Investor Preferences in the Business Plan

So what is that investors look for in your business plan? The may be a number of opinions on what a investable business plan is. Depending on the investor I'm talking to their is normally a range if different responses. Everything from "as long as the opportunity is clear' to 'I really invest in the person behind the business more than the opportunity itself' Truth be told it probably a combination of the previous two for me, but in the table below I tried my best to summarize the key issues in the business plan that needs to be included to ensure you are really communicating what the investor is looking for.

Too many entrepreneurs limit their opportunities by writing weak business plans. Great ideas are common; much rarer are businesses with the people and products to enter a market and take share or dominate. Only 1 % to 2% of all business plans presented to angels or VCs receive funding. 

Companies don’t build themselves. People build companies. Ultimately, an angel investor is selecting a management team. A great team can make even a mediocre company achieve reasonable success, whereas a company with the best technology will not be successful with a mediocre management team. 

Some of the key factors of a business plan that improve the success potential of a startup are shown below.

Success Factors 

Factor	Description
Management	• Years of operational experience in a similar industry  • Startup experience with a similar business model that led to a successful exit  • Willing to be coached
Market	• Addressable market that is fragmented and growing  • Customers already lined up
Technology	• Patent protected  • Creates strategically defensible position
Competition	• Shows that company has some competition, regardless of product or service  • Clearly summarizes competitors and key threats
Business model	• Similar to one or more used by successful companies  • Demonstrates that customers have real pain that product or service solves (“must have” vs. “nice to have”)
Exit strategy	• Identifies target acquirers  • Shows deal history of acquisitions and IPOs with key financial multiples and ratios
Risks	• Objectively assesses risks and describes actions to reduce, mitigate or eliminate them
Financial projections	• Shows conservative, expected and targeted figures with assumptions for each  • Focuses on cash flow and profitability
Capital structure	• Detailed  • Preferrably shows ownership by founders and only small numbers of unprofessional or inexperienced investors
Investment desired	• Places an offer on the table - indicates valuation  • Shows uses of funds in detail  • Details expected future rounds and uses of funds from each round

Who reads your business plan?

So much is written about writing the business plan, what to include, how much of this and which specifics of that, that we often forget about one of the most important considerations of the business plan, who will read it. For you as the entrepreneur, we also have to remember that the - Who will read it question is really crucial.

The saying goes that beauty is in the eye of the beholder and that is as true here as anywhere else. What is the reader looking for, what do the they notice and what does not really matter? At a recent business plan competition where a number of the judges were not from a business finance background, I was astounded at what they were looking at and seeing as important. Points of view were often very different and what one appreciated as a job well done, others over looked completely in favor of something else.

Nine times out of ten when I’m looking at a new business plan I’m rushed and my aim is to quickly work out whether it makes sense to meet the company behind the plan or whether we should politely let them know we are not interested, with a brief explanation as to why. As you would expect, we review many more business plans than we take meetings – I have never run the numbers but a back of the envelope estimate suggests that excluding plans from entrepreneurs who are well known to us the ratio of meetings to business plans received is in the region of 1:10, and lower still from entrepreneurs we have no connection with. With these sorts of ratios it is important for our productivity that we get to a decision quickly.

From the entrepreneur’s perspective situation is very different. The business plan and accompanying email is an important document, the one shot to impress a potential investor and try to get a meeting. Hence a lot of work goes into the business plan, and a lot of hope can be invested in it.

Clearly there is an undesirable asymmetry here – entrepreneur spends a long time creating the business plan, investor reads it quickly. I am writing this post to address that issue.

I am not anti-writing business plans by any means, and I think they serve important purposes beyond getting a first meeting with investors:

* writing a business plan typically helps to clarify and enhance thoughts and plans about the business
* investors will look to the business plan for information at later points in the process (hopefully including a more thorough read prior to the first meeting, assuming there is one)

However, I thought it might be helpful to highlight the parts of business plans I zoom in on when deciding whether to go for that first meeting:

* Summary of product
* Evidence of momentum – e.g. user traction or customers
* Summary financials
* Evidence of ambition
* Maybe a description of the market dynamics (often I feel comfortable enough with the market already)

The astute amongst may have noticed that despite the fact VCs always harp on about the importance of ‘team’ it isn’t on this list. That’s because we form our opinion on people from meeting them much more than from reading about their history.

The key issues is to perhaps include the most important elements of your plan in both he Executive summary, boude and conclusion for the reader not to overlook it.

Business Plan Outline

When drawing up a business plan it is important to take into consideration what information you wish to make known to your business investors and financiers in order to gain favour with them. A clear-cut business plan is of utmost important and will also help and guide you as your grow your new business.

What information needs to be in your business plan? What is the order of information that will make the most sense to lenders and investors? You can answer these questions with the business plan outlines provided below.

What are the standard elements of a business plan? If you do need a standard business plan to seek funding — as opposed to a plan-as-you-go approach for running your business, which I describe below — there are predictable contents of a standard business plan outline.

For example, a business plan normally starts with an Executive Summary, which should be concise and interesting. People almost always expect to see sections covering the Company, the Market, the Product, the Management Team, Strategy, Implementation, and Financial Analysis. The precise business plan format can vary.

Is the order important? If you have the main components, the order doesn’t matter that much, but here’s the sequence I suggest for a business plan. I have provided two outlines, one simple and the other more detailed.

Simple business plan outline
1. Executive Summary: Write this last. It’s just a page or two of highlights.
2. Company Description: Legal establishment, history, start-up plans, etc.
3. Product or Service: Describe what you’re selling. Focus on customer benefits.
4. Market Analysis: You need to know your market, customer needs, where they are, how to reach them, etc.
5. Strategy and Implementation: Be specific. Include management responsibilities with dates and budgets. Make sure you can track results.
6. Web Plan Summary: For e-commerce, include discussion of website, development costs, operations, sales and marketing strategies.
7. Management Team: Describe the organization and the key management team members.
8. Financial Analysis: Make sure to include at the very least your projected Profit and Loss and Cash Flow tables.
Build your plan, then organize it. I don’t recommend developing the plan in the same order you present it as a finished document. For example, although the Executive Summary obviously comes as the first section of a business plan, I recommend writing it after everything else is done. It will appear first, but you write it last.
Tim Berry mentions a number of these issues in his business planning blog

A business plan may change with time and one must always leave room to grow and expand the original vision and direction that the business is taking when starting up your new business venture. As an entrepreneur, seeking mentors and angel networks to help you along, constantly refer back to your original plan, but be open to change and expansion in accordance with what you current economic situation in your country may be experiencing at the time. You may need to add more products, or discontinue some, and recreate your plan, purpose and vision.