10 Keys to a Business Plan
that Gets Funded
by Bruce Lynch, entrepreneur, boot-strapper and revenue systems expert
of Exxel International and BruceLynch.com
Introduction
This paper will help you ask yourself important questions. This introduction includes questions investors often think about without asking. How to run your company is the real issue, and then how to present what you are doing. Knowing what questions to expect will help you to prepare for conversations and help to decide what to include in your written plan.
This document can help you to pull together the people who can build your company and the materials you need. Use it as a guide. Clarify the real substance of your business to create "a business plan that gets funded."
This document can help you to pull together the people who can build your company and the materials you need. Use it as a guide. Clarify the real substance of your business to create "a business plan that gets funded."
A potential investor is excited. You talk several times.
Then, your calls are not returned. Why?
Then, your calls are not returned. Why?
The call was not returned? Not finding a 'sponsor' and Revenue Formula often are 2 normal causes. There are many alternatives to consider and many issues. Experienced and capable advisors can make the difference between success and failure. The right advice and real shirt-sleeves help can make the difference between your company moving side ways and having it generate clear, healthy, well financed growth.
Experienced entrepreneurs, executives, presentation professionals, senior finance professionals, efficiency experts, respected Board members and practical results oriented implementers are all cost-efficiently accessed through Exxel. We help you to create and implement the Real Plan, not just the Business Plan documents.
Key #1. Vision -- a clear, strong vision is what attracts investors.
Back it with deep experience and with real results. The right Vision will succeed one way or another. Before you lock in on a Vision, question everything. Once you do lock in, question and review what it takes for the Vision to continually unfold.Here are some questions to work with. They will help you develop a clearer vision. And, you will be better prepared for questions that investors will ask.
What Questions will Investors Ask?
A scenario: Your company is running very well. Yet investors just sap your time and do not invest. Maybe you receive polite refusals or can not even get an investor's attention?What makes a company appeal to an investor? What does it take to get a budget approved at a large organization? Can a hidden issue kill approval? It sure can. How important is it to be recommended?
The Lead Investor
A "lead investor" is a person who will step out before others and write a check to invest. They are the ones with whom you should spend most of your time and effort. Many will say that they will. How will you know if a person really will?Should you approach a brokerage firm, venture capital company, relatives or angels? How can you tell if a consultant can really help you raise money? Should you pay finder's fees to raise money? Should you pay interest to investors or sell stock?
What value should you put on your company?
You can find practical realistic answers to what valuation the market(s) will allow you to use. Even in as little as 1 hour a decent understanding of the valuation range is likely to be reached.Or, should you let the investors set the value? When should you offer warrants or options? These and many more questions can be answered. How? Exxel can help. Advisors at the Big 6 accounting firms have the experience. You need to come to your own answers, to what will work for you. Do so with the help of people who have "done it before" and who have enough experiences to help you weigh alternatives.
Ranking the 10 Keys
Change your written plan and what you say, again and again if you need to. Get each of the 10 Keys to a level that feels right as you consider each of the 10 Keys. Otherwise, investors are unlikely to write a check, or you could get a lot less.The Keys are numbered in what is descending importance for most situations. Vision is first because it is the most important. The rank of one Key compared to another can vary. Your industry, your personal experience, company size, how your company is currently positioned and the kind of investor you approach all can affect rank. An investor who considers lending you money (like a bank) thinks very differently from one that buys ownership, equity.
Sometimes you can sell 3% of your company for more investment money than you receive by selling 20%. Sometimes you can get debt financing even though a huge number of companies have said that it is impossible. There may even be a way to meet your projections without outside capital.
Key #1: Vision, is the Golden Key
Investors who would pass you by will climb in with you. High caliber team members and suppliers will take risks and perform work beyond what you thought was possible. Everyone wants to have an impact on their world.
Like a powerful magnet, strong, clear Vision draws people to your company.
Like a powerful magnet, strong, clear Vision draws people to your company.
Create a clear path, so that they can walk with you. Help them feel that they can contribute, can participate in the impact of your company.
How do you know if it is? Listen to what people say who have never heard from you before. Consider having independent people help you to improve how you describe your Vision.
The right Vision must be: clear, practical, achievable and all-encompassing.
Develop an image, a detailed description of what your company will be in three years. Set aside any details about what actions are needed to get there. Just describe what the company is doing then. Why are there so many new customers? What is the prime reason people do business with your company? What key team members have been added? What products? Geographic markets?
Avoid this: "We could do this. And, we probably will do that. But, maybe, if the competition is not too tough, or if we do not run out of money, we will have a wonderful product." Such an attitude creates failure.
A simple, clear Vision: "We have this great ... technology, distribution approach, .. This particular group will strongly benefit from it in this way. We'll sell it in the following ways ..."
What makes your product or service very important to your customers? What is the process required to sell it? What are the driving forces in the market and among customers? Where does your company fit among those forces?
Capture your vision in writing. To do so is a creative process, one that is well understood by Exxel. Without that Vision your chance to get funded is very small.
Avoid this: "We could do this. And, we probably will do that. But, maybe, if the competition is not too tough, or if we do not run out of money, we will have a wonderful product." Such an attitude creates failure.
A simple, clear Vision: "We have this great ... technology, distribution approach, .. This particular group will strongly benefit from it in this way. We'll sell it in the following ways ..."
What makes your product or service very important to your customers? What is the process required to sell it? What are the driving forces in the market and among customers? Where does your company fit among those forces?
Capture your vision in writing. To do so is a creative process, one that is well understood by Exxel. Without that Vision your chance to get funded is very small.
Generate a clear Vision.
Key #2: Your Revenue Formula is the key that makes it Believable
New money is added by investors. How much revenue does it generate and when? How much of it is specifically for marketing and sales expenses.
When would you invest?
Set aside the fact that you want to raise money for a few minutes. You are the potential investor. Here are Scenarios, as if you were the potential investor. First you hear "The Base". Next you hear "Credible Detail".
The Base: A business plan says your company will spend $300,000 on advertising and generate $2 million in revenue the second year. It explains that the company will hire an unnamed ad agency. Normal detailed spreadsheets with revenue and cost by quarter for 3 years are included.
What happens? Investors stand back and say,
The Base: A business plan says your company will spend $300,000 on advertising and generate $2 million in revenue the second year. It explains that the company will hire an unnamed ad agency. Normal detailed spreadsheets with revenue and cost by quarter for 3 years are included.
What happens? Investors stand back and say,
We need to watch your
company perform for a while.
Add Credible Detail: The business plan adds some detail. $210,000 of the $300,000 will be used to test in three publications. By the end of the test, management and the agency both expect that revenue will be three times the ad cost before counting the impact of new customers through referrals. The other $90,000 is used after the test to start growing the revenue stream.
Looks good. We'll wait.
Independent Review Confirms: An advisor who turned around two companies recently and who has deep experience with your industry has reviewed your Plan. Under his direction a 200 person survey of potential customers was completed. He projects that the ads will generate revenue of between three and five times the ad cost.
Has this team really performed before? Maybe we should ask an expert to see if this all hangs together. I hear that another investor is close to a decision.
Believable Urgency is Added: The company offers new terms for investors. $150,000 is offered at a discount to complete the test. Those who invest in the test get a the option to invest at lower price per share during the next round.
Your Revenue Formula should have the following elements for each major portion of sales and marketing:
Growth can be reliable and consistent. Describe how you will do it. For more about increasing revenue consider how Exxel can help increase revenueprobably without any extra budget or expense.
 When your company decides to spend more money on marketing and sales, how much more revenue will it generate?How long will it take for that revenue to occur? How consistent, believable, forecastable and low-risk is that relationship?Or, if your project is non-profit or has no revenue, then change the word revenue to the phrase "tangible, measurable impact". In the place of a potential investor, would your prefer: an explanation of your "Business Model" that sounds convincing also, to have a Revenue Formula that is proven?The Valuation went from $500,000 to $2 million in 4 months.
With annual revenue running at $4 million per year, revenue has been stable and "working capital was negative." No fun. Suppliers calling to collect. An opportunist or vulture declared, "it is not clear if this can be made profitable. I'll put up to $500,000 into the company's operations in exchange for 51%.
3 Months Later: Monthly revenue was up, as predicted, using the Revenue Formula. A "marketing oriented" venture firm and a merchant bank each indicated likely interest using a $2 million pre-money valuation. By month 9 in this sequence the valuation used was $3.5 million pre-money with monthly revenue up only 20% from the starting point. A Scenario for you to Create
Perhaps you can do the work to create a scenario like this one.
I come to you seeking an investment of $1 million and state that revenue a year later will be up $2 million per year and then growing at 20%. Of that $2 million increase, $700,000 is the cost for sales and marketing, what professional investors call "marketing money". $500,000 of that $700,000 will generate $1.5 million per year in revenue within seven months of the marketing "launch." The resulting revenue will use a portion to perpetuate the increase. The marketing will use methods and media that are being used now, methods to "clone and repeat" using measurements and comparisons. The cloning of the Revenue Formula will expand to reach more people and markets. The remaining $200,000 of the $700,000 is for marketing experiments that we think might put our revenue way above the forecasts that we have given to you.
- more about Key #2: " The Revenue Formula
that Investors want to See" - | RSS Feed from Ray Kurzweil'sKurzweilai.net
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Key #3: Proprietary Advantage
"Why should I invest? As soon as you start to grow, competition will hurt you."
Your Proprietary Advantage could be related to the product or to how you serve the market. Commonly, it includes intellectual property and your system of distribution. What makes your company less vulnerable to competition? When other companies try to compete, what will slow them down?
Think of this Advantage as a set of walls around your company and its customers. The walls protect your company. Your Proprietary Advantage protects the ability of your company to serve and keep your customers. The strength of those walls attracts new customers to you. The walls make it difficult for competitors to harm you.
What gives you an advantage over companies who serve the same needs? Do you have a cost advantage in Operations or in Revenue Generation? Can you create "economy of scale" that does 'not make business sense to duplicate?' Compare the position your company has in the market with key marketing principles. What will cause a customer to think of you first? Exxel has a list of these principles and can help you make your marketing more proprietary. Consider " Marketing Principles".
Patents, perhaps you have none? Or, maybe any smart person could get around them? If so, rethink your position. Discuss your the situation with practical, experienced business people. An advisor may see proprietary advantage that you over-looked or that you thought not important. They may recommend an action you can take that will deliver such an advantage, without any real cost. The right advice and a small amount of work can often make your company much stronger.
Think of this Advantage as a set of walls around your company and its customers. The walls protect your company. Your Proprietary Advantage protects the ability of your company to serve and keep your customers. The strength of those walls attracts new customers to you. The walls make it difficult for competitors to harm you.
What gives you an advantage over companies who serve the same needs? Do you have a cost advantage in Operations or in Revenue Generation? Can you create "economy of scale" that does 'not make business sense to duplicate?' Compare the position your company has in the market with key marketing principles. What will cause a customer to think of you first? Exxel has a list of these principles and can help you make your marketing more proprietary. Consider " Marketing Principles".
Patents, perhaps you have none? Or, maybe any smart person could get around them? If so, rethink your position. Discuss your the situation with practical, experienced business people. An advisor may see proprietary advantage that you over-looked or that you thought not important. They may recommend an action you can take that will deliver such an advantage, without any real cost. The right advice and a small amount of work can often make your company much stronger.
Your company can be strong. Explain what it takes to be strong and how it will be sustained.
Key #4: Presentation Quality
"How can I believe they will succeed? I can not understand their Plan."You see your whole company. You know the staff, the suppliers, the customers and the products. What does the investor see?
"I like the business but the Plan looks like it was done in high school."
Your materials must represent you well. They are a constant reminder about your company. Investors meet on their own with others.
What will investors show to those people you might never talk to?
The first impression is often the most important. Just about every investor will seek advice from others. Is there a clear statement about your company? About the investment opportunity? Are there pictures? Do graphs simplify trends and show the potential?The content must include a clear Executive Summary. It serves two purposes. People who advise an investor can read only it and see that what your company says makes sense. The potential investor can read it again and again. It will provide what is needed to describe your company to others.
Ernst and Young, Inc. Magazine and several others provide thorough outlines for a business plan. If you want to know what sections to include, refer to them. Consider the more fundamental issues.
Is the Plan clear, compelling, realistic, repeatable and complete?
You put your Vision in the investors hands. Make sure it presents well.
Key #5: Familiarity - Entrance & Exit
I am just not comfortable. It seems attractive but I just don't know. It just does not quite sit right.
Consider an analogy. Your friend calls, "I want you to come with me to Kurozai. You will like it there." You respond, "What is it like?"
In the beginning your company is unknown. "What is it like there?"
An investor needs to feel comfortable that the investment will "work". They need to see that someone will pay them more than they invest. Why will that happen? How? When? Is there a back-up plan?
In the beginning your company is unknown. "What is it like there?"
An investor needs to feel comfortable that the investment will "work". They need to see that someone will pay them more than they invest. Why will that happen? How? When? Is there a back-up plan?
People like Success. Investors want to repeat their successes.
Is your product unique? Be careful. That needs to be positioned carefully. If it is unique, maybe customers will not want to buy it. As an investor, how would you feel emotionally if you heard this:
This has been done before. We made some
improvements. The improvements are tested.
They work. Customers are excited.
improvements. The improvements are tested.
They work. Customers are excited.
Consider your product, your industry, and your business strategy. All need to feel familiar and comfortable before you get funded.
Take particular care with presenting your business strategy. What is familiar to you is new to us. What have investors seen before that is similar to what you will do? There are five different business strategies that investors particularly like. The five include acquisition, cookie cutter, turnaround and others.
Present, clarify, how your company is similar to what investors like and expect.
Key #6: No Holes in the Management Team
"They need to fill out their management team."
Perhaps you can and should not afford to hire a Vice President of Marketing, another for Development and a third for Finance. Even when you do raise the money, you do not want to pay a lot of fat salaries.
"If they have not done it before, then we have to watch for several quarters."
One experienced highly capable executive is not likely to be able to build a company profitably unless there are other members of the team.
There always has to be someone to "watch the money", Finance. There has to be someone to generate the revenue, Marketing or Sales. In most industries someone has to make sure customers receive good product cost-effectively. Yet another person needs to oversee development of new products or services.
Put all that together and executive salaries can quickly exceed $700,000 per year.
What can you do?. Pull together to right Board of Advisors and the right set of service organizations.
If you do not have an executive who has generated the kind of revenue growth that you forecast, find one. Without one investors are likely to drag their feet for a very long time.
If you can not afford one, then rent one part time. Exxel can help. Show that high caliber people will help you succeed. Include executives who have done it before.
For very little money you can get the experience and depth needed for a major boost to your credibility.
Key #7: Practical about Money
"I am afraid the money will be gone and they will not meet their projections."
"Did you see the kind of car that he drives? How about those oriental rugs?"
"Did you see the kind of car that he drives? How about those oriental rugs?"
Appearance can be just as important as substance.
Maybe the oriental rugs came from your mother's house, but an investor would not know that. Consider the visible issues and a set of management reports that you can show to investors.
There are some very important and simple manual procedures that you can put in place to manage money. They vary somewhat from one industry to the next. Typically such a system includes daily reports about bank balances, receivables, payables and sales.
Procedures answer questions that could make you vulnerable. What will you change if revenue is below forecast? When will you add computers or expand the amount of space that you use?
Investors have seen disasters.
A company can be right on track and then let their cash disappear. Usually it disappears innocently enough with an inventory purchase, a build-out of a location or an investment that turned out not to be liquid. More often the cash disappears because of a combination of decisions. Each seemed prudent, but the decisions all added up to a very scary decline in cash.
One way to manage a company can cause cash balances to vary widely, as much as a whole month of revenue different from the end of one month to the next. Often there is another way to manage that will keep that change to one fifth as much.
The right, simple set of management reports and guidelines can make all of the difference. Show your investors that you know how to manage cash. If you have others doing it for you show the reports you get that make sure the CEO is in control. Clarify what rules will be used. Provide a written set of criteria to address any particular concerns about managing money that come up in your conversations with investors.
Procedures answer questions that could make you vulnerable. What will you change if revenue is below forecast? When will you add computers or expand the amount of space that you use?
Investors have seen disasters.
A company can be right on track and then let their cash disappear. Usually it disappears innocently enough with an inventory purchase, a build-out of a location or an investment that turned out not to be liquid. More often the cash disappears because of a combination of decisions. Each seemed prudent, but the decisions all added up to a very scary decline in cash.
One way to manage a company can cause cash balances to vary widely, as much as a whole month of revenue different from the end of one month to the next. Often there is another way to manage that will keep that change to one fifth as much.
The right, simple set of management reports and guidelines can make all of the difference. Show your investors that you know how to manage cash. If you have others doing it for you show the reports you get that make sure the CEO is in control. Clarify what rules will be used. Provide a written set of criteria to address any particular concerns about managing money that come up in your conversations with investors.
Address the fears that come up for every investor. Show a strong set of accounting controls and reports.
Key #8: Third Party Support
"This company was recommended to me by one of the most experienced executives in their industry. She has been out there and likes what they are doing."
Less time to raise money and a better valuation can come about because of conversations between third parties and your potential investors. Those same experienced outsiders can sometimes recommend an idea that can save substantial money, a strategy that can win a major customer or provide an introduction that can bring in an important reseller.
Take the time to cultivate important suppliers and customers, to find good and well connected advisors. Your law firm, your accounting firm and Exxel can all help. Recruit and involve highly respected outside advisors. Have them advocate your cause.
Develop a Board of Advisors
Because they are not Directors, a Board of Advisors has no Liability. You can also be flexible with each Advisor about when and how their time is used. Ideally have at least 1 advisor in each Category: Large Accounting Firm, Respected Law Firm, Industry CEO, Industry Engineer, and an Angel Investor.
The right outside support can make the difference between ignoring your company and making an investment.
Key #9: Compensate Participants
"It looked great but there was no clear exit strategy."
"The CEO did not seem like he would let go."
"It seemed like the sales people were likely to leave."
"The CEO did not seem like he would let go."
"It seemed like the sales people were likely to leave."
If you are the CEO, you have several audiences to serve. All need to receive good value from your company. If you seem likely to "hold on" too tightly, then investors will back away. Often it will be so subtle that you will not know why the investors stop returning your calls.
"I'm not giving up over 50%!" You can bring about that result without scaring away investors. Be careful.
Very soon after an initial contact from an investor the valuation will be discussed. If you are too high you lose the investor. If you are too low then you seem to eager, even desperate. If you refuse to set a valuation the investor is likely to think that you are really just thinking of a high valuation.
On valuation what is the solution? There are two.
- Get expert advice and set a valuation and structure that is in line with what investors would want.
- Hire an investment banker, lawyer or other person to be the one to discuss valuation.
Everyone should benefit while you keep your well earned portion.
Key #10: Understand Investors
Understand each of the people, what they want and when the want it.
The process of working with professional institutions that invest is similar to the sales process for any large transactions.
Learn about the 'diligence process.' Who among the invetor's team has responsibility to understand your market, your technology, your plans and your management team? Expect and seek to get to know the person who is "sent in." Often such a person is the key to move from Interested to Serious.
When working with the team of one institution, look for the leaders. See who takes initiative and what other investor firms they syndicate with.
Who is a Lead Investor? and who seldom will be first to get involved? Who are the opinion leaders among investors in your space?
Assume that there will be multiple audiences including some who want "more detail" and some who want less.
When working with the team of one institution, look for the leaders. See who takes initiative and what other investor firms they syndicate with.
Who is a Lead Investor? and who seldom will be first to get involved? Who are the opinion leaders among investors in your space?
Assume that there will be multiple audiences including some who want "more detail" and some who want less.
Learn what you can and align both the frame of reference and self interest.
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| Beta test your investor sales process. As two sources for support seek out investor angels with experience in your industry and seek out a professional entrepreneur supporting partner at a well connected accounting firm another at such a law firm. Just as you would for a new product or service, get feedback early from friends of the house. Refine the substance of your Plan and the presentation content with help from Allies. Be true to your Vision. The true entrepreneur is one who stays with the vision molding and shaping how to get there, reducing every risk in the process. | |||
Thank you for reading 10 Keys. It was originally written in 1997 and is posted at http://exxelinternational.com/10keys/index.html
BruceLynch
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