What Investors Look For in a Plan

From venture capitalists to angel investors, here’s what your business plan needs to include to catch the eye of startup investors.
September 12, 2005
By Tim Berry

Although you definitely need a business plan to find investors, your plan alone–no matter how good it is–isn’t enough to attract investors. The investment decision depends on a lot of other factors: the business team and its track record, the product you’ll be selling, the competitive advantage you have and what your market is, among others. By itself, your plan is like an automobile engine–the car won’t go anywhere without it. But the engine alone isn’t enough to make the car go, and you need to recognize this from the beginning.

Another important point to understand is that investors are not all the same. At the high end, there are a few thousand venture capitalists working for a few hundred venture capital firms. At the low end, you have friends and family. And in the middle, there are tens of thousands of private investors called “angels.”

The venture capitalists are the most demanding. They fund only a few thousand plans per year, and they have to reduce their risks because they’re investing other people’s money. They probably won’t consider your venture unless you’re introduced to them first because they have no other way to screen and process all the proposals they get. They aren’t sharks or bad people–they’re just professional managers doing their job. They won’t steal your idea: The last thing they want is another business idea without a team to implement it. Therefore, when they search for investment vehicles, they look for the following:

  • A management team with a proven track record. Yes, that often means they won’t fund your plan because you don’t have experience, but you don’t have experience because they won’t fund your plan. Deal with it. If this is the case, look for angel investors or friends and family (and keep reading).
  • A defensible product with a competitive advantage. It’s easier to predict the success of a tangible product than it is a service, which is why service businesses are rarely interesting to venture capitalists. Of course, there is the occasional exception, such as Netflix, the popular home delivery service for DVD movie rentals, for example.
  • Reasonable valuation. Divide the amount you plan to take as investment by the percent of ownership you’re offering to give in exchange. For example, offering 50 percent of a company for $5 million means you’re valuing your company at $10 million. An outrageous valuation shows investors you may still have your head in the clouds.
  • A clear statement of the investment offering Check with your attorneys about the legality of your offering, including how much equity for how much money you’re planning to offer this time through, and the planned future dilution for later rounds of investment.

Other things that interest venture capitalists include:

  • A shot at increasing the value of the company from whatever they think it is now to about 100 times that in three to five years.
  • A plan that requires at least a $3 million investment–in fact, the more the better. Your plan has to show that the money is carefully planned and really needed.
  • A plan that has several other similar investors ready to invest at the same time. Venture capitalists find safety in numbers so they don’t want to be the only investor in a deal.
  • A clearly stated exit strategy. Investors like to see that you’ve thought ahead to how they’re going to get their money back on the deal.

Angel investors are harder to predict. They’re usually wealthy individuals or small groups who invest in different ways. Most of them look at almost the same factors as venture capitalists. Some of them, however, will consider lesser investment amounts and will even invest alone. They often specialize in a specific type of business, such as retail or technology, perhaps because they know that sector well.

When it comes to friends and family, I can’t tell you what they’ll look for because they’re your friends and family. I can tell you to be very careful about seeking friends and family to invest in your new venture because businesses frequently fail and you don’t want to lose your friends and family when you lose your business. And don’t make the deal based on a handshake–you should treat your deals with friends and family just as you would with a professional investor.

I can also tell you that you absolutely must check with an attorney before taking any type of investment for your startup. There are laws that control private investment; most of them were enacted to prevent stock fraud. And selling stock takes significant legal work. Whether you’re one of the very few startups that land venture capital investment or you’re taking investment from angel investors, friends or family, work closely with an attorney to be sure that any deal you do is structured properly.
Tim Berry is the “Business Plans” coach at Entrepreneur.com and is the president of Palo Alto Software Inc., which produces the industry’s leading business planning software, Business Plan Pro, as well as other popular planning applications for businesses.

Copyright 2005 Entrepreneur.com, Inc. All rights reserved.
Courtesy of Entrepreneur.com
URL: http://www.Entrepreneur.com/article/0,4621,323316,00.html

An Introduction To Business Plans

Why is a business plan so vital to the health of your business?
March 02, 2001
Compiled by Laura Tiffany

A business plan is a written description of your business’s future. That’s all there is to it—a document that desribes what you plan to do and how you plan to do it. If you jot down a paragraph on the back of an envelope describing your business strategy, you’ve written a plan, or at least the germ of a plan.

Business plans can help perform a number of tasks for those who write and read them. They’re used by investment-seeking entrepreneurs to convey their vision to potential investors. They may also be used by firms that are trying to attract key employees, prospect for new business, deal with suppliers or simply to understand how to manage their companies better.

So what’s included in a business plan, and how do you put one together? Simply stated, a business plan conveys your business goals, the strategies you’ll use to meet them, potential problems that may confront your business and ways to solve them, the organizational structure of your business (including titles and responsibilities), and finally, the amount of capital required to finance your venture and keep it going until it breaks even.

Sound impressive? It can be, if put together properly. A good business plan follows generally accepted guidelines for both form and content. There are three primary parts to a business plan:

  • The first is the business concept, where you discuss the industry, your business structure, your particular product or service, and how you plan to make your business a success.
  • The second is the marketplace section, in which you describe and analyze potential customers: who and where they are, what makes them buy and so on. Here, you also describe the competition and how you’ll position yourself to beat it.
  • Finally, the financial section contains your income and cash flow statement, balance sheet and other financial ratios, such as break-even analyses. This part may require help from your accountant and a good spreadsheet software program.

Breaking these three major sections down even further, a business plan consists of seven key components:

1. Executive summary
2. Business description
3. Market strategies
4. Competitive analysis
5. Design and development plan
6. Operations and management plan
7. Financial factors

In addition to these sections, a business plan should also have a cover, title page and table of contents.

How Long Should Your Business Plan Be?

Depending on what you’re using it for, a useful business plan can be any length, from a scrawl on the back of an envelope to, in the case of an especially detailed plan describing a complex enterprise, more than 100 pages. A typical business plan runs 15 to 20 pages, but there’s room for wide variation from that norm.

Much will depend on the nature of your business. If you have a simple concept, you may be able to express it in very few words. On the other hand, if you’re proposing a new kind of business or even a new industry, it may require quite a bit of explanation to get the message across.

The purpose of your plan also determines its length. If you want to use your plan to seek millions of dollars in seed capital to start a risky venture, you may have to do a lot of explaining and convincing. If you’re just going to use your plan for internal purposes to manage an ongoing business, a much more abbreviated version should be fine.

A quick way to find all the helpful sections of our guide to creating a business plan.

About the only person who doesn’t need a business plan is one who’s not going into business. You don’t need a plan to start a hobby or to moonlight from your regular job. But anybody beginning or extending a venture that will consume significant resources of money, energy or time, and that is expected to return a profit, should take the time to draft some kind of plan.

* Start-ups. The classic business plan writer is an entrepreneur seeking funds to help start a new venture. Many, many great companies had their starts on paper, in the form of a plan that was used to convince investors to put up the capital necessary to get them under way.

Most books on business planning seem to be aimed at these start-up business owners. There’s one good reason for that: As the least experienced of the potential plan writers, they’re probably most appreciative of the guidance. However, it’s a mistake to think that only cash-starved start-ups need business plans. Business owners find plans useful at all stages of their companies’ existence, whether they’re seeking financing or trying to figure out how to invest a surplus.

* Established firms seeking help. Not all business plans are written by starry-eyed entrepreneurs. Many are written by and for companies that are long past the start-up stage. WalkerGroup/Designs, for instance, was already well-established as a designer of stores for major retailers when founder Ken Walker got the idea of trademarking and licensing to apparel makers and others the symbols 01-01-00 as a sort of numeric shorthand for the approaching millennium. Before beginning the arduous and costly task of trademarking it worldwide, Walker used a business plan complete with sales forecasts to convince big retailers it would be a good idea to promise to carry the 01-01-00 goods. It helped make the new venture a winner long before the big day arrived.

“As a result of the retail support up front,” Walker says, “we had over 45 licensees running the gamut of product lines almost from the beginning.”

These middle-stage enterprises may draft plans to help them find funding for growth just as the start-ups do, although the amounts they seek may be larger and the investors more willing. They may feel the need for a written plan to help manage an already rapidly growing business. Or a plan may be seen as a valuable tool to be used to convey the mission and prospects of the business to customers, suppliers or others.

Plan Updating Checklist

Here are seven reasons to think about updating your business plan. If even just one applies to you, it’s time for an update.

1. A new financial period is about to begin. You may update your plan annually, quarterly or even monthly if your industry is a fast-changing one.

2. You need financing, or additional financing. Lenders and other financiers need an updated plan to help them make financing decisions.

3. There’s been a significant market change. Shifting client tastes, consolidation trends among customers and altered regulatory climates can trigger a need for plan updates.

4. Your firm develops or is about to develop a new product, technology, service or skill. If your business has changed a lot since you wrote your plan the first time around, it’s time for an update.

5. You have had a change in management. New managers should get fresh information about your business and your goals.

6. Your company has crossed a threshold, such as moving out of your home office, crossing the $1 million sales mark or employing your 100th employee.

7. Your old plan doesn’t seem to reflect reality any more. Maybe you did a poor job last time; maybe things have just changed faster than you expected. But if your plan seems irrelevant, redo it.

A quick way to find all the helpful sections of our guide to creating a business plan.

Business plans tend to have a lot of elements in common, like cash flow projections and marketing plans. And many of them share certain objectives as well, such as raising money or persuading a partner to join the firm. But business plans are not all the same any more than all businesses are.

Depending on your business and what you intend to use your plan for, you may need a very different type of business plan from another entrepreneur. Plans differ widely in their length, their appearance, the detail of their contents, and the varying emphases they place on different aspects of the business.

The reason that plan selection is so important is that it has a powerful effect on the overall impact of your plan. You want your plan to present you and your business in the best, most accurate light. That’s true no matter what you intend to use your plan for, whether it’s destined for presentation at a venture capital conference, or will never leave your own office or be seen outside internal strategy sessions.

When you select clothing for an important occasion, odds are you try to pick items that will play up your best features. Think about your plan the same way. You want to reveal any positives that your business may have and make sure they receive due consideration.

Types of Plans

Business plans can be divided roughly into four separate types. There are very short plans, or miniplans. There are working plans, presentation plans and even electronic plans. They require very different amounts of labor and not always with proportionately different results. That is to say, a more elaborate plan is not guaranteed to be superior to an abbreviated one, depending on what you want to use it for.

# The Miniplan. A miniplan may consist of one to 10 pages and should include at least cursory attention to such key matters as business concept, financing needs, marketing plan and financial statements, especially cash flow, income projection and balance sheet. It’s a great way to quickly test a business concept or measure the interest of a potential partner or minor investor. It can also serve as a valuable prelude to a full-length plan later on.

Be careful about misusing a miniplan. It’s not intended to substitute for a full-length plan. If you send a miniplan to an investor who’s looking for a comprehensive one, you’re only going to look foolish.

# The Working Plan. A working plan is a tool to be used to operate your business. It has to be long on detail but may be short on presentation. As with a miniplan, you can probably afford a somewhat higher degree of candor and informality when preparing a working plan.

A plan intended strictly for internal use may also omit some elements that would be important in one aimed at someone outside the firm. You probably don’t need to include an appendix with resumes of key executives, for example. Nor would a working plan especially benefit from, say, product photos.

Fit and finish are liable to be quite different in a working plan. It’s not essential that a working plan be printed on high-quality paper and enclosed in a fancy binder. An old three-ring binder with “Plan” scrawled across it with a felt-tip marker will serve quite well.

Internal consistency of facts and figures is just as crucial with a working plan as with one aimed at outsiders. You don’t have to be as careful, however, about such things as typos in the text, perfectly conforming to business style, being consistent with date formats and so on. This document is like an old pair of khakis you wear into the office on Saturdays or that one ancient delivery truck that never seems to break down. It’s there to be used, not admired.

# The Presentation Plan. If you take a working plan, with its low stress on cosmetics and impression, and twist the knob to boost the amount of attention paid to its looks, you’ll wind up with a presentation plan. This plan is suitable for showing to bankers, investors and others outside the company.

Almost all the information in a presentation plan is going to be the same as your working plan, although it may be styled somewhat differently. For instance, you should use standard business vocabulary, omitting the informal jargon, slang and shorthand that’s so useful in the workplace and is appropriate in a working plan. Remember, these readers won’t be familiar with your operation. Unlike the working plan, this plan isn’t being used as a reminder but as an introduction.

You’ll also have to include some added elements. Among investors’ requirements for due diligence is information on all competitive threats and risks. Even if you consider some of only peripheral significance, you need to address these concerns by providing the information.

The big difference between the presentation and working plans is in the details of appearance and polish. A working plan may be run off on the office printer and stapled together at one corner. A presentation plan should be printed by a high-quality printer, probably using color. It must be bound expertly into a booklet that is durable and easy to read. It should include graphics such as charts, graphs, tables and illustrations.

It’s essential that a presentation plan be accurate and internally consistent. A mistake here could be construed as a misrepresentation by an unsympathetic outsider. At best, it will make you look less than careful. If the plan’s summary describes a need for $40,000 in financing, but the cash flow projection shows $50,000 in financing coming in during the first year, you might think, “Oops! Forgot to update that summary to show the new numbers.” The investor you’re asking to pony up the cash, however, is unlikely to be so charitable.

# The Electronic Plan. The majority of business plans are composed on a computer of some kind, then printed out and presented in hard copy. But more and more business information that once was transferred between parties only on paper is now sent electronically. So you may find it appropriate to have an electronic version of your plan available. An electronic plan can be handy for presentations to a group using a computer-driven overhead projector, for example, or for satisfying the demands of a discriminating investor who wants to be able to delve deeply into the underpinnings of complex spreadsheets.

Courtesy of Entrepreneur.com
URL: http://www.Entrepreneur.com/article/0,4621,287323,00.html