The preparation of an effective business plan that is designed to appeal to investors is vital in securing those first meetings that enable investors to have confidence in you and your business. If it is well crafted it will attract investors into more discussion. But if there is something even slightly wrong, the investors will be deterred and go away. It is crucial to assess your plan objectively, with the eyes of an investor. All too often, the fund-raiser is too close to his business and may not be able to see the things that need attention.
Here is a simple three-step guide to build confidence: The Three ‘Ps’:
Always in that order:
What is the essence of a good business proposition? It is not just about extolling the virtues of a particular product or service.
Investors want to know how it came about, is the concept tried and tested in the marketplace or is it a complete start-up (which is always riskier)? Does the business earn revenue yet? What are the distribution channels into the marketplace and the challenges (barriers to entry include competition, pricing, the cost of gaining access to new outlets)? What is the vision? And the long-term objectives? And the Strategies to meet the objectives?
All of these things are vested in the Proposition – you can have the best widget in the world, but it will not succeed if these other points have not been thought through. Investors will run a mile.
And the final key point: what do you need the money for? It is imperative that any investment is committed to developing the proposition, and not to paying salaries or filling ‘black holes’ in the current finances. Investors want to know that their money is aimed at fulfilling the vision and the objectives in the Plan.
And finally, they want to know what’s in it for them in terms of small business tax relief (EIS); percentage of the business; seat on the Board and a defined role, and the predicted exit plan when the time comes.
No investor will commit funds if he does not have confidence in the current Management Team, and the planned introduction of new management as the project grows. Concise and relevant CVs must be in the Plan, as must an organisation chart indicating future management development.
Only once the first two items are satisfied will the investor scrutinise the financials. They must be set out in a certain way, and summarise key data about predicted profit/loss, cash flow, and balance sheet for three to five years ahead. It is important to amplify this with assumption footnotes and to back it up with a comprehensive financial information deck, available on request.
The figures must add up (!!), and be properly audited to ensure that there are no irregularities in the reporting that might put an investor off.
And investors will look for a funding contingency to cover the transaction costs of getting investment and to allow for things not going to plan.
This is important detail work to which entrepreneurs all too frequently give insufficient time.
Any small, early-stage company will require assistance to get all of this right and entrepreneurs must appreciate the need to invest in the right business advisors right from the start, and to regard it as an investment, not a cost.