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.
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