Venture Capitalists — What investors want to know...

How to inspire investors with BizPlanBuilder...

When the entrepreneur is ready, the money will appear.

Steps to Writing Business Plans the Angels and VCs Will Finance

Building a business requires more than just an idea and a plan. For a moment (and you may need to refer to this moment often), put yourself in an investor's position... What would YOU want to know about a business before you invested in it? We often recommend investing an amount of money in a friend's business just to get the mental, physical, emotional, and spiritual experience of investing precious CASH in someone else's business.

Many investors rely on the answers to these simple questions:

What is the track record of the people involved? (If you don't have enough, then build team of people who do.)
What is the worst-case scenario?
How can we get out of it in 3-5 years?
Why will it work? (Your market analysis needs to demonstrate why enough certain people will buy it.)
Has it been tested before? (How can you do that with a brand-new idea?!? See 'Why it will work.')

Now, more than ever, you must be convincing to the bone. And, expect that intelligent people with money will want to feel comfortable with you and your answers. You will find that, no matter who you are and what you are doing, you’re going to need answers to these basic questions—in plain-English...

Who are you?
Why are you in business?
What is the opportunity here?
What is the current situation in the world?
How big is the market?
What will you sell?
How is your business structured?
How will you make money?
Who else is doing the same thing?
How do you compare?
Who are your most important customers?
How will you reach and inspire them to buy from you?
Do you have any strategic partners who will help?
Who are the people running your business?
What experience do you/they have?
Who else are you working with?
Who are your advisors? Who is on your board?
Where are you today?
What have you accomplished?
How much money do you need to start / grow?
What will you do with the money? What’s the deal?
How much money will investors make?
When & how will investors make their money back?

Your Executive Summary will either inspire an investor emotionally or not (that's how most of us make decisions). This will only open the door to further discussion and exploration. The rest of your plan must provide the whole story with proof, logic, and the introduction to the people who will be response-able to build and run the business.

“We've been using your financial model for many years for financial analysis, partnering, M&A, and VC analysis here in Silicon Valley and in Europe. I have used a few other programs that cost $1500+ and yours are better, more accurate and more detailed.
I can trust the integrity of the BizPlanBuilder financial models.”
- Geir Ilstad, Principal, Prudent Management, Los Altos, CA

Investors likely have many interests. When you approach them with a complete plan A) you will have the above answers firmly in your head and you will be able to speak them with certainty B) your plan will provide written documentation that adds believe-ability C) having done the math, you will feel great about your prospects for personal wealth, as well as a huge payoff for your investor(s)(who may get richer then you do from your deal).

Warning: Some entrepreneurs, deep in their psyche somewhere, may resent investors, who seem like they don't do much work, making a lot of money on your deal. Someday, you too may be in a position where an entrepreneur will approach you for investment. Who will you be in that place? How should they FEEL about you? How would you feel about them? Click here to learn more about Choosing the Right Investors.

We've used BizPlanBuilder ourselves...
to raise capital from investors, to get a $210,000 SBA loan, as well as a $750,000 line of credit from Citibank. We don't say this to brag, but we did tweak BizPlanBuilder as a result of every experience. We built this experience and the parts we are certain were effective into the main structure of the software.

What Do Investors Care About?

Remember, these guys get a pile of business plans every day! Before you can write a plan that satisfies all the points that an investor cares about, you need some idea what those points are. The answer to this is really no secret. Investors want you to know what sort of businesses they are interested in funding. They don’t want you to waste their time. Ask about investors and what they’re interested in or research them in trade or financial publications.

First, remember the one common attribute shared by all investors: They all want to make money. This may seem obvious, but sometimes this fact gets lost in the excitement of your own idea. Often, investors have a portfolio of industries that they specialize in. Even charitable groups who grant money will want something in return such as local job generation. Your plan needs to emphasize how your business will pay off for the investor and that it pays off in the right kind of return on investment (ROI). Once you get that firmly in mind, you are ready to explore the differences between investors.

Remember, you are not selling your product or service to your investors...
(Using the same pitch you would use to sell to a customer.)
You are selling a share in a money-making machine.

To give you an idea about the things you need to consider, ask yourself the questions posed below. The answers help you narrow your investor selection and help define how you need to talk to them through your plan.

What business are you in?
Each type of investor has a certain portfolio they invest in. They have business expertise in funding certain types of companies in certain industries, and they tend to stick with them. For example, a retirement fund manager may limit his or her investments to low-risk companies. They are also probably well diversified having some foreign stocks, some utilities, some technologies, and so forth. You need to find out who funds your type of business.

How much money do you need?
Investors tend to have an average range of funds avail-able for investments. For example, credit unions and banks tend to fund loans for items in the car, boat, and home price-ranges while government contracts can be in the millions. The smallest investors are probably yourself, your family, and your friends. The largest investors are usually venture capitalists and certain government agencies.

Try to match your need to a funding source that is capable of handling the amount you need. Consider also that you may need more than one source, working in concert, which is perfectly acceptable in many cases.

How risky is your business?
The more risky your business, the more return on investment you need to offer to attract backers. You have to be able to offer them more return than they can get a less risky investment. For instance, if the bank is offering 9% CD rates, you have to either beat that or find a way to lower your risk.

Be sure to match the amount of risk you offer with the right sort of vendor. For example, in banking, they mark up the money they pay depositors by about 2%. This is called the “spread.” Your project has to not only pay back the entire amount but the interest too. In the back of the banker’s mind, he or she is thinking, what happens if you can’t pay it back? You have to make up any shortfall and losses from profit not sales. How much profit can you afford to lose?

For the banker, it would mean losing all the profit they would have made on their loan to you, as well as on the profit they would have made had they loaned that money to someone else who didn’t default. This translates into about a 98% assurance that they will get their money back.

In addition, be sure that the way your plan is written doesn’t give the wrong impression about your risk. Be honest, but be sure your perceived risk is accurate and not expressed poorly. For example, one measure of risk is your Asset to Debt Ratio. Look at your plan objectively and ask yourself if you would offer funding based on your financial picture. You may need to pay particular attention to the way you present financial analyses and ratios to be sure your business looks as sound as it really is.

For how long do you need the money?
Each investor has a particular term in mind. Many investors have more than one way to finance. For example, banks offer different terms for different purposes and amounts. Car loans range from 1-5 years: the longer the term the lower the rate. But the longer the term, the more money you end up paying. Home loans work similarly. On the other hand, venture capitalists typically don’t want to be paid interest at all. They want to be cashed out in a fairly short time with a fairly high return.

Your plan should be designed around this need. Does your investor want his or her money back in a short or long term? Do they want it back in cash, in interest over time, or in stock? Can you convert the first loan into a second with a new investor, and cash out the first investor?

Do you plan to grow the business and then sell it?
This is a question you need to answer fairly early on in your business planning. This is a fundamental goal, and it affects the way you conduct daily business. If your goal is to grow a company and then cash out, your plan needs to address how you intend to do that.

The way you structure your finances for this type of goal is different from the way you structure a company you intend to keep and run. If you plan to sell, how are you making your business more attractive to a buyer? What sort of equity position do you have, and what sort of equity position will your investor have? Will there be a market for your company when you intend to sell it? Do you have a business broker helping you? What sort of financial picture are you trying to paint?

Do you qualify for government grants, guaranteed loans, or special Economic Development Zone funds?
Have you thoroughly explored the possibility of grants, subsidized, or guaranteed loans? The government and private institutions have many programs to aid certain sectors of the business community. Perhaps you are only familiar with disaster relief loans offered by the SBA, but there are many more. You can find out about these types of programs through the government, trade associations, other business people, and through associations who specialize in locating these types of loans and grants. One prerequisite for these special grants and government loans is a business plan.

Your plan will surely be rejected if you don’t do your homework. However, some agencies will help you with your plan. Be aware, though, that many, many people apply for grants in particular because grants do not require repayment and are very attractive. Your plan has to be very compelling and competitive. Be clever. Think about what all those other plans might contain, then highlight why you are better and more deserving.

Are you asking for first-round or second-round financing?
Some investors won’t offer first-round funding. Instead, they specialize in second-round funding. Second-round financiers feel more comfortable funding companies who have proven that they can meet first-round goals.

Find out which type of investors fund companies at your stage of development. Your plan will be rejected out of hand if you don’t choose wisely. Moreover, you don’t want to go on record as having made this type of mistake lest you have to come back and ask for an investment from this same person or agency later on.

First round financing is usually a subject for venture capitalists, government loans and grants, and angels. Second-round financing, which typically goes toward expansion and growth, is the specialty of other types of investors such as banks, finance companies, and business brokers.

Are you seeking all your funds from one source or from a number of sources?
As mentioned above, some investors, such as angels, tend to fund in groups called syndicates or consortiums. This is for two primary reasons. One is that they want to spread the risk around. The other is that they cannot individually meet the amount you are requesting. Find out what each investor’s dollar limits are.

This cuts two ways though. Some investors don’t want to share the return and would not want to join such an arrangement. Similarly, if you have previous funding from somewhere else, try to find out in advance how your new and current investors would feel about your bringing another investor on-board. You have to spell out very carefully the terms, risk, and standing.

For some investors, bringing others on board is expected. For instance, corporations expect it and they sell stock for that reason. They care somewhat about how much stock goes to any one shareholder but, in general, they welcome new investors. Similarly, general and limited partnerships are often set up to attract new partners. Some real estate partnerships, for example, have a few general partners who run the business, but actively solicit limited partners who only invest funds by buying shares of property.

If you intend to solicit additional investors, your plan needs to be sent to the right sort of investor. It has to spell out exactly how that arrangement would work and how each partner or shareholder divides the equity and risk.

What form of payback can you offer?
This may sound obvious. People pay back investors out of profits, don’t they? Well, no. Actually, investments are usually paid back out of sales. If you start tapping into your profit, then you have nothing to pay yourself or your employees with. You also eliminate your ability to reinvest in your business without the need for further loans. See Part Two: Business Plan Financials, for more information.

There are many ways to formulate a payback strategy. Furthermore, each investor has a preferred method of repayment. For example, a venture capitalist generally wants to be cashed out. You have to show that you can earn enough to do that. Will you be in a position to sell the company when the repayment is due? Will you be in a position to make a public stock offering that will cover the debt? Or, can you take on partners who will cover the cash out?

For these reasons, it is important to find out what sort of repayment plan (exit/payback strategy) your investor expects. Then you need to figure out if you can meet that need one way or another. If not, find another type of investor or change the way you do business.

What is your purpose for seeking funding?
Does your investor want security or collateral? The reason you are asking for money affects who you ask. If you are financing growth or expansion, you might look to stock offerings instead of a bank or an angel. On the other hand, if you have assets in the form of inventory or accounts receivable, you may find
finance companies who will loan you money with that as security. As you pay the loan back, you can borrow more up to a certain limit. If your purpose is to purchase property or buildings, you might want to seek out certain government loans who prefer this type of security.

At the same time, consider leasing or renting. If you need money to buy capital equipment or other fixed assets, such as special machinery for production, you may want to explore leasing it from the manufacturer with a buy-out option.
Your plan needs to highlight the purpose of the funds throughout. Use this information to help you select the right investor.

Do you have any intellectual property or other unique advantages?
Investors are favorably impressed by companies who have intellectual property such as patents or proprietary technology because that can be a significant business edge. Even if you don’t hold patents, you may have some other unique attribute that is in demand. Perhaps you have developed an electric car battery that lasts for a week without recharging before anyone else. That might be interesting.

List these unique features prominently in your plan. Remember that what is obvious to you may not be obvious to your reader. Tell your reader why this is an asset, how it affects demand, and how long this advantage will be yours.

What form do you want this investment to take?

Do you want to retain controlling ownership?
Do you want all the money up front?
Do you want a line of credit? A secured or unsecured loan?
Do you want to offer stock?

Be sure that you match your investment requirements with an investor who can handle it.

What can your investor do to help besides investing?

As mentioned above, some investors can offer management advice, product guidance, or business contacts. They are often a great source of contacts with other businesses or people that you might benefit from knowing. Having a good relationship with your investor can also help if you ever get into temporary trouble and need some understanding. Ask yourself: