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Business Plans: "The Investors Point of View" 

There are more clichés and misunderstandings surrounding business plans than any other part of the capital raising process. These range from the belief that plans are not needed (my concept is so good that it sells itself) to the "thicker the better" school of business plans. This group supplies the fund raiser with an 100 page book that includes 20 pages of newspaper clippings and a scholarly treatise on the industry complete with 15 pages of charts and graphs, which may be impressive. but is not read. The failure of both of these approaches stems from a misunderstanding of the role of the business plan in the capital venture world. 

Contrary to popular belief, no capital venture firm or angel (defined as persons who invest their own money in businesses) hears a presentation or reads a plan and then writes a check on the spot. An angel is no different than a capital venture firm in his or her desire to make a prudent investment. I remember sitting at a forum on angel investing, when an audience member indignantly accused the panel of angels of being no better than venture capitalists because they wanted experienced management, collateral, growth industries and significant returns on their investment. The thought was that an angel investor suspended all prudent business practices and just threw money at any project presented by glib entrepreneurs. Nothing can be further from the truth. Each venture capital source must present the plan to a committee or advisors to determine if further processing is warranted. The business plan is the door opener, if the plan is favorably received the firm or individual will proceed to the next step, due diligence. 

What does the venture capital community want to see in a business plan. Pierce Investment has reviewed hundreds of plans. The projects that are selected achieve a business comfort level that encourages further pursuit. If a project or business is inherently unsound, a skillfully drafted plan can not cure the flaws, nor does a poorly written plan automatically condemn an excellent company's chances for financing, however it does make it significantly more difficult. Most proposals received fall in between. In these cases the business plan is crucial. What do capital sources want to see in a plan ? They basically want these questions answered: 

  • What is unique about this company or project?- The investor or lender is not necessarily looking for a unique product, but one with growth potential that sets it apart from other industry members or from other proposals received. 
  • What does the company do?- The reader wants to be able to understand the company's product and services and the operations of the company. 
  • How does or will the company attain profitability?- This area entails discussion of the market and competition as well an analysis of areas such as revenue and profit margins. 
  • What benefit will be derived from a capital infusion?- In other words how will the proceeds of the financing be utilized and what results benefiting the investor will be achieved. This should translate into increased revenues and profits and an excellent return on investment. 
  • Is management capable of implementing the business plan?- Many investors consider this the most important element of a business plan. An investor must be comfortable with the experience and abilities of the management team. An outstanding management team can, many times overcome other plan deficiencies. 
  • Do the financial projections make sense?- Over optimistic projections reflects on management's judgment. Projections can be aggressive, but must be within the realm of the real business world. 
  • Is there an exit strategy for the investor- Does this business have the potential to merge, be acquired, go public or buy out the investor ? This is important, since the most popular venture capital vehicle is the convertible debenture. The investor must be confident that either the debt payments can be sustained or that their stock conversion rights have home run potential. 

If the business plan satisfactorily answers these questions, the plan has served its purpose. The details of the plan, answering these questions is the job of the business plan writer. Does the format and style of a plan make a difference to an investor. It definitely does. Pierce Investment looks more favorable upon a plan that is easy to read, well laid out and written in acceptable business plan style. The style of a good business plan is somewhat unique. It is between the syntax of an SEC document in which every aspect of the business is doomed to failure and a marketing piece in which everything about the business is wonderful. It is a factual document, but it is also a presentation piece, in which positives can be featured, but not overly emphasized. Attractive packaging of the plan can be beneficial. Appropriate color graphics and an attractive cover always sets a positive tone. However, the proper balance must be reached. We get turned off when a plan has a large number of pictures making the plan look like a marketing piece. The next logical question is should an existing business or start-up prepare the plan or retain a business plan writer ? It is a question of time, ability and money. A typical business plan prepared for the purpose of obtaining financing, takes at least between 30 to 50 hours to reach the final product. It will be considerable more if a learning process is involved There are many software programs that serve as guides, however it takes a high level of writing ability to draft a plan. If one has the time and the ability to prepare the plan it is a feasible option. Retaining a business plan writer has many advantages. Since a business plan writer does this for a living, the plans can be produced faster and written at a professional investor friendly level. The writer also is detached from your business allowing for a realistic presentation of the business and its future. Investors can always detect a plan prepared from a software package versus a professional prepared plan. Investors generally favorably note that the company has gone through the expense to present a professionally prepared plan. The cost of having a plan professional prepared is small as in comparison to the amount of money the average business is seeking. Fees for plans usually start at $3,000 and can increase to $10,000 or more depending upon the complexity of the plan. It is usually a good investment for most seekers of financing. It is hoped that this articles has clarified the role of the business plan and will make the difficult task of raising capital just a little bit easier.

Author: Michael Goldstein
proplana@gate.net
www.proplana.com

 

 

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