How to Write a Business Plan

Seth YakatanKatan AssociatesJanuary 15, 2008UCI Student Center Newport Beach Room C

Disclaimer

• My opinion

Our Business

• Strategic Consulting• Mergers and Acquisitions• Business Development and Partnering

and Other• Government and Industry Advisory• Corporate Training

Katan Associates: Representative Clients

Seth Yakatan, MBA

• In excess of 15 years experience as a corporate finance professional• In excess of 4 years on a direct investment basis as a venture

capitalist• In excess of 6 years as a merchant banker; part of a group with over

$5 billion under management at Union Bank of California, N.A.• Founded Katan seven years ago, completed:

– Sale of assets of 3 biotechnology companies; transaction value > $75.0 million

– Advised on 3 successfully completed, early-stage, partnering assignments, with value generated for clients in excess of $250.0 million

– For the past five years, Mr. Yakatan has served as a faculty member for the BIO Annual Meeting Executive Workshop Series

• Currently sits on Board of Directors of DCI Capital USA BDC, (OCTBB:DCIU)

• Mr. Yakatan holds a BS in History and Public Affairs from the University of Denver and a MBA, from the University of California, Irvine, Graduate School of Management.

Seth Yakatan Track Record page #1

Arranged financing for Private Equity Firm’s acquisition of this asset

Managed Transaction00 -01

UBOC Equity Sponsor TransactionKorea Times

Arranged financing for Private Equity Firm’s acquisition of this asset

Managed Transaction00 -01

UBOC Equity Sponsor Transaction

Cygnus Business Media

Divested Tower Communication Portfolio for $225.0 million

Co-Led Transaction99 -00Sell Side M&A

Classic Cable, Inc.

Arranged financing for Private Equity Firm’s acquisition of this asset

Managed Transaction99- 00

UBOC Equity Sponsor Transaction

R&R Media, Inc.

Acquired by VoiceStream in 2001 for $300.0 million, 13.3x return 1100% IRRSourced, VP99 -00

UBOC Private Equity InvestmentSol PCS

Acquired by Charter Communications in 2000Sourced, VP

98 - 99

UBOC Sub-Debt InvestmentHelicon Cable

Acquired by Rock-Tenn Co. in 2002Sourced, VP98 - 99

UBOC Private Equity Investment

Heritage Marketing Group

Acquired by Pitney Bowes in 2004Assistant VP98 - 99

UBOC Private Equity Investment

Ancora Management

Largest Private Hispanic Media Firm in USA

Negotiated, Advised Company on terms97 -98

UBOC Sub-Debt Investment

LBI Holdings II

Operates as SunCom; $1.1 billion market capAssistant VP

96 - 97

UBOC Private Equity t InvestmentTriton PCS

Acquired by RCC, Inc, in 2001for $1.2 billionAssistant VP96 -97

UBOC Private Equity Investment

Triton Cellular

Acquired by PEMEX in 1996Associate93 - 95

Sureste Ventures InvestmentANEW, Inc

IPO in 1994Analyst91 - 93

Venture Growth Funds Investment

BioCryst Pharmaceuticals, Inc.

Acquired by Cardiotronic Systems in 1994Analyst

91 - 93

Ventana Growth Funds Investment

R2 Medical Systems, Inc.

Company Description Vintage Role Status

Seth Yakatan Track Record page #2

Arranged $35. 0 million financing

Managed Transaction05 -06Debt Facility

XL Tech Group

Assist in new company formation processAdvisor04 -Company formation

Premiere US Academic Institution

Assisted CEO in broad restructuring of companyAdvisor04 -Restructuring

Nventa Pharmaceuticals

On goingExternal BOD04 -Business Development CompanyDCI USA

Acquired by Assay Designs in 2005M&A Advisor04 -05Katan M&A AdvisoryStressgen Reagents

On-going

Negotiated, Advised Company on terms03 -04

Pharmaceutical PartnershipDermaTrends

Entity ongoing; created 4 portfolio companiesAdvisor02 -03

Regional Venture Capital FundBiocomm

Terminated post Sanofi MergerAdvisor02 - 03

$40.0 million partnership with AventisMTI, Inc.

On-goingAdvisor01 - 02

$203.0 million partnership with RocheStressgen, Inc.

Acquired by Milipore for 4.1x revenues

Managed Transaction01- 02Katan Sell-Side MandateCPG, Inc.

Acquired by Harvard Bioscience, Inc.

Sourced, Managed Transaction 01- 02Katan Sell-Side MandateInovio, Inc.

Company Description Vintage Role Status

Agenda

• Risk & Milestones• How I Do It• Business Plan 101• Specific Criteria• A Few More Tips• Q&A

Risks & Milestones

Seth YakatanKatan AssociatesJanuary 15, 2008UCI Student Center Newport Beach Room C

Risk

Time

Value

”EarlyHype”

”DIssapointmentsand disillusion”

”Debugging”

Commercialization

Most new technologies go through a long maturity-this can take up to 20 years development cycle before they reach commercialization

Milestones of Development

Taken from “Between Invention and Innovation An Analysis of Funding for Early-Stage Technology Development” Prepared for NIST Economic Assessment Office November 2002, page 33

Proof of Concept

Early-Stage Technology

DevelopmentBasic Research Product

DevelopmentProduction /

Marketing

IP CreationInvention:Functional

Business Validation

New Firm or Program

Viable Business

NSF, NIHCorporate ResearchSBIR Phase I

AngelsCorporationsTechnology LabsSBIR Phase II VC

EquityDebtCapital Markets

Are you ready to start today ?

• What do you have?• Why is it novel?• What is the market?• At what stage of development is it?• Can one technology support the formation of an entire

company?• Who can help ?• Where do I get $$$$$$$ ?

DP’s Issues

• Inability to tell the story properly

• Failure to meet or respect the time frame

• Failure to explain the value proposition

• Failure to disclose issues up-front

• Lack of knowledge of the competitive landscape

It IS a Tough Road

• There is a high failure rate in new ventures– Approximately 20% are successful in obtaining more than 1 round of

capital

• VC’s strive for failure rates of 80% on investments– 5 in 10 investments fail

– 3 in 10 investments breakeven

– 2 in 10 investments succeed • A 2004 report by PriceWaterhouseCoopers indicates that only

10% to 30% of venture capital funds produce profit-generating firms

Would You Have Invested?

How I Do It

Seth YakatanKatan AssociatesJanuary 15, 2008UCI Student Center Newport Beach Room C

Our Criteria – K. I. S. S.

• Do we believe that the people involved can get the job done?

• Does the product/technology/company have a sustainable competitive advantage?

• Do we share similar expectations of value and outcomes?

• Can we add value to the company/process given our involvement?

4 Easy Steps

• Elevator Pitch • Presentation• Executive Summary• Plan

– Executive Summary– Products or Services– Market Need (Marketing ??)– Market Potential– Competitive Advantage– Management– Financial Overview

The Elevator Pitch

• Do we know what this is ???• An elevator pitch (or elevator speech) is a brief overview

of an idea for a product, service, or project. • The pitch is so called because it can be delivered in the

time span of an elevator ride (say, thirty seconds or 100-150 words).

• Part Mission Statement• Part Positioning Statement

Executive Summary

• Most important piece of the Plan• Begin with the Elevator Pitch • Talk about product / service• Highlight Market• Promote Management• Use of Proceeds• Ask for the $$$• What is the value ?

Presentation

• Use as a high level outline for the business plan– Executive Summary

– Products or Services

– Market Need

– Market Potential

– Competitive Advantage

– Management

– Financial Overview

Business Plan

• Executive Summary

• Products or Services

• Market Need

• Market Potential

• Competitive Advantage

• Management

• Financial Overview

Business Plan 101

Seth YakatanKatan AssociatesJanuary 15, 2008UCI Student Center Newport Beach Room C

What is a Business Plan ??

• A business plan is any plan that works for a business to look ahead, allocate resources, focus on key points, and prepare for problems and opportunities

• Plans don't sell new business ideas to investors. People do. Investors invest in people, not ideas. The plan, though necessary, is only a way to present information

Purpose

• Business planning is about results

• You need to make the contents of your plan match your purpose

• Don't accept a standard outline just because it's there

Key Factors

• Simplicity

• Believability

• Focus

• Management

• Milestones

Key Mistakes

• Management

• Competition

• Idea / Technology inflation

• Belief in the market

• Valuation or Lack of Valuation

• Answering questions

• Lack of milestones

ABRAHAM LINCOLN

• 1831 Failed in Business• 1832 Lost bid for Illinois State Legislature• 1834 Failed in Business• 1835 Fiancé died• 1836 Suffered a nervous breakdown• 1843 Ran for Congress and Lost• 1848 Tried again for Congress and Lost• 1855 Ran for US Senate and Lost• 1856 Tried for Vice President and Lost• 1859 Lost bid for Senate again • 1860 Became 16th President of the US

Specific Criteria

Seth YakatanKatan AssociatesJanuary 15, 2008UCI Student Center Newport Beach Room C

Business Plan

Katan’s Concepts• Executive Summary• Products or Services• Market Need• Market Potential• Competitive Advantage• Management• Financial Overview• Development pathway• IP• Technology overview• BOD• AB

Competition Requirements• Executive Summary• Products or Services• Market Need• Market Potential• Competitive Advantage• Management• Financials

Some things to consider…

• Does the plan explore an opportunity that is realistic?• Is the business model well thought out and have the potential to be effective?• Are there past benchmarks set that the plan can be measured against?• Is a significant initial investment required?• What is the length of the implementation process?• Does the business have the necessary tools to become a market leader?• Has a clear target customer been established?• Does the management team have the skills to succeed?• What are the projections for the venture to achieve profitability?• Is the plan concise and well written?• What will allow this business plan to have sustained success?

Executive Summary

• What problem are you solving? • What is your business proposition for solving the

problem? • Who are your customers? • Who are your competitors? • How viable is your business? • How do you make money? • Executive Summary is clear & effective as a stand-alone

document

Products or Services – What ?

• What is the product or service?

• What are its attributes?

• Advantages and potential drawbacks?

• Why/how is your product/service more compelling than existing ones or the competition? What is the stage of development?

• Do you have a proprietary position or intellectual property protection planned or in place?)

Market Need – Why ?

• What specific conditions in the market have created the problem you are solving?

• How will your product/service take advantage of the opportunity?

• Who are your customers and what are their attributes?

• Clearly define your potential customers and why they will pay for your product or service

Market Potential – Why ??

• What are the characteristics of the market for your product or service?

• How will you reach the market? • How big is the market opportunity: number of potential

customers & annual sales? • Can you narrow the market to a manageable segment? • How will you dominate the market? e.g. through pricing,

quality, geography, etc? • Is there a market niche where you will have competitive

advantage?

Competitive Advantage – How ?

• Competitive Matrix: Who are your competitors?

• Their strengths & weaknesses?

• Your strengths & weaknesses?

• How will you close the gap?

• How easily can competition close gap?

Management – Who ?

• Who are key team members and their respective roles?

• What are their relevant experiences and accomplishments?

• What other areas of expertise are you lacking?

• When will you need additional team members?

Financials

• Income Statement

• Balance Sheet

• Funds Required & Uses

• Key Assumptions

• Financial Model

A Few More Tips…..

Seth YakatanKatan AssociatesJanuary 15, 2008UCI Student Center Newport Beach Room C

Clayton Christensen: Disruptive Technologies

• The term disruptive technology was coined by Clayton M. Christensen and described in his 1997 book The Innovator's Dilemma. Disruptive Technologies Displaced

steam engines and internal-combustion engines

horses and humans (for powering machines)

Hydraulic excavators Cable-operated excavators

mini steel mills vertically integrated Steel mills

minicomputers mainframes

Container ships and containerization

"Break cargo" ships and stevedores

desktop publishing traditional publishing

digital photography originally, instant photography, now increasingly all chemical photography

personal computers minicomputers, workstations

Clayton Christensen: Disruptive Technologies

• Main Principals– 1. Companies listen to their customers, and strive

to bring to the market the products their customers ask for.

– 2. Small Markets Don’t Solve the Growth Needs of Large Companies.

– 3. Markets that don’t exist can’t be analyzed: Get close to your customers, learn their needs.

– 4. Technology Supply May Not Equal Market demand.

Definitions

Taken from “Understanding Valuation: a venture Investor’s perspective”Callow, etal, Boston Millenia Partners White Paper

Pre Money Valuation = notional amount of equity value prior to any equity investments

Pre Money Valuation + Invested Capital = Post Money Valuation

Price per share = Pre Money Valuation / Pre-Money Shares

$5 million pre-money

+ $5 million =

$10 million post money &50% ownership

DataFinancing Company

StageData Risk /

UncertaintyValue in Millions

Seed Incorporation / early Development

Soft / Value Proposition

Extremely High

$1+

Series A (First Inst Round)

Development Validation / Time to Market

Very High $3+

Series B Shipping product

Prelim Revenue

High $7.5+

Series C Shipping product

Predict Revenue

Moderate $10+

Mezz /Later Shipping product / Profitable

Hard Data, EBITDA, Net Income

Low $20 to $50+

Taken from “Understanding Valuation: a venture Investor’s perspective”Callow, etal, Boston Millenia Partners White Paper

The Exit

• It there one ?

• How realistic is it ?

• What happens if there is none ?

• Is that okay ?

Key Lessons for Success

• Products must have large and near-term markets• Compatible corporate team• Level of funding sufficient to meet goals• Observant – follow market – don’t discard anything• Confidence in common sense• Be prepared for competition – new product pipeline• Need luck and smart friends

Q & A

Seth YakatanKatan AssociatesJanuary 15, 2008UCI Student Center Newport Beach Room C