What do investors look for?

The most important thing you can put in your Business Plan is believability.  Once I was writing a bio for myself and had my brother (the marketing guru) critique it for me.  He immediately balked at the phrase “thousands of IPOs” saying that it smacked of hyperbole.  I, of course, protested!  During my twenty years on Wall St., I had worked on at least two hundred to three hundred new public issues of bonds, preferred stock, and equities each and every year.  Add them all up, and you get thousands.  Right?  Wrong.  There may have been thousands of IPOs in reality, but no casual reader of my bio would accept that as a realistic statement.  It just doesn’t sound right.  It sounds like I am exaggerating my involvement.  So, we re-wrote the statement to read “hundreds of IPOs” which people found very impressive even though I was secretly cringing at the image I knew would mean that I had been a real slacker on the job, if it had been true.

All your facts, claims, and figures should seem reasonable.  You do not want to claim to be the first, the best, the only, or the premier anything.  Even if your figures suggest that you will indeed make $20-billion in profits in Year 1, do not say so.  Never use the B-word when referring to your revenue projections!  It is an automatic disqualifier.  Always sound humble, but do not be stupid about it.  If you have a question as to whether your claims sound reasonable or full of hyperbole, pay some outside consultant to give you a professional opinion.  Do not ask a friend or your Mom to critique your document.  They will tell you it is good even if it is terrible because, quite naturally, they don’t want to hurt your feelings.

One of my clients, a delightful middle-age woman well known in Hollywood social circles, brought me the Business Plan that she had slaved over for months.  She wondered why this gorgeous example of graphic design and digital artistry was not attracting the attention it so richly deserved.  When she showed it to her friends, they all raved about what a wonderful Business Plan it was.  When I looked at it, I saw a document with lots of inappropriate pretty pictures and a lot of unproven claims based upon the old ‘as everyone knows’ bit as well as lots of ‘feelings’ such as “I feel this would be a good thing for World ecology” and “We all have a hole in our lives that this will fill while making our investors millions of dollars.  How could one go wrong investing in XXXXXXXX?”  The amazing thing to me was how this intelligent worldly woman could wonder why Venture Capitalists weren’t anxious to give her the $10-million she wanted.

Another important thing is to make sure all the people you list as Advisors actually know they are Advisors!  Investors just might call them up to ask them why they are involved in your company, and it helps if they recognize your name.

I once started a consulting gig for a young woman who had an interesting idea that involved online promotions of romance books with eventual television series or movie production in goal.  Everything looked reasonable until I got to the Board of Advisors section where she had listed some very big Hollywood names.  Oddly enough, I happened to know a couple of these people personally, so I got on the phone to check out what they thought of my client and not one of the people I called had much recollection of her.  “Oh yeh.  Is she a tall redhead?  Has some idea for an online book thing?  Kinda spicy stuff?  Yeh.  She invited me to lunch so I went.  Terrible idea.  Both the lunch and her project!”

In fact, everything you put in your Business Plan should be supportable.  If you mention that some expert said that a person who could figure out how to produce a product like your product would be likely to make a $-zillion, then you should put in a footnote explaining where you got the quote.[1]  If you are using an article that strongly supports your views, you might want to include it in the Appendix.  However, do not do this unless the article is of vast importance.  You do not want the Appendix to rival the New York City Yellow Pages in size!

You also do not want to talk about future dreams.  If your intent is to start out making widgets, do not go into describing how you will grow your widget making business into a medical equipment company and then in a few years into a major defense contractor.  One of the major horrors that keeps venture investors awake at night is entrepreneurs who seek money to finance Idea A and then end up spending it on Idea B.  This happens all the time and usually ends up in a very messy legal battle.

Stick with the basic business and prove in your document that such a business can indeed make a profit that will enable it to expand into other related markets.  Keep everything short and simple.  Keep it easy to understand.  Do not add feelings or emotional assessments of how important your company will be in achieving world peace.

[1] This is what a footnote looks like.  You can find it under INSERT > FOOTNOTE .

Who wants to see your Business Plan?

It is always important to remember that the people who will look at your Business Plan do not want to be entertained.  They want to see a serious document that describes a serious business.  They do not care if there are colors or artistic formatting.  They are probably more comfortable looking at a Wall St. style Business Plan than at a document that looks as though it has been produced by an advertising agency.  It is always a good idea to use a serif font like Garamond (the Wall St. favorite) or Times New Roman.  If you use a non-serif font, Ariel is best.  Your document and headings should be left-justified, and you should use an outline-type numbering system (see sample plan) for your headings so that the reader can easily know where s/he is and can refer to a specific section in communications.

You will find your Business Plan document is extremely useful for a variety of things, so you might want to prepare both a ‘private version’ and a ‘public version’.  Do not title your files using ‘private version’ and ‘public version’ because you will probably be sending the document out in digital file format via email.  So, unless you want the attorney you are planning to hire asking you what ‘public version’ means and why you didn’t send the ‘private version’, simply call the public version ‘Business Plan’ and the private version that will be given to investors ‘Venture Plan’. 

You will be showing it not only to employees of The Bank, Angel Investors or Venture Capitalists, but you will also be showing it to your attorney, your office landlord, your equipment leasing company, your business consultant, your accountant, your new managers, your Web developer, your marketing guru, and anyone who needs to know about your company.  It can be edited to provide copy for your marketing materials.  It can be expanded into an Operational Business Plan.  It can be cut up, annotated and given to your managers as a ‘things to do’ document.

Today, a Business Plan is an ordinary document.  It saves time and money when you are breaking in a new consultant or provider of professional services such as an attorney or accountant.  Any new manager will want to see your Business Plan before deciding to come to work for your company.  Because so many different people will be looking at it, you should write it to be as simple and informative as possible.  Do not use obscure technical terms or archaic academic prose.  Even the most sophisticated reader of Business Plans will drop your document at least to the bottom of the pile, if not into the trashcan, if it takes any effort or time to read and understand.

What can a business plan do?

A Business Plan cannot get you funding.  The quality of your company or your idea will do that.  The Business Plan should bring out the highlights of your company in a responsible-seeming manner so that it is believable.  The only thing a Business Plan can do for you is either get you through the door of opportunity or into the circular file of rejection.  Oh, if it is ridiculous enough, it can be passed around from one snotty critic to another with a note attached saying “Hey!  Take a look at this idiot!  What a hoot!”   I am sorry to say it has been done in far crueler ways.  You don’t want that to happen to your Business Plan.

How To Save Your Biz Plan From The Circular File

Don’t over-design your document. It doesn’t need to look like a magazine — it must look serious. Don’t add graphics and photos that have nothing much to do with the business idea you are pitching.

Don’t add graphics and photos that have nothing much to do with the business idea you are pitching.

Don’t use hyperbole. No matter how brilliant your idea, it is not poised to become the next Unicorn — particularly if you haven’t launched it yet. Never use words like “the best” or “the leading” or “will become outstandingly profitable” or “soon to be a key player in the industry” or “creating a lot of buzz in the Venture Capital community.” You get it. Stick to the basic facts. Hyperbole never achieves what you think it will. Professional investors see it as amateurish.

Do insert a disclaimer right after the title page. It doesn’t need to be very exciting. It can be a simple paragraph stating that the document is a confidential description of your business idea and it is for information purposes only. It is not an offer to buy or sell securities. The information included in the document is based on the research, planning, and assumptions of Management. Even if all assumptions prove to be correct, there are many things that could negatively affect this business in real-life operation. Google “business plan disclaimers” and find one you like. Keep it simple.

Don’t expect an investor or banker to sign an extensive Non-Disclosure Agreement. They ordinarily aren’t looking to copy your idea and will feel it necessary to run the NDA past their attornies. This usually means they will refuse to accept your business plan.

Putting the word “CONFIDENTIAL” in the header or footer probably provides as much protection as an NDA under most circumstances. The value of an NDA is to demonstrate in court that you have informed the recipient of your document that it is confidential and should not be circulated irresponsibly.

If you have a business plan promoting a medical or technical breakthrough of importance, file a preliminary patent to protect it and have your attorney involved in presenting your business plan to potential investors.

My own disclaimer is that everything I say is based on my research and experience and should be taken with a grain of salt and its truth and value verified by your own attorney.

The first thing to know about business plans

A Business Plan can make you look suave, sophisticated, intelligent, fascinating, and highly desirable.  It can also make you look like a rank amateur, or worse, like an unrealistic fool.  It is best to try to avoid the latter.

A Business Plan can help you create a better business by making you think about your ideas and how you are going to run your company profitably.

A Business Plan can serve as a roadmap for you to follow when putting together your business.  It helps you keep track of your original intent so other people’s ideas do not sidetrack you.  It helps you determine what you have done and what needs to be done next.

There are several types of Business Plans, and it should be immediately obvious which one you need.  We will be dealing with the first type – the Business Plan that will, hopefully, attract investors with lots of money who are clamoring to put that money to work in your business.

The Business Plan for Funding Purposes – Comes in two varieties:

The Bank Variety

This is used to obtain a loan.  Since The Bank is not interested in loaning out money that is not collateralized in some way, such as with inventory, receivables, plant and equipment, an investment portfolio, or your house, if you do not have any of these you probably won’t want to try to get money from The Bank.  Even if you have the desired collateral, The Bank will probably not be very interested unless you can show 3 to 5 years of tax returns proving that your company makes money.  The Bank does not want to auction off your loan collateral unless they absolutely have to, contrary to popular opinion, so The Bank usually requires that your company has enough revenues to not only pay its bills but also to pay back the loan.  A Business Plan you intend to present to The Bank should contain your audited financials for the past 3 to 5 years and should very clearly spell out what your company does, what the product/service is and who buys it, and how you intend to spend the loan money, in the clearest and most simple terms.  The Bank does not employ people with great vision for the potential of small businesses like yours.  The Bank employs people who can memorize a list of loan requirements and are uncomfortable with any business enterprise that is even slightly out of the ordinary.  The more normal you can make your company appear on paper, the better your chance of getting The Bank to give you money.

 

The Venture Capital Variety

Venture Capitalists of today are a jolly breed, addicted to the dream of making returns of at least 30-times their investment.  During the height of the dot-boom, many Venture Capitalists had absolutely no practical business experience and may have made their decisions on a purely image-driven basis.  This does not mean that they still operate that way.  The troubles brought on by the dot-bomb have resulted in many fewer Venture Capitalists, and those that are left are a world-weary bunch.  Although they do have the vision that The Bank lacks, they are also generally looking for a real company.  If they are the kind that requires your company to have been in operations for at least a year before they will believe you actually have a real company, they will be looking for audited financials for that year of operation, plus some history and strongly supported projections.  If they are interested in pure start-up situations, they will be looking to see if your company has any there there.   Even Angel Investors are requiring a larger percentage of facts to dreams these days.  Your Business Plan will need to be well-researched, supported, scrupulously free of overstatement, and have very tight revenue models with a back-up plan in case all goes wrong.  Your financial projections must be very detailed!  You need to show that you actually know how much it will cost to run your company.

The Organizational Business Plan

This document is a detailed roadmap of how you are going to run your business. It is essentially a larger and more detailed version of the Business Plan you would use to seek funding, and it includes full versions of your target market demographics, Marketing Plan, Sources and Uses of Funds, a timeline with benchmarks, Personnel Plan, Operations Plan, Production Plan, Fulfillment Plan, and all your contracts, employee forms, administrative forms, etc.  It will run about 100 pages, give or take a few dozen pages, and should be updated each Quarter.

The Expansion or Reorganization Plan

This takes a critical look at the history of your company, the budgets, the revenues, the profits, and seeks to make everything perform better. In the case of a healthy company, you would be seeking to add new sources of revenue either through marketing, new products, new services, going into new markets, or a combination of all.  In the case of a failing company, you would be seeking to remove those losing elements and build up the ones that seem to have a future.

A well-crafted Business Plan can make the difference between success or failure.  It can teach you a lot about your business, and it can humble you.  It can also be a vehicle for your own outrageous imagination, which will probably get you nowhere.

A Business Plan cannot get you funding.  The quality of your company or your idea will do that.  The Business Plan should bring out the highlights of your company in a responsible-seeming manner so that it is believable.  The only thing a Business Plan can do for you is either get you through the door of opportunity or into the circular file of rejection.  Oh, if it is ridiculous enough, it can be passed around from one snotty critic to another with a note attached saying “Hey!  Take a look at this idiot!  What a hoot!”   I am sorry to say it has been done in far crueler ways.  You don’t want that to happen to your Business Plan.