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Comps

I've reviewed a lot of early stage business plans over the past few months.  All of them are for companies that are looking for their first capital, many times from friends, families, and angel investors.  Some of them are also targeting early-stage VCs.  One thing missing from most of them are suitable comps (or comparisons) to help a potential investor compare the prospective investment with past successful investments.

Comps are helpful in several areas.  First of all, it's important to show how the business model of the prospective investment mirrors a successful business model from some other company.  Maybe that company is in the same segment and the new company will be a direct competitor.  More likely, the new company is trying to displace existing competition with a more efficient business model.  In that case, look for other market segments where a similar shift has occurred.  Also, show why the stakeholders in the new company's market are likely to be receptive to this business model shift.  Who wins?  Who loses?  Those 'losers' are the new company's competitors, even if they don't make the same type of product or service.

Another important comp is one that shows that a company with this type of model and in this type of market can scale rapidly.  Generally, markets that are growing rapidly are ones that are ripe for new entrants to take some significant market share.  Sometimes, a new company with a disruptive technology can drive the growth in a new market.  Occasionally, markets are efficient enough that a new competitor with a strong proposition can steal market share in a commoditized market.  With a new company, you need to figure out which of these dynamics apply to your situation.  Provide some evidence and provide a comparable growth situation as an example of rapid growth.

The most common type of comp that entrepreneurs focus on is the exit comp.  When you look at what the exit can be worth, make sure that you are comparing apples to apples.  Compare public companies to other public companies, or discount the earnings or revenue multiple when comparing a public company to a private company.  When looking at M&A exit multiples, you need to make sure that your comps are ones from recent times in a similar environment.  Make sure that the companies are at similar stages (profitability, revenue growth, etc.).  The more different a comp is from your new company, the more you have to discount the comp to cover the level of risk in the comparison.

One of an entrepreneur's most common complaints is that the investor or VC doesn't 'get' their opportunity and doesn't see the  big potential.  Effective use of comps can make your exciting story easier to understand.

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