Financial Needs & Projections, Traction, Unique Success Factors, Marketing plan, Research.
A good Business Plan is an essential tool for startups and, when executed correctly, it serves two key purposes:
- It provides goals & roadmap for you to follow in order to build a successful company.
- It provides the format & information for Lenders, Angels & Investors (VCs) need to determine whether or not to provide funding to you.
When preparing your Business Plan for an Investor, you must keep this audience’s unique needs in mind. Below, you’ll learn what these needs are and what investors will scrutinize most when reviewing your plan. Investors will generally take equity in your company, or they will give you a Loan that must be repaid. In either case, their primary goal is to get a Return on their Investment (ROI). For Loans, they want to have great confidence that you’ll be able to repay the loan & interest. For Equity Investments, they want to see a good growth potential and a reasonable possibility of your exiting at a significant multiple.
Exiting & Significant Multiples.
For those unaware of the phrases “exiting” & “significant multiple,” please allow me to explain. “Exiting”: referring to an event in which the equity investor will be paid. The most likely exit event is for you to eventually sell your company. Another positive exit event is taking your company public; an IPO (Initial Public Offering). While this is very favorable to investors, the likelihood of this happening is extremely low. Next, a “multiple” is the return on the investment (ROI) that investors will receive. For example, let’s say a venture capitalist invested $5 million in your business and, upon exit, received a $50 million check for their equity stake. In this case, the investor would have received a 10X multiple or ROI. Equity investors generally want to see a 5 to 10-times multiple. While this seems very high, it’s because they understand that many of their investments will not materialize at all.
Below are 5 of the most critical factors that Investors look for in your Business Plan – to determine if they think you will give them the Return-on-Investment (ROI) they desire:
1. Financial Needs & Projections
Investors need to know how much money you are seeking, the proposed uses of the funds & financial projections. Your Financial Projections should show your expected sales, expenses & profits over the next five (5) years. Investors want to see significant growth & profits to feel confident about your assumptions. For example, while it’s easy to assume that your sales will grow 500% per year, investors will want you to provide rationale behind this and other assumptions. Did your last company grow at 500% per year? Are there other companies in the market that are growing at this rate? The more research you can do to bolster your assumptions, the more credibility they will have in the eyes of investors – which will make them more likely to believe in your business and fund your company.
2. good Traction that indicates success.
Investors want to see that you’ve achieved traction.” It is getting growing users or, ideally, many more paying customers for your product or service. By gaining traction, you reduce risk for yourself & investors. For instance, consider two companies developing Mobile Apps. One just has the idea to create the App. The other has already built the App (ie, they’ve proven they could successfully code & complete the App). They’ve so far acquired 10,000 users (ie, they’ve proven they could market the App and that customers really want it) and 1,000 users are currently paying for a premium subscription of the App (ie, they’ve proven they can monetize their business). As you can see, the latter company has already removed multiple risk factors to the Investor and is thus much more likely to receive funding.
In the Executive Summary at the start of your Business Plan, you want to clearly describe what you do and explain any traction that you’ve accomplished thus far to get investors interested right away. (I can help you with Exec Sumry. Peter@Wiz4.biz) Note that if you are in the early stage of your startup, it may be hard to show traction in terms of paying customers. However, you could show a prototype or research you’ve done proving customer interest in your product. Sometimes you need to get creative in showing traction!
3. Unique Success Factors
Documenting your unique success factors is critical to winning over investors – which is why any comprehensive Business Plan should include a section on this. Your unique success factors are those things that make your company more likely to succeed. Traction, as just mentioned, is clearly a unique success factor. Other factors are past accomplishments of your management team. They can also be Market Research you’ve uncovered showing that market trends are moving in a direction that benefits your company over your competition. Another success factor could be a marketing partnership you’ve formed that’s sure to bring in a steady flow of customers. Think through why your company is uniquely qualified to succeed in your given field, and stress this in your Executive Summary + throughout your Business Plan – as it’s imperative investors see and understand this.
4. a good Marketing plan
The marketing section of your Business Plan discusses the Four 4Ps, which include:
- Product or Service
- Place, or Distribution Strategy, which is how customers will buy from you (ie, website, storefront, direct mail, distributors, etc)
- Promotions, which is how you will attract new customers
3a) Within the Promotions section of your Biz Plan, you need to explain to investors the cost of attracting a new customer, the expected lifetime value of your customer and whether or not there’s room to scale. Regarding the cost of attracting customers, hopefully you have real figures to work with. If not, you can apply realistic assumptions. For example, you might assume that via Pay-per-Click advertising, it will cost you $2 per click, and one out of every 100 clicks will become a Customer. Thus, your customer acquisition cost (CAS) will be $200.
3b) Gross Profit. Next, you might be able to show that your average customer pays $100 for your product and buys 10 times over the first year at a 50% profit margin. This would mean that your average customer gives you a profit of $500.
3b) Viable Market. Finally, you want to show the market is big enough to support your growth. Ideally, you can prove with market research that your Target Market includes, let’s say, 5 million customers. In summary, you would be showing it costs you $200 to obtain a customer worth $500, and there are 5 million potential customers out there; this would prove to investors that you have a sizable and profitable opportunity.
The final thing investors really care about in your Business Plan is the research you did. Research will appear in multiple sections of your plan, and the goal of it is to bolster the rationale that your company is worth investing in. As demonstrated above, the right research will support your Financial Projections, unique success factors and other key sections. Here is the key Research you need to conduct:
- In your Industry Analysis section, you must provide research on the size of your market and trends of the market
- In your Customer Analysis section, you should document how many target customers exist + their wants & needs
- Your Competitors. Show their strengths & weaknesses, and conduct research to support your Financial assumptions. Do a SWOT analysis – Strengths, Weakness, Opportunity & Threats.
Key Takeaways on preparing your Business Plan for Investors
Investors want confidence that investing in your business will give them a solid return on investment. It is your job as the founder of your company to make sure your business plan achieves this. Be sure to conduct your research, and pay special attention to your Financial needs & Projections, Traction, unique Success factors & Marketing plan. Then finding Investors to invest in your Business will become much easier.
I can do Exec Sumry & Biz Plans for you. Contact Peter@Wiz4.biz
Comments: Do you know any other Factors to influence Investors & get Funded?
from Startup Nation 11/21 enhanced by Peter/CXO Wiz4.biz
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