How to create an investor-grade business plan

Jul 29, 2020

John Convery discusses the critical elements of an investor-grade business plan and what investors and venture capital firms look for in an investable business.

The saying “paper never refuses ink” can certainly be applied when business plans are being written. Entrepreneurs and business owners have license to include what they want and can go overboard in producing great looking (and sounding) documents, but to what end? Venture capital firms will tell you privately how many plans pass across their desks but are discarded very quickly because they are not grounded in reality or properly thought through.

There is any number of sources that proclaim to give you the formula for “how to write a perfect plan” or “how to write a winning plan”. Thanks to the web, there are now templates galore you can use in tandem. There are also multiple sites that outline what a great business plan should contain.

Writing a good plan is not an exercise in producing grandiose business models and frameworks, with dazzling technical language and 2-D diagrams in brilliant, sharp colours and padding the whole lot off with forecasts and various scenarios. This sort of approach might win you a prize in a visual design contest, it will not help you raise investment.

A business plan clarifies what a business is going to do, and how it is going to do it. For any start-up or established business, the process of writing a business plan is a discipline in explaining this. The article will therefore focus on what is required to produce an investor-grade business plan, what should go into the plan,     and what investors or venture capital firms look for before they invest in a business.

Function and role

The business plan is a blueprint for a business; it is essential if you are thinking of starting a business and is also an important tool for any established business. It is not static; rather, the business plan for any business will change over time as the business develops and as objectives change. For any start-up business, here are strong reasons why you need to write one:

  • the process of writing a business plan will challenge owners to critically examine the business potential. It will test and serves to clarify the feasibility of the business idea;
  • it allows you to set out your goals and prioritise business objectives;
  • it allows you to measure what progress is achieved; and
  • it is required to attract investors and secure funding.

Contents

In terms of length, an investor-grade business plan of 10-20 pages is reasonable. The key elements and content should include the following:

1. Executive summary: the most important part of the business plan, the executive summary is generally the last section to be written. The objective is to grab the reader’s attention, sell the investment opportunity, and to get the potential investor to read the entire plan. It should be succinct and no longer than two pages. The key elements are:

  • Opportunity: in a nutshell why is your product great and what customer problem will you solve? Explain the pain-point, your solution, and what are you offering.
  • Product: describe its benefits and what it can deliver.
  • Value proposition: who is the target market, your customer, and why will they want to buy it? What are the benefits?
  • Marketing strategy: how will you reach your customers and what are your distribution channels?
  • Competitive advantage: who is the competition? What is your competitive advantage?
  • Business model: how will you generate revenue, and from whom? Why is your model scalable?
  • Team: who are the management team, and why will they succeed?
  • Financials: include highlights from the P&L for the next three years, cash balances, and headcount. Explain how you will reach your revenue targets.
  • Funding: how much funding is required, and what will it be used for? Outline plans for future funding rounds.
2. Product/service solution: what is it, what does it do, how does it work, who is the typical customer, and why is it different?

3. Value proposition: explain the problem your business aims to solve. Where is the pain? Quantify the benefits for your customer in terms of money or time – and remember, the pain must be large and the benefits meaningful to convince a customer. Skip the technical jargon and be customer-centric.

4. Market and opportunity: explain the overall industry and market dynamics. Segment the market by customer group and identify your target customer. Quantify the total market size and market opportunity of your addressable market. Use charts or graphs if necessary but remember that all figures should be from accredited sources and referenced.

5. Competition: list and discuss all your competitors. Include any product/service that could be a substitute or alternative for your customer and outline how you compare with competitors.

6. Competitive advantage/edge: some call this the secret sauce. How are you differentiated from your competitors? Detail your sustainable competitive advantage, highlight any barriers to entry that might keep your competitors away, and explain why any customer would buy your product/solution.

7. Business model: how will you make money, who pays you, and how much do you keep after any expenses? Explain all sources of revenue from your customers and explain how your model is scalable.

8. Marketing/sales strategy: this is your ‘go to market’ strategy. How will you reach your customers? Will you choose direct sales, partners, resellers or web? Include pricing and how much will go to channel intermediaries; provide a timeline of key milestones.

9. The team: detail founders and key members, their qualifications, experience, track record, and domain knowledge. Include any advisory board members or industry figures involved with the business.

10. Financial projection: for a start-up, include one-year detailed P&L data, cash flow prediction, balance sheet by month, and annual summary figures for three years thereafter highlighting key figures in P&L, cash flow and headcount. Also, what and when is your peak cash requirement? Cash is critical, and the cash flow statement is the key one. For an established business, include P&L, balance sheet for the last three years, and project P&L, cash flow and balance sheet by month for the next three years. For any financial projection, outline all key assumptions used. These must be based on sober and pragmatic reasoning, clearly justify growth assumptions, and highlight the peak cash requirement and break-even point.

11. Funding requirements: explain the amount of funding required for the business. How much is being provided by other investors? State what the funds will be used for and show how much existing founders and owners have provided to date.

12. Exit strategy: discuss the opportunities for investors to exit such as an acquisition, trade sale or IPO (beware, IPOs are only for the very best companies). Highlight trends in the market and give examples of valuations relevant to your business, but don’t go overboard and perhaps discuss your aim to build a truly sustainable business.

Business plan pitfalls

Do not make exaggerated claims. Business plans are meant to inform and reassure, not entertain, readers. Avoid the following types of statements or claims unless you can back them up with robust evidence:

  • according to Gartner, the market is worth X billion; we only need Y% of this.
  • we have no competition.
  • our product is vastly better than anything else available.
  • we can be number two in the market within 12 months.
  • our technology is superior.
  • customers will switch to our product.
  • we will be profitable within 12 months.
  • we can repay our investors after three years.
  • our mission-critical kit is best of breed.
  • we plan to target multiple overseas markets.
  • we need to pay top salaries to attract top people.
  • we want to retain the maximum amount of equity possible.

It generally takes at least four years to reach €1 million in annual turnover, and that is if you are exceptionally lucky. It generally costs twice as much and takes you at least twice as long as you think it will to get there.

Raising finance

A start-up will typically go through different stages of funding sources as it moves from idea stage to product development, testing, initial customer validation and on to generating revenue. Initial funding will be provided by the founder, family and friends. Sooner or later, the founders will need to seek seed funding, which might be provided by an angel investor or seed venture capital fund. When a business seeks to raise outside finance from an investor or venture capital firm, they will look for the following criteria:

  1. Team: investors ultimately back people, not ideas. This is the number one criterion. They especially like those with deep knowledge and great experience; they will focus on track record and achievements.
  2. Market: they will seek a large market opportunity and strong growth rate. If the market has barriers to entry, better again. It needs to be big to support the returns many venture capital firms seek.
  3. Sustainable competitive advantage: a clear competitive advantage or unique selling point over others.
  4. Technology: great technology is a fundamental requirement now.
  5. Scalability: clear potential to grow in overseas markets.
  6. High gross margins: this reduces the amount required for working capital.

Conclusion

Without a well-prepared and researched business plan, there is little chance of attracting outside funding. For a reader, the plan should be:

  • credible
  • plausible
  • implementable
  • investable
It goes without saying that the plan should be grammatically correct, with no spelling errors. It should also be page referenced with no mistakes in the financials and look professional overall.

John Convery is a business adviser to start-ups and small businesses. In the October issue, John will consider why so many start-ups fail, and how to improve the chance of success.