Editor’s note: This article was first published in January 2013. The advice dates from January 2013 and is based on a 2012 test of how venture capital analysts read business plans. Investor practice and tools, such as pitch decks and data rooms, have changed since.
We’ve already made clear what an investor is really looking for in our business idea: nothing other than making money (although some genuinely want to be part of certain projects on principle). Some time ago we also outlined the structure of a good business plan, 100% professional. Times are changing, though: competition is growing and investors receive far more funding requests from entrepreneurs, so we need to redesign our strategy.
To begin with, it’s already an advantage to know how a venture capital analyst reads your business plan once you send it: which pages they spend most time on, which ones they pay most attention to, and so on. We should also bear in mind that while they read our business plan, they’ll be interrupted by the phone, their assistant, clients dropping in…
Carlos Polo Gil has published an article tracking how an investor reads the project we send them. He used Doocuments, a tool for monitoring what is done with the files you send someone.
It isn’t just because Carlos Polo or his Doocuments tool say so: I can vouch that he’s right in a very high percentage of cases. So let’s move on to the strategies and points for putting together what we’ll call the perfect business plan.
The page an analyst looks at longest is the first one (the cover), and probably the second and third as well. The rest of the pages (especially if the business plan is long) get what is commonly called a skim, until they reach the section on risks and competitors, where they’ll pay attention again if we haven’t worn them out yet.
The ideal, perfect business plan
Use a hook rather than a complete, detailed business plan
Think of it like a CV. Sending a good CV doesn’t get you a job; it opens the door to the next level, a job interview, where we can show what we’re worth far better. Here is the structure for this business plan.
1. Summary or introduction (here we have 100% of their attention)
Explain the key points of the project very briefly: a short description of the product, the benefits for the customer, the founding team’s experience, the investment required, the legal structure chosen and the profit target for the first year.
Short, concise, eye-catching and realistic.
2. The business idea, the product and the market
Until now, each of these three points was covered on separate pages or in separate sections. So as not to tire out the analyst reading our business plan, we’ll combine them and, once again, be brief, clear and concise, answering these questions.
Why will my business idea succeed?
Here you’ll show a need or a gap among consumers (the market) and describe how your product or service fills it. Explain who your potential customers are (your target market) and why they would buy your product or service rather than someone else’s. If you can, include statements on technical development and the status of patents and licenses.
Note: If your business idea is technological, try to explain it so that even a 10-year-old could understand it, avoiding jargon that people who aren’t tech professionals wouldn’t follow.
Explain the marketing strategy you’ll follow to win that market and compete with your rivals. It’s also a good idea to write down your company’s goals for the next three to five years.
3. The team behind you
The work experience, ventures and achievements of each person who will start the project with you (if there are any), or failing that, the profile of the people you plan to hire for the most important roles in your project.
4. Risks and profits (maximum investor attention)
Every investor gives 100% of their attention to the word risk.
Avoid phrases like “safe investment” or “risk-free”. There’s no such thing, and if there were, the project wouldn’t be worth investing in. Be realistic about the risks. Lay out the scenario you expect, and then the worst situation that could arise, while stressing that it’s unlikely. All the investor wants to know is that, if those risks do materialize, they’ll be well managed by the entrepreneur they’re placing their trust (and money) in.
Show maturity, humility and honesty here: investors aren’t as scared of risks as we think, but they do run from risky people. Basically, give them a SWOT analysis.
Now that we’ve delivered the bad news, let’s put the icing on the cake: our expected profit scenario, plus a very optimistic and unlikely one in case everything goes better than expected.
5. Our competitors
As with the previous point, avoid saying “we have no competition”. It would show that you were careless and unprofessional in your market research, or that the product is too innovative, which would call for a different kind of management and probably more capital.
6. Final summary
We’ve now finished the business plan that will serve as our letter of introduction. We should try to keep these points to a few pages while making them very informative.
In this last point, we tell the investor that we’ve used this short business plan so as not to tire them, and that we have a fully complete business plan available in which they can see the full marketing strategy, the planning, the financial costs of each phase, distribution channels, strategic alliances, our product’s operating cycle, the purchasing plan and so on, and, very importantly, the other investors taking part in our project (if there are any).
In the end, our conclusion is that if a summary of the business plan doesn’t get you a personal meeting, the complete, detailed business plan would have got the same result. That said, we should have the complete business plan ready in case they are interested.
Further reading
- If you can’t explain your business idea in 60 seconds, you don’t have a business
- No funding? Let your customers finance you with solidarity bonds
Featured image: ENERGY.GOV, Public domain, via Wikimedia Commons.
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