLAN TO USE
LEARNING OBJECTIVES

After reading this chapter, students should be able to:

   Understand what a banker expects from an entrepreneur who is seeking a loan.
   Explain how to respond to a banker‟s questions in a professional and thorough manner.
   Understand what an angel investor expects from an entrepreneur who seeks an investment.
   Understand what a venture capital firm expects from an entrepreneur who seeks an
    investment.
   Know how to develop marketing partnerships with firms by sharing the venture‟s business
    plan.
   Know how to recruit qualified individuals to board seats by sharing the venture‟s business
    plan.
   Explain the use of the business plan to help acquire necessary physical resources, such as
    office space.


11-1 INTRODUCTION

The business plan helps entrepreneurs stay on track toward their business goals.

   As a road map, the plan provides a means by which entrepreneurs are able to stay focused on
    strategy execution despite myriad distractions that are likely to arise.

    o Entrepreneurs who have a business plan are far more likely to remain focused and on the
      road to success than are those that haven‟t invested the time to create a plan.
    o It is also a marketing document that introduces the entrepreneur and the business to other
      people who might be interested.
    o The business plan has other uses besides serving as a road map and helping acquire a
      bank loan.
    o Another common occurrence is that new ventures are approached by other businesses
      seeking to become allied in some way.

          The inquiring firm often believes that the two ventures are complementary and can
           help market each other‟s products.
          Finally, the entrepreneur may also need to present the business plan to acquire
           resources.
Chapter 11: Putting the Business Plan to Use                                                    11-2




11-2 SEEKING CAPITAL

The various sources of capital that are available to the entrepreneur include lending institutions
such as banks and equity investors such as angels and venture capitalists.

   Each of these capital sources will expect the new venture to provide a business plan.
   However, each is likely to require a slightly different type of presentation of the plan.

11-2a Lending Institutions

Lending institutions such as banks are formally operated and tend to require formal
documentation as part of the loan origination process.

   It is far more difficult for entrepreneurs to actually succeed in convincing the bank to give
    them a loan.

    o With the U.S. economy continuing a weak recovery from a relatively mild recession
      since the fourth quarter of 2001, small business lending by banks showed very moderate
      increases in 2002.

   To understand the expectations that a bank places on the entrepreneur seeking a loan, it is
    helpful to understand the structure of the loan origination process.

    o Banks have a number of staff members who are designated as loan officers.

             Often, these individuals will hold lofty-sounding titles such as “vice president” or
              “commercial loan officer.”
             These titles are designed to promote a sense of confidence to loan seekers that they
              are talking to a decision maker.
             More often than not, however, the loan officer who actually meets with and discusses
              loan options with the entrepreneur is not the decision maker.
             Most loan officers have a specific low-credit limit for which they can make a decision
              on their own.
             For loan requests above that limit, loan officers are responsible to a higher-level
              decision maker or, more often, a decision-making board.

   Many entrepreneurs approach a bank with anxiety because they feel as though they are the
    ones in need and the bank has all the resources.

    o But it pays to remember that a bank has no resources of its own.
    o Successful entrepreneurs understand that the loan officer must be convinced that his or
      her career will be advanced by securing a loan for the new venture.
Chapter11: Putting the Business Plan to Use                                                   11-3




             The best way that an entrepreneur can convey this belief is to prepare materials that
              the loan officer can use to present to the board.
             A professionally done business plan will include color graphics and binding, and it
              should be numbered to indicate that distribution is being controlled.
             In addition to the business plan, the presentation to the banker should include:

              1. The entrepreneur‟s résumé and résumés of all other executive officers who will
                 serve in the venture.
              2. Completed loan package, typed (not handwritten) and signed.
              3. Venture collateral material such as brochures, advertisements, and web pages.
              4. A brief executive summary of the venture, separately bound, summarizing the
                 venture and its market opportunity in four to six pages with a financial summary.

    o These materials will help persuade the banker and the board that the entrepreneur is a
      professional who is concerned about the details that separate the winners from the losers.

11-2b Angel Investors

Seeking capital from angel investors is vastly different from seeking capital from lending
institutions.

   Angels are typically wealthy individuals who allocate a small part of their net worth to
    investments in high risk/high reward early-stage businesses or businesses that are more
    mature but have smaller capital needs than more traditional venture capital deals.

    o Angels operate in a number of ways, sometimes through groups of pooled funds or
      individually.
    o Angels are even available now through Internet links and networks. Most angels as a
      group invest up to $1 million (although often less).
    o Angel investors are far less formal than a lending institution and will require different
      documentation than a lender does.
    o Angel investors are less formal than the banker but no less concerned about achieving a
      fair return on their money.

   An entrepreneur may seek angel investors for loans or equity investments.

    o The term equity refers to ownership shares in a venture.

             Equity can be sold to angel investors in a number of ways, depending on the legal
              structure of the organization.
             In most cases, the entrepreneur should approach an angel investor through a referral.
             People who occupy a respected position within a referral network tend to guard their
              reputation carefully.
Chapter 11: Putting the Business Plan to Use                                                    11-4



             They refer only deals that they believe to have a strong chance of being successful,
              and they tend to refer deals only to investors who might have an interest in that type
              of venture.

    o Angel investors often meet face to face with entrepreneurs, but not always.

             If a deal is presented to an angel through a highly trusted referral source, the
              entrepreneur may only need to submit materials to the angel and to the angel‟s
              professional team, such as accountants and lawyers.
             Together, the angel and the team may decide on whether to make an investment and
              how large an investment to make without even meeting with the entrepreneur.
             In most cases, angel investors, like bankers, require a complete business plan in order
              to make a determination about whether to invest.

    o The entrepreneur should present a professional business plan complete with operating
      history and three-year financial pro forma statements.

             The business plan specifies the type of debt or equity offering that the business is
              making to the angel investor.
             The amount of the investment is usually specified in terms of a minimum.

    o Other documents that the entrepreneur includes with the business plan when attempting
      to sell stock to an angel investor include a so-called subscription agreement and a private
      placement memorandum (PPM).

             The subscription agreement is a document that provides details about the specific
              stock offering.
             These details include elements such as the total amount of stock being offered, the
              price per share, the current ownership structure of the company, and the rights and
              privileges that accrue to all shareholders (e.g., voting rights, right to sell or purchase
              additional stock).
             The PPM is a legally necessary document that provides potential investors with a
              thorough understanding of all the risks associated with investing in new ventures and
              specifies how the offering fits within the laws of the Securities and Exchange
              Commission.
             Normally, entrepreneurs will enlist the assistance of an attorney to prepare the
              subscription agreement and PPM.
             Another document that may be used with angel investors is a very brief version of the
              business plan known as an investor‟s executive summary.

   An entrepreneur who wishes to raise equity through angel financing should consider the
    following issues in structuring a deal with angels:

    o Type of securities
Chapter11: Putting the Business Plan to Use                                                   11-5




             Angels often purchase common stock.
             Some angels ask for preferred stock with certain rights and liquidation over the
              common stock.
             Some even ask for convertible debt or redeemable preferred stock, which provides a
              clearer exit strategy for the investor but also places the company at the risk of
              repaying the investment plus interest.
             If the angel asks for preferred stock or convertible debt, the entrepreneur needs to
              consider the ability to repay the investment as well as the possible impact of the
              investment in future financing rounds.

    o Rights of first refusal

             Some angels ask for a right of first refusal to participate in the next round of
              financing.
             This right makes sense because the entrepreneur will want to reward the investors
              who took the most risk.
             At the same time, such rights may be cumbersome if the next round of investors
              wants to control the participants in that round.

    o Board of director representation

             Angels often serve on the board of directors following an investment.
             As the company raises future rounds of financing, the issue arises as to how long the
              angel should continue to have the right to be elected to the board.
             One alternative is to have the angel‟s board right disappear once the company raises a
              certain amount of equity financing or once the angel‟s ownership percentage falls
              below a certain level.

    o Negative covenants

             In order to protect their investment, angels often ask the company to agree to not take
              certain actions without the angel investors‟ approval.
             These actions may include selling all or substantially all the company‟s assets, issuing
              additional stock to existing management, selling stock below prices paid by the
              investors, or creating classes of stock with liquidation preferences or other rights
              senior to the angels‟ class of security.

   An angel investor who has been brought into the deal early on, who has been sought on
    occasion during the emerging phase for advice and counsel, and who has developed trust for
    the management and a belief in the potential for the venture will be more inclined, when the
    time comes, to make the required investment.
Chapter 11: Putting the Business Plan to Use                                               11-6



    o Entrepreneurs who have been executing a plan, completing stated milestones, and
      operating within their budgets are more likely to receive investment capital than are those
      who merely appear to have been lucky.

11-2c Venture Capital

Venture firms are usually partnerships formed by one or more venture capitalists (VCs).

   The partners in the firm raise money to form a venture fund.

    o The investors in the fund are limited partners, or LPs, and include sources such as
      pension funds, private institutions (universities, charitable trusts), and wealthy
      individuals.
    o The LPs invest this risk capital in order to receive above-average returns on their money
      over a period of ten to twelve years.

   All VCs must be concerned with making money for their limited partners.

    o There is enormous pressure on venture funds to produce far better than average returns
      for their LPs in return for the risk capital invested.
    o VCs will only be interested in an entrepreneur‟s business if it promises to make a lot of
      money and reach liquidity within a three- to six-year period.
    o In addition to money, most VCs also care about creating value, developing new markets
      and products, participating in the formation and growth of important companies, working
      with entrepreneurs to build new businesses, and supporting the growth of the economy.
    o The ability to be involved with and influence the development of young companies is
      almost universally considered a privilege among venture investors.

   Entrepreneurs seek venture capital usually after the company has demonstrated its ability to
    make a profit or at least to generate significant revenues that may lead to profitability.

    o Venture capital funds rarely provide capital to start-up ventures.

             A drop-off in venture capital funding was evident in the wake of the dot-com crash
              beginning in early 2000.
             The proportion of companies receiving funding at each stage of development has
              steadily drifted toward later-stage companies between 2002 and 2004.
             Over the same period, the average time between financing rounds has increased while
              the average dollar amount of funding has decreased.

   Entrepreneurs will find greater success in obtaining venture capital if they can demonstrate a
    successful track record of sales to the company‟s target market.
Chapter11: Putting the Business Plan to Use                                                 11-7



    o In contemporary parlance, the ability to generate steady revenues is called traction.

             A company has traction when it can demonstrate a growing sales volume, repeat
              customers, and increasing market share.
             The minimum size opportunity that most venture firms prefer to invest in is
              companies with revenues in the range of $20 million to $50 million within four to six
              years, with pretax profits of 20 percent or more.

   Like other industries, the venture fund industry is segmented.

    o Many funds focus on a particular investing profile, including industry specialization and
      stage of company.
    o Other venture firms, particularly the very large, or mega-funds, maintain a balanced fund
      and invest across a diverse range of markets and stages.

   Seed funding is money provided to companies that need to determine the feasibility of the
    business concept.

    o It can be very difficult to find VC funds interested in funding ventures of this type.
    o Start-up capital follows initial market success, especially if the growth potential is large.
    o Expansion or growth capital requires demonstrated traction and prior growth and is easier
      to obtain the larger the future growth potential.
    o So-called mezzanine financing is late-stage capital that may be needed to position the
      firm for a merger or acquisition or for listing on a public exchange such as NASDAQ or
      the New York Stock Exchange via an initial public offering (IPO) of stock.

   Venture capital is a way of transferring wealth from one generation of entrepreneurs to the
    next.

    o Although it will normally take persistence and determination for entrepreneurs to win the
      confidence of the venture capital community, money is available to those who build a
      sound business model.
    o The following list of suggestions are some that entrepreneurs should keep in mind when
      preparing to present their business ideas to venture capitalists:

             Make the presentation stand out. Remember that words can be awfully dry after
              awhile, but don‟t be frivolous or cute.
             Use pictures, diagrams, and graphs.
             Use animation or video, but only if the slides make sense when viewed as hard copy a
              few days or weeks later.
             Use a consistent, professional-looking template and color scheme.
             Proofread it carefully, and have someone else proofread it again to make sure there
              are no typos. Someone who can‟t be trusted with a word processor may not be
              considered trustworthy with money.
Chapter 11: Putting the Business Plan to Use                                                  11-8



11-3 SEEKING PARTNERS

In addition to the use of a business plan to acquire capital, via loans or equity, entrepreneurs may
also need a well-developed plan to entice potential alliance partners to participate with them in
joint business ventures.

   A new venture often lacks market “identity”, its primary market may not recognize its brand.

    o One way to mitigate that problem is for emerging ventures to become associated with
      well-recognized and respected brands.

             Alliance partners should be firms whose business interests and models are
              complementary to those of the new venture.
             Entrepreneurs stand to gain tremendous benefits through alignment with well-known
              and respected brands.
             At the same time, it may happen that entrepreneurs underestimate their venture‟s
              contribution to the relationship.
              It would be easy for a small, start-up venture to be overwhelmed by the prospect of
              such an alignment.
             To prevent the potential to underestimate the venture‟s contribution to the
              relationship, the new venture‟s business plan should include the benefits it will bring
              to its partners.

    o Another type of business alignment is associated with the acquisition of customers,
      usually referred to as business development.

             A new venture is often overburdened with too much work and not enough people.
             Gaining new clients can be very difficult while the firm is working to satisfy the
              demands of existing clients.
             Rather than hiring additional salespeople, the new venture can seek business
              development partners who can sell its products or services.
             Software venture that we have been discussing may align itself with firms that are
              already selling software products to organizations. Such firms are often called valued
              added resellers, or VARs.
             A VAR would be interested in selling the new venture‟s software to increase its own
              portfolio of products and its own revenues.
             Successful entrepreneurs establish such mutually beneficial business alliances not
              only by promoting the value of their own venture‟s products or services but also by
              negotiating a contract that provides incentives for the VAR.
             The contract that governs this alliance may include such terms as:

              1. Sharing a percentage of the revenue from each sale.
              2. Allowing the VAR to have right of first refusal to install and integrate the new
                 software for a fee to be charged to the client.
Chapter11: Putting the Business Plan to Use                                                  11-9



              3. Enabling the VAR to market and sell maintenance or service contracts to the
                 client.
              4. Training the VAR to represent the venture‟s products to potential clients.
              5. Offering an exclusive license to represent the venture‟s products in a specified
                 region or to a specified industry vertical.

    o In a third type of business alliance, a growth-oriented firm or one that has reached the
      mature stage develops deeper relationships with other business ventures.

             Firms that enter into deeper relationships often establish joint ventures. A joint
              venture requires that each firm commit substantial resources to develop a new product
              line or new service.

   To be successful, strategic alliances require their own business plan (or, at minimum, some
    type of detailed project plan).

    o Businesses seeking to establish joint venture partnerships need to present a clear set of
      business objectives and operating efficiencies.
    o Normally, when a firm is approached to consider a joint venture undertaking, the firm
      takes time to study the offer, the venture making the offer, and the management team
      running the venture.
    o The process of developing a deeper understanding of the potential joint venture partner is
      known as due diligence.

             Due diligence is conducted by all parties to a joint venture (indeed, in some cases,
              joint ventures are formed by multiple partners).
             The due diligence process usually begins with a swapping of nondisclosure
              agreements among the partners.
             The firms also exchange financial information to determine each company‟s solvency
              and ability to support the joint venture.

    o The business plan is an essential part of the formation stage of a joint venture.
    o To convey professionalism, discipline, and business acumen, the entrepreneur should
      present a well-crafted plan that is no more than six months old and that contains both a
      record of operating history and projected future returns.

11-3a Co-Marketing

In addition to VAR relationships and joint ventures, many firms today are prospering from so-
called co-marketing arrangements (also frequently called co-branding).

   Co-marketing refers to the practice of two distinct firms to build their independent businesses
    or brands in the same location or to use the same distribution channel.
Chapter 11: Putting the Business Plan to Use                                                    11-10



    o For example, consumers commonly can pick up fast food from a major brand, such as
      McDonald‟s, at their favorite gasoline station, such as a Chevron station.

   An entrepreneur with a new and emerging brand can gain rapid awareness and market
    penetration through a careful co-marketing arrangement.

    o A co-marketing arrangement, like a VAR approach, must provide benefits to both parties
      to the agreement.
    o The entrepreneur seeking to establish a co-marketing arrangement needs a professional
      business plan to persuade the established brand to agree to a co-marketing deal.
    o A well-crafted business plan is the cornerstone of the established brand‟s due diligence
      process and will help the company feel confident that the new venture has staying power
      within its industry.
    o In the end, of course, all business is about results, usually measured in financial terms.

   Thus, the new venture‟s business plan includes marketing information relevant to prospective
    co-marketing partners.

    o It also projects the benefits that will accrue to marketing partners through a co-marketing
      arrangement.
    o All entrepreneurs want their own venture to benefit, but the prospective partner‟s primary
      viewpoint is self-interest.

   Today, co-marketing has become exceedingly commonplace. Among businesses that are
    primarily centered on the Internet or have extensive Internet distribution models, the term
    affiliate program is often used in place of co-marketing.

11-4 SEEKING RESOURCES

The final use of the business plan that we will address in this chapter is the acquisition of
resources essential to the success of the venture.

   Two primary resource types (other than capital, which we discussed earlier in this chapter)
    require a business plan:

    o Human capital and
    o Office space.

11- 4a Human Capital

   The human capital that we refer to here is top-level executives and board members.
Chapter11: Putting the Business Plan to Use                                                  11-11



    o In addition to recruiting executive officers, the venture may want to establish a board of
      directors or an advisory board.
    o The difference between the two boards is primarily centered on fiduciary responsibility:
      the board of directors has it, the advisory board doesn‟t.

             Although most board members are protected from liability through the firm‟s
              insurance, well-qualified board candidates take their board duties seriously and will
              not want their reputation affected by a poorly planned venture.
             Most potential board candidates require a business plan to review in order to evaluate
              their willingness and ability to assist the entrepreneur.
             Although the advisory board does not have fiduciary responsibility, most individuals
              who are qualified to provide advisory assistance to a new venture will also want to
              review the venture‟s business plan.

11-4b Office Space

Because early-stage ventures often have difficulty with cash flow, they will on occasion have
trouble paying regular monthly bills.

   Landlords know this, and they attempt to ward off problems with lease payments through
    several well-known tactics.

    o One tactic commonly used in early-stage ventures is to require the lease applicant to
      submit a business plan as part of the application process.
    o Entrepreneurs should be prepared with an up-to-date business plan when seeking office
      space.

             The ability to produce a business plan demonstrates to the landlord that the business
              is organized and well managed.
             Entrepreneurs who present a plan on request increase their probability of acquiring a
              lease for office space when it‟s needed.
Chapter 11: Putting the Business Plan to Use                                               11-12



KEY TERMS

Affiliate program: A marketing strategy, enabled by the Internet, whereby affiliates can earn
commissions by linking their website to another that is selling complementary products or
services.

Business development: The process of acquiring customers for a new venture.

Co-marketing: Arrangement between two companies with complementary products or services
to market their offerings together.

Due diligence: The process of examining a company prior to making an investment.

Investor’s executive summary: A brief version of a company‟s business plan that can quickly
be scanned and read by a qualified investor.

Loan officer: A person, employed by a lending institution, who is responsible for assisting
customers in the loan application process.

Loan origination process: The procedures associated with securing a loan from a lending
institution, such as a bank.

Low-credit limit: A monetary limit below which the loan officer is allowed to make the lending
decision.

Membership shares: Equity held in a limited liability company (LLC).

Nondisclosure agreements: Agreements often required to be signed by investors in firms that
have proprietary intellectual property so as to prevent those investors from disclosing proprietary
information to others.

Referral: An introduction to a potential investor by someone who already knows the investor.

Risk capital: Money that has been earmarked by a venture firm or venture capitalist for
investment in high-risk, high-return ventures.

Subscription agreement: A document that an investor signs to indicate intent to invest in a
stock offering.

Traction: A venture‟s history of acquiring customers and obtaining market share.

Value added resellers (VARs): A company that is in the same market as another company,
offering different but complementary products, and that may be able to market the other
company‟s products in addition to its own.
Chapter11: Putting the Business Plan to Use                                                11-13



Venture capitalist: A person who invests in companies that have a high return potential.

Venture firm: An investing firm usually organized by one or more venture capitalists.

Venture fund: A pool of money organized by a venture firm to invest in ventures with high
growth potential.
Chapter 11: Putting the Business Plan to Use                                                  11-14



PRACTICE QUIZ

    1. Entrepreneurs should understand that the loan officers are the decision makers for all
       bank loans. Answer: False
       Rationale: Loan officers are the initial point of contact for the entrepreneur and can
       make specific low-credit-limit loans, but larger amounts are deferred to a high-level
       decision maker or even a board to decide.
       Reference: 11-2a

    2. Entrepreneurs should approach angel investors through referrals. Answer: True
       Reference: 11-2b

    3. In contemporary parlance, a company‟s ability to generate steady revenues is called
       leverage. Answer: False
       Rationale: Traction is a company‟s ability to generate steady revenue and to demonstrate
       a growing sales volume, repeat customers, and increasing market share.
       Reference: 11-2c

    4. Friends and family who provide money are also known as angel investors. Answer: False
       Rationale: Angels are typically wealthy individuals who allocate a small part of their net
       worth to investments in high risk/high reward early-stage businesses or businesses that
       are more mature but have smaller capital needs than do more traditional venture capital
       deals.
       Reference: 11-2b

    5. Subscription agreements for angel investors include information such as voting rights and
       rights to sell or purchase additional stock. Answer: True
       Reference: 11-2b

    6. An investor‟s executive summary is a very short document, usually less than one page,
       with no financial information. Answer: False
       Rationale: An investor‟s executive summary is a document that is similar to the business
       plan, but it is far briefer, generally, four to six pages, and includes a financial summary.
       Reference: 11-2b

    7. The right of first refusal is when angel investors are given the first option to participate in
       the next round of financing. Answer: True
       Reference: 11-2b

    8. Alliance partners should be firms whose business interests and models are
       complementary to those of the new venture. Answer: True
       Reference: 11-3
Chapter11: Putting the Business Plan to Use                                               11-15



    9. Venture firms are only interested in businesses that will reach liquidity in more than ten
       years. Answer: False
       Rationale: Venture capitalists will be interested in an entrepreneur‟s business only if it
       promises to make a lot of money and to reach liquidity within a three- to six-year period.
       Reference: 11-2c

    10. Since the crash of the dot-com entrepreneurs, venture capitalists have been more liberal
        with their investments. Answer: False
        Rationale: During the late 1990s, money was flowing from venture funds to dot-com
        entrepreneurs at a rapid rate. But in the wake of the dot-com crash beginning in early
        2000, a drop-off in venture capital funding was evident.
        Reference: 11-2c

    11. Which of the following terms describes the situation in which people stopping to get gas
        at Chevron are able to get food from McDonald‟s?
        a. affiliate programs
        b. co-marketing
        c. value added resellers
        d. none of the above
        Answer: B
        Rationale: The term co-marketing refers to the practice of two distinct firms to build
        their independent businesses or brands in the same location or to use the same
        distribution channel.
        Reference: 11-4b

    12. Which of the following would not be what angel investors purchase for their investment?
        a. membership shares
        b. convertible bonds
        c. common stock
        d. preferred stock
        Answer: B
        Rationale: If the venture has been organized as an LLC, the angel would purchase
        membership shares in the company. If the venture has been organized as a corporation,
        the angel would purchase either common stock or preferred stock.
        Reference: 11-2b

    13. A PPM (private placement memorandum) has to specify how a new venture‟s offering
       fits within the laws set by the
       a. IPO.
       b. VAR.
       c. SEC.
       d. VC.
       Answer: C
Chapter 11: Putting the Business Plan to Use                                               11-16



         Rationale: The PPM is a legally necessary document that provides potential investors
         with a thorough understanding of all the risks associated with investing in new ventures
         and specifies how the offering fits within the laws of the Securities and Exchange
         Commission (SEC).
         Reference: 11-2b

    14. An entrepreneur who wants to raise equity through angel financing would be wise to
        consider which of the following issues in structuring the deal?
        a. type of securities
        b. board of director representation
        c. negative covenants
        d. all of the above
        Answer: D
        Rationale: Before raising equity through angel financing, an entrepreneur should
        investigate the following aspects of the deal: type of securities, board of director
        representation, negative covenants, and first rights to refusal.
        Reference: 11-2b

    15. Components of due diligence include all of the following except
        a. nondisclosure agreements.
        b. the exchange of financial statements.
        c. marketing materials.
        d. a PPM (private placement memorandum).
        Answer: D
        Rationale: The due diligence process usually begins with a swapping of nondisclosure
        agreements among the partners. Once those are signed, the partners will commonly
        exchange business plans, public documents such as marketing materials, annual reports,
        and other documents such as strategic plans. The firms also exchange financial
        information to determine each company‟s solvency and ability to support the joint
        venture.
        Reference: 11-3
Chapter11: Putting the Business Plan to Use                                                 11-17



QUESTIONS TO BE DISCUSSED

1. How does an entrepreneur prepare for a meeting with a banker? What essential items does
   the entrepreneur bring to this meeting when seeking a loan for a new venture?

    Answer: While preparing for a meeting with a banker, entrepreneurs need to make note of
    several aspects.

    To understand the expectations that a bank places on the entrepreneur seeking a loan, it is
    helpful to understand the structure of the loan origination process.

        Banks have a number of staff members who are designated as loan officers.

         o Often, these individuals will hold lofty-sounding titles such as “vice president” or
           “commercial loan officer.” These titles are designed to promote a sense of confidence
           to loan seekers that they are talking to a decision maker.
         o More often than not, however, the loan officer who actually meets with and discusses
           loan options with the entrepreneur is not the decision maker.
         o Most loan officers have a specific low-credit limit for which they can make a
           decision on their own.
         o For loan requests above that limit, loan officers are responsible to a higher-level
           decision maker or, more often, a decision-making board.

        Many entrepreneurs approach a bank with anxiety because they feel as though they are
         the ones in need and the bank has all the resources.

         o But it pays to remember that a bank has no resources of its own.
         o Successful entrepreneurs understand that the loan officer must be convinced that his
           or her career will be advanced by securing a loan for the new venture.

         o The best way that an entrepreneur can convey this belief is to prepare materials that
           the loan officer can use to present to the board.
         o A professionally done business plan will include color graphics and binding, and it
           should be numbered to indicate that distribution is being controlled.
         o In addition to the business plan, the presentation to the banker should include:

              1. The entrepreneur‟s résumé and résumés of all other executive officers who will
                 serve in the venture.
              2. Completed loan package, typed (not handwritten) and signed.
              3. Venture collateral material such as brochures, advertisements, and web pages.
              4. A brief executive summary of the venture, separately bound, summarizing the
                 venture and its market opportunity in four to six pages with a financial summary.
Chapter 11: Putting the Business Plan to Use                                                   11-18



         o These materials will help persuade the banker and the board that the entrepreneur is a
           professional who is concerned about the details that separate the winners from the
           losers.

    REF: 11-2a

2. What challenges are involved with the acquisition of venture capital? What pressures does a
   venture capitalist have to contend with in his or her own career?

    Suggested approach: The students should provide their opinion on the pressures a venture
    capitalist may experience in his or her career. The below provided information can serve as a
    background to understand the concept of venture capitalists.

    Venture firms are usually partnerships formed by one or more venture capitalists (VCs).

        All VCs must be concerned with making money for their limited partners.

         o There is enormous pressure on venture funds to produce far better than average
           returns for their LPs in return for the risk capital invested.
         o VCs will only be interested in an entrepreneur‟s business if it promises to make a lot
           of money and reach liquidity within a three- to six-year period.
         o In addition to money, most VCs also care about creating value, developing new
           markets and products, participating in the formation and growth of important
           companies, working with entrepreneurs to build new businesses, and supporting the
           growth of the economy.
         o The ability to be involved with and influence the development of young companies is
           almost universally considered a privilege among venture investors.

        Entrepreneurs seek venture capital usually after the company has demonstrated its ability
         to make a profit or at least to generate significant revenues that may lead to profitability.

         o Venture capital funds rarely provide capital to start-up ventures.

                  A drop-off in venture capital funding was evident in the wake of the dot-com
                   crash beginning in early 2000.
                  The proportion of companies receiving funding at each stage of development has
                   steadily drifted toward later-stage companies between 2002 and 2004.
                  Over the same period, the average time between financing rounds has increased
                   while the average dollar amount of funding has decreased.

    REF: 11-2c

3. Where does an entrepreneur find an angel investor?
Chapter11: Putting the Business Plan to Use                                                 11-19



    Suggested approach: The students should provide their opinion on where an entrepreneur
    can find an angel investor. The information provided below could serve as a background to
    understand the concept of angel investors.

    Angels are typically wealthy individuals who allocate a small part of their net worth to
    investments in high risk/high reward early-stage businesses or businesses that are more
    mature but have smaller capital needs than more traditional venture capital deals. Angels
    operate in a number of ways, sometimes through groups of pooled funds or individually.

    People who occupy a respected position within a referral network tend to guard their
    reputation carefully. They refer only deals that they believe to have a strong chance of being
    successful, and they tend to refer deals only to investors who might have an interest in that
    type of venture.

    An entrepreneur may seek angel investors for loans or equity investments. Angel investors
    often meet face to face with entrepreneurs, but not always.

    REF: 11-2b

4. Who should an entrepreneur approach about serving as a member of the venture‟s advisory
   board? Why?

    Suggested approach: The students should provide their opinion on who should an
    entrepreneur approach about serving as a member of the venture‟s advisory board. They
    should further reinstate their opinion by provided justifiable reasons.

    In addition to recruiting executive officers, the venture may want to establish a board of
    directors or an advisory board.

        The difference between the two boards is primarily centered on fiduciary responsibility:
         the board of directors has it, the advisory board doesn‟t.

           o Although most board members are protected from liability through the firm‟s
             insurance, well-qualified board candidates take their board duties seriously and will
             not want their reputation affected by a poorly planned venture.
           o Most potential board candidates require a business plan to review in order to
             evaluate their willingness and ability to assist the entrepreneur.
           o Although the advisory board does not have fiduciary responsibility, most
             individuals who are qualified to provide advisory assistance to a new venture will
             also want to review the venture‟s business plan.

    REF: 11-4a
Chapter 11: Putting the Business Plan to Use                                                11-20



5. How can the business plan be useful in recruiting talented people to serve on the venture‟s
   management team?

    Answer: Normally, when a firm is approached to consider a joint venture undertaking, the
    firm takes time to study the offer, the venture making the offer, and the management team
    running the venture.

        The process of developing a deeper understanding of the potential joint venture partner is
         known as due diligence.

            o Due diligence is conducted by all parties to a joint venture (indeed, in some cases,
              joint ventures are formed by multiple partners).
            o The due diligence process usually begins with a swapping of nondisclosure
              agreements among the partners.
            o The firms also exchange financial information to determine each company‟s
              solvency and ability to support the joint venture.

        The business plan is an essential part of the formation stage of a joint venture.
        To convey professionalism, discipline, and business acumen, the entrepreneur should
         present a well-crafted plan that is no more than six months old and that contains both a
         record of operating history and projected future returns.

    REF: 11-3

6. What is the value of including a “milestones achieved” section in the business plan?

    Answer: An angel investor who has been brought into the deal early on, who has been
    sought on occasion during the emerging phase for advice and counsel, and who has
    developed trust for the management and a belief in the potential for the venture will be more
    inclined, when the time comes, to make the required investment.

    Entrepreneurs who have been executing a plan, completing stated milestones, and operating
    within their budgets are more likely to receive investment capital than are those who merely
    appear to have been lucky.

    REF: 11-2b

7. Why is it important for the entrepreneur to develop personal relationships with a banker even
   if turned down for a loan?

    Suggested approach: The students should provide their opinion on why it is important for
    an entrepreneur to develop good personal relationships with a banker even if they are turned
    down for a loan. Generally, a good relationship with a banker can lead to a loan application‟s
Chapter11: Putting the Business Plan to Use                                                     11-21



    acceptance in the future, and the banker can become an invaluable resource for learning
    about alternative sources of funding or methods to achieve loan acceptance at the bank.

8. Why is it preferable for an entrepreneur to approach an angel investor through a referral?
   Explain.

    Answer: It is preferable for an entrepreneur to approach an angle investor through a referral
    since it is desirable to be introduced to an angel investor by someone the investor already
    knows and trusts. People who occupy a respected position within a referral network tend to
    guard their reputation carefully. They refer only deals that they believe to have a strong
    chance of being successful, and they tend to refer deals only to investors who might have an
    interest in that type of venture.

    REF: 11-2b

9. How can a business plan be used to help the entrepreneur acquire physical assets, such as
   office space?

    Answer: Because early-stage ventures often have difficulty with cash flow, they will on
    occasion have trouble paying regular monthly bills. Landlords know this, and they attempt to
    ward off problems with lease payments through several well-known tactics. One tactic
    commonly used in early-stage ventures is to require the lease applicant to submit a business
    plan as part of the application process. The landlord knows that a business without a plan is
    more likely to fail. Usually, the landlord is not qualified to read and assess the plan, but the
    absence of one sends a signal that the venture may be too high a risk. Entrepreneurs should
    be prepared with an up-to-date business plan when seeking office space. The ability to
    produce a business plan demonstrates to the landlord that the business is organized and well
    managed. Entrepreneurs who present a plan on request increase their probability of acquiring
    a lease for office space when it‟s needed.

    REF: 14-4b

10. Name some co-marketing relationships in your community. What value does each brand
    receive from the arrangement?

    Suggested approach: Students are required to name some well-known co-marketing
    relationships in their community, stating the value each brand received from such an
    arrangement. The following excerpt provides information on the concept of co-marketing.

        In addition to VAR relationships and joint ventures, many firms today are prospering
         from so-called co-marketing arrangements (also frequently called co-branding).

        Co-marketing refers to the practice of two distinct firms to build their independent
         businesses or brands in the same location or to use the same distribution channel.
Chapter 11: Putting the Business Plan to Use                                               11-22




         For example, consumers commonly can pick up fast food from a major brand, such as
         McDonald‟s, at their favorite gasoline station, such as a Chevron station.

        An entrepreneur with a new and emerging brand can gain rapid awareness and market
         penetration through a careful co-marketing arrangement.

        A co-marketing arrangement, like a VAR approach, must provide benefits to both parties
         to the agreement.

    Today, co-marketing has become exceedingly commonplace. Among businesses that are
    primarily centered on the Internet or have extensive Internet distribution models, the term
    affiliate program is often used in place of co-marketing.

    REF: 11-3a
Chapter11: Putting the Business Plan to Use                                                 11-23



CASE STUDY

“Polaris Communications Learns How to Pitch to Investors”

Questions for Discussion

1. What is the value of an external consultant in helping the entrepreneur raise money?

    Suggested approach: Students should consider the importance of properly marketing the
    business plan and how consulting experts may improve the quality of the business plan.

2. Do you think it‟s possible to develop an investor pitch that appears too polished? Explain
   why or why not.

    Suggested approach: The students are required to provide their opinion on whether they
    think it is possible to develop an investor pitch that appears too polished. The students should
    further substantiate their opinion by providing justifiable reasons.

3. What are the essential elements of an effective executive summary?

    Suggested approach: Students must research on what forms the essential elements of an
    effective executive summary. The students could refer to Chapter 10; Writing the Business
    Plan to understand the concept of an effective executive summary.
Chapter 11: Putting the Business Plan to Use                                                 11-24



EXPERIENTIAL EXERCISE 1

“Test the Venture Capital Readiness of Your Business Concept”

Introduction: Venture capital can push a company from the brink of stardom into the limelight.
Take the true-false test provided in the text to find out if your business idea has what it takes to
win venture capital.

Suggested approach: The students are required to take the true-false test to determine the
„Venture Capital Readiness of their Business Concept”.

After completing the test, students need to mark their answers based on the scoring provided at
the end of the exercise.
Chapter11: Putting the Business Plan to Use                                                 11-25



EXPERIENTIAL EXERCISE 2

“A Conversation with a Banker”

Introduction: The profession of “banker” can be a bit of a mystery to people. How does a
person decide to enter a career in banking, and what does that person do to become successful in
such a career? To the entrepreneur, the question is not just a mystery but is also a mystery to be
solved. The most effective way for an entrepreneur to acquire the debt funding necessary during
the early stages of his or her venture is to become familiar with a banker and to help that banker
become successful in his or her career. By creating a business plan and operating a business in a
manner that will help the banker become successful; the entrepreneur can develop a long-term
relationship that will be a source of support during difficult periods in the life of the venture.

Suggested approach: The students are required to interact with banks and bank representatives
to complete this exercise. They must focus their visit to the bank on getting to know a small
business loan officer. The teams should arrange a meeting with the loan officer to discuss
questions provided within the exercise.

The group must take notes during their interviews with bankers and report back to the class on
their findings. Alternatively, a guest speaker could appear in class and respond to the questions.
Chapter 11: Putting the Business Plan to Use                                11-26



OTHER RESOURCES

Websites of interest:

Angel Investor News
http://www.angel-investor-news.com/

Directory of Angel-Investor Networks
This article on Inc.com‟s site lists angel networks in the United States.
http://www.inc.com/articles/2001/09/23461.html

								
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