By Fernando Berrocal
A business plan is an essential tool for startups, and when implemented efficiently, it accomplishes two goals:
- It lays forth objectives and gives a detailed plan to develop a successful business.
- It gives lenders and investors the framework and information they need to decide whether or not to support.
When writing a business plan for investors, keep this audience's requirements. You'll find out what these criteria are, as well as what investors will look for while examining your business plan.
In most cases, investors will either take shares in your business or provide you with a loan. In either instance, getting a return on their investment is their main purpose. When it comes to loans, they want to know that you'll be able to pay back the cash invested plus the interests. They want to see substantial growth potential and a reasonable chance of exiting at a big multiple when it comes to stock investing.
By "exiting", it refers to a situation in which the equity investor receives payment. Your business will likely be sold. Another good exit option is to take your business to the public; while this is appealing to investors, the chances of this occurring are little to none. Following that, a "multiple" is the expected “Return on Investment” (ROI) for investors. Imagine a venture capitalist invested $5 million and received a $50 million payment for their portion. In this situation, the investor would have received a 10X return. A 5 - 10 time multiple is preferred by most equity investors. Here are 5 important elements investors look for in a business plan to decide if you can provide them with the desired return on investment:
Financial Requirements and Forecasts: Investors want to know how much money you're looking for, what you plan to do with it, and what your financial expectations are. Over the next 5 years, your financial predictions should reflect your projected sales, costs, and profits. Investors want to see big revenue and profit growth, but they also want to be confident in your assumptions.
The more research you conduct to back up your assumptions, the more credibility they will have in the eyes of investors, making them more likely to believe in your business and fund it.
Traction: Investors are looking for evidence that you've gained traction. This phrase is akin to "proof of concept." It's the process of attracting consumers or paying customers. You and your investors both benefit from acquiring traction.
You want to clearly describe what you do and explain any traction you've achieved so far in the executive summary at the beginning of your business plan to pique investors' interest. It's worth noting that if you're a startup, showing traction in terms of paying clients may be difficult. You might display a prototype or research that demonstrates client interest in your concept.
Unique Success Factors: Documenting your unique success factors is crucial to attracting investors, which is why a section on this should be included in any business plan. The things that make your business more likely to succeed are known as your unique success factors. Consider why your business is particularly prepared to thrive in your market and make sure investors see and understand this in your executive summary and throughout your business plan.
Marketing Plan: The "Four Ps" are discussed in the marketing portion of your business plan and are: “Products”, “Price”, “Place” where clients will buy from you based on your location, or distribution strategy (e.g., via your website, distributors, etc.), and “Promotions” to attract clients.
You must explain to investors the cost of attracting a new client, the estimated lifetime value of your customer, and whether or not there is an opportunity to scale in the promotional sector.
Research: The purpose of research, which will feature in several areas of your strategy, is to support the argument that your business is worth investing in. The correct research will back up your financial estimates, unique success characteristics, and other crucial areas. Here's the main research you'll need:
- You must include research on the size of your market and trends in your industry analysis section.
- You should include how many target consumers there are, as well as their demands and requirements, in your customer analysis section.
- Your adversaries. Demonstrate their pros and cons, and conduct research to back up your financial assumptions.
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