Small Business: What investors look for in a plan
Although you definitely need a business plan to find investors, your plan alone–no matter how good it is–isn't enough to attract investors. The investment decision depends on a lot of other factors: the business team and its track record, the product you'll be selling, the competitive advantage you have and what your market is, among others. By itself, your plan is like an automobile engine–the car won't go anywhere without it. But the engine alone isn't enough to make the car go, and you need to recognize this from the beginning.
Another important point to understand is that investors are not all the same. At the high end, there are a few thousand venture capitalists working for a few hundred venture capital firms. At the low end, you have friends and family. And in the middle, there are tens of thousands of private investors called "angels."
The venture capitalists are the most demanding. They fund only a few thousand plans per year, and they have to reduce their risks because they're investing other people's money. They probably won't consider your venture unless you're introduced to them first because they have no other way to screen and process all the proposals they get. They aren't sharks or bad people–they're just professional managers doing their job. They won't steal your idea: The last thing they want is another business idea without a team to implement it. Therefore, when they search for investment vehicles, they look for the following:
- A management team with a proven track record. Yes, that often means they won't fund your plan because you don't have experience, but you don't have experience because they won't fund your plan. Deal with it. If this is the case, look for angel investors or friends and family (and keep reading).
- A defensible product with a competitive advantage. It's easier to predict the success of a tangible product than it is a service, which is why service businesses are rarely interesting to venture capitalists. Of course, there is the occasional exception, such as Netflix, the popular home delivery service for DVD movie rentals, for example.
- Reasonable valuation. Divide the amount you plan to take as investment by the percent of ownership you're offering to give in exchange. For example, offering 50 percent of a company for $5 million means you're valuing your company at $10 million. An outrageous valuation shows investors you may still have your head in the clouds.
- A clear statement of the investment offering Check with your attorneys about the legality of your offering, including how much equity for how much money you're planning to offer this time through, and the planned future dilution for later rounds of investment.
Other things that interest venture capitalists include:
- A shot at increasing the value of the company from whatever they think it is now to about 100 times that in three to five years.
- A plan that requires at least a $3 million investment–in fact, the more the better. Your plan has to show that the money is carefully planned and really needed.
- A plan that has several other similar investors ready to invest at the same time. Venture capitalists find safety in numbers so they don't want to be the only investor in a deal.
- A clearly stated exit strategy. Investors like to see that you've thought ahead to how they're going to get their money back on the deal.
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