How to Write a Great Business Plan that will Attract Investors

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.

Countless books and articles have been written about how to write a business plan. There are also many software programmes available that will create impressive-looking documents! 

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.

A great business plan is one that can be distilled to a very simple proposition without losing its attractiveness. 

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.

The market

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/service

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? 

Risks

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?

Financial projections

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?

Executive Summary

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.

Warning

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

 

Even an Elephant Can Slip

The past few years have seen previously unthinkable corporate giants such as Lehman Brothers, Kodak and Saab destroyed by economic turmoil or by unforgiving customers and tough rivals.

The average lifespan of a company listed in the S&P 500 index of leading US companies has decreased by more than 50 years in the last century, from 67 years in the 1920s to just 15 years today, according to Professor Richard Foster from Yale University. Professor Foster estimates that by 2020, more than three-quarters of the S&P 500 will be companies that we have not heard of yet.

As 75% of the GDP of developed countries comes from services, innovation is even more important. Because commoditisation occurs even faster in services than in products, innovations are easier to copy and patents can provide little protection.

Failure rate for new products can be as high as 90%, so innovation carries huge risks. Businesses’ dilemma is that if they do not introduce new products, they may go out of business; if they introduce new products, the may lose a lot of money.

Innovation in general is not always easy - especially for publicly listed companies that must balance the concerns of capital markets and shareholders, who demand quarterly profits and who are not necessarily interested in decades-long research projects.

Large companies can throw a lot of money on new products and innovation, but it does not mean that spending large sums of money will lead to success in the market-place. For example, Motorola’s Iridium project cost more than $5 billion and failed in 1999.

In the end, the real test is not just whether how much money is spent on R & D, but if the end products/solutions can be turned into cash.

Because of the recent fall in share price of Apple, some are asking whether Apple has peaked.

Apple has done very well compared to its competitors. The main problem the company faces is the unrealistic expectations set by analysts and investors. If Apple were to grow for the next five years at the same rate as the last five years, its revenue would be over $1.2 trillion! This is impossible to achieve.

Samsung accounted for one in four of all mobile phones shipped worldwide in 2012, as its shipments rose 20% to 396.5 million.

Apple's phone shipments grew by 46% to 135.8 million mobile phones in 2012.

Nokia's global phone shipments fell by 20% from 417.1 million units in 2011 to 335.6 million in 2012.

Demand for the iPad mini was so high that Apple could not make them fast enough, despite many critics suggesting its $130 premium to rivals such as Amazon’s Kindle Fire would put off shoppers.

In 2004 Apple had $7 billion revenues and $172 million net income. Apple was ranked 301 in Fortune 500 list. In 2011, Apple had $87 billion revenues and $20 billion net income. Apple was ranked 35 in Fortune 500 list.

In 1997, Apple's share was worth just $3.19 when it faced the possibility of bankruptcy. When it reached $700 last year, no one complained! In fact, many of the analysts said early last year that the share price would go over $1,000.

Apple’s results - unlike those of HP, Microsoft, Cisco and IBM - have not been boosted by large acquisitions. They are the result of a handful of market-leading products. No company of a similar size has grown at Apple’s pace. 

However, Apple will face a number of challenges:

1.    Its rivals are catching up in the smartphone and tablet businesses it pioneered.

2.    Its business still revolves around drawing customers to stores to buy its latest must-have gadgets. But as the cloud is becoming more important, Apple has been forced to learn the rules of a new game. In the cloud, Apple is operating outside its comfort zone – something Tim Cook acknowledged when he apologised for its flawed Maps app.

3.    Beyond the core operating system, Apple’s own apps and services are less successful; Ping, Apple’s attempt at social networking within iTunes, was shut down in September 2012. Other parts of Apple’s cloud suite, such as iMessage and Game Center are prone to bouts of downtime. Apple has to demonstrate that its iCloud can deliver seamless experiences that play more naturally to companies like Amazon and Google.

Steve Jobs focused on making great products and ignored short-term profits. John Sculley, who ran Apple from 1983 to 1993, focused more on profit maximization than on product design after Jobs left and Apple almost went bust!

In 1998 Michael Dell suggested that Steve Jobs shut down Apple, which was in deep trouble and distribute the proceeds to shareholders.

While Samsung has the best phones from a hardware point of view, it still lags far behind Apple when it comes to brand power. This will undermine Samsung’s pricing power and thus its ability to make healthy profit.

Apple is perceived as a premium brand. Apple has proved that it is possible to earn high margins with brilliant design and even during economic downturns customers are willing to pay premium prices for its products.

Therefore, offering cheaper devices to boost revenue in the short-term is not the answer. The company should remain as a product leader and ignore the analysts and the so-called experts.

“Innovation distinguishes between a leader and a follower.”  Steve Jobs

Read More:  

http://www.economist.com/news/business/21570751-worlds-most-valuable-firm-may-be-past-its-prime-has-apple-peaked

http://www.economist.com/node/21559624 

http://www.forbes.com/sites/connieguglielmo/2012/04/03/apple-may-be-worlds-first-trillion-dollar-company/ 

http://www.ft.com/cms/s/0/f7b16d66-6714-11e2-8b67-00144feab49a.html#axzz2IWyyl9bg