Financing Bioeconomy Ventures, Part 3 – The Business Plan

September 27, 2017 |

By Gerald Kutney and Bob Kodrzycki, Lee Enterprises Consulting
Special to The Digest

(Note: This is Part 3 of an 11-part series. Part 1 is here. Part 2 is here.)

A business plan contains basically only two major subjects:

  1. The business case for the investment: ROI and pro forma
  2. Risk management.

Keep in mind that investors review hundreds of business plans every year. Not only must the plan be sound in terms of risk and reward but there needs to be a compelling reason for investors to choose your plan over all the others that are likely acceptable in terms of risk and reward:

  • Is your business timely:
    • What current needs in the market are addressed?
    • What is the unmet demand in the market?
  • Main areas to de-risk:
    • Technology
    • Feedstock supply
    • Off-take of product

The business planning process starts with the pro forma.[1] A business case must be described in the pro forma which yields a ROI that exceeds the risk of the project. After the pro forma and the related investment analysis, risk mitigation is the general theme for the remainder of the business plan. Risk and ROI are proportional to each other; i.e., a high-risk project such as an emerging technology must have a higher ROI than an established technology to attract financing. The prerequisite ROI is defined by those providing the financing.

Focus on Risk Mitigation

Risk management must be an obsession with project developers, and the business plan must demonstrate how the risks have been (or will be) contained or marginalized. Biofuel/renewable chemical projects are generally at higher risk than more traditional projects because of inherent uncertainty with biomass supply and quality; in addition, emerging-technology projects are viewed as exceptionally risky because of operational unknowns.

Business plans come in many shapes and sizes, but in terms of style and format, the business plan should:

  • Be thorough but concise (details should be available in auxiliary documents which are available upon request)
  • Not contain hyperboles (never claim “best technology”)
  • Be transparent (list all risks…and how you are going to address them)
  • Keep acronyms to a minimum
  • Use layperson terms (i.e., minimize industry or technical jargon).

Build the Plan

Below are typical sections of a biofuel or renewable chemicals business plan:

  1. Executive Summary
  • Describe and “sell” the project in one to two pages.
  • Write this after you’ve finished the other sections.
  1. Profile
  • Contact information
  • Project Synopsis
  • History of development
  • Business model/type of business (e.g., project developer; build-own-operate; licensing technology; selling reactors or facilities)
  • Legal structure and ownership
  • Organizational chart
  • Management (and advisor) qualifications (brief bios: business, financial, marketing, technical, operational, legal, etc.)
  1. Investment Opportunity/Financial Risk
  • Project description, schedule, and status
    • Do you have a site already available?
    • Have you obtained a construction quote and drawings?
  • Pro forma P&L[2]
  • Sources of Inputs and Outputs
  • Sensitivity Analysis
  • Investment required
  • (Potential) sources and use of funds
  • Capital Cost Estimate (engineering-class category)[3]
  • Start-up, training, and related costs
    • Will state or local authorities help with training and recruitment?
  • Cash-burn rate
  • Cash-flow statements, timeline to positive cash flow
  • Milestones (stage gates, go/no-go points, metrics, critical success factors), and timeline
  • Future growth potential.[4]
    • Investors like to see projects that will scale, either by expanding existing facilities after becoming established or by building additional facilities using the same technology.
  1. Risk Mitigation
  • Biomass (long-term supply strategy, quality assurance, price, logistics, and supplier engagement and commitment)
    • Do you have a feedstock supply study? If so, how much of the available feedstock will you require? The lower your requirement of the available supply the lower the risk of losing access, or getting into price wars, for your feedstock.
    • Can your feedstock be acquired through a broker that can assure a multi-year supply with pricing scheme?
    • Are there multiple suppliers for your feedstock?
    • Are there competitors for this feedstock?
    • Is there a seasonal cycle to feedstock availability? If so, can you store enough feedstock on site to stay operational year-round?
  • For emerging technologies – Stage of Commercial Development including description of technology and development, competitive position/differentiation, I.P., patents, scale-up plans
  • Are you the technology developer or are you licensing from a third party?
    • If third party are they providing a performance guarantee and training for operations?
  • Construction
  • Are you using an EPC provider (with insurance wrap)?
  • Operations (cost and uptime, labor availability)
  • Do you have a projected list of required personnel and pay scale?
  • Do you have access to a regional study of available skilled labor?
  • What is the plan for maintenance? Will yearly shut-down be required or can maintenance be done without a complete facility shut-down?
  • Can waste products, or by-products, be sold or upgraded to something useful?
  • Markets (quality assurance, price, market demand, logistics, customer engagement and commitment)
    • Investors like to see an off-take agreement for your product, especially with a bond-rated customer (stable and established) for a long term if possible.
    • How will you assure a continuous supply of product to your customers? Customers want to be assured of having a steady supply of your product, especially if you have an off-take contract with them
  • Regulatory and Permitting Approvals (municipal, provincial/state, federal)
  • Biomass supply (if applicable)
  • Construction
  • Operational, including environmental and waste handling/discharges
  • Product Use (if applicable)
  • Community engagement and support (NIMBY).

For early-stage project business plans, all the components do not need to have been completed, but project developers must show an understanding of what will be required and their plans to address them.

Keep it Current

A living document, the business plan serves as a road map showing where the project is going and how to get there. For potential investors, the business plan has an added role: it is one of the ways they learn that the project developers know what they are doing. A good business plan lowers the level of the “buyer beware” caveat and builds trust with potential investors. The business plan, though, is but a synopsis; the details behind the business plan are critical for next steps in the financing process.

Details for completing the components described in the business plan are addressed in the upcoming articles in this series. Next up: Financing Bioeconomy Ventures: 4 – Competitive & Strategic Analysis of Renewable Fuel and Chemical Ventures.

About the Authors

Gerald Kutney is the Executive Vice President of Emerging Technologies, Biomass Power, Biogas/AD, and Investor Services for Lee Enterprises Consulting, and Managing Director of Sixth Element Sustainable Management in Ottawa. He has a Ph.D. in chemistry and over two decades of executive experience with global corporations and entrepreneurial enterprises in the forest bioeconomy.

Bob Kodrzycki is a member of Lee Enterprises Consulting and an expert in biomass feedstock and biofuels project development. He has a PhD, and over 27 years of experience in industrial R&D and consulting with a focus on commercialization of biotechnology, renewable energy and biobased products in a range of settings from Fortune 500 to entrepreneurial endeavors. Bob has performed emerging technology landscape analysis and assisted clients with technical due diligence, assessments and intellectual property strategy. He is an inventor on 12 granted patents and 39 patent applications.

[1] In the previous articles in this series – Financing Bioeconomy Ventures: 2 – The Pro Forma – the pro forma was described.

[2] See the previous articles in this series – Financing Bioeconomy Ventures: 2 – The Pro Forma ibed

[3] For example, see U.S. Department of Energy, DOE G 413.3-21 Chg 1 (Admin Chg), Cost Estimating Guide, October 22, 2015

[4] For newer technologies, growth will be subordinate to the commercial success of the first facility.

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