Business Plans for Angel Capital

"Does a business plan for raising equity capital have to be more complex than one that is written for, say, a bank loan.  The answer is "No".  You will not necessarily need a more complex business plan for raising investor capital but one with a different focus.   

Generally, Investors care about three main things (in no particular order):

  • The size of the market for the opportunity and therefore the potential return on investment.
  • The management team’s experience, education and character.
  • A detailed exit strategy.

Whereas banks are mostly interested in:

  • Reducing exposure to risk
  • The probability of repayment
  • Meeting Underwriting Requirements (Ratio Analysis - See Getting a Business Loan)

So…getting back to investors; let’s look at the three priorities above and see how they affect your business plan.

The size of the market or the potential for the opportunity is typically used as a litmus test for weeding out projects.  Investors are not interested in project with only a local or regional market.  Businesses without a national or even global market, often referred to as Microenterprise, have an obvious disadvantage.  They have a limited market size and therefore limited revenue potential.  Generally, investors are interested in high risk high return ventures.  So looking at your business plan the focus narrows in on the Market Potential Section and the Marketing Section (you may even want to create a separate marketing plan).  These two section will provide the justification for your sales estimates in the financial projections.  If you believe your company can do $XX,000,000 in sales by the end of year three you better have some quality data on your target market to back up those assumptions and a well thought out marketing plan to reach potential customers on a national scale.

The second criteria is the management team’s expertise.  I say team here because business opportunities with a national scale require more than one person to run the company effectively.  I believe your team should consist of three executives: 1) a product guru, 2) a marketing expert and 3) a finance/numbers geek.  Most people find that they are good at 1 or sometimes even two of these areas but almost never do you find someone who is naturally talented at all three.  So build a good team before you seek investors and include detailed resumes for each of the key managers and owners in your business plan.  Make sure your focus the information on why your team members are the best for the role they will play or they will expect you to find someone else to fill that role…investors are not big on "nepotism".  Expect investors to perform a process called "due diligence" which is essentially a detailed and through review of you and your business’ history, reference, partners, etc… 

The third criteria is an exit strategy.  Investors are typically not interested in owning a share of the company and collecting dividends forever.  What they are interested in is a big payoff from their investment.  Which typically means one of several options: 1) You buying out their positions at a predetermined price.  Like three times their investment in five years or five times their investment in three years.  2) Having a second round of investor financing purchase their ownership rather than seeing their investment get diluted.  3) Finally, seeing the company make an Initial Public Offering or IPO where the offering makes 10 times, 100 times or an even greater return on their original investment.  So your financing request portion of your business plan should include a planned and detailed exit strategy.  Note that this exit strategy will only be a suggested one…most investors will require a term sheet be written up and negotiated before they make the investment as a business plan cannot serve as a legal offering of securities.

One final suggestion for changing the business plan.  Pull the executive summary out of the business plan, dress it up with graphs, logos, key financial data (charts), and a suggested return on a hypothetical investment and use this document as a "hot sheet".  Use this document to introduce potential investors to your business idea without sharing all the proprietary information in your full business plan.  Also, have anyone who reads your plan to sign a non disclosure/confidentiality agreement before sharing your idea with them.

If you are looking for a business plan template that works well for investors I would suggest Jian’s BizPlan Builder.  (Note: you need Microsoft Office for this software to work).  It has a business plan outline specifically formatted for Angel / Venture Capital Investors and also includes a PowerPoint presentation template for pitching to investors.  The financial models are a little complex but your will need to complete them for an investor to take your seriously.  If financial statements are not particularly your cup of tea, the software has a feature where you can set up users and share real-time with other users…I suggest sharing it with your local SBDC office.  They can either help you complete the financial projections or use different templates/financial projection models that will suit your funding request.

I hope this answers your question and Good Luck!

Mr BizPlan
www.diybizplan.com

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