Having a good business plan can increase your startup’s chances of raising investment as well as achieving success
By Ka Wing LI
Launching a new business without a proper business plan is almost like sky diving without knowing where to land — you may get lucky and find a landing spot or break your bones landing in the wrong place. Running a business without a business plan may lead to success but more often than not, it will cause a good business idea to fail.
The U.S. Small Business Administration clearly provides a simple business plan format and explains the sections a good business plan must have. A business plan is not just a ‘boring document’ that you need in order to raise funding. Even if you are bootstrapping, and even if you think you have a fairly good idea about your business objectives and how to grow it, you still need a ‘business plan.’
A good business plan document contains details about what your business does, how and what problem or market gap it aims to tackle, and how it plans to make money. For entrepreneurs, a business plan is a document that contains their vision of what they want the company to do and become, and the objectives it wants to accomplish. It helps give direction to the company and its team.
Besides, when launching a business, one of the most important factors to consider is whether the idea is feasible or not. And a good business plan forces you to step out of your dreams into reality and look at what is truly achievable. Therefore, it helps you to set practical goals by forcing you to delineate a clear and practical way to achieve those goals, create efficient strategies for growth, analyze results, and anticipate your future needs.
It is particularly important for startups to have a business plan in order to raise funding. Most investor groups do not even grant an interview to a startup that does not have a proper business plan document. Investors are interested in startups that understand the financials and key metrics of their business and focus on execution more than their idea. Therefore, a perfect business plan shows how you are going to execute your startup idea.
An idea or vision is abstract – it helps create a strong and emotional narrative, but at the end of the day, investors want to know how you are going to pay them back. They need to understand that your business idea is not only feasible but also scalable with a clear path to profitability.
This does not mean that you need to show them a hockey stick growth chart. You simply need to show how much you plan to grow and how you’re going to achieve that growth. You may need investment to achieve growth, but a good business plan will show investors how you’re going to tackle all the other market challenges. This instils confidence among investors which in turn helps loosen their purse strings.
Here are a few useful tips to help you write the perfect business plan.
1. Consider all perspectives
Most often, entrepreneurs write business plans only from their perspective. This leads them to overlook important factors that affect their startup’s chances of success like market needs and investor needs. Overlooking the perspective of the market in a business plan is a grave but common mistake.
You can use your business plan to list excellent products and services that your startup will offer. But if customers do not need your products and services, you do not have a viable market. And lack of a viable customer base means that your startup cannot survive. If you neglect the market perspective, you may also fail to identify the most profitable channels of revenue, which would leave your business plan with holes.
In fact, experts even recommend emphasizing the market perspective by demonstrating user benefits rather than dwelling on the technological prowess of your startup or the virtues of your technological innovation. The technological nuances are important for your startup to be able to provide quality products and services, but investors are more interested in whether your product or service has actual market demand. In other words, they want to know if your business can make money.
With startup investment, investors want to get returns that are higher than the average stock market gains. Therefore, your financial projections cannot simply state the expected growth rate of your startup. Keeping investor needs in mind, your business plan should also mention how much equity the founders are willing to give up for how much investment, and show investors how much returns they can get, and how and when they can cash out.
2. Do your homework
Showing up unprepared at a meeting with investors is worse than not knowing answers during an exam — there are more important things at stake than your grades, the future of your company, for instance. Besides, being unprepared or having a business plan with no data creates the impression of a founder who is not serious. Ideally, your business plan should answer all questions your investors might have about your business. But the answers cannot simply be statements without facts.
In order to show that your business plan has credibility, all your claims have to be supported by data and facts. And the only way to collect these facts and data is through primary and secondary research. And while conducting research, make sure you cover all bases. If you believe your product has demand, back it up with data from market research. If you believe your market size is big, show data to support your hypothesis.
It is important to research all possible questions in depth. For instance, if your startup’s target customers are small and medium enterprises (SMEs), do not simply state the total number of SMEs in your target region. Delve deeper and find out how many of those businesses really need your product or service and how many can afford them.
This will enable you to provide a logical number of customers in your target market and a practical number of customers that your business aims to gain in order to be sustainable and profitable. Failure to find out such in-depth information can also lead you to believe your target market is bigger than it really is, making your financial projections and entire business plan faulty, to say the least.
Moreover, do not overlook the macroeconomic challenges to your business. For instance, if your startup’s target market is currently in depression, it could affect your startup’s earning potential. In that case, find relevant data to demonstrate why your business is still viable.
Ultimately, if you are well-researched, your business plan will be more comprehensive and credible. This can boost investor confidence about your startup’s potential to be successful and make them invest in your company.
3. Convey a clear startup vision, mission, and purpose
Co-author of The 31 Practices Alan Williams said, “Business plans…encourage entrepreneurs to focus on what they are going to do.” A good business plan notes down the key focus and purpose of a startup. This means that it explains why the startup exists, what it aims to accomplish, and the values that the startup and its employees stand for.
Therefore, a good business plan can and should act as a guidebook for decision-making at all levels. Besides, it helps investors better understand the startup’s team and the direction they want the startup to go in.
4. Use numbers wisely
As stated earlier, investors want to see how much returns they can get if they invest in your company. This means providing sales and profit forecasts for at least the next five years. But sometimes entrepreneurs quote numbers for growth forecasts that are that either overly optimistic and therefore unrealistic, or too skimpy to make economic sense for investors.
There is no need to understate costs to show hockey stick growth charts. In fact, investors would appreciate a realistic but lower projection more than one that promises the sky but is unrealistic. However, the projections should not be too low either because then investors would not get enough returns to make economic sense for them to invest in your company.
It is important to remember that your financial projections give you bargaining power. How much investment you can raise in return for how much of your startup’s equity is often negotiated based on sales and profit projections.
This is because your financial projections are used to determine the value of your company at investment maturity. The investors then calculate how much equity they need to own in order to realize their return expectations. In other words, the higher your projections, the more valuable your company will be and the lesser equity investors need to own in order to get the returns they want and vice versa.
When it comes to numbers, another grave mistake entrepreneurs often make is providing overwhelming data regarding every financial aspect. This tends to turn off investors since they make for uninteresting reads. Therefore, when preparing a business plan, ensure that you only provide the most vital and relevant financial information and attach the rest in ‘Appendix’ as supporting documents.
At the end of the day, your business plan needs to prove to investors that your startup is worth investing in. And to make a convincing case, you need to provide in-depth and relevant information without making the business plan lengthy and overwhelming. Following these tips may help write the perfect, short, and crisp business plan, but do not underestimate the time and effort it requires. For entrepreneurs, preparing a business plan is one of the most difficult challenges to overcome and requires days or even months of effort.
Ultimately, the success of your startup depends on how you put the perfect plan into execution. Having a business plan does not guarantee success. But having a plan in place increases your chances of success by many folds. As former British Prime Minister Winston Churchill once said, “Plans are of little importance, but planning is essential.”
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