There are hundreds of thousands of business plans floating around and trying to find a home for funding. I receive hundreds of business plans annually, and I can definitely tell you that 99% of these documents are ridiculous as presentations of an exciting investment opportunity. I am not referring to the value of the product being described, but to the presentation that is intended to describe an exciting investment situation.
One of the reasons so many plans are so poorly written, and there are many, many additional reasons, is that the writers don’t understand how plans are read. Investment banks, venture capital firms, family offices, angel firms, banks, and blind investment groups receive a stack of plans for their consideration every day. A junior reader, often a recent MBA, is usually assigned to read and review the plans and weed out all the obvious losers. The remaining business plans are marked after reading the sections in the following order: Executive Summary, Finance, Management, and Exit Strategy.
Why is it important to recognize the order in which a business plan is read? Because these are the areas that need to be addressed in a powerful and compelling way to get the business plan in front of decision makers. The wording and construction of these sections dictate the level of interest the original projection reader will express in the synopsis that they will attach to the copy of the business plan as they begin their path through the project analysis process.
The executive summary is read first. This should be a vivid two page snapshot of the company and address every aspect of the opportunity. The executive summary needs to paint an exciting picture that leaves the reader wanting to know more. Unfortunately, most plans don’t read past the first paragraph or two.
Why? I have discussed this with investors on many occasions. I’ve asked the question, “aren’t you concerned that you might be missing out on a great product opportunity just because the document has a poorly written executive summary”? The universal response, “If there is no more passion or ability to excite us than what we see in a poor executive summary, we never had to look back to see a missed opportunity. If it can’t make a great first impression for us, then neither will you.” by no one else”?
You only get one chance to make a great first impression. The business plan is the first impression of your projects. It is the superstructure of your opportunity, the skeleton and a base. If a house has a weak foundation, it will not stand for long. Why entrepreneurs submit documents that do not adequately reflect the emotion they believe inherent in their invention is a sad mystery. A poorly executed executive summary negates all the time, energy, investment, and innovation that goes into a new offering.
Assuming the newly submitted business plan has an exemplary executive summary and passes the initial screening reading, the financials will be read next.
Why Finance? Well, the executive summary is the skeleton of a project, while the financials are the muscle.
Financials are based on a set of assumptions that are key to presenting a realistic and justifiable cash flow, balance sheet, and income statement. Investors have certain Return on Investment parameters that they must aim to achieve before they can consider any investment commitment. The assumptions on which the financial data is based must come from extensive research, current market conditions and historical means.
The main reason finances lead to the death of the project is that the assumptions are based on dreams, hope and pie in the sky. A general rule of thumb for successfully overcoming the Finance section hurdle is as follows: Investors should realistically see that they will receive a return on investment of around 30 percent from the 24th and 36th month (year 3) afterward. to make an investment. This rate and speed of return should be able to withstand aggressive scrutiny. Believe me, investors are crazy about analyzing, poking around, producing and destroying the assumptions on which finance is built.
Good news! Your Business Plan has successfully passed through the doors of Executive Summary and Financials. Next, Administration!
The Management section represents the brains of the new company you are considering investing in. An experienced (industry specific) management team must be available or readily available for a successful placement.
The downfall in this area for so many would-be entrepreneurs is the complete lack of direct management experience. I recently reviewed an excellent security product that had broad appeal. An exciting product, great margins, consumer need and obvious benefits, yet the group seeking funding had no executive management experience in any of the areas the project required. They are candidates for a sale or license, but a financing round never happens without solid management. Remember: the investment is being made in people, people capable of driving an exciting opportunity to success.
Don’t dream of running your own business, with someone else’s money, if you’re a warehouse manager but need production and marketing experience to be successful in your new business. It just won’t happen, unless the investment comes from Aunt Hazel.
However, if you have strong, hands-on management experience and the Management section indicates a full team, the plan will progress through gate three and to the final initial hurdle to overcome. What is your Harvest Goal (exit strategy)?
The exit strategy is crucial for investors and the effective management of their money reserves. The exit strategy is the brains, the intellect, and the emotional component of the deal. Venture capital is a high risk/high reward game. Investors know that successful investing has to pay off big and relatively quickly in order to cover losers that far outnumber the home runs they hit.
Some entrepreneurs are unrealistic about reaping profits from their business. This scares investment and risk money. Before investment is considered, an agreed plan will be required to start, profit, sell, or exercise a myriad of other harvesting mechanisms at maximized points in the business cycle. The best thing for the entrepreneur is to be very flexible when negotiating the harvest. Exit strategy is best summed up as an area where the entrepreneur is open, flexible, and wants to maximize profits and make a fair deal for all parties.
Inflexibility is a deadly sin for investment seekers. I can’t overstate the number of deals that never happen, products endure and die, opportunities are missed because an owner is unrealistic in framing their requirements for his enrichment when potential success is achieved. Leave something on the plate for all parties to a deal.
The other sections of a personalized business plan are now important, but only after the preeminent areas of executive summary, finance, management, and exit strategy have passed the test. If your business plan has all four in good order, you’ll be in weird company. Too many entrepreneurs dream of securing the investment. This is anything but a dream exercise. It is hard, competitive, demanding and hard work. Putting the necessary effort into your project will greatly improve your chances of success!
Don’t take shortcuts! Do not guess on details and assumptions! Don’t fill in the blanks on a store-bought template! Do not offer your review opportunity until you have a professional and exciting presentation! Your Business Plan represents you, your family and your partner’s future!