Martin Zwilling, a startup mentor and angel investor, posted recently on Gust (Startup Funding & Angel Investing – Gust) a very pointed article on Why are Good Business Plans So Rare These Days? He points to two contradictory trends, the first one where entrepreneurs don’t believe in a value of well thought out business plan document and believe that an overview document is good enough to get external investment. On the other hand, investors are frustrated by poor quality of business plans they receive. Hence, web is littered with tips and articles on how to write a good business plan.
I absolutely agree with his assessment that startup (co)founders are simply not spending time to think through their idea and test the market on their own first, before going out and asking other people to invest in them. Entrepreneurs usually get money from friends and family first. Friends and family deserve to see a business plan document more than anyone else because if (or when) business fails, they will not only lose money, but also damage personal relationship too. If they have a chance to see a well developed document, that clearly outlines risks on a new venture launch, they will be more supportive and less disappointed if things don’t work out. In this early stage, it is very important to define a failure to prevent throwing good money after bad, and to minimize financial strain on yourself and your family.
Once (co)founder is ready to seek external funding, a business plan document is not only a nice to have, but necessary. I know, most investors will not bother reading the complete document, but they expect to see one that looks professional. After all, would you buy a new TV without a user manual? Do you read it? No. But, you expect it.
Why do entrepreneurs with no business plan document think that someone will throw a million of dollars their way only because they have a cool idea?
- Executive summary: this is the most important section of a document as everyone reads it. You need to succinctly describe the value proposition, go to market strategy, team (gaps), ROI projection, and how much money are you raising.
- Value Proposition: the second most important section. Explain what your product is, who is the target market segment and quantify why is your product better, faster, cheaper than other solutions in the market place. Incremental improvements will not impress anyone, but if you can offer a product that is at least 25% better than current solutions, you will have investors’ attention.
- Target market: write about your initial target market segment, expansion market segment, market size, growth rate, industry trends, competition (don’t forget your competitors and companies offering substitute products or solutions). This can be very long section. If you are not that familiar with the industry or if you don’t have experience doing market analysis, you can hire a consultant to do this project for you. I would place medium importance on this section as investor you are approaching is an expert in the market. Just make sure you don’t go off into the weeds and write something that no one else agrees with. External consultants can be really helpful working with you to understand the market.
- Product or a Service: explain what it, how it works, and how does it meet the needs of a customer. It’s important to tie this section back to your value proposition.
- Go to Market Strategy. How will you make the product, sell it? What is your business model? This is a very important section that describes your internal operations and distribution channels. Every company will have its unique business model and implementation. Well though out business model and strategy implementation will differentiate you from the crowd.
- Financial Plan. Believe it or not, this is the section that is of least importance to investor. They have very experienced in private company valuations and they will stick to their numbers. You really don’t have to go into a lot of details with your pro-forma sheets, so you need to have a ballpark understanding of our cash burn rate and how much money do you need per each development stage.
- Team. Investors put money into people they believe have enough experience to execute a strategy. Being honest about your skills gaps will be appreciated by investors as they will perceive you as a team player open to suggestions. List here people that you need to hire and skill set that they need to have for a role. Most likely, investors will have someone to recommend for the role you need to fill.
Dragana Mendel, a management consultant for startups, small and medium size businesses develops and executes growth strategies for her clients.