A business plan’s main purpose when raising finance is to market your business proposal. It should show potential investors that if they invest in your business, you and your team will give them a unique opportunity to participate in making an excellent return.
Most people assume that the only thing standing between them and spectacular success is a glossy business plan with five-colour charts. Nothing could be further from the truth!
Many people waste too much time on producing an elaborate business plan with five year financial forecast and pay too little attention to what really matters.
Investors look for entrepreneurs offering a compelling value proposition in a large market with a clear plan to build a profitable organization. The value proposition must stand a chance to establish a sustainable competitive advantage with a business model that works.
You need to keep in mind that venture capital companies receive more than 100 business plans a month and they only invest in a few projects. Therefore, the rejection rate is more than 97%. A winning business plan for raising funds must be written from the perspective of the investor.
A business plan covering the following areas should be prepared before approaching investors.
The management team
Investors look for entrepreneurs who have the right attitude, passion and ambition to create successful companies. Great companies are led by great people.
Smart investors will check whether the management team has the right qualities before they read the rest of the business plan. Without the right people, the rest of the business plan has no value.
You need to convince investors that there is a real commercial opportunity for the business and its products and services. Investors look for rapidly growing markets mainly because it is easier to obtain a share of a growing market than a mature or stagnant market. In addition, the industry must be structurally attractive.
Investors will want to know evidence-based answers to the following:
Is there a market?
Is it big enough?
What is the size of the market?
What is the growth rate?
What factors are driving and changing the market?
Is there a gap in the market? If yes, is there a market in the gap?
How will you compete with incumbents and new entrants?
What is your unfair advantage?
How can this unfair advantage be protected and enhanced over a long period of time?
The product or service needs to be some combination of better, cheaper and faster.
You need to provide clear and convincing answers to the following questions:
What business is the company in?
What is your customer value proposition?
What is your revenue model?
What is the serious problem your company trying to solve?
What evidence is there to suggest that there is a pressing need for the solution?
What are the key success factors that you need to focus to succeed?
What are the taboos in this industry?
Can you break any of the taboo?
Can you deliver better value at lower cost?
You must address the critical risks and problems that the business may face. Investors will generally be aware of some of these risks, so failure to address them will undermine your credibility. Investors would rather back cautious optimists than reckless gamblers.
You need to address the following:
What are the key risks facing the business?
Which of these risks could be fatal to the business?
What partnerships could help to mitigate and address these risks?
What alternative paths are available to the company, if a major risk materializes?
Realistically assess sales, costs (fixed and variable), cash flow and working
capital. Assess your present and future margins, bearing in mind the potential impact of competition.
Present different scenarios for the financial projections of sales, costs and cashflow. Ask “what if?” questions to ensure that key factors and their impact on the financings required are carefully and realistically assessed.
Keep the financial forecast realistic and simple. Do not make widely optimistic projections about sales and profit.
State how much finance is required and from what sources and explain what it will be used for.
Explain how the investors will make a return. Why would the investor be better off investing in your business rather than leaving money in a bank account or investing in another opportunity?
This is the most important section and is often best written last. It is vital to give this summary significant thought and time, as it will determine the amount of consideration investors will give to your detailed proposal. It should be clearly written and powerfully persuasive, yet balance sales talk with realism in order to be convincing.
As every business is different, a business plan must be tailor-made for the business. A “Pre-packaged Package” produced using software or business plans that are downloaded from the Internet will set off a “red flag” to the investors. So avoid wasting your time and money developing a business plan that does not have a chance of getting any investment.
"If you cannot explain it simply, you do not understand it well enough." Albert Einstein