Unless you are a serial entrepreneur with a string of successes behind you, you need a business plan to convince investors that you can build a business out of the dream that has been driving your passion to change the world.
Don’t believe that Silicon Valley myth that all you have to do is sketch your idea on the back of a napkin, and investors will line up to give you money.
Based on my experience as an angel investor and a mentor to dozens of entrepreneurs, having no business plan is the quickest way to define yourself as just a dreamer, or at best a hobbyist.
Let me be quick to say that a plan doesn’t have be a book, and probably should start as a “pitch deck” of maybe a dozen slides which cover all the right bases. The details can be added later.
Now let’s talk about the bases that need to be covered. Since this document is outward facing, it is important to keep the terminology and tone consistent with that of your customer set, investors, and business partners. Skip the acronyms and jargon.
Open your pitch by grabbing the investor’s attention with a statement or question that piques their interest, then hit the following key bases:
1. Definition of customer problem, followed by your solution.
Use concrete terms to quantify value and pain. For example, “I just patented a new cell-phone technology that will double battery life for half the cost.
No more pain of phone shutdown in the middle of a call.” This is your elevator pitch hook, which you must be able to deliver in 30 seconds.
2. Opportunity segmentation and competitive environment.
The market scope for your solution should be quantified in non-technical terms, with data sourced from professionals in the industry, rather than your own opinion.
List key competitors and alternatives, highlighting your sustainable competitive advantages, such as patents and trademarks.
3. Provide details on the business model and cash flow.
Every business, including non-profits, needs a business model to survive. Providing your product or service free to customers may sound attractive in marketing materials, but you need revenue sources to survive.
Free is a dirty word to investors, since it’s hard to get a financial return from free.
4. Highlight why your team is the best for this challenge.
Make sure you name your key players and advisors, and include any prior startup experience and prior leadership in the relevant business domain.
Current and past titles don’t convey this information. Professional investors look for the right people, more than the right product.
5. Marketing, sales, and customer experience.
I’m assuming that most of you will see these as essential elements of a real business, but not needed for a hobby.
Yet I continue to get funding requests that never mention any specific plans or costs to be associated with these elements. No mention usually means no plan and not competitive.
6. Project revenues, costs and investment needs.
If you are not willing to set targets for yourself, don’t expect investors to commit their funds. Major milestones along the way should be outlined.
When sizing your funding request, be aware of the value of your startup today, since most investors expect an equity share for their contributions.
7. Outline the potential investor return, and payback process.
The best way to do this is to highlight a recent similar company payback to investors, via going public or acquisition exit. Angel investors look for high-growth potential companies who can double revenues yearly, and sell for a high multiplier, providing a 10- times multiplier return.
If you don’t have the time to write things down, or your writing skills leave something to be desired, don’t be afraid to get some help. No executive I know writes all his own contracts, but every smart one owns every one that is written for him, and understands every element.
An entrepreneur who can’t manage a plan, probably won’t be able to manage the new business.
There are no guarantees, but various studies have found that entrepreneurs who start with a plan generally double their chances of building a successful business.
In any context, and especially in the high-risk world of startups where more than 50 percent fail, you don’t need to start your venture by convincing key players that you have nothing yet but an expensive hobby.
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.