During the past 20 years, I've read several thousand business plans and executive summaries for angel, venture capital or business buyout investments. Unfortunately entrepreneurs make it too easy for investors who have the biggest check writing capabilities to discard their business plans.
What do entrepreneurs do wrong?
On the first read of any business plan, investors are looking for fast reasons NOT to invest, rather than reasons TO invest. They evaluate risk then reward -- in that order.
Yet, entrepreneurs tend to overstate the upside of a business opportunity in their written presentations. Their perfect world plans lack balance making it too difficult for investors to believe anything in the document.
To improve your chances of appealing to investors, follow my top 10 business plan presentation recommendations.
- Prepare one plan. Most entrepreneurs ask if they should prepare a best case and worst case plan for investors. My advice is always the same -- make one plan for investors your very best work. Now here's my exception to this rule. Prepare a separate business plan for equity investors and a separate, more conservative business plan for lenders. Lenders care about different measures of business success than investors. Whereas investors get their money back when a company is sold many years down the road, bankers get their money back from a company's predictable monthly cash flow. Business plans that hype rapid revenue growth are likely to scare away even the most ambitious lenders.
- Say it fast. The first page of your executive summary should be the most concise and well-written page of your business plan; otherwise investors may not bother reading page two. State your entrepreneurial purpose clearly. The point is to get to the point. Avoid hyperbole, exclamation points and statistics that run on for pages and pages.
- Think like an investor. What matters to investors is more important than what matters to you. Emphasize in your executive summary and elsewhere those factors that lead to successful investment outcomes: industry-leading gross profit margins, intellectual property rights, brand extension capabilities, customer contracts, recurring revenue potential, partnerships with larger companies, competitive advantages, likely acquirers, etc. If you dedicate more business plan space to describing cool product features and social networking PR plans than widely accepted "investment fundamentals," then your plan probably won't get a second look. Experienced investors invest in businesses, not hip products that can become obsolete in fast changing markets.
- Market size relevance. Investors prefer to invest in companies that operate in markets that are growing rather than shrinking. Declining customer demand for products and services only means that competitors will discount product pricing which tends to decimate smaller company profitability.
- Profit margin leadership. First-time fundraisers often assume that all they have to do is show a net profit on their projected income statement to attract investors. Actually, profit margin calculations (measured in percentages) can reveal more about a company's investment value than simple net profit numbers. Compare your projected margins to industry averages. If your software company projections predict a gross profit margin of 25% and the industry average is over 70%, guess what? Your business plan is dead on arrival. No smart investor will ever willingly invest in the industry loser.
- Think about the unthinkable. Every business plan should describe competitive and operating risks. Candid risk disclosure doesn't discourage investors because they always will have more confidence in entrepreneurs who acknowledge the competitive risks, rather than underestimate them in an idealistic way. To boost the competitive "fire power" of your plan, consider developing a separate business plan section called, "Management's Assessment of Key Operating Risks." Write down at least five risks that could potentially decimate your business, and then describe how you would mitigate these potential problems.
- Partner to persevere. The longer it takes to commercialize an idea on a finite amount of cash from personal savings or investment capital, the greater chance of business failure. If you want to avoid joining the one-third of new businesses that fail within the first two years of operations, then consider strategic partnerships to minimize the amount of cash and time required to achieve cash flow breakeven. Investors love it when entrepreneurs don't try to do it all themselves. Can you private label your new product or license your technologies to generate revenues with lower marketing costs? Can you piggyback onto another company's distribution network to reach more customers? Can you share development costs with a larger corporation? Think about it.
- Explain and double check your projections. I hate it when I receive extensive Excel files without any explanation of the entrepreneur's assumptions about costs, speed of customer acquisition, personnel requirements, and other important projection variables. If projections are too cumbersome to understand, investors may give up on your projections, your plan and you.
Susan Schreter is a 20-year veteran of the venture finance community, MBA-level educator and policy advocate for small business owners. Her work is dedicated to improving startup operating performance with reduced personal risk to entrepreneurs. She is the founder of www.takecommand.org, which offers the largest centralized database of regional and national small business funding sources in the U.S., including angel clubs, micro-finance lenders, venture capital funds and more. Follow Susan on Twitter @TakeCommand