Writing An Effective Business Plan For a High Technology Startup Robert B.

Dellenbach
Fenwick & West LLP

Dawn H. Woo
M.B.A./J.D. candidate, Haas School of Business and Boalt Hall School of Law University of California, Berkeley
2004-7 Fenwick & West LLP All Rights Reserved

The business plan will likely be the single most important written document in the early years of your firm. Investigation of this plan will account for much of the discussion you have with the venture firm. It is the vehicle around which you get to know each other. Peter Wagner, Accel Partners Youve identified a big problem, come up with a strong potential solution, and now need to gather the human and financial resources to make your dream a reality. So why do you need to write a business plan? A business plan is a road map for transforming your ideas into a successful business. Most frequently in the high technology world, business plans are an important step to raising the funding necessary to turn the vision outlined in the plan into reality. Business plans also help you describe and promote your business to co-founders, key hires, banks, customers, suppliers and other business partners. Moreover, a successful business plan is a tool for focusing your teams efforts, and a benchmark against which you can measure progress. Finally, going through the process of developing your business plan will also help you calibrate your ideas against real world economics and trends and help guide you to those activities that are likely to be fundable and ultimately successful and away from those endeavors that may not be accepted by the market.

Using Your Business Plan Effectively. Anyone you talk to is a potential investor, employee or
customer, so you must be able to explain your business proposition in a variety of ways. To meet these various needs, your business plan should take the following forms: Elevator Pitch: your value proposition in 2-3 sentences; Executive Summary: 1-2 pages that clearly outline key aspects of your business; Powerpoint Presentation: 8-20 slides that immediately catch an investors attention and effectively convey your value proposition; and The full business plan: 10-30 pages describing your business in relative detail, plus attachments such as projected financials, resumes, and market data.

Investors rarely want to see a full business plan as the introduction to you and your business. The process comfortable to most investors is to receive an executive summary from a known intermediary,

such as a lawyer, accountant or other business contact. An investor will rarely read a full business plan sent cold. You can use a Powerpoint version of the business plan when you meet the investor in person, and deliver the full business plan upon request for additional information. In this process, the investor will use the information in your business plan to evaluate whether or not your assumptions about the market opportunity are valid and assess whether your company is a good investment. If the investor decides to invest, he or she will submit to you a term sheet outlining the terms and conditions of financing. While you and the investor negotiate the term sheet, the investor will do additional business and legal due diligence based on the business plan. Weaknesses and errors in the business plan can delay this process; conversely, a thorough and well-organized business plan can be a roadmap guiding the investor through the business opportunity and hard issues and expedite the path to funding.

What do Investors look for? Venture capitalists have substantial experience in helping start-ups become successful businesses. Based on their opportunity to add value, they take great risks and are looking for exceptionally high returns on their investments. Here is what a few prominent venture investors say about what they are looking for in an investment opportunity:
Kleiner Perkins: Were on the look out for ideas with the promise to invent new business categories or radically alter existing ones. Our focus is on new technologies and new applications of technology that will drive high-impact change. Mayfield Fund: Were looking to invest in exceptional, tech-savvy, people-smart technology entrepreneurs with unique insights into the dynamics of their markets; innovative technologies or solutions that solve big, important problems for customers; companies with potential to capture and maintain a leadership position in large, underserved technology markets; differentiated business models that provide a significant return on investment over several years. Hummer Winblad Venture Partners: We look for entrepreneurs who have a passion for their business, a large and growing market opportunity, a hard to duplicate technology, and a business model that works for both the target customers and the enterprise. Versant Ventures: We look for: experienced, passionate entrepreneurs, large market opportunity, proprietary product or service; realistic business model.

The key criteria investors mention most often are: Customer pain & value proposition; Growing, underserved market; Exceptional management team; Sustainable, competitive advantage (secret sauce); $50-$100M+ revenues in 5 years; Clear exit strategy, including IPO with market cap of $200M-500M+ or an earlier acquisition yielding 5-10X returns (i.e., 5 to 10 times return on investment); Opportunity to be market leader (1st or 2nd); and Industry or technology fit, i.e. a business operating in an area in which the particular investor has some knowledge or expertise.

Angel investors today are using many of the same criteria in making their investment decisions, but are willing to invest at an earlier stage (and lower price) to secure a position in a promising business and to provide the needed seed capital for development to the level where the economics meet venture investors criteria.
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While seeking investors, the evaluation should be mutual. An investor will want to take an active role in your business, and you need to think about whether the investor will be a good partner. Do you share a similar vision for the company and the market? Does the investor have the connections or expertise to help your business succeed? Will you be able to work together effectively? Its important to choose the right investor taking money from the wrong partner can doom your venture before you even get off the ground.

The Executive Summary. The executive summary is key in the investment process. It should be
your business plan in its most concise and persuasive form. The executive summary forces you to streamline your message and focus on its most important selling points. After reading your executive summary, potential investors should be able to understand the nature of your business and why it is a good investment. Most importantly, it should compel interest in the more detailed business plan; if you fail to capture readers attention in the first few paragraphs, they wont have the appetite to learn more about your business. You may have heard that you should write your executive summary after completing your business plan. Though a finalized business plan is generally prerequisite to an effective executive summary, it is helpful initially to outline the main points you want to convey to investors, and that you will address in more detail in your business plan. You then iterative between developing your plan and refining your summary, all the while remaining open to the possibility that key points might change in nature and relative importance. Remember that the goal is to present the best, most concise description of your business to generate investor interest. The following areas are the most frequently included in an executive summary.

Overview. The overview generally begins with your elevator pitch. What need are you fulfilling? What problem you are solving? How are you going to do this? Include a short statement of when the company was founded, which growth milestones you have met and your current development status. Market. Describe the market for the companys products or services, including specific market
segments and customers. Indicate the current size of the market (in aggregate revenues) and projections for market growth over the next five years, expected changes in the market, and how those changes might affect your business. Entrepreneurs often identify a large general market rather than focusing on the specific market that is actually addressable by the company. Properly framing the market is essential for your own assessment of the business opportunity and for establishing credibility with investors. Back up your market claims with facts and statistics from well-respected sources in your industry. If there is no direct data (which is not uncommon), extrapolate from or compare to the best data you can get on similar markets. This section of the executive summary should demonstrate the realistic size of the opportunity youre presenting at a high level. In your full plan, you should include more detail about the source of your projections, customer demographics and trends, and your ability to deal with those changes.

Sales Strategy. In this section, lay out your plans to penetrate the market, including your strategy
for addressing different market segments or for vertical expansion within a designated segment. Will you become a leader in an existing market, or are you creating a new market? Describe your sales strategy and where you intend to focus initial efforts. What you will do to expand your sales efforts as the company grows? Many business plans fall short in this area. Its not enough to simply show you have a great idea; you need to show how you will turn that idea into a profitable business by describing how you will actually sell your product or service. You dont need to map each point between A and
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B highlight key strategies and when you expect to implement them.

Product and Service Offerings; Technology. Describe what you offer, including the
features, benefits, differentiating attributes and development status of your product or service offerings. Include a description of the underlying technology; this description should contain enough information to support the benefits and differentiation youre asserting, but not so much detail as to lose the reader or disclose your key secrets. Include a brief product roadmap demonstrating your vision for the future. Describe any regulatory issues you might face, such as FCC compliance, FDA approval, privacy concerns, or export controls. Balance meaningful description against too much disclosure. In your full business plan, you will describe the technology, and the risks, in much more detail. Identify actual and potential competitors and your sustainable competitive advantages. There is ALWAYS competitionyou need to see it. How are people solving the problem you are addressing today? Who has technology that could be used against you? Who are the big players in your industry that could enter and crush you? How will those players react to your entry? The following are examples of sustainable competitive advantages: Intellectual property; Technological advantage; First to marketopportunity to lead market; Market experience and industry contacts; Sustainable cost advantages; Economies of scale; Branding; and Lock-in effects.

Competition.

Team. [T]he successful venture capitalist invests in people first and business plans second. In real
estate, the three biggest criteria are location, location and location. The venture capital axiom is people, people and people. [F]ive major characteristics that investors look for in entrepreneurs , in order of importance, are leadership, vision, integrity, openness and dedication. Jim Swartz, Accel Partners Clearly, management is one of the most, if not the most, important factors in business success. Assemble a top-notch team, including people who have the following attributes: Visionary who can see the business potential and communicate the vision to others (Founder/CEO) Technologist who can develop the product (Founder/VP Technology/Engineering) Closer who can get deals done (CEO/VP Sales) Operations guru who can keep the lights on (CEO/COO/CFO) Watchdog who makes sure you operate within your means, identifies when money is running out and keeps you in compliance with laws and regulations (CFO)

If possible, show management depth and stamina. Include an experienced board and advisors. Much of your success will depend on whom you know, who knows you, and how far your contact base reaches. Be frank about holes in the team and clarify future needs, including a description of your next few hires (these can be positions and responsibilities, rather than specific individuals).

Financials and Projections. In the executive summary, present your primary sources for
generating revenue, projected 5-year revenues and headcount, and indicate when you expect to break even. Specify key milestones and financial resources required to get there. Although not included in the executive summary, make sure you can back up your projections with real market data from respected research groups or from your own well-documented and well-executed studies. Clarify and qualify your assumptions. Build your projections from the ground up, starting with headcount. Remember that investors will not be interested in your projections unless they believe that the assumptions youre making are reasonable and reflect market realities. Finally, make sure that your financial projections are consistent between the text and spreadsheet models.

Additional Material for your Business Plan. Your business plan should include supporting
details for each assertion in the executive summary. In addition, you should address the following additional areas in the final business plan.

Capitalization. If this is your first round of financing, your capitalization will consist solely of the investments made by the founders. As you start seeking outside investors, your capitalization structure will get more complex. Note that in angel round investments, the company generally provides the term sheet. In contrast, venture capital firms will generally provide their own term sheets when they are ready to invest. Either way, you need to explain your current capitalization structure in your business plan. Summarize your outstanding stock, including fully diluted, authorized, issued and reserved shares, by number of shares and percentages. Project who gets what in a liquidity event. For each round of investment to date, include cash received, price paid per share, and post-money valuation. You should also estimate these variables for projected future rounds. Be sure to include your option plan details and possible warrants. The farther along your company is, the more detail you should provide. You may need a lawyer or someone with significant private equity investment experience to help you structure this portion of your business plan.
Describe your strategy for operating the business, including facilities needs, employment requirements, benefits, insurance, capital expenditures, and, if applicable, manufacturing plan. Provide some detail as to how you will accomplish your business goals and describe any competitive advantages of an operational nature that you might have. Be sure to discuss the major operational risks and hurdles you will face and how you plan on overcoming them. The operating plan should dovetail with your financial plan.

Operations.

More Detail on Financial Projections and Market Data. In your Executive Summary,
you did not have the space to explain your projections and market data in great detail. The goal of that section was to give a high-level view of the problem youre trying to solve, how you will solve it, and why your company is a good investment. In the full business plan, include your projected income statement, balance sheet and cash flows. Provide more detailed monthly projections for years 1-2 and summary quarterly data for years 3-5. Elaborate on the details of how you made your financial projections, including your assumptions and revenue model, your costs of revenue, and your headcount projections. You should also explain the market in greater detail, showing how you will make inroads into your initial target market and expand into larger markets as your company matures.

Resumes of Founders and Key Employees. You should include the resumes of your founders and key employees. Since investors care a great deal about the people theyre investing in, it is important to show how your current team has the experience and skills necessary to make your start-up business a success.
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How do I write my Executive Summary and Business Plan? To write an effective executive summary and business plan, you need to know your audience. For venture investors, use a familiar format like the outline presented above. Eliminate distractions such as hyperbole, excessive technical detail, jargon and, unless essential to making your point, graphics. Be thorough and cover all the points. Be concise, precise and consistent. Do your homework and show the investors that you fully understand the market, your customers, the technology and your competitors. Spell check. One of the best things you can do is find an expert or mentor to review your plan. Dont be shy about doing this it could mean the difference between getting what you want and not getting anything at all. Mistakes to Avoid. The following are common mistakes that can be fatal to your efforts:
Failure to clearly describe the opportunity; Unrealistic projections for revenues, expenses and funding needed; Simplistic or unsupported market and financial assumptions; Underestimating or not appreciating competitors; Failure to describe a sustainable competitive advantage; Inconsistent data; Missing key sections, facts or data; and Errors (spelling, facts, background).

You typically only get a few minutes of attention from any investor, and you need to make your case quickly, credibly and clearly. Investors see many plans. If its too hard to get through yours, they will move on to someone elses. As Hummer Winblad Venture Partners puts it, Business plans are not graded by weight keep them simple and to the point. Finally, credibility and realisam are important - if investors cant trust what you say, they will have no interest in investing in your company.

Resources. The following websites include information that may be helpful to you as you write your
executive summary and business plan and seek funding: Accel Partners, a venture capital firm, offers several free articles and links on its website. http://www.accel.com/work/resources.php AngelDeals.com, a virtual global network for the business community of entrepreneurs seeking funding and growth, provides a variety of resources including a venture capital directory, contracts, forms, checklists, business planning guides, and networking tools. Requires paid membership. http://www.angeldeals.com/entre/ The Angels Forum is a private group of 25 investors, including individuals and small corporate and family venture funds, that on average makes 5-15 new A round investments per year, as well as follow on B and C round investments in existing portfolio companies. Its website provides links to several educational resources to learn more about entrepreneurship. http://www.angelsforum.com/aboutus_resources.html Band of Angels, a formal Silicon Valley group of more than 100 former and current high tech executives who are interested in investing their time and money into cutting edge startup companies, is primarily focused on seed stage high technology companies with strong teams, proprietary technology, and big markets. The group invests in the range of $300k to $750k, but often lead a syndication of $2-3M; few companies successfully raise financing from the Band at valuations greater than $5M. http://www.bandangels.com/ Capital Connection is run by a small research and consulting firm that focuses on entrepreneurs and small and mid-sized companies. The website contains information about
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financing, marketing, and business plans, as well as directories of business experts and incubators. http://capital-connection.com/ Fenwick & West LLP, a law firm that provides comprehensive legal services to high technology and life sciences clients, offers a variety of articles relating to start-ups and venture capital on its website. http://www.fenwick.com/publications/6.12.0.asp Garage Technology, a seed- and early-stage venture fund, offers on its website several selfauthored articles related to obtaining financing. http://www.garage.com/resources/index.shtml Golden Capital Network provides networking, consulting, and training services to entrepreneurs that pass its initial screening. There are a few limited resources available on the website. http://www.goldencapital.net/Entrepreneurs/Get_Involved_with_GCN.asp Hummer Winblad Venture Partners invests solely in software companies and offers a few helpful hints on its website. http://www.humwin.com/hints.cfm Kleiner Perkins Caufield & Byers is a venture fund with specific initatives in information technology and greentech innovation. http://www.kpcb.com/index.html The Keiretsu Forum is an investment community of accredited private equity investors, venture capitalists and corporate/institutional investors that provide early-stage capital in the range of $250K-$1.5MM for a myriad of opportunities; 70% of its investments are in technology companies and 30% in non-technology opportunities. http://www.k4forum.com/about/index.html The Lester Center for Entrepreneurship and Innovation at the University of California, Berkeley, runs the Bay Area Entrepreneurs Forum, a monthly networking opportunity for entrepreneurs (http://entrepreneurship.berkeley.edu/bef.asp), and oversees the UC Berkeley Business Plan Competition. The Competitions website offers many useful resources. http://bplan.berkeley.edu/index.cfm?section=Resource%20Center Mayfield Fund invests in incubation, seed and early-stage companies in the communications, consumer and enterprise software arenas. Mayfield sponsors the Impact CEO conference and answers a few FAQs on the investment process. http://www.mayfield.com/for_entrepreneurs/landing.aspx North Bay Angels provides a forum for making early stage investment capital and advisory assistance available to entrepreneurial companies in the North San Francisco Bay Area. Priority will be given to opportunities that are related to telecommunications, software, Internet, optics, and medical devices/services; additionally, other potentially attractive investment opportunities such as real estate development, manufacturing, retail, food/wine projects, etc. will be considered. http://www.northbayangels.com/index.html Prism Venture Partners, based in Boston, MA, invests in information technology and life sciences companies. http://www.prismventure.com/index.asp Sand Hill Angels is a group of successful Silicon Valley technology professionals that invests in early stage private companies in the San Francisco Bay Area in the Internet, information technology, and life sciences sectors. Its website offers a few hints on preparing a business plan. http://www.sandhillangels.com/ Silicom Ventures links experienced investors with entrepreneurs from around the globe. http://www.silicomventures.com/about.htm Tech Coast Angels, the largest angel investor network in the U.S. and number one source of startup funding in Southern California, offers a resource directory for entrepreneurs and investors on its website. http://www.techcoastangels.com/content.cfm?id=EA6BF3CE964F-11D4-AD7900A0C95C1653 Technology Funding, a venture fund focusing on early-stage medical and biotechnology companies, offers some links to additional resources for entrepreneurs.
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http://www.technologyfunding.com/resources.html Venture Capital Access Online, an Internet-based marketplace for the venture capital and private equity industry, has compiled useful templates, links to articles, a glossary, and calendar of events on its website. It also offers a downloadable venture capital and private equity directory. Some services require registration and/or a fee. http://www.vcaonline.com/resources/ Versant Ventures, a venture capital firm specializing in early-stage investments in medical devices, biotechnology and pharmaceuticals, healthcare services, and healthcare, provides on its website a useful list of sample questions that companies might evaluate in assessing their business opportunities. http://www.versantvc.com/entrepreneurs.html?main#

Conclusion
Organizing is what you do before you do something, so that when you do it, it is not all mixed up. (A.A. Milne) Your business plan is the key to effectively raising funds and attracting support for your efforts. By preparing a well-conceived, well-organized and well-presented executive summary and business plan you are giving your audience the best opportunity to evaluate your business potential.

Good Luck!
About Mr. Dellenbach: Robert B. Dellenbach has counseled entrepreneurs and investors as a corporate and intellectual property attorney at Fenwick & West LLP since 1989. He advises start-ups and venture-backed companies on business plans, incorporation, financing, founders stock, employee equity plans, intellectual property protection, licensing, distribution and strategic agreements, mergers and acquisitions and public offerings. Mr. Dellenbach has represented hundreds of software, communications, Internet, biotechnology, semiconductor and other technology companies and their investors. Mr. Dellenbach received his Juris Doctor from Stanford Law School, where he was copresident of the Stanford Law and Technology Association. He sits on the Advisory Boards of the Lester Center for Entrepreneurship and Innovation at the Haas School of Business at U.C. Berkeley and of the Womens Technology Cluster in San Francisco. Mr. Dellenbach can be reached at Fenwick & West LLP, 555 California Street, San Francisco, CA 94104, Tel: (415) 875-2323, Fax: (415) 875-2350, email: rdellenbach@fenwick.com, www.fenwick.com. About Ms. Woo: Dawn H. Woo, a 2006 Summer Associate at Fenwick & West LLP, is an M.B.A./J.D. candidate at the Haas School of Business and Boalt Hall School of Law at the University of California, Berkeley. She has five years of experience as an economic consultant, specializing in the valuation of intellectual property and business ventures, and has also advised small businesses on how to develop marketing plans. At Haas, Ms. Woo won an award for her teaching of business writing and competed in the Berkeley Business Plan Competition and the Venture Capital Investment Competition. Ms. Woo received her B.A. in Economics and American Studies from Stanford University. She can be reached at dawn.woo@mba.berkeley.edu.
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