Small and start-up companies are constantly being told about the importance of a business plan. Its is especially important to small companies who wish to attract investors. Large companies have Strategic Plans for building internal consensus on business direction and for gathering input and perspective from its investor community, often represented by the board of directors. The small company uses the business plan to sell what is often an idea to strangers. There is little or no track record so the plan is a combination of a few useful data points and a grand scheme to turn these data point points into a business. Unfortunately an entrepreneur often writes the plan from their own perspective instead of the perspective of these strangers whom they hope become investors. If you want to convince me to invest in your business, you had better know the questions that I expect to be answered in your business plan.
I recently lead a midsize business ($450 million) through the divestiture process. A major multinational was selling this division which didn’t fit with its future direction. Since the process coincided with the financial crisis, my staff and I got lots of experience pitching the business to potential investors. After 17 trips to NYC to pitch, I became an expert at answering questions and eventually a private equity firm became the proud new owner of this business. Whether the potential investor is an equity investor or debt investor; or financial institution or strategic entity, many of the questions are repetitive and can be summarized into the questions below.
- What is the purpose of your business and how will it make money?
- What is your ‘runway’ for growth?
- What is your value proposition versus competitors?
- Do you know the risks associated with your business and how to mitigate these risks?
- Why should I believe in you and your business?
These are challenging questions for a small company and even more challenging for a start-up, but you need the answers and you need them professionally communicated in a written business plan. You will then need to make a pitch with slides to concisely present this plan to potential investors. Your pitch tries to summarize the plan by touching on the highlights. If you have a good business, and have vetted your potential investors well, they will become interested enough to read your business plan. There are many thousands of new businesses started every year. Investors have learned that successful investing comes from narrowing the number of businesses through various screening processes. By vetting the potential investors, you lessen your chances of being screened by presenting to investors knowledgeable of your business area and able to add value to your business after the investment.
About 50% of new businesses fail within 5 years and nearly 70% fail within 10 years. In baseball terms, investors are scouting for new players, knowing that most will not make it to the big leagues. If you don’t show a healthy knowledge of the game, they will not pick you. Answering the questions above will demonstrate that you know the game.
As you translate the answers into a business plan, you might consider the following outline.
- Executive Summary: A good Business Plan starts with a summary. Think of this as the appetizer, but it must be tasty enough to cause the reader to want more. It’s a great place to explain the purpose of your business and how it will make money.
- Background/History: Introduce your plan by giving more details about your company and any relevant history. This is a good time to introduce yourself and your management team plus any advisers. Keep it short and simple. I really don’t need to know about your great great grandfather (unless he contributed directly to your business).
- Market Overview: Tell me about your addressable market. I emphasize the word “addressable”. This is the part of the market which you could theoretically capture 100% market share with your products and/or services. If you have a device which cures appendicitis, the market is not the more than $200 billion medical device market. If the device can be used over and over to treat various patients with appendicitis, then the market is not even the number of patients with the ailment. It is the number of treatment professional which might buy the device. Explain the addressable market, it’s growth rate and your business plans to capture market share. Investors want to know that you are more than just a dreamer. They want to know you are practical about the size and reasonable about the opportunity to deliver growth for your business.
- Business Approach: After providing details about your market, its time to explain your value proposition. How are you different from others in this market? Will competitors respond to your presence and how will this impact your business. This is a good place to show a table of revenue projections for the next few years (normally 3-5 years). Make sure you justify and explain all your assumptions, because I and any potential investors will be skeptical. Bigger is not necessarily better. Investors prefer you to narrow your approach to show proof of success while minimizing cash requirements. If you have 2-3 products in your pipeline, consider putting all but one on hold and rush the one product to market. If you have narrowed your approach, briefly explain the sequence of events.
- Operational Highlights: There are likely many activities that must happen to deliver your products and/or services effectively. Describe your operational plans and how you mitigate operational risks associated with your business.
- Financial Review: Describe the financials associated with your business, including multi-year projections of revenues, costs, and profits, Breakout significant cost categories and explain all assumptions. You may also want to include a balance sheet to show cash flow projections and inventory changes if appropriate. If you are seeking investors, the balance sheet will show the timing and critical nature of your cash requirements so consider your negotiation stance before including the balance sheet.
- Appendices: Your business plan should be concise with a reasonable amount of detail to show you are knowledgeable and have a great plan. Often you might anticipate follow-up questions and want to provide more complex information. Use the appendices to provide this information rather than clogging your plan with mountains of data or long explanations.
Every business is different but winning companies show some similar traits. Your business plan should communicate clearly the answers to the questions. You should vet your potential investors well. Finally, summarize your plan into a pitch which will illuminate your passion for success.
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