Screening due diligence #2: Quality of the Business Plan

What is the overall quality of the company's business plan?

As a second screening mechanism, venture capitalists often scrutinize the business plans they receive to gauge the quality of general presentations, thoroughness, clarity, coherence, and focus. These surface aspects often convey much about the quality of the investment opportunities and the entrepreneurs, themselves, underlying the surface. Says Russ Siegelman, partner at Kleiner Perkins Caufield & Byers:

The variations in the quality of the plans I read is amazing. Sometimes they look like the entrepreneur's dog has chewed them, and they are photocopied sloppily onto standard copy paper, with typos & coffee stains. Sometimes they are glossy, well written, with plenty of Excel generated charts and pages of financial projections. One might think that a good VC will get beyond the stains and the chewed pages and get to the business idea to make a judgement. But that isn't my view. If entrepreneurs don't present their ideas in a quality way, they probably aren't organized or professional enough for me to want to invest. I am not typically a form over substance kind of guy, but when it comes to business plans, I can't get to the substance if the form doesn't make the quality bar.

C Gordon Bell, Digital Equipment Corporation veteran and adviser to US Venture Partners, states rightly that 'the ability of a CEO and his or her top-level group to write a good business plan is the first test of their ability to function as a team and to run their proposed company successfully.'

At a minimum, venture capitalists prefer business plans that convey a coherent and compelling story. They like plans that are clear, concise, thorough, and professional in presentation; practical, realistic, and credible in content; and that adequately explain all assumptions on which claims are made. They also like highly focused, concise plans. Venture capitalists generally prefer business plans that present a lot of information in a very few words.

Plans addressing these topics fully (but efficiently) tend to be effective in conveying to venture capitalists the overall merits of the given investment opportunities. They also provide a solid foundation on which venture capitalists can begin their due diligence.

Additionally, most venture capital investors strongly favor business plans that contain well-thought-out, well-defined milestones. Venture capitalists use such milestones to measure and monitor companies' performance. Alan E Salzman, managing partner of VantagePoint Venture Partners, and John Doerr explain, for venture capitalists, 'early detection of deviation from the plan will indicate needed changes in the scheduled financings and help identify emerging problems in time for corrective action.' Business plans containing appropriate and well-defined milestones facilitate this function.