How do investors read business plans?

There are hundreds of thousands of business plans out there trying to find a funding home. I receive hundreds of business plans annually, and I can definitely say that 99% of these documents are ridiculous presentations of an exciting investment opportunity. I am not referring to the value of the product being described, but to the presentation that is intended to describe an exciting investment situation.

One of the reasons so many plans are so poorly written, and there are many, many other reasons, is that the writers don’t understand how plans are read. Investment banks, venture capital firms, family offices, angel firms, banks, and blind investment groups receive a stack of plans for consideration every day. A junior reader, often a recent MBA, is usually assigned to read and review the plans and weed out all the obvious losers. The remaining business plans are checked off after reading the sections in the following order: Executive Summary, Finance, Management, and Exit Strategy.

Why is it important to recognize the order in which a business plan is read? Because these are the areas that need to be addressed in a powerful and compelling way for the business plan to stand in front of decision makers. The wording and construction of these sections dictate the level of interest that the original projection reader will express in the synopsis that he will attach to the copy of the business plan as he begins his route through the project analysis process.

The executive summary is read first. This should be a vivid two-page snapshot of the company and address every aspect of the opportunity. The executive summary needs to paint an exciting picture that leaves the reader wanting to know more. Unfortunately, most plans don’t read past the first paragraph or two.

Because? I have discussed this with investors on many occasions. I’ve asked the question, “aren’t you worried that you might be missing out on a great product opportunity just because the document has a poorly written executive summary?” The universal answer, “If there’s no more passion or ability to excite us than what we see in a poor executive summary, we’ve never had to look back to see a missed opportunity. If you can’t make a great first impression for us, neither will you.” for no one else”?

You only get one chance to make a great first impression. The business plan is the first impression of your projects. It is the superstructure of your opportunity, the skeleton and a foundation. If a house has a weak foundation, it will not stand for long. Why entrepreneurs submit documents that do not adequately reflect the emotion they believe to be inherent in their invention is a sad mystery. A poorly executed executive summary negates all the time, energy, investment, and innovation that went into a new offering.

Assuming the newly submitted business plan has an exemplary executive summary and passes the screening read, the financials will be read next.
Why Finance? Well, the executive summary is the skeleton of a project, while the finances are the muscle.

Finance is based on a set of assumptions that are key to presenting a realistic and defensible cash flow, balance sheet, and income statement. Investors have certain ROI parameters that they must try to achieve before they can consider any investment commitment. The assumptions on which financial data is based must come from extensive research, current market conditions, and historical media.

The main reason why finances lead to the death of the project is that assumptions are based on dreams, hopes and heavens. A general rule of thumb for successfully clearing the Finance section hurdle is this: Investors should realistically see that they will receive a return on investment of around 30 percent beginning in the 24th and 36th month (year 3) after to make an investment. This rate and speed of return must be able to withstand aggressive scrutiny. Trust me, investors are crazy to scrutinize, poke, push, and tear at the assumptions on which finance is built.

Good news! Your Business Plan has successfully passed through the doors of Executive Summary and Finance. Next up, Administration!

The Management section represents the brain of the new company that is being considered to invest. An experienced (industry specific) management team must be available or readily available for a successful placement.
The downfall in this area for so many would-be entrepreneurs is a complete lack of direct management experience. I recently reviewed an excellent security product that had wide appeal. An exciting product, high margins, consumer need and obvious benefits, yet the group seeking funding had no executive management experience in any of the areas the project required. They are candidates for a sale or license, but a funding round never happens without strong management. Remember: the investment is being made in people, people capable of driving an exciting opportunity to success.

Don’t dream of running your own business, with someone else’s money, if you’re a warehouse manager but need production and marketing experience to succeed in the new business. It just won’t happen, unless the investment comes from Aunt Hazel.

However, if you have strong and direct management experience and the Management section indicates a full team, the plan will move through gate three and to the last initial barrier to overcome. What is your Harvest Goal (exit strategy)?

The exit strategy is crucial for investors and the effective management of their money reserves. The exit strategy is the brain, intellect, and emotional component of the deal. Venture capital is a high risk/high reward game. Investors know that the successful investment must pay off a large amount and relatively quickly in order to cover losers that far exceed the home runs they hit.

Some entrepreneurs are unrealistic about the profit harvest from their business. This scares investment and risk money. An agreed plan to split, profit, sell, or exercise a myriad of other harvesting mechanisms at maximized points in the business cycle will be required before investment is considered. The best thing for the entrepreneur is to be very flexible when negotiating the harvest. The exit strategy is best summarized as an area in which the entrepreneur is open, flexible, and wants to maximize profits and make a fair deal for all parties.

Inflexibility is a deadly sin for investment seekers. I cannot overstate the number of deals that never happen, products endure and die, opportunities are missed because an owner is unrealistic in framing his requirements for his enrichment when potential success is achieved. Leave something on the plate for all parties to a deal.

The other sections of a custom business plan are now important, but only after the preeminent areas of executive summary, finance, management, and exit strategy have passed the test. If your business plan has all four in good order, you’ll be in strange company. Too many entrepreneurs dream of securing the investment. This is anything but a dream exercise. It is hard, competitive, demanding, hard work. If you put the necessary effort into your project, you will greatly improve your chances of success!

Don’t take shortcuts! Do not guess details and assumptions! Don’t fill in the blanks on a store-bought template! Don’t offer your review opportunity until you have an exciting and professional presentation! Your Business Plan represents you, your family and the future of your partner!

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