Your business plan is very often the first impression potential investors get about your venture. But even if you have a great product, team, and customers, it could also be the last impression the potential investor gets if you make any of these avoidable mistakes.
By: Hitesh Khan/
Investors see thousands of business plans each year, even in this down market. Apart from a referral from a trusted source, the business plan is the only basis they have for deciding whether or not to invite an entrepreneur to their offices for an initial meeting.
With so many opportunities, most potential investors simply focus on finding reasons to say no. They reason that entrepreneurs who know what they are doing will not make fundamental mistakes. Every mistake counts against you.
Many early-stage companies believe that more is better. They explain how their product can be applied to multiple, very different markets, or they devise a complex suite of products to bring to a market.
Most potential investors prefer to see a more focused strategy, especially for very early stage companies: a single, superior product that solves a troublesome problem in a single, large market that will be sold through a single, proven distribution strategy.
That is not to say that additional products, applications, markets, and distribution channels should be discarded – instead, they should be used to enrich and support the highly focused core strategy.
You need to hold the story together with a strong, compelling core thread. Identify that, and let the rest be supporting characters.
A business plan that fail to explain the sales, marketing, and distribution strategy are doomed.
The key questions that must be answered are: who will buy it, why, and most importantly, how will you get it to them?
You must explain how you have already generated customer interest, obtained pre-orders, or better yet, made actual sales – and describe how you will leverage this experience through a cost-effective go-to-market strategy.
No matter what you may think, you have competitors. Maybe not a direct competitor – in the sense of a company offering an identical solution – but at least a substitute. Fingers are a substitute for a spoon. First class mail is a substitute for e-mail. A coronary bypass is a substitute for an angioplasty. Competitors, simply stated, consist of everybody pursuing the same customer dollars.
To say that you have no competition is one of the fastest ways you can get your plan tossed – investors will conclude that you do not have a full understanding of your market.
The “Competition” section of your business plan is your opportunity to showcase your relative strengths against direct competitors, indirect competitors, and substitutes. Besides, having competitors is a good thing. It shows potential investors that a real market exists.
Potential investors are very busy and do not have the time to read long business plans. They also favor entrepreneurs who demonstrate the ability to convey the most important elements of a complex idea with an economy of words.
An ideal executive summary is no more than 1-3 pages. An ideal business plan is 20-30 pages (and most investors prefer the lower end of this range).
Remember, the primary purpose of a fund-raising business plan is to motivate the potential investor to pick up the phone and invite you to an in-person meeting. It is not intended to describe every last detail. Document the details elsewhere: in your operating plan, R&D plan, marketing plan, white papers, etc.
A successful business has to borrow money because before a single sale can be made, there needs to be something to sell. Every business needs some form of investment before it can start trading. This could be as simple as a computer, a telephone and an internet connection. But most need more: stock, premises, marketing and something to pay the staff, even if it’s a sole trader.
In any case, any business should be mindful that they need to borrow when they don’t need the money. Because when you try to borrow when you run out of funds, it may be too late as very few financial institutions would want to lend to any business which is in the red.
Remember, Revenues are not cash. Gross margins are not cash. Profits are not cash. Only cash is cash. So, when you build your financial model, make sure that your assumptions are realistic so that you raise sufficient capital. It’s a tough investment climate, but good ideas backed by good teams and good business plans are still getting funded.
One of the most important aspects of securing funds is to demonstrate to potential investors that you can organise your thoughts and ideas in writing and can support them with financial information. Make sure that you understand all the information that is being presented in the loan application. Respect the investors’ need to ask what appear to be personal questions. Remember, they are going to be your business partner!
Bankers for example, will be very interested in how you run your business as a profit generating exercise and your plan to generate cash flow. Healthy cash flow is the very essence of a successful small business. After all if your cash flow is poor, your business will struggle to operate efficiently and repay any loan.
One best small business loan tips most people won’t give you is to not wait until you are desperate to ask for money. This is not a good foundation for a successful loan application. The bank wants to feel secure in its decision. It does not want to hear that your business needs the loan to survive; it wants to hear that your business needs the loan to grow.