90% of Business Plans get put on the rubbish pile and never get funded!

I have written and reviewed a considerable number of business plans, some of which  got funding, developed into public companies and had an IPO, others never got off the ground. There is no magic formula but there are key aspects that professional investors look for in a business plan, which if ignored, will result in a ‘ it’s not for me’ response.

Here they are:

1. The Team

Investors invest in the Team first and the Concept second! Good ideas are ten-a-penny, building a team to implement them is much harder. Many so called Business Plans are actually just Concept Papers, (aka White Papers).

If you are trying to raise funding for a new business from third parties ( as opposed to friends & family), the number one question that an investor will ask is, is the right team in place. I see far too many business plans that have just two principals, who may have come up with a good idea, but just don’t have the  experience of running their own business or the full skill set to manage and grow a successful business. For team members that have only ever been employees, cutting loose and becoming an entrepreneur is a radical life changing event. The team has to represent to the investors that the combined expertise and skill sets are sufficient to deal with the ”curve balls’ that business life throws at you.

What does that mean in practice? Identify the areas of weakness of each team member and fill it with members that have the right experience and skill sets. This is usually a big issue in service led businesses. I see so  many business plans where the founders come out of a service industry, have identified a niche area they believe that industry is lacking in and that has value but fail to fully address the skill sets needed to develop the concept. Today, service industries innovations are technology led. Make sure you have an experienced technologist on the team.

The other key that is a must is an Finance Director. I see so many business plans where the principals have clearly no idea of finance, yet they fail to include a qualified Finance Director as part of their team. On most occasions those plans get binned immediately.

Remember, your first pitch are to the potential members of the team. If they, being experienced in their field, are persuaded by your business idea and come on board, it’s the first vindication of your concept.

    2. Cash Flow

The next big no-no is ‘cookie cutter’ business plan accounts. Investors want to see a proper monthly cash flows  on an excel spreadsheet. They want to see how their money is going to be used. This can then be summarised into a P&L and Balance Sheet but they want to see the raw data. You need to supply at least 36 months worth of an illustrated cash flow forecast, with Good, Expected and Poor scenarios. If you have a Finance Director on board, this would be done without issue. Usually a lack of cash flow data and no Finance Director go hand-in-hand.

If you need an example of a basic cash flow forecast click here

    3. Investment Amount and Valuation

Another contentious area is the investment being asked for. I have had so many conversation that go something like this;

” well, we need U$1,000,000 but U$500,000 will do”.

What! That’s half a million difference? Which is it? If you can do it on U$500,000 why do you need a U$1,000,000? Get your numbers right! This comes back to having solid cash flow projection.

Tied to this is the valuation put on  a business concept. Most of these business plans are at the idea stage or embryonic. Your valuation of the company needs to be right. If you are asking for U$500,000 and offering 20% of the company, that means you are valuing your company at U$2,500,000! For an idea! With that type of valuation most investors will want to see that the company has at least started to generate income and has the potential to be worth U$25,000,000 in the future.   In my view, you are going to have to give away more than you think in equity, be prepared.

   4. Exit Strategy

How are the investors going to make money? So many business plans just fail to address this key issue. Investors need to know. As a rough guide, they are usually working on a 3 to 5 year timeframe and need to make x10 their money, to compensate for the risk. Tell them how you will achieve this. Use comparables. Give examples of valuations, trade sales and listing of other companies in the same or related industries. You need to show that you have thought it through and understand the way your industry works regarding mergers & acquisitions and the costs and procedures of an exit. They need a reason to invest.

    5. Company Structure

If you have got 1, 2, 3 & 4 right, then the next issue that usually scuppers an investment is the lack of a proper company structure. Make sure  that your company is incorporated in a jurisdiction that both allows you to offer shares to third parties and is investor friendly. How do you issue more shares? What type of shares are you offering, Normal, Preference or are you offering Convertible Debt? Are there Warrants to incentivise investors? If you need to raise more money in the future are their pre-emption rights to deal with that could affect this?  Does the jurisdiction only allow a certain number of shareholders for your specific type of company?. Can a shareholder transfer or sell their shares easily? Do you need a holding company and a subsidiary operating company structure, in different jurisdictions, to allow an easier exit in the future? There are legal and tax issues here, so make sure you at least have a legal firm on board that can deal with these issues.

  6. Business Plan Layout

Most Business plan layouts are just not investor friendly.

After the front cover, the first page should be the index

Your second page should list: The team, The company name, address and registration number, the advisers ( legal, accountancy, technical etc), your company bank, amount being raise, equity offered.

Then the Executive Summary: No more than a page, with paragraphs on; the concept, the team, the market, the technology (if any) and the exit strategy/value.

The Business plan itself should be no more than five pages but with detailed appendicies. These should include separate appendicies on: full cash flow scenarios for 36 months, full team bios, full marketing plan, full technical specifications, intellectual property protection and the company share structure pre and post investment.

7. Flavour-of-the-Month

Despite all of the above, some concepts just won’t get funded. On the contrary, I have seen a number of poor business concepts get funded purely because they are in  an industry that is in vogue and the investors have FOMO.

Raising money is hard but there is no need to make it even harder by leaving out the key investor requirements.