There is a considerable debate about the value of a business plan as a predictor of success in a new venture. As a result, many entrepreneurs opt to take their products or services to market by improvising along the way rather than waste time on elaborate business plans.
While there is validity in a notion that business plans rank very low as predictors of business success, a recent survey shows that entrepreneurs seeking external finance are 19% more likely to commit their vision to paper than those not seeking finance. So, while entrepreneurs may experiment in the pursuit of their vision in the early stages of their enterprises but as soon as the startup begins to evolve, innovation, growth and scaling becomes important. This is when a business plan becomes critical for fundraising and general business success.
So, business plans do build legitimacy and confidence among investors. Most entrepreneurs waste too much time focusing on financial projections spanning several years which is unrealistic because there are too many unknowns. Moreover, things change over time. So, entrepreneurs tend to be far too optimistic on profits which investors disregard anyway.
Essentially, the numbers should form part of a business model to show that you have thought through the key drivers of the enterprise’s success or failure. This model must include key resources, customer relations, customer segments, distribution channels, value proposition as well as break-even points and the point at which the enterprise will start making profits.
So, what exactly do investors look for in a business plan?
The people behind the business
Spend considerable time on the people side of the business plan because this where the investors focus their attention. Describe each team member’s knowledge of the product or service of the enterprise; its production processes; the market itself, customers and competitors. It is important to also include those teams providing key services or important resources for the business, such as lawyers, accountants, and suppliers. Always remember financiers support the people behind the business more so than the idea itself. Partner with people whose success in business is well known because they are likely to command some level of respect with financiers and prospective clients.
The business profile
What the business will sell —to whom; whether the business can grow or scale; how fast; who and what stand in the way of its success.
Factors likely to change that you have no control over
The regulatory environment; interest rates; economic conditions; demographic trends; inflation; and so on.
Risk and Reward
An assessment of everything that can go wrong and right, and a discussion of how your team will respond. Investors respond better to realistic predictions rather than exaggerated information on a glossy paper.
So the question is, does your business plan look in good shape or does it need some work in order for it to be investor ready?