Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs – Business Plans Are Not Developed For Your Investors!

Today many entrepreneurs complain that their potential investors do not read their business plans.  With an average of over 300 hours of effort required to develop a complete business plan, do they have a point?  I say no!  The real purpose of a business plan is to properly prepare the entrepreneur, with the appropriate background information to raise money for their start-up and not to educate the investors about their company.  This article outlines my reasoning behind this argument.

Until it is Written on Paper a Business Plan is not Real

To develop a complete business plan an entrepreneur has to take their business “concept” from the depths of their mind to the reality of paper.  For many entrepreneurs this is a daunting task.  Most of these same entrepreneurs have never written a business plan before in their lives and really do not understand the amount of research, planning, and diligence effort required to complete this task.  Don’t fool yourself, writing a proper business plan that stands up to the rigors of sophisticated investors (e.g., venture capitalists), is a big effort. As is often the case, in the end, the result is that most of the original concepts or ideas you as an entrepreneur envisioned in your mind regarding your start-up business, and ultimate business plan, will be much different once it is put on paper. I have found this to be the case for every business plan I have written. Although, through the required research, planning, and diligence, the resulting business plan, once written, should reflect the realities of the market and not the original business “concepts” in your mind.  This is an invaluable educational process that will result in you being a much more informed entrepreneur and an “expert” in your business.  As a result of this process, when you get in front of investors, this effort of developing a complete business plan will allow to answer the “tough” questions that will inevitably arise from potential investors.

A Business Plan Substantiates Your Business Vision and Objectives

 

As an entrepreneur, the exercise of developing a complete business plan allows you to substantiate the vision for your start-up company and at the same time develop market driven objectives that reflect the realities of the market.   This again is an invaluable exercise, as it provides you with a level of confidence that is based on reality and not hyperbole.  Often, once an entrepreneur completes their business plan they realize that their original thoughts regarding the vision and objectives of their start-up company have changed substantially from their original “concepts” or intent.  This is a good thing, as it now provides this same entrepreneur with a market driven vision that has associated business objectives that are now both relevant and achievable. Where before the entrepreneur completed their business plan, their start-up company’s vision and objectives are often unreasonable and would not pass the “smell” test with potential investors.

 

Remember, often when you present to investors, they will ask tough questions regarding the vision for your company and its overall market objectives. By developing a business plan you will be able to substantiate your response to these questions based on real market data, and a well thought through thorough analysis.  This will provide your start-up company leg up with your potential investors.

 

A Business Plan Provides Credibility with Your Investors

 

Completing the task of developing a business plan provides you as an entrepreneur and your start-up company with credibility.  With the completion of your business plan, now you have reference material to substantiate you claims and something to refer to when being questioned by potential investors.  It also shows these same investors that you have the diligence and perseverance to complete such a document and are willing to do the hard work to develop your start-up company.  This is very important to investors as they need to believe that you have the perseverance and drive to get though the tough times. 

I have met many entrepreneurs that talk a good game, but when it comes down to it, they are not willing to put in the required effort to educate themselves, and at the same time bring themselves to the next level by developing a complete business plan for their own start-up company.  This will ultimately not sit well with your investors, because they also know that part of the reason for developing a business plan is to address all of the issues facing your start-up company in the market, and by not doing so, you will more than likely have over looked something.  Finally, if you do not develop a business plan, then those issues that have not been properly addressed through your start-up company’s research and planning process will eventually come out during the investor due diligence process, and may ultimately result in you not securing funding from these same investors.

A Business Plan is a Check Point that is Required by Investors

 

All investors, when they get to a certain point of interest, will want to see your company’s business plan.  This is generally a “check point” on their due diligence list and is required by all types of private equity investors (e.g., angel investors, venture capitalists, etc.). More often than not, for the larger more established venture capital firms, they will have their junior partners provide a thorough review your start-up company’s business plan, and develop a report that is then provided to the senior partners.  This report is generally the basis that is used to get to the next level of discussions regarding potential funding.  If you do not have a business plan, or your business plan does not meet the requirements of these sophisticated investors, you will not get to the next level of due diligence and ultimately not secure funding. So as an entrepreneur, you need to understand that as some point during the due diligence process, your business plan will be required to be seriously considered as an investment opportunity by your potential investors.

 

A Business Plan Provides a Basis of Performance Measurement

 

Your company’s business plan puts a stake in the ground regarding projections of your start-up company’s future performance. As a pro forma based document, your start-up company’s business plan is often used by your investors a measurement stick to determine if your company is performing at the level you anticipated in your start-up company’s planning process.  Therefore, as an entrepreneur, you need to put the proper diligence into the development of your financial pro forma statements.  This will allow you to develop and present achievable market objectives and associated time frames in your business plan. 

From your investor’s point of view, your start-up company’s business plan is used to “set the bar” in which measure your start-up company and its overall performance.  These performance objectives can include, but are not limited to:

·         Revenue growth objectives,

·         Market share gains,

·         Gross margin targets,

·         Sales and marketing objectives,

·         Customer traction goals,

·         Operational margin goals,

·         Earnings growth objectives, and

·         Return on investment targets.

These performance objectives are often reflected in the terms and conditions of your term sheet and final stock purchase agreement.  Therefore, it is important to develop a business plan that is credible and achievable.

A Business Plan Provides a “Jumping Off Point” for the Future

One of the key benefits of developing a business plan is that you always have a single reference point in which to refer to when looking forward in the constantly evolving market. This does not require that you change your business plan every time you recognize a change in the market. On the other hand, it is important to realize that your company’s business plan is a “living document” and it can be used in the future as a “jumping off point” to reflect changes in the market. This means that changes in the market need to be reflected in your business plan as time moves forward.  Accordingly, not all changes really will affect your day-to-day business plan. Generally, most changes in the market are evolutionary and if you did your homework from the beginning, your business plan has taken care of this, as it is already necessarily a forward-looking document. It is the major changes in the market that may affect your company’s business plan. These things can include a new competitor with disruptive technology, significant changes in the project market growth, substantial changes in the average selling price in the market, etc. These items may cause you to reconsider your business plan. Therefore, as an entrepreneur, your business plan is an important and beneficial document to refer back to when there are significant changes in the market.

As outlined, the business plan is really a tool that is to be used by the entrepreneur to prepare themselves and their start-up company for their meetings with potential investors.  There are lots of benefits to developing a complete business plan, many of which focus on the entrepreneur and their potential success with the investor community.  So, when developing your start-up company’s business plan, remember it is you as an entrepreneur that benefits the most from this exercise, and it is not intended to be a end all for your potential investors.  By developing a complete business plan, the entrepreneur will ensure that their start-up will have the proper focus and at the same time be better prepared when presenting to potential investors.

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April 27, 2009 - Posted by | Venture Capital, venture finance

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