Entrepreneurial Finance 03 – Business Plans and Investors!

Session #3 – Business Plans & Investors

When developing a business plan to present to investors, there are three things that one needs to keep in mind to show that their plan is backed by a sound business model. A sound plan will generate revenues, make profits, and produce free cash flows. But before even looking at the financials, we need to determine the feasibility of the business idea. A very useful tool to assess business feasibility is a SWOT Analysis, which focuses on the strengths (S), weaknesses (W), opportunities (O), and threats (T) of the service or product idea.

Once you have a a feasible business, it’s time to write your business plan. I won’t go into the details of a business plan because you can find that information anywhere, but I will say there are two main reasons why you need to have a business plan. First, a business plan will allow you to look at every single aspect of your business in detail. It will help you determine potential hurdles and help you strategize the business as a whole. Second, a business plan will help you get the investment you need to operate and grow the business. Investors will examine your business plan and make an assessment to determine whether your idea is worth investing in. Most investors will focus their attention on three sections of your business plan – Executive Summary, Management Team, and Financial Plans & Projections. That being said, those three sections can not be fully completed unless you explore the marketing and strategy plan, the operations, and the risk/SWOT of the business. It is often said that a business plan needs to make 6 propositions to attract investors:

  1. Potential for accelerated growth in big market
  2. Sustainable position of market power
  3. Capable, ambitious, trustworthy management
  4. Plausible, value enhancing stepping stones
  5. Realistic valuation to allow the investor to earn a sizable multiple
  6. Promising exit possibilities

Once a business plan is submitted to an investor, it will be assessed using the investor’s specific criteria – Therefore, it is important to pursue an idea that is attractive to the investor. Some of the categories that investors may be interested in are the Industry/Market, Pricing/Profitability, Financial/Harvest, and your Management Team. These 4 things will most likely be looked at when an investor is evaluating your business plan. The VOS Indicator scorecard describes how an investor can potentially perceive your business based on the criteria mentioned.

(Entrepreneurial Finance, Leach & Melicher)

The management team is probably the most important aspect of a proposal. An angel or VC needs to believe in the entrepreneur and his team in order to invest his money. At the end of the day, a business idea is only as good as the people behind it. In fact, as mentioned below, the top 2 angel investment criteria deal with the entrepreneur – not the product or service!

10 Angel Investment Criteria – Van Osnabrugge & Robinson, Jossey-Bass

  1. Enthusiasm (passion) of the entrepreneur
  2. Trustworthiness of entrepreneur
  3. Sales potential of the product
  4. Expertise of the entrepreneur
  5. Investor liked the entrepreneur upon meeting
  6. Growth potential of the market
  7. Quality of the product
  8. Perceived financial rewards (for investor)
  9. Niche market
  10. Tract record of the entrepreneur

Tomorrow’s class is all about Measuring Financial Performance.

DIA

PS – Note that all info is summarized from my Entrepreneurial Finance class at Hult IBS, and the Entrepreneurial Finance 4th edition textbook by Leach & Melicher (highly recommended).

 

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