Let’s face it, most investors don’t have time to read anything more than the executive summary of anything that is sent to them.. So, should you even bother writing a business plan? What should one look like? And what may it say about you?
In short, yes & no, or rather, it doesn’t need to be as complicated as you think, but rather it depends on the stage your business is in (early early vs years of operation and profits). A business plan will help you in crafting your business as well as provide those investors that do take an interest with further ‘meat’ to evaluate your company after meeting you.
From Guy Kawasaki‘s ‘Art of the Start‘ to Business Plans for Dummies there are plenty of books out there on what constitutes a good business plan… but what is the point of a business plan in the first place? Shouldn’t you just ‘get on’ with doing your business and worry about that business stuff later?
Well, in some cases yes you can get away with not doing one, but generally, I believe, the answer is no… A company’s business plan, no matter how short it is (10 slides), has been useful for me as an investor the many times I’ve had to evaluate an opportunity.
Remember, a business plan is about helping you organize your thoughts and then being able to convey them clearly to someone else, not about meeting some magical quota of pages with graphs and charts (although depending on the complexity of your proposition, this may be necessary).
Generally speaking I have found a company’s “plan” has allowed me to determine:
1) The company’s communication style and ability to articulate what they (their product or service) do, clearly and succinctly. Does the company rely too much on buzz words and/or comparisons to get the point across, or is it clear in articulating its objectives and vision? Is the plan well written (grammar)? Do I walk away from reading it being able to describe the opportunity in simple terms to others?
2) The company’s ability to research their market size, competitors, and key industry players, distribution channels, etc. If a company has not adequately researched the size of their market, this can be a real deal-killer. One time I had a company come and speak with me about what they were doing. Whilst originally really excited about the potential of what their product could do, upon further probing during our meeting, they concluded that the market size was only few million in sales world wide, for the whole industry. As you can imagine, realizing the size of your market size during an investor meeting is probably not the best way to make an impression. The identification of key competitors is also an important detail to include and can actually play to your favor if you can clearly articulate how you differentiate from them. In the case of some companies, where distribution channels and key partnerships are important, identifying these and discussing them is important in providing potential investors with confidence that your team understand the challenges inherent in its industry.
3) The company’s ability to analyze their cash needs and expectations for growth. Nothing is more scary than a company whose ambitions are huge, but whose idea of cash management is not in line. You don’t need a CFO, but you do need to have thought out what key costs grow with your ambitious growth and when are the crucial cash-points are for your company. Generally speaking, I don’t have financial discussions with companies until subsequent meetings, but you can guess that in meetings with companies where I walk away learning something new about how the finances work for their specific industry are the ones where I feel most comfortable that they’ve thought things through.
4) The completeness and experience of the company’s team. Although I’ll discuss what I look for in a management team in a later blog post, suffice it to say that if you have a great team, highlight their accomplishments. If you know you need to hire someone to round out the team, it’s OK to put that down as a future hire.. at least it’ll make the investor know that you know there is a weak-point in the team that you plan on solving as soon as the investment comes in.
So, would a company be able to articulate all of these points during a face to face meeting? Perhaps, but it’s more than just communicating the story to me as an investor, but rather, writing a business plan is also so that the founders can justify all the components of a business plan to themselves. During the writing of the business plan, you may find that the business model changes or even the industry focus changes to avoid some risks that were identified early on.
Now, a couple of tips… the first one being, don’t put a valuation in your business plan. Investors may ask you this in person, but you are likely to get your hopeful valuation wrong on paper and come across as either too big or too small for the investor instead of just forcing the investor to focus on what the company could be. Generally speaking, every time I’ve seen an expected valuation in a company’s business plan, it has been out of line with the market. The second tip is that a cap table can be a handy thing to include in your business plan (but perhaps you won’t have space to include it in a presentation). This is useful mostly for subsequent discussions, but can greatly help the investor do calculations on potential returns.
Another big bonus to having a business plan is that many times investors (VCs in particular) have a structure whereby the person evaluating the deal has to defend the deal to his or her partners in a team meeting. For this process, they usually do a lot of research on the company’s industry, but your business plan provides them with a good head start, pictures, etc for them to include in their own research, saving them (and you) a lot of time in getting the deal done.
In conclusion, one of the best things you and your team members can do, is co-draft a business plan, no matter how simple, that you feel can represent your company without requiring your physical presence to get the value of your opportunity across. It should, at the bare minimum (even if slides or doc), include (not necessarily in this order either):
1) An overview of who you are and what you’ve done (basically, why you and your team can make this happen..)
2) A succinct explanation of what your product/service does, screenshots if possible.. run it past a non-techie friend and see if they can explain it back to you
3) A market overview section, the market size of your opportunity, key players, competitors, partnerships, target market, etc.
4) Your financials (at the very least, your expectations of cash usage), if preceding a physical meeting, a cap table would be useful. If your business is about growth first, then clearly show your potential investors how much money you will need to grow it to where it hits the tipping point.
Hope this helps!
- The Difference Between a Business Plan and Planning (blogs.constantcontact.com)
- April 18, 2011 Business Plan: A roadmap to you, Necessary for Loans (learnedatscore.wordpress.com)
- Tips for writing a business plan (premierlinedirect.co.uk)