Writing a Business Plan
The difference between a good business plan and a bad business plan can be summed up in a single word: credibility. To be sure, a good business plan is not the same as a good investment opportunity but, as with so much in business, presentation can make a difference, so it is worthwhile ensuring your business plan is as professional as possible.
Credibility
It’s well known, but worth repeating, that investors make their investment decisions based on their assessment of the attractiveness of the market opportunity and the character of the management team. A credible business plan will show a detailed, insightful knowledge of the market, backed up with evidence, and will be backed by a management team with drive, ambition and tenacity. A business plan without these elements is a set of ideas, dreams and assumptions.
Even if a meeting with investors has been arranged by introduction, nevertheless the business plan is like a ticket to get in the door, so it’s worth putting in some effort. No one will pay too much attention to the numbers. Everyone knows the road ahead for early stage investments is steep, twisting and will occasionally stop abruptly. Investors needs to assess whether the management has the resilience to look for new paths and is prepared to work hard just to keep going. It doesn’t mean the numbers aren’t useful. They’ll be needed as a yardstick of progress, but a credible business plan is not necessarily reflected in the fine detail of the financial tables, so your energies should be directed to where they will be most helpful: describing the opportunity and preparing your CV.
Business Plan Document
Make the document as easy on the eye as possible. It needs to be visually attractive without appearing too ‘glossy’. Make full use of pictures throughout. (The picture below is a visualisation of a prototype drinks product).
Five minutes on Google will give you a checklist of headings to cover. Here’s my template:
Executive Summary
Don’t put any information in here that isn’t in the main document. This isn’t a ‘conclusion’ for a report. Don’t worry about correct English; you don’t have the space. Apply the journalist’s technique of Bottom Line Up Front (BLUF) which usually means cutting your last sentence and placing it at the top (you’d be surprised how often the meaning of the text is unchanged, but the communication improved). Don’t run beyond two pages. And don’t be shy of saying how much investment funds you’re seeking to raise.
The Business
Here you introduce your business to someone who won’t have heard of you and doesn’t know your market. The level of detail is not unlike the sort of corporate brochure you might prepare for a customer: ‘We’ve been leaders in market x for 8 years’; that sort of thing. It needs enough information so someone knows which trade you’re in, the size of your company, it’s history. The essential information to convey is, firstly, that you have some ‘asset’ that is valuable, whether it be a unique market position, prototype for a new gizmatron, or know-how. Conclude with an explanation of why finance is required, such as ‘Now looking to expand into new territories…’
The Opportunity
This is where you’ll either hook an investor’s interest, or not, by describing the size of the market, the rate of growth or unmet demand. You need to make the investor decide that they want to be exposed to this market. Some of these things go in fashions. The comedy programme 30 Rock had a scene where a business opportunity is pitched in three words: ‘Wind power. Bandwidth. Chinese market’, to which the other character puts his hand to his mouth in excitement. That’s the sort of effect you’re looking for! It’s worth remembering that there are fashions in investment cycles. I once worked with a start-up that had very credible management and a tasty low carbohydrate snack bar. They had raised some money privately in 2004 around the time when awareness of the Atkins diet was peaking. That must have been one of the easiest pitches ever.
Be bold. We British are famously under-stated and can qualify our assertions on the attractiveness of an opportunity almost as soon as we’ve made them. You’ll be surprised how effective statements such as ‘We’ve discovered an unmet need of £150m in the xyz market’ can be, when stated with confidence. It makes it sound like a bag of money is sitting under a tree waiting for you to just pick it up. It’s hyperbole, but if you can nudge the investor towards that way of thinking, you’re on the right track. To be successful at selling, after all, is partly about enjoying the game.
Business Operating Model
This section has most relevance to start-ups where it can be easy to see why a particular product would be attractive but not obvious to see where in the value chain the start-up company will fit. A good example of this is the internet where most of the value ends up with us, the user, being able to do things quicker and easier than before, but – as we expect many internet-based services to be free – it leaves the company having to reply on advertising revenues or subscription fees or licensing deals with bigger operators. Another example would be in drug discovery, where the company basically can’t afford to take a product to market and can only make money by passing a clinical milestone and selling the technology on to a larger enterprise.
For more mature companies, this section is really just the opportunity to explain how a proposed expansion will work. For example, a veterinary group explaining how they will target retiring vet practices, how much money they will offer, and what overheads can be cut on consolidation afterwards.
The Market
Here’s where your credibility will be tested most severely. This section needs relevant, detailed, auditable information on all aspects of the market: customers, suppliers and competitors. This is obviously much easier for a business that already trades. If it is a new product, what has been the market test results; have you obtained the first customer order? At what price has the manufacturer agreed to make it? This is the level of detail need. It cannot be obtained by purchasing some market research. It needs some shoe leather to have been worn out by engaging directly with the market. This is the part where starting a new business is described as having to kiss a lot of frogs to find your prince. It is hard, and not for everyone. There’s no way around it. If you haven’t done this level of homework, you won’t be taken seriously.
The Financial Plan
This is the most inward-looking part, but don’t be sucked into spending too much time finessing the details. Such activity is firstly unnecessary and, more importantly, it displaces the hard work of getting meetings with potential customers. The financial plan should cover the basics: how much money is needed, what it will be used for, and the cash flows that will be subsequently expected.
Even if enthusiastic, investors will want to manage their risk by doling out investment funds in as small chunks as possible, tied to clear milestones and objectives, so it’s a good idea to make it clear how much money (and how much time) it will take to reach each milestone.
Deal Structure
It’s difficult to generalise this section because it’s so specific to each individual investment. If the business is mature, it’s simply a case of being clear about the legal and fiscal structure of the company, pre and post investment. If the venture is more in the early stage, the management will be in a far less powerful position to dictate terms. Nevertheless, it’s worth making a firm proposal about how you envisage the investment working.
Management Team
This is the easiest part: writing about yourself and your colleagues. It is for reasons of credibility that many companies will invite some heavy-hitter to advise or even chair their company. It tends not to add much value to the company other than keeping your investors happy. Exercise caution because parachuting people in where the chemistry doesn’t work can be a recipe for dysfunction. It is certainly true however that the more you strengthen your management team, the more you strengthen your investment ‘story’.
Words of Warning
It is a common error for people to spend too much time on a business plan too early in their venture. In a strange way it can be quite damaging to a new enterprise because it gives a false sense of being in control. The people who are really in control are your customers. You need to meet them, and they won’t give a hoot for your business plan. So if you’re a consumer-focused business, you need to hit the streets, so to speak. If your customers are other corporations, you need to get meetings and make presentations. You don’t need a business plan for any of these activities. The only people that need a business plan are the financiers and if they are genuinely interested they’ll get all the information they need from their due diligence process. The business plan is an important entry document but, if you are successful in raising finance, it will only be one of many more plans and reports you’ll have to prepare. Calibrate the time you spend on your business plan to reflect this more constrained role.
Summary
For any given level of attractiveness of a business opportunity, the better presented your business plan, the more likely it will be to succeed. However, success for the business plan document shouldn’t really be measured in terms of finance raised but, rather, on meetings taken. It’s what you say and do in the meeting that is more likely to determine success or failure in raising finance.