Bbs302 | Business Plan | Assessment Answers

What are venture capitalists looking for in a business plan

Investors such as venture capitalists will look hard at;

• the size of the proposed new venture,
• the financial projections - and whether they are soundly based,
• whether they will be able to at least recover their investment and, hopefully, make a good profit from it,
• what the competitive advantage of the proposed new venture is
• and they will also look at the skills and abilities of the management of the proposed venture.

They apply a 'laser like focus' to these aspects.  Just as you should in your business plan too.

Introduction:

In the recent era, gaining money in illegal ways is increasing at a significant rate. This scenario has become more crucial as these fraudulent activities affect both the organizations and the stakeholders. After the globalization and technological advancement, this scenario has become more frequent in the global platform. Edirisuriya et al (2015) stated that this sort of money laundering comes under fraudulent activities and always leaves a negative impact on the society. Statistical data shows that in the FY 2017, more than $340 Million was reported in Australia and the value is increasing incredibly, as the fraudulent value was found $70 Million in the FY 2016 in Australia (Coursehero.com, 2018).

Considering the fact, the current study purposed to decrease the fraudulent activity through the innovation of ‘Fraud Controller Software’, which can serve national and international users. The new software can be used by any organizations irrespective of the business operations and the presence in varied geographical locations. A brief description of the entrepreneurial venture of the firm ‘Frauda Software’ and its proposed management style for running the business have been covered in the current report. A business plan has been made considering key factors such as marketing strategy, competitor analysis, financial risks and the tentative risk control mechanism, so that the new venture can sustain in the highly volatile market.

Description of the Entrepreneurial Venture:

The rationale behind the venture and the size of the proposed new venture:

Although much fraud control software was introduced to mitigate fraudulent activity in Business sectors in Australia, the majority of them failed to mitigate the issues. The owner got the motivation to introduce newly developed software that could help to eradicate 75% of the global frauds.

The proposed new venture is a Small Enterprise, where the business structure is “Sole Trader”. Maximum strength would be 5 including the owner. The owner will have the total controllability on the overall operation as well.

The financial projections and whether they are soundly based to recover profit:

The company has decided to invest $5 Million for this project, which is significantly higher at an initial cost. However, the current market scenario indicates that the existing competitors are cutting costs and offering the products at a lower price, which is affecting both the service levels and the return on investment as well (Aleksa, 2017). Thus, if the company can launch robust software in a competitive pricing in the Australian B2B market, a large client base can be grabbed. As a consequence, the company can reach the break-even point in a shorter time span. Down the line 3 years, a higher ROI can be attained as well. Thus, considering the market need, target mass and the product pricing, it can be stated that the financial projection is quite justified.

Competitive advantage of the proposed new venture:

• The software is unique and highly competitive against the previously offered products
• Due to sole trading, the whole earning and profitability would go to the company account
• Total controllability on the business reduces the risk of losing reputation due to false interpretation of the products or services offered.

Required skills and abilities of the management of the proposed venture:

• Software development methodological skills
• Knowledge on the network and data security and policies
• Basic financial transaction knowledge over the internet and associated activities
• Forecasting skill for identifying possible future frauds
• Business management and operational skills
• Product advertising and promotional skills

'Laser like focus':

Since the business will compete in a highly competitive environment and the venture capitalist tends to invest a higher sum, the entrepreneur needs to have laser-like-focus to get success in both ways profitability and the identity in the global market (Siddiqui et al. 2015). Three core business agenda needs to be followed which is as follows:

• From the initial day, every business question should be correlated with the revenue. Otherwise, the company might have a chance to become a profit- killing organization.
• Customer journey map, online promotions, etc, are to be prioritized on a daily basis.
• During the flow of operation, the target would be achieving a continuous flow of revenue. This could enhance the trustworthiness among the firm and venture capitalist.

Management:

The executive body of the Frauda Software has chosen sole trader business structure as most of the funding to launch this new venture has been done by the founder. According to Pollack (2015), this type of low-cost structure provides single control to the founder so that all the business functions and operations can be managed easily. Adding to this, the founder could also be accountable to deal with all the financial and legal compliances faced by the firm and its existing business opportunities. Moreover, the sole proprietorship managerial structure would help the business administrator to take all the professional decisions that ensure full earnings of company profitability through strategic planning and marketing. However, the risks and business challenges must be faced by the founder alone (Varadarajan, 2015).

Marketing:

Initially, Frauda Software could start a face-to-face meeting with the business organisations and the other financial enterprises by providing valuable information about the newly launched product or service. This would be helpful to increase people awareness about the monetary fraudulent activities and also advantages of this new product for the benefits of the firm. In past studies, Hellman (2005) mentioned that in a highly competitive environment, a firm could go for commercial marketing policies like the online trailer, newspaper advertisement, magazine or roadside holding boards etc. to draw the attention of the maximum business clienteles. In doing so, the selected company would require choosing the commercial bank initially and could target the airline companies before penetrating in the international market (Abdullah Saif, 2015)

Competitor analysis and positioning:

Considering the existing competitors operating in the Australian market, the chosen firm named Frauda Software must offer an integrated business software solution to the target clients. Similar fact also mentioned by Kim (2015) that there should be an advanced business-to business solution that must help the target clients of Frauda Software to avoid any financial security inconsistencies during the time of a transaction. Additionally, incorporating some innovative penetration testing program would help the firm to offer an utmost security index compared to the other rivals (Christine and Prinsloo, 2015). Moreover, the core offering to restrict the ethical hacking constraint would help the firm to achieve a sustainable market position in the Australian market. All in all, streamlining the security offerings with the critical infrastructure of a bank, airline and government would help the firm to attain a globally competitive position in near future.

Financial Analysis:

Considering the current scenario it has been assessed that the company’s own investment is $3 million, while the debt amount from the financial institutions would be $2 million. Thus, it is a mixed funding approach. In other words, the capital structure will be a combination of both debt and equity. The debt component will be 40% and the rest will be funded through own sources. In other words, the debt and equity proportion will be around 2:3 respectively.

In this context, it may be worth to note that the combination of both debt and equity may be construed to be ideal for a start up because of the mix of both the type of sources of fund in efficient mix. Since debt is a cheaper source of fund than equity, the inclusion of more debt may reduce the overall cost of capital for the firm. As a result, the firm may enjoy the benefit of lower discounting rate while evaluating the capital investment project or a capital budgeting decision in terms of present value of its cash flows. However, the higher amount of debt may lead to the liquidity problem in terms of long-term solvency issues. Since debt sourcing may involve significant amount of finance costs in terms of interest payment (along with principle repayment), the same may considerably affect the bottom-line of the firm. Such charge against profit is made irrespective of business profitability which may adversely impact the solvency position of the business in the long-term.

On the other hand, equity sourcing is better than debt in terms of lesser risk of interest payment. Since the equity funding does not involve any such interest costs associated with it, the firm may be saved from the issue of fixed payment burden in the form of interests. However, it may be noted that the equity is costlier source of fund than debt and hence, the same enhances the firm’s overall cost of capital. Since the owner groups’ expectations increase in proportion with their equity investment in the business, the capital intensive investment projects may require to be discounted with higher discounting rate which may render lots of operationally viable projects financially non-viable.

Since the present context involves 2:3 combinations with major emphasis on equity, the start-up may afford to maintain the same provided the management ensures smooth cash inflow and profit for the business in continuous and effective manner. Since there is no fixed payment burden on a newly conceived business, it may seems to be financially viable as the business owners may afford to forego lesser return in the form of dividend or share of profit in the initial years and accumulate surplus and reserve for subsequent growth and development.

Key risks and challenges

Risks:

Since the present venture is investing more from the family and own savings as compared to the bank loan, the company might experience a few potential risks and challenges, which are described herein: 

Operation risk:

Since the business venture will be running under the sole proprietorship, there is a higher possibility of experiencing operational risk. Breakdowns in the internal operations, people and the overall system might create a major hindrance in the overall software development life cycle (SDLC) process. Thus, failure to run smooth operation would result in unsuccessful project delivery (Rokonuzzaman and Choudhury, 2011).

Finance risk:

If the business fails to provide potential profitability, the own funding will be a loss and at the same time the owner has to pay the interest and principle amount to the bank. However, since the equity value is higher, the financial risk of repaying the debt amount or legal obligation is lesser in this case. On top of that, a major business downfall or lack of market penetration could result in significant loss in overall operating income.

Security risk:

As the company is dealing with security and privacy of data, any type of malware attack on the developed software could also hinder the overall operation of the newly developed software. Thus, the company could attain significant security threats on its own product.

Challenges:

Marketing and promotions of the newly developed product would be a potential challenge to the new company. Since, the business concept is well established and highly competitive in the Australian and global market, failure to promote the products and services might lead to unsuccessful brand awareness among the consumers. Moreover, as the business has targeted mainly financial institutions, a robust marketing would be needed to reach the management bodies and grab those target mass (Liao and Rice, 2010). Thus, the disruptive innovation alone would not be sufficient to take the market opportunity; rather, adopting innovative promotional activities would be more challenging for the current brand.

Conclusion

Based on the discussion and analysis performed in the previous parts of the paper, it may be concluded that the analysis of a business idea is one of the most crucial parts in business studies as the process of such evaluation may involve consideration of different factors that are both internal and external to the business. In the instant case, the business plan may seem to be financially and operationally viable and feasible. However, the management may need to exercise the judicious marketing and promotional strategy to reach out to the market and effectively build the customer base. A well planned and organised business plan may sizably contribute towards the success of the business in the long-term.

References:

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Christine, M. and Prinsloo, M. (2015). Authenticity in marketing: a response to consumer resistance? Journal of Marketing and Consumer Behavior in Emerging Markets. 15(2). pp. 15-32.

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Edirisuriya, P., Gunasekarage, A. and Dempsey, M. (2015) Australian Specific Bank Features and the Impact of Income Diversification on Bank Performance and Risk. Australian Economic Papers. 54(2), pp.63-87.

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Hellman, K. (2005). Strategy?driven B2B promotions. Journal of Business & Industrial Marketing, 20(1), pp.4-11.

Kim, H. (2015). Liability of Financial Institution related to Electronic Financial Transaction Fraud. Korea Financial Law Association. 12(3), pp.181-214.

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Pollack, J. (2015). Understanding the divide between the theory and practice of organizational change. Organizational Project Management. 2 (1). pp. 35-42.

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Siddiqui, A., Marinova, D. and Hossain, A. (2015). Liquidity Risk, Syndication Behaviour and the Risk Culture of Australian Venture Capital Industry. SSRN Electronic Journal. 27^th February, pp.1-35.

Varadarajan, R. (2015). Strategic marketing, marketing strategy and market strategy. AMS Review. 5 (3-4). pp. 78-90.