Business Plan Guidelines

May 2011

BUSINESS PLAN GUIDELINES

The business plan used for your initial VC pitch generally takes the form of a power point presentation consisting of the following slides (try to keep each topic to a single slide). Executive Summary (OK to be two slides) This is a high level summary of the key points from each of the other sections of the business plan. Market Opportunity This is a description of the industry and gives statistics for the size of the market being addressed by your products. It should include market forecasts for a few years out. All of your statistics and forecasts should be based on impressive third party sources. This section should contain a discussion of the pain the industry is facing that is solved by your products. You will describe your solution to this pain later under the Solution section, but this section should set up the straw man for you to knock down. Business Model This is a very specific description of how you will earn revenue. You need to give the details of how you will charge fees. You need to characterize the type of fee, who will pay the fee and exactly what they are paying for from the customers perspective. Technology and Products (or Services) This is a high level description of the technology you will develop (including your IP protection strategy) and the products or services you will sell. You need to walk a fine line between disclosing enough to give the impression that your technology is whiz bang but keep in mind the risk that this business plan might inadvertently or otherwise be shared with others. Leave the really sensitive stuff to the verbal part of the presentation if you can. Solution This is where you will knock down the straw man you previously set up in the Market Opportunity section. This is a discussion of how your products, technology or business will solve the pain currently being faced by your industry. Competition This is a discussion of each of your competitors (name names) and a realistic assessment of their strengths and weaknesses. You need to describe your barriers to entry here and discuss how you will beat your competitors. This is a critical part of the business plan and often the VCs will know of a competitor that you werent aware of. That can be disastrous, so you have to do your homework very thoroughly on this topic area. If the VCs do know of additional competitors, hopefully it will be ones that you could not have known about since they are in stealth mode, in which case you should just roll with the punches as you try to address that competitors business on the fly.

Sales and Marketing Strategy This is a discussion of your sales and marketing strategy. Give both an overview of your strategy generally and then try to be specific about any unique tactics that you will use. This needs to be compelling. When the VC thinks about this from the customers perspective, they need to see how your approach would be an effective one. Operations Describe your operations and try to give a clear sense of how you will make, sell and deliver your products or services. Focus on things like facilities, employee headcount and any other major cost side items that you need to execute your business plan. Up until this point, you have focused mainly on the revenue side of your business, this is where you start to describe your key cost drivers. Financial Projections Provide your projected income statement from funding through profitability. Most VCs will want to see a break-even point within 4 years of their investment (of course earlier is always better). This will depend in part on the time horizon for the particular fund they are using to make the investment since a given fund may be closer to a liquidity event where the fund must make distributions to its limited partners. Your presentation needs to be reasonably detailed. A good rule of thumb is to break out any items that contribute 10% or more to the total of a particular category. Having said that, you probably dont want to break down your operating expenses into more than 5 or 6 line items. Your projections need to be reasonable and you will need to defend them at a very detailed level with the VCs. This is the slide that you will spend the most time discussing. VCs will probably stop you here and start asking questions at this point. Some are patient and hold the Q&A until the end of your presentation, but you should let them interrupt here if they want to. Just be aware that the most common approach that VCs get sick of seeing from entrepreneurs is a set of financial projections that essentially say the market is huge and if we get just 1% market share, we will be hugely successful. The better approach is not to have merely an arbitrary assumption about market share, but have some reasons why you will be able to generate the revenue in your projections. Also, theres probably not much point in trying to claim that your projections are really conservative, since thats what everyone says. You want to give the impression that you are making reasonable assumptions and that you are savvy enough to know that virtually no projections are actually conservative. Investment Schedule and Use of Proceeds This is a discussion of the timetable for and amount of each financing event you have assumed in your financial projections. In addition, you need to describe in reasonable detail what the proceeds of each financing will be used for. The level of detail should dovetail with the line items in your financial projections. You need to show all of the financing you believe will be needed to get to profitability. In general, most companies try to take in as small an investment as possible that will be just enough to get the company to the next milestone where the companys valuation goes up. For example, an early stage company might take in just enough money to enable them to develop a prototype or otherwise get to proof of concept if that will significantly increase the value of the company. This strategy is designed to minimize dilution for the founders, but needs to be balanced against the relative comfort that having extra money in the bank can provide. Often, this strategy

dovetails with the VCs desire to invest in tranches to help boost the IRR for their investment. You just need to be aware that tranche investing means that you need to pre-agree on the valuations for each milestone, which can be difficult. Sometimes tranche investing means that the VC actually wants to put the entire amount in at the initial valuation even though the company only receives the money as it hits the milestones. This means the founders dont get any valuation credit for hitting the milestones and may really end up being an option on the part of the investors to invest if the milestones are not realistically achievable. Analysis of Risks This is a discussion of the material risk factors that face the investors. Obviously, every startup is risky and all face many of the same risks generally. Try to be specific about the particular weaknesses you think you may have. Here again, you want to appear reasonable and balanced in your analysis. Think about how you can mitigate these risks for purposes of the Q&A discussion. Management Give the bios of the founders and the key executives for your company, including the CEO, CFO, the chief technology person and the sales and marketing person at a minimum. Its OK to give the bios for your Board of Directors and your Advisory Board members, but VCs wont be too impressed with name dropping if it appears that those persons will have only a high level role. In real estate, its location, location, location. In venture finance, its team, team, team. This is a critical section of the presentation and will probably be the most important element from the VCs perspective for making an investment. Because of the inherent risks involved with startups, most VCs take comfort from their belief that a smart management team will find a way to make money even if their initial business plan fails or hits a roadblock. Other Sections Depending on your business, there are a number of other sections you may want to include if they are somehow unique, impressive or important for your business plan. Some of these include: Potential Customers; Current Key Customers; Exit Strategy; Distribution Channels; Strategic Partners; Stockholder Profile; Legal Structure; Regulatory Environment; Clinical Trials; and Industry or Scientific Awards. Obviously, these guidelines cover a standard set of issues to be addressed in your business plan presentation, but your individual business plan needs to be tailored to your business and there could be many other aspects not covered here that would be important to cover if they are unique, impressive or otherwise important to your business plan. Most VCs will only want to sit through 12 to 15 slides, so only add to the above sections if its truly important to understanding your business.

Orrick Attorney Biographies & Contact Information

May 2011

Lowell D. Ness
Partner, Corporate Silicon Valley (650) 614-7455 lness@orrick.com

Related Practice Areas

Corporate Governance Advice Emerging Companies Venture Capital and Strategic Investments Mergers and Acquisitions Capital Markets

Lowell Ness is a partner and a founding member of the firms Emerging Companies Group in the Silicon Valley Office. He has considerable experience in securities law and corporate governance matters. His practice focuses on high growth emerging companies and involves venture capital financings, mergers and acquisitions, public offerings and private placements. His clients include startup companies from the earliest stage and well established public companies. Mr. Ness also represents both private equity and venture capital funds. Recent transactions include representation of: Premier Devices in its $84 million sale to Sirenza Microdevices. Micrus Endovascular in its initial public offering and a secondary public offering. PDF Solutions in its initial public offering and concurrent private placement. Landec in a PIPE offering of common stock to private investors.

Education
J.D., cum laude, Georgetown University Law Center, 1994 B.A., cum laude, University of Pennsylvania, 1989

Honors
American Jurisprudence Award, Commercial Law American Jurisprudence Award, Decedents' Estates

Languages
English French

Mr. Ness acted as either company counsel or investors counsel in venture capital financings for BayPackets, Buildfolio, CaritaSoft, Chenomx, Cognigine, Convergence CT, CustomerNation, DeltaGen, Financial Engines, Ishoni Networks, Horizon Photonics, MariTech, MetiLinx, MediaQ, MIOX, Mobilitec, NavLink, Network Physics, NewPort Communications, nth degree software, OnFiber, Partnerware, peerMusic, Swift Financial, ValiCert, Varian, VirnetX and Zoom Systems. He acted as either company counsel or underwriters counsel in public offerings by BankAmerica Corporation, Central Garden & Pet, ESS Technology, Fritz Companies, The Gap, Health Systems Design Corp, Il Fornaio, Novatel Wireless, Orbit Resources, PG&E, Providian, Select Comfort, S3 Incorporated, The PMI Group, Transamerica, Trendwest, Varian and West Marine. He has also represented numerous companies in connection with mergers and acquisitions, including ABM Industries, ALSTOM, Business Evolution, Capstan, ESS Technology, FunMail, Intersperse, Kinders, Louisiana Pacific,

MediaQ, MIOX, NeoVista Software, Outdoor Industry Group, PDF Solutions, Pinnacle Systems, PG&E, Promedix, Redwood Empire Bancorp, Saqqara, Symphony Systems, Topcon, Varian, Versatron, Windom Health Enterprises and Zend. Mr. Ness began his career at the firm as a summer associate in 1993. Mr. Ness has taught a course in Securities Regulation at Santa Clara University School of Law. Mr. Ness is a frequent speaker at national MCLE seminars on topics that have included Legal Opinions, Drafting Stockholders' Agreements, Corporate Governance for Family Businesses and Mergers & Acquisitions for LLCs. Admitted in California Memberships American Bar Association State Bar of California, Business Law Section Bar Association of San Francisco Member, Executive Board, Law & Policy in International Business, 19921994

Joseph Z. Perkins
Managing Associate, Corporate Silicon Valley (650) 289-7188 JPerkins@orrick.com

Joseph Z. Perkins, a corporate associate in Orrick's Silicon Valley office, is a member of the Emerging Companies Group, which advises emerging companies and venture capital firms. Mr. Perkins's practice focuses on providing private venture financing and merger and acquisition services to Internet, high tech, and clean technology companies.
Related Practice Areas
Emerging Companies Venture Capital and Strategic Investments Mergers and Acquisitions Corporate

Some of Mr. Perkins's current and former clients include: Bleacher Report (funded by Hillsven Capital, SoftTech VC, and others) Calista Technologies (acquired by Microsoft) CubeTree (acquired by SuccessFactors) Flourish Network (a 501.c.3 corporation) Flurry, Inc. (funded by Draper Fisher Jurvetson and InterWest) Greenplum (funded by Meritech, Sierra, Mission and others) Handmark (company-side acquisitions) LS9 (funded by Flagship Ventures, Khosla Ventures and Lightspeed Venture Partners) MIOX (funded by Sierra, DCM and others) MyShape (funded by DFJ and others) PowerSet (acquired by Microsoft) Xobni Corporation (funded by Khosla Ventures, First Round Capital, Baseline Ventures, Blackberry Fund and Cisco) SAY Media - fka VideoEgg (funded by August Capital and others) Voxify (funded by Palomar Ventures, El Dorado Ventures and Sigma Partners)

Education
J.D., Harvard Law School B.S., summa cum laude, Philosophy, University of Utah B.A., summa cum laude, Japanese, University of Utah

Honors
Phi Beta Kappa

Languages
Japanese

Prior to receiving his Juris Doctor from Harvard Law School, Mr. Perkins spent four years as an officer of a company that provides language and travel services to Japanese travelers. Admitted in California