If you think you only need a business plan to go fishing for capital, you are sorely mistaken.
A business plan–thoughtfully assembled and diligently updated–is the very blueprint for any company. It sets direction, facilitates communication and establishes performance metrics. Better yet, well-articulated business plans force business owners to constantly weigh the strengths and weaknesses of their operations.
And, yes, these documents are de rigueur when courting professional investors.
Investment-grade business plans–usually about 20 pages long–are grounded in deep knowledge of an industry and the money-making opportunities within it. I can’t do that work for you, but I can highlight the 10 key elements that matter most–to business owners and their investors. (For important tips and traps in creating these plans, check out the accompanying slideshow.)
1. Definition Of The Problem. Every plan must start with an explanation of the problem the business aims to solve–not a description of the company and product. Lay it out in terms your mother could understand, and quantify the “cost of pain” in dollars or time. Avoid airy assertions like “every customer needs this” and gobbledygook like “next generation platform”–they mean nothing and undermine your credibility.
2. Solution and Benefits. This is not the place for a detailed product specification. Instead, explain how and why the product works, including a customer-centric quantification of the benefits. Again, skip the technical jargon and hyperbole.
3. Industry & Market-Sizing. Without compiling a tome, capture the evolution of the overall industry, market segmentation, market dynamics and customer landscape. Relevant charts and graphs, with figures from accredited sources, sell a story very efficiently.
4. Explanation Of The Business Model. This section should explain (again, clearly) how you will make money: who pays you and how much of that you get to keep after expenses. A mere glance should yield a decent grasp of the business’ growth potential.
5. Competition and Sustainable Advantage. List and describe all of your competitors, including substitute products or services. (Simple example: If you’re selling a car, don’t forget about motorcycles and trains.) Then detail your sustainable competitive advantage, and highlight barriers to entry which will keep your competitors at bay.
6. Marketing and Sales Strategy. Here you sum up how you will go to market, including your pricing and distribution channels (which could also include strategic partnerships). This is a good place to map out a timeline of key milestones.
7. Executive team. Investors ultimately bet on people, not ideas. Convince investors that your team has the chops and determination to start new businesses, and demonstrate deep knowledge in the company’s specific domain. Include members of the Advisory Board and key industry players involved in the company.
8. Funding Requirements. Explain how you arrived at the amount of capital you are asking for, and describe in depth how you plan to use that money. Show the amount of financial commitment founders and equity owners have in the company, including sweat equity (hours slaved in exchange for a percentage of the company, as opposed to cash salary).
9. Financial Forecast. Include revenue and expenses for the last three years (if relevant), and project them for the next five. Clearly show–and justify–any growth assumptions. Highlight the break-even point.
10. Exit Strategy. This section is required when courting outside investors eager to know when and how they will get their money out, and what sort of return they might expect. (Initial public offerings–the exit of choice for many investors–are few and far between these days.) Plan to keep the business in the family? Ignore this section. Trap: Plenty of entrepreneurs have built companies only with an eye to sell them. For many, this is the greased path to perdition. Focus instead on building a truly sustainable business. The money, fame and stock tickers will come.
A final word on great business plans: Longest and fanciest doesn’t win the race. These documents are meant to enlighten and reassure, not entertain. The best plans anticipate and answer every question an investor could possibly ask, except maybe: “Where do I sign?”