Winner's Circle

Making A Plan

Without exception, you must have a business plan if you want to do business with a venture capitalist.

There are some strict do's and don'ts you should heed when writing a business plan. Do give a clear and simple explanation of your idea. Do have a well-thought-out sales and distribution plan. Do show that you are knowledgeable about your market. Do explain who your competitors are and how you will compete against them. Do include full resumes of your key managers. And do, if possible, write your own business plan. Pat Hamner, vice president of Capital Southwest Corp. in Dallas, says he wants to read business plans that "make sense and exude credibility. I like to see if all the sections of the business plan hang together, having been supported through well-documented statements and data," he says.

Venture capitalists notice certain red flags when reviewing a business plan. For example, don't make statements such as "there is no competition," "this is a paradigm shift for the industry," or "my idea represents a multibillion-dollar market." Al Fleener of Seed Company Partners LP in Dallas feels that the more grandiose the business plan, the harder it will be to sell. "Demonstrating that you have analyzed the market and will initially go after a segment of it is far more attractive to a venture capitalist than going after the entire market all at once," he says.

An employee list that only includes family members is another red flag. It's one thing to have friends on the list; it's hard to believe, however, that one family has all the skills necessary to make a venture successful.

Your business plan is the most important tool for communicating your idea to venture capitalists. Not only does it sell your idea, but it also demonstrates your ability to plan for, organize and manage a successful business venture.

Your intellectual property rights must be clearly represented to a potential investor. All rights should be specific, protected and properly assigned to the company being formed. Any arrangement in which you or other related parties retain the rights as individuals to the basic patents or other intellectual property under a license and royalty arrangement will not be looked at favorably. The venture capitalist does not want any other agreements in place that deplete the value of the company it is helping to fund. If you have not yet received patent protection on your idea, having searches conducted and opinions rendered by a patent attorney can be very useful to a venture capitalist during his evaluation.

Most venture capitalists will sign nondisclosure agreements. However, virtually no venture capitalist will sign a covenant not to compete. At this point, therefore, you should have already filed for a patent.

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This article was originally published in the April 1998 print edition of Entrepreneur with the headline: Winner's Circle.

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