Continuation of reflections on investments in startup projects
(The previous article in this series is another advice for startups.)
Andrey Stadnik, BFM Group Ukraine
Not so long ago I had a chance to get acquainted with the business plan of an investment project involving the construction of a huge production complex. The business plan itself describes the introduction and mass production of a certain innovative development to be applied, according to the author, in the transport industry.
The developer, I must say, has prepared very seriously for the issue of preparing the document. Here is the choice of a construction site, and all the stages preceding commissioning, and an organizational plan, and cost calculation, and marketing justification, coupled with social significance, and a financial model with options for attracting investment. Everything would be great if it weren't for one "but". This very "innovation" assumed…
"...the production of a device that changes the orbit of the rotation of electrons around the nucleus of an iron atom. As a result, there is the effect of a helicopter propeller and a vertical thrust is formed, which will reduce the weight of metal objects."
There is a disease in which the patient can draw clear and logical conclusions, but their prerequisites have not the slightest relation to real life. So it is here. To achieve the goal, the innovator delved into completely non-core areas for himself. For example, financial management and the basics of production management. Construction and marketing analytics. And for a non–specialist, I got into it quite competently. The output was a comprehensively developed document. It's just a pity that his topic itself has nothing to do with the laws of elementary physics, and the place of such an innovation is in the kunstkammer of near–scientific nonsense.
Of course, there were a lot of inaccuracies, omissions, mistakes in that business plan. But in general, they would not be critical if it were not for the idea of the project itself.
What was this example for?
And to the fact that it is much more often the exact opposite. The idea of a business may be sensible, but the authors who promote this idea, the degree of its preparation for practical implementation in most cases tends to zero.
The Internet is full of information about how to dress a "naked idea". Of course, there is enough "water" written by students or stupid copywriters who slightly modify other people's work for their websites. But there is enough sensible information. How can I not use it?
It seems Google is used for everything. Only a completely lazy or stupid person is not able to get an idea of what information he needs and what primary data needs to be collected in order to evaluate his idea for market viability and get an idea of the formation of costs for its implementation.
But for some reason, many authors of business ideas do not have time to do this somehow. Some people think that you can pay a consultant who will look into their head and read all the unspoken thoughts and wishes there. After that, he will collect all the data, do marketing research, write a business plan, find an investor, build everything himself, organize and transfer the management of an already operating business to the brilliant initiator of the project.
And there are also individuals who believe that an investor is obliged to do all this. They say that if he is a venture capitalist or a business angel, then this is his problem.
Unfortunately, we do not live in a fairy tale, and this cannot be by definition. For the reason that at all stages of the project there is such a thing as responsibility. Show me a consultant who takes full financial responsibility for how other people will implement his calculations? You won't show it, because it's absurd.
By the way, if the author of the idea absolutely does not want to go into the organizational details of his project, then it is necessary to turn not to consultants, but to project companies or project management specialists.
Although, since the responsibility for making decisions at all stages falls on such a structure involved from the outside, then control over the further management of the project will also be assigned to the performers. Optimally – before commissioning. Ideal for an investor – until full payback. Moreover, it is absolutely not a fact that for the process business, which it will become from the moment of launch, other attracted specialists will not be needed.
There is a natural question about where the author of the idea of a new business can see himself in this scheme? Maximum – as a hired manager responsible for technological processes. And this is also provided that he is competent in them. You can naively count on some hypothetical dividends paid by royalties, or a block of shares in the company. But this is all from the realm of unrealistic fantasies.
The idea itself, no matter how brilliant, but until it is capitalized, is worth nothing. A complete zero. Why would an investor constantly pay the author of an idea for the introduced zero? They don't pay for zero anywhere and never.
It should be said here that an idea can get its value long before capital investments in it.
For example, you have an idea involving the construction of a new plant. It's not worth anything yet. But when you have all the pre-investment studies, contracts of intent with equipment suppliers, construction design contractors, a detailed business plan has been drawn up, a land plot has been selected and agreements have been reached with land users on the subsequent alienation of land plots in your favor (or the decision of the local session on the development of the allotment project) – this package of documents already has a certain price. It is sometimes quite difficult to define it in monetary terms (theoretical calculations exist, but that's why they are theoretical).
However, this tool works. In some industries, there are even certain prices. Don't ask me, because everything is subjective. Although, I think, if you calculate a project with a horizon at which NPV will be comparable to investment costs, take into account the cost of the money involved, make two financial models, then the margin obtained can be considered the approximate price of the idea.
What should startups do who do not want to be distracted from creativity and whose ideas cannot be capitalized without significant upfront costs? Look for an entrepreneur partner with experience and experience. There is no other way. If it is not possible to find a reliable partner, you need to learn how to do everything yourself.
It should be understood that for any business, without exception, the organizational and financial model is completely identical. What is furniture manufacturing, what is a greenhouse complex, what is a metallurgical plant, what is a water park, what is a bank or an insurance company, what is a social Internet network for cross-stitch lovers, what is the development and sale of software products, a perfume shop or a paid toilet. Everything is the same.
The formation of costs can be divided into 4 main categories.
- Costs of the preparatory period. Purchase and construction of all necessary fixed assets (one-time payments). Company registration, purchase or repair of premises, equipment, transport, necessary licenses, permits and patents. In the case of large projects, all expenses, without exception, from the beginning to the moment the facility is put into operation and the start of production, which includes both material and non-material costs. Bribes, too. In general, everyone, without exception, until the moment when the project is launched and sales begin.
- Costs directly related to the production of products (the more goods sold, the more they spent on its purchase and delivery to the place of sale). This is the direct cost price. Do not forget that raw materials sometimes need to be purchased for the future.
- Total costs. Something that can be taken as a relative constant. For example, advertising, photo, rent, transport, communications and so on.
- Taxes, payment of the loan body and interest on it.
The revenue part should be determined based on the results of marketing research, while not forgetting about the production capacity or the optimal workload of personnel.
You make a sign: the top line is revenue, the bottom line is costs. If you can make such a monthly table, 70% of the financial plan is already ready.
It is clear that to an inexperienced person and who, after years, has forgotten the school mathematics course, all these formulas of the reduced income, profitability standards or payback calculation may seem creepy. And the requirements for a full-fledged financial business model, with their tables and graphs, generally resemble a Japanese Kabuki theater, where everything is beautiful, but absolutely nothing is clear.
In fact, all these seemingly terrible formulas represent a series of elementary actions (addition, division, multiplication). No more than that.
Of course, there are enough complicated things in financial management. But in order to convey to the investor an understanding of the project, its cost, profitability and payback, the above (IRR, NPV, ARR, PI, PB) are quite enough. It's very simple.
The same applies to the preparation of pre–investment documentation. It is enough to at least get acquainted with the methodological recommendations of Tacis, go through the points of the typical content of the business plan in the BFM Group standards, or read the works of V. Behrens and P. Havranek. For example, the "Manual for the preparation of industrial feasibility studies" (the same one that, with someone's light hand, they used to call the UNIDO standard).
It is worth noting that this would be good if it were not for the leapfrog with definitions of terms and the lack of logical thinking among many entrepreneurs who want to attract financing to their projects.
Well, for example, a recent case. One citizen asked us to develop a business plan for his production project. They say there is a potential investor who wants to see a document prepared according to international business planning standards.
Since the client claimed that he had all the necessary information and it only needed to be brought into a normal format, he was sent a questionnaire to fill out. The questionnaire has a fairly simple tabular form, in which it is necessary to enter data sufficient to calculate a financial model based on them. Well, additionally answer questions to describe the company, the essence of the project, the organizational plan and, in part, to determine the marketing situation.
When the person saw the questionnaire, an explosion of indignation followed from his side. For some reason, he decided that this very questionnaire filled out by him was a ready-made business plan. Well, what about it? There are signs. There are numbers in the plates. The most ready-made business plan that someone else has to pay for! They tried to explain, sent examples – it was useless. The client bit the bit in a rage, deciding that he was being bred.
Well, that's his problem. I don't know what and how he decided there. There are enough inadequates around us. And this is not the case. There are also limited people who do not know how to use the Internet and search engines.
Good gentlemen! I don't advertise Google, but I can't go anywhere without it. Everything I have written here has been written and rewritten before me in hundreds of variants. It doesn't matter that you don't know how to present, master and capitalize your ideas yet. Everything comes with time. The main and rather risky topic for you is the search for a partner who can implement all your developments and not throw you.
Choosing an adequate partner is a very painful topic. Personally, I have been burned on this issue more than once. I will try to tell you about my mistakes in more detail soon.
To be continued.
Portal "Eternal youth" http://vechnayamolodost.ru26.05.2011