Monday, August 13, 2012

These 10 Key Elements Make a Business Plan Fundable

People ask me if they really need ANY business plan, unless they are looking for an outside investor. In fact, a business plan is needed more by you than investors, as the blueprint for your company, team communication, and progress metrics. Things that make it investment-grade for outside investors will also benefit you, since you are the ultimate investor.

First of all, any good business plan should demonstrate that you have done the homework to be an expert in your industry, and in what it takes to build a successful business from your idea. I’ll skip the basics here, and highlight only key elements that investors focus on:

  1. Define the problem. Every plan must start with the problem you are solving, not a description of your company and product. Explain in terms your mother could understand, and quantify the “cost-of-pain” in dollars or time. Terms like “every customer needs this” and “next generation platform” are far too soft, and should be avoided.

    Many entrepreneurs scare away potential investors by claiming that their technology represents “truly disruptive technology.” What that may mean is that you haven’t figured out yet what problem it solves, or it may take many years for people to get it. No investor wants to wait that long for his payback, or fund the years of waiting.

  2. Solution and benefits. This is not the place for a detailed product specification, but an explanation of how and why it works, including a customer-centric quantification of the benefits. Skip the technical jargon and hyperbole. Do describe your intellectual property and “secret sauce”.

    Focus is the keyword here. Pick a specific solution that you have built or prototyped, rather than rambling about all the possible things that could be done with your idea. Clearly define the customer, channel, and revenue model associated with this solution.

  3. Industry & market sizing. Start with the evolution of the overall industry, market segmentation, market dynamics, and customer landscape. Remember that investors like industries that have a billion dollar opportunity, and a double-digit growth rate. Data from accredited market research groups like Forrester or Gartner is required for credibility.

    It always amazes me how an entrepreneur can define his market opportunity so broadly, and then assess his competition so narrowly in the next breath. You won’t impress investors by claiming that everyone in China needs one, and nobody else has exactly the right features to compete with you.

  4. Explain the business model. This is how you will make money, who pays you, and gross margins. In this section, you need to be passionate about revenue, profit, and volume growth. Many people seem to use the social network advertising model for revenue, but forget it assumes at least 100M users and $50M investment.

    Avoid any statements like “All we have to do is get 1% of the market.” There are two problems with this assertion. First, no investor is interested in a company that is only looking to get 1% of a market. Second, that first 1% is the toughest of any market, so you look na├»ve implying it's easy to get.

  5. Competition and sustainable advantage. List and describe your competition, direct and indirect, including customer alternatives. Asserting you have no competition is not credible. Then detail your sustainable competitive advantage, and highlight barriers to entry which will keep your competitors at bay.

    Often I see statements like “Microsoft is too big/slow to be a threat.” Usually the reason the big companies are no threat is because the market is too small. But investors know that sleeping giants do wake up, the moment your company shows some traction. Competing with IBM, Microsoft, and other large companies should never be minimized.

  6. Marketing, sales, and partners. Describe your market penetration strategy, sales channels, pricing, and strategic partnerships. Here is also a good place for a rollout timeline with key milestones. Convince investors that you have lined up sales channels, strategic partners, and a viable marketing strategy.

    Be careful with assertions like “We have strong interest from a major customer.” The mention of unsigned contracts normally takes away more credibility than it adds. You can bolster this position by including a Letter of Intent (LOI), contract summaries, or even testimonials.

  7. Executive team. Investors invest in people - not just ideas. Convince investors that your team is experienced in starting a new business, and have great expertise in the selected business domain. Include Advisory Board members and key industry people connections.

    Sometimes I see statements like “A world-class CEO will be joining us after funding.” Rest assured that potential investors will ask for names, and place some calls. Soft responses from your candidates will definitely kill your credibility.

  8. Funding requirements. Explain how you calculated the funding requirements, and show details on planned use of funds. Quantify existing skin-in-the-game, by insiders and outsiders, including sweat equity and capital. Include a current valuation estimate.

    The most credible sizing approach is to do your financial model first with the volume, cost, and pricing parameters you want. See where your cashflow bottoms out. If it bottoms out at minus $400K the first year, add a 25% buffer, and ask for $500K funding.

  9. Financial forecast and metrics. Project both revenues and expense totals for next five years, and past three years, if relevant. Show breakeven and growth assumptions. Details should be available in a separate financial model, but not included here.

    Remember that investors are looking for large, scalable, high-growth opportunities. Attractive deals show double-digit positive growth per year, and revenues that are projected to $20M or more within five years.

  10. Exit strategy. This section is only required when you expect outside investors. These investors want to know that you are thinking about a liquidity event – when and how they will get their money out, with ROI. For a family business, don’t project an exit.

Otherwise, identify your preferred exit strategy, including specific candidates for merger or sale, and timeframe. “Going public” (IPO) is another alternative, but not common. Show how your rate of return would be attractive to investors.

An investment-grade business plan is a professionally prepared document, preferably about 20 pages, to satisfy both angel investors and venture capitalists. In preparing it, try to look at your project through the investors eyes. If your plan is missing one or more of the above elements, it will likely be deemed not “fundable”, and rejected.

The best plans are not usually the fanciest or the longest. They are not measured by the quantity of impressive graphics or the size of the revenue projections. Investment-grade ones attempt to answer every question an investor could possibly ask, except maybe “where do I sign”?

Marty Zwilling


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14 comments:

  1. How important nowadays is either the lining up of a strategic beta customer or actual revenues to getting sources of Series A financing and beyond? I'm sure that the answer is both a) it depends, and b) the more the better, but are you seeing trends towards investors demanding a track record and be willing to make the risk/reward trade? Will JOBS and more open crowdfunding change this?

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  2. Jason, if you personally don't have a startup track record, a customer and revenue will likely be required with professional investors for Series A. Crowdfunding from non-professional investors may help somewhat. With a strong business plan, per this article, you may beat the odds.

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  3. Is there any truth to what I heard that VCs don't like people who have played the game before? I heard that repeat successful (IPO) entrepreneurs are considered threatening to VCs and that the entrep should use his contacts to get funding the second time around.

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    Replies
    1. @Robin, In my experience, the reality is quite the opposite. VCs prefer repeat successful entrepreneurs, because these have a proven track record, which is less risky.

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  4. For online businesses in particular, marketing tactics can and should be measurable and a positive ROI is an indicator that a given stratagem is working. Great post Marty!

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  5. Thanks Marty - these elements represent a very solid list for entrepreneurs preparing a business plan to raise finance. I also feel entrepreneurs should seek more impartial and independent feedback so the various assumptions they make can be subjected to some scrutiny in advance of a plan being submitted to prospective investors. As you point out, industry knowledge is also vital. I meet entrepreneurs with more modest ambitions e.g. looking to open a coffee shop. My first question to them is 'Have you worked in one?'. The majority say 'no' which significantly increases the risk in my mind. Alan

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    The Information you shared is very informative
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  8. Well, I think if you start a business than it's necessary to make an efficient business plan. Really, if you have a good idea then a buiness plan can prove that it's really good and worth of attention, energy and investment. I think all these steps are very helpful, I really like that everything is explained very well on this blog. I have taken out pay day loans online to start a business, and with a help of this tips I guess I can really make my business plan work. Sucessful buiness is just like an art and there's always something to learn to make it more efficient.

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  9. Please Martinz, i was asked in my institution to 'Briefly enlist the key elements of a business plan and its usefulness from two dimension'. Can you help me out? Thanks.

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    Replies
    1. @Wodi Rhema, I think I just did help you out with this article. Enjoy.

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    2. Reading through these guidelines, I felt that apart from all the solid factors that have been mentioned, an important factor "proper advertising for business growth" was neglected. Promotions, both online and offline forms an important part of creating a huge client base. This includes advertising in medias and socal networks, adorning creative sign designs, distributing ad brochures and SEO promotion. Those were some smart insights Martin. Thanks for sharing.

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