Easing the process of raising capital
It is a rare entrepreneur who can raise money beyond the seed round without a well prepared, thoroughly researched business plan. It maps out the road to success. The business plan must convince investors that you know the best route to get there and that if there are twists and turns in the road, as there inevitably will be, you can navigate them.
Typically, venture capitalists (VCs) and angels focus primarily on the management team, the idea, market opportunity, and the financials, but other factors play into the final decision of an investor to fund a business. Here are ten tips that will magnetize your business plan making it more attractive to investors.
Hook them immediately
Investors are deluged with business plans, rejecting most within a few minutes of beginning to read them. How do you stand out from the rest? Open with a couple of sentences that grab the attention and imagination of investors and entice them to want to read more. These first few sentences must tell the reader what you do, why you are unique, the size of the market, and the share of market you expect to capture and when.
Project solid management expertise
The strength of your start-up's management team is absolutely critical to your success and your ability to raise venture and angel financing. A start-up doesn't need to have a complete team to raise funding, but it should, at the least, have key players on board who have the experience and the vision to make the company a success. VCs and angels invest in people, not just ideas on paper, and they want to make sure that your team can deliver. Investors look for an effective management team that:
- Has successfully started and run other companies
- Works cooperatively
- Consists of members selected to provide a range of industry knowledge and functional skills
- Has integrity, passion, flexibility and reliability
Corporate and advisory board members can help enhance the expertise, experience, and network of the managers of a start-up. Marquis names impress investors. Choosing well-represented professional resources such as accountants and lawyers will not only expand your network but also increase your credibility with investors.
3. Develop captivating and believable financials
Investors will want to know how you arrived at your projections. These assumptions should be clearly spelled out. If you have an existing business, you have a pretty good sense of how much things will cost, how much staff you'll need, and the sales, you're likely to make. But when you're just starting out, these projections are difficult to make. Instead, develop your financials from the bottom up.
- Examine different distribution channels and the opportunities and costs in each
- Source manufacturers and suppliers
- Project staffing needs with salaries and start dates
Investors will expect numbers to be more or less aggressive depending on the stage, level of risk of the company and whether they are a VC or an angel. Angels tend to have less aggressive goals than VCs.
Know your numbers and be ready to explain how each item in your projections has been calculated, because any serious investor is likely to grill you on the detail. You'll also be expected to know your brake event point, burn rate, when you are going to run out of money and what the investor's exit strategy is (buyout, IPO, merger/acquisition).
4. Target a significant market with opportunity
VCs in particular are looking for big opportunities - they want to know that your business will serve a large market (at least $1 billion) and possibly become a market leader. They want to understand what the market situation is that needs to be addressed and how you plan to exploit it. Is the consumer frustrated, perhaps the industry is plagued by poor quality control? Is it an untapped market niche? Are you consolidating a fragmented market? Have you developed a technological or medical breakthrough?
5. Include a well-researched market analysis
Part of targeting a significant market opportunity is knowing everything about the market, not just is size and opportunity. Provide a full analysis of the market, its characteristics, growth potential and all relevant trends. Include a competitive analysis, which describes the strengths and weaknesses of the competitors within your market and your competitive advantage.
6. Create competitive barriers
You must have a sustainable competitive advantage. Do you have patents, copyrights, a proprietary process or technology, exclusive licenses or agreements? Are you the first to market? How long can you protect that lead if a big company enters the market? Do you have the best people or the best strategic partners?
7. Forge strategic alliances
Securing strategic alliances with key players in the industry, distributors, vendors, etc., shows venture capitalists and angels that others trust you, want to work with you and establishes proof of concept, which is particularly important for a start-up. This definitely increases an investor's confidence in you.
8. Set realistic and achievable milestones
Investors don't give a large sum of money in one chunk. You'll need to address how much will be needed, when each contribution will be made and what the goals are to be accomplished in that period. If you don't achieve your goals you may not get the next contribution so make your milestones realistic.
9. Show management's commitment
For start-ups, a personal investment on the part of the entrepreneur demonstrates his or her seriousness and willingness to take on part of the risk and shows investors the entrepreneur's commitment to the project.
10. Attend to details
VCs and angels don't have a lot of time or patience. The business plan should be:
- Concise - about 30 pages
- Consistent - numbers in particular need to be consistent throughout the text of the plan, the
- Financials and the assumptions
- Well documented - footnote where appropriate
- Accurate - don't make things up
- Easy to read - use a font and type size that area readable, remember most investors are over 40
- Well laid out
- Written in an acceptable business plan style
- Handsome - use of color on the cover and graphics can be beneficial
Be sure the cover page has the name of your company, logo, its address, phone and fax numbers and company URL, plus the name and title of the contact with email address. Include a table of contents that provides a logical arrangement of the sections of your business plan, with page numbers. Believe it or not entrepreneurs sometimes overlook these small details.
Getting funding is no easy task. Hard work, persistence and following these tips will improve your chances of success.
*The article above is reprinted from VC Experts Encyclopedia of Private Equity & Venture Capital at www.vcexperts.com
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