A while ago we explained what the structure of a good business plan should look like, along with a few points on making your business plan ideal for raising finance.
One thing we need to be clear about: the expectations we have for our business idea may be very different from our company’s real growth prospects. You know it, and future investors know it happens too.
Among the most common reasons businesses fail is that, in the end, costs are higher than the business plan predicted and profits take much longer to arrive than we first imagined. In other cases, profits never come at all. Investors back ideas, but they don’t want to throw their money away, so our business plan needs to answer a few questions.
Questions your business plan should answer
What is your competitive advantage?
Even with a good business idea, a competitor may appear out of nowhere when they see our business is working and quickly take our market away from us. This is something investors worry about when deciding whether to invest in our company.
That is why it helps if our business has certain barriers to entry, such as patents, copyright, trademarks and so on. You don’t need them to succeed in business, but having them will give investors some reassurance.
Will customers pay for your product or service? Why?
Unless our business idea is based on a completely free model, if it is a freemium or premium model, investors need to be very clear about why customers would pay for your product, because that is the foundation of any business.
This is probably the most important question a business plan has to answer, because without customers there is no money, and without money a company can’t survive. So… why would anyone be willing to pay for your product or service? Make sure the answer is convincing and sensible.
Are you in a growing market?
The key to success lies not only in the product or service, but in the future of the industry you operate in. You may have an eye-catching business idea in a sector that is shrinking rather than growing. You need to be able to explain how you will use the investment to grow quickly and compete in that industry, doing much better than your competitors.
Is your product innovative?
On this point we still can’t quite agree. Are innovative business ideas better? Yes. Are they harder to bring to market? Definitely.
Some investors aren’t looking for innovative ideas and prefer something simple, even an improved copy of another company, because at least they know that “thing” already has a market. The problem with highly innovative products is that you have to open up a market for them, and it is certainly easier to serve an existing market than to create a new one.
That said, if your idea is innovative and you have the potential and the ability to bring it to market, so much the better.
Is your business plan realistic?
Aim to present a business plan with realistic goals. These days, investors much prefer you to talk about the difficulties and how you are going to tackle them. They would rather hear that than be sold the idea that it’s “a piece of cake” and that in three months you’ll be on the Forbes list as one of the richest people in the world.
Your business idea can be very ambitious, but the business plan must be realistic.
What roles will each of you have in the company?
Investors want to know who and what: who is involved in the company and what each person will be responsible for. We need to have all of this very clear and well defined. Sometimes two entrepreneurs with the same skills and knowledge team up simply to share their fears about taking on a business project, not because they need each other for the company to work.
The right people need to be in the right positions, and more staff will be brought in as the company grows.
An extra tip when looking for finance
Don’t take money from just any investor
This advice may seem counterintuitive at a time when entrepreneurs are looking for funding however they can and from whoever will give it. But remember that the last thing you want is a capital partner who wants quick results and whom you’ll only ever see when they come to collect their share and secure their investment.
Look for an investor who can help you and even take part in some way in the company’s growth. In fact, we give investors the same advice the other way round: “Invest, where possible, in projects you know well and where you can help the company grow.” That way you know that, if the time comes, you can step in to protect your investment.
And basically, these are some of the questions we should make clearest to investors through our business plan when we go looking for finance.
Featured image: Aaron Parecki, CC BY 2.0, via Wikimedia Commons.
