September 8, 2008

Not That Plan

The business plan you should be using to raise capital is not the same as the one they usually teach in college.  I went over the topic several times in graduate school and each time the spiel was the same:  It should be a comprehensive guide to how to run your business.  Update it every month, or quarter.  Use it to keep everyone going in the same direction.  Include important operational plans and strategic studies in detail.  And of course, the longer the better because that shows that you put more work into it (unfortunately I’m only half joking).

If you are one of the few people who actually have and use such a plan, good for you but it probably won’t get you very far with an investor. You need to have a plan written just for the purpose of soliciting investment. There are multitudes of guides and examples on the web and in print on business plans, make sure that the ones you are looking at make are clearly designed for this purpose.

We at FundingUniverse see lots of funding seeking business plans and of course have lots of ideas on what works and what doesn’t. Here’s a simple idea: Approach the fund seeking business plan and related documents as a sales tool. You are trying to sell a product, an investment in your business, to a customer and investor. Like any piece of sales collateral it needs to reflect the characteristics of your target market that affect their buying habits.

As customers, accredited investors tend to be about as discriminating as you are going to find. Here is an analogy: You are a car salesman. Don’t look at it as if you are selling a car to someone who buys a new car every 4 years. “Look at the room in this baby…” Assume the fellow (and for some reason the overwhelming majority of them are fellows, women seem to be very thin on the ground in this sector) is a car buyer for another dealership. He looks at dozens of cars per week. He will try to make a decision on a well defined, specific set of criteria. Usually many of these criteria will be quantitative. He is not emotionally tied to your deal and it will be very hard to get him emotionally tied to your deal. Like a professional poker player he will look at his hand, the odds, the risk and return, the other player, etc. and make a dispassionate judgment. Even if he is emotionally wrapped up in what you are doing or acts impulsively, he will likely want to pretend that his is the other guy, the one I just described, the poker player. At the very least, he will want to be able to make the case that he was making an objective, well considered investment decision.

Most investors put these criteria on their web sites. Here are some examples from Garage.com, Keiretsu Forum, and the Sofia Angel Fund. With these types of criteria in mind you should write you plan as kind of combination between a sales proposal and a legal argument. Emphasize what the investors say is important to them. It probably isn’t a technical schematic of each of your products’ components or a process narrative on how a customer complaint is handled or a mission statement. And of course it should be specific, quantitative, clear, concise and compelling.