It is always useful for applicants for venture capital to be familiar with the criteria used by fund managers in appraising applications.  Loughborough University Business School has undertaken a study of all the applications (and accompanying business plans) received by one venture capital fund.  The analysis below is based on that study. 

The main reasons for rejection of business plans were: 

incomplete information 
inadequate growth opportunities 
market limitations (size, no unique selling point, etc) 
management competence and commitment 
financial weakness 

INCOMPLETE PLANS ARE OFTEN REJECTED 

The number of applications received, over a six month period, was 97.  Of these, 31% were rejected on the grounds that they were incomplete in terms of the fund's specific requirements.  The fund was looking for business plans which clearly demonstrated: 

good market opportunities for growth 
management skill to exploit such opportunities 
a financial structure which would allow for the financing of the required resources 

Incomplete plans were therefore those which failed to demonstrate one of these key characteristics. 

Plans submitted via financial intermediaries were of a higher quality than those sent directly by applicants, suggesting that their intermediaries serve as a useful check on quality.  However, applications that were sent, and often prepared, by firms of accountants showed two key weaknesses, both of which can easily be resolved: 

There was a tendency to give excessive financial data.  Detailed costings and sensitivity analysis created overkill.  The basic need is for three years of historical data, plus financial statements giving a five-year forecast. 
The applications lacked market data derived from market research results, product information and competitor analysis. 

MARKET INFORMATION IS VITAL 

A strong market is important for the generation of the high growth rates needed in investee companies.  Venture fund managers are looking for compound rates of return of 30-35%, realised over a five-to-eight year time scale.  The market potential to achieve such growth rates must be shown to exist: hence the rejection of plans with little market information. 

In the case of the fund studied, two-thirds of plans were rejected because of market inadequacies.  The types of inadequacies included: 

lack of unique selling point 
unproven market (start-up business) 
level of competition 
inadequate 

These observations give two useful pointers.  First, ensure that the pan includes detailed market research information and a strategy for exploiting market opportunities.  Second, ask yourself if the product is really one with a unique characteristic and very high growth potential. 

A STRONG MANAGEMENT TEAK IS ESSENTIAL 

Access to a large market is only part of the story.  Management inadequacies caused the failure of 12% of applications.  These included limited skills, weak track records and so on.  The venture fund manager needs to know that growth will be achieved, and this requires tight management.  Some plans did not even include any CVs for senior staff and directors. 

Other companies lacked a key team member, such as a financial director.  A funding application will be much more likely to succeed if management skills can clearly be demonstrated.  Indeed, the fund manager can be quoted as saying that "the quality of the plan is a reflection of the quality of the management". 

FINANCIAL REASONS FOR REJECTION 

On the financial front, 18% of applications were rejected for purely financial reasons, including weak margins, overtrading and, in two cases, insolvency.  Clients must have resolved their internal financial weaknesses before making their applications.  The only acceptable financial weakness to a fund  manager is lack of finance to take advantage of growth opportunities, not a lack of funds to maintain the status quo. 

Clients need to tailor the plan to the financing source being approached.  The informed adviser already knows this.  An application for a bank loan will be drafted in a very different way to one for venture capital. 

In an environment where bank lending is increasingly constrained, knowing how to access venture funds is a useful skill for any firm.