Raising Capital – Writing the Business Plan that Succeeds

November 27, 2008 · Posted in Business Plan, Fashion Business Loans, Investors 

You have a great idea or maybe have started a company and need some capital to support your revenue growth. You think that the best source for the fund-raising will be venture capital or maybe an angel investment. You have mapped out your fund-raising strategy and are at the point of writing your business plan. You want to write a business plan that will succeed in bringing in the needed funds.

Recognize that the business plan you are writing is essentially a marketing document. You are marketing your company to an investor who will be buying a piece of it. Like selling anything else, you need to understand what the investor is looking for. Venture capitalists are generally looking for two things.

The primary desire of the venture capitalist is to make 10x the return on his or her investment over the course of five years (they say ten years, and they will give you ten years, but only if it looks like you are on the right course). The secondary desire of the venture capitalist is to be in on the next new, new thing.

Angels on the other hand are often wealthy individuals who have started a company themselves. They are definitely interested in a return, but they also enjoy being part of your company, being able to look at what you are doing and say, “I had a hand in making that successful.”

There are plenty of websites and books that will lay out the form of a business plan – what should go first and what sections should be included and which can be left out, but they often leave out the burning questions that the investor has that must be answered whatever the format.

To successfully raise money, make sure that your business plan answers these questions:

* What are you selling?

If you are selling a new light bulb that costs half as much and lasts twice as long, then you are selling: (1) a light bulb, (2) customer savings, (3) improved environment.

* Who is going to buy this product?

The more specific the better. For instance, say “we will be selling our software suite to medium-sized pet product companies. The initial gate keeper will be the head of human resources, the ultimate decision maker will be the chief financial officer. We have already talked to Sally Smith and Joe Jones are Pets R Us who are very interested in this product.”

* How much are they willing to pay?

Note, this does not say ‘what is the price?’ You can put any price on your product you want. If your local grocery store pays $10 per customer delivery now, it is likely that they are unwilling to pay more unless you offer some significant improvement over the service they use now.

* How many customers are there?

This and the previous question are what is handled in the Market section. This is often the most important section of the document. VCs often want to see a huge market size because they have the belief that it is easier to capture a small fraction of a large market than a large fraction of a small market – plus there is limited upside in a small market. Be realistic and specific. Don’t make generalizations like “the U.S. spends $2 trillion in health care in 2005, therefore, that is my market for my medical widget. Say “there are 6,000 major medical facilities in the U.S., each one needs 30 patient check in software licenses, and currently pay $1,000 per license seat per year; therefore, the market is $180 million.”

* What is your customer doing now to solve the problem?

This is your primary competition… even if the answer is ‘nothing.’ Nothing is often perceived as being very cheap and inertia is very hard to overcome. You should be aware of who else is trying to solve the problem… they are your secondary competitors.

* Why would your customers switch?

You are going to have to convince your future customer that your solution is better, faster or cheaper than what they are doing now. You will have to convince your future investor that you know what you are doing and are going to be successful at creating revenue opportunities.

* Are you the right person to run this company?

Take the time to look inward at yourself and decide if you are really the person who should be running the company. If your skills are inventing and visionary thinking, but you often get in fights with your co-workers, you are probably not a good CEO candidate. If you can’t manage your checkbook and tend to overspend and be in debt, you will run your company the same way. Do you want to spend a lot of time overseeing and working with others? Can you delegate? If you say no, then you may want to include in your plan how you will find someone to take on these responsibilities.

* How much will this all cost?

If you think you will make $1 million in revenue, but it will cost $1 million to get there, you will not get an investment – not even if your technology is the coolest, most life-savingest technology ever. You need to have a good handle on exactly how much it will cost to get to the point where you will be able to sell the company or take it public. If you have never run a company before, get a lot of advice in this area before starting out. You need to understand how long you will have to house, feed, and nourish your employees and equipment until your company starts bringing in enough revenue to be self-supporting. Nothing is more frustrating than knowing it will just take six more months before you hit breakeven, but you can’t make it because you ran out of money.

Once again, use these questions as a guide to write the marketing document that will succeed in raising money. Be specific. If you can’t answer these questions specifically to an investor, you probably can’t answer them as a business.

Please visit my website for more small business finance advice: http://cfoyourself.com

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