Crafting an Effective Business Plan (Part 4) – How Investors Read Business Plans

Wow! You’ve successfully drawn the fish to your part of the lake, captured their attention by your bait, felt them nibble at the concept of your new startup and have successfuly set the hook. Congratulations!

This post focuses on how the business plan is used to reel in the investor by providing them with the information they need to see. Of course, the information in the plan must be complete, it must be accurate, it must be compelling, it must be easy to read, it must be concise and it must be organized in a way that demonstrate experience and expertise to savvy investors.

It is important to iterate that a successful business plan is actually a sales document. That doesn’t mean that it’s covered in fluff and flowery marketing talk, but it does need to be interesting and compelling enough to want to read more. It should not read like a mystery novel, nor should it read like an encyclopedia entry. Present the facts in a compelling manner and organize the document in a way that makes it easy for the investors to find the information they are looking for.

You can’t do that, however, unless you first understand how investors read business plans. Having read hundreds of plans in close proximity to angel investors, venture capitalists, bankers, and other potential investors, I can tell you a few important facts.

Business plans are ready by a variety of people

from a variety of backgrounds

for a number of diverse purposes

and in a number of ways.

Keep in mind that just because you organized your business plan with great care from front to back does not mean that potential partners / investors will read it that way. In fact, many investors that I know read the business plan from the back to the front (starting at the dry, detailed, boring financials…that reveal everything…every flaw in your plan).

In general, however, most investors will read your business plan’s executive summary first. Beyond that, I have noticed that most investors will then continue to read your plan in one of four ways.

1. In order – A small number of investors will continue to read your business plan front to back (until they feel that they have enough information to warrant either a) further investigation or b) the garbage can.
2. By personal expertise – Other investors will follow the executive summary by turning to the section of the business plan that they understand best. Note, this is based on personal experience of the reader. Some investors will turn to the financials, some to sales / marketing, and others to the operations. They have built decades of experience in this area and can quickly judge the quality of your plan and your idea based on the thought you have given to their specific area of expertise.
3. Base on past experience – Most investors have had multiple startups under their belt and their personal experience has convinced them that startups generally fail / succeed for a specific reason. Based on their personal involvement in previous startups they may realize that a strong management team makes all the difference and will quickly turn their attention to that section of your business plan. Others may have past experience that suggests that having an accurate understanding of your competitors is the prime reason past ventures have failed / succeeded and may turn to that section. Still others may be convinced that a strong “go-to-market strategy” would have saved previous endeavors and may start their reading at that point.
4. Weakest link – I personally fall into the fourth category of readers. Those readers who, after reading your executive summary think of the most likely reason your business has of failing. If I think that marketing is going to be critical to your success then I turn to that section of your business plan (if I can find it.) If the information that I find in that part of your plan demonstrates that you know what you are talking about and that you have a strong plan in place for succeeding in what I determine is the most important part of your specific venture then I am impressed and I will then think of the 2nd most likely reason for your demise and will turn to that section. If you have both of these 2 areas well organized with a strong plan then I probably don’t need to read more because I would be willing to move forward with a follow-up meeting.

Keep in mind that most investors are reading to convince themselves that your idea is either valid or invalid (as well as relevant / irrelevant to their field of expertise and size of investment). As soon as they see proof that it does not “fit” for whatever reason, they will almost always stop reading your plan at that point. As a result, the further they read into your plan, the higher the likelihood that your plan will catch their attention and could result in a follow-up meeting. (Congratulations, the fish is now at the side of the boat.)

The business plan must contain all the details but it must generate excitement and it must sell the business.

There are, of course, several key tips that could make or break your business plan. Those specific tips will be the subject of my next post.

Crafting an Effective Business Plan (Part 3) – Baiting the Hook

As mentioned in the previous posting, when fishing for potential investors, there is a fine line between baiting the hook and feeding the fish. The art behind the fundraising process (and it takes a tremendous amount of skill and talent to do it right) lies in crafting a variety of weapons and knowing how (and when) to skillfully use each one.

Start by developing a creative and compelling “tag line” to describe your business. This should be a brief 1-sentence answer to the question “What do you do?” NOTE: The answer this question should never be “Here is an 80-page business plan that includes 18-months of personal research, 40-years of made-up financial projections, pretty graphs and charts and a note from my mother.” Something more along the lines of  “We break the poverty chain,” or “We save orphans from starvation,” or “We cut inventory costs by 40%.” Any of these answers should elicit the shocked response of  “Wow, how do you do that?”. If you don’t receive that response on a regular basis you need to rework your tag line or rethink your business.

Of course, the next step in the process is to have a slightly more detailed response to the question “Wow, how do you do that?”. Something like “Our programs deliver food and training dirctly to 1.5 million children in 29 third-world countries.” or “Our software leverages proprietary industry data and minimizes freight and logistics costs on over 50,000 products in the automotive parts industry.”

If done properly, your next response is something like “How do you do that?” or “How big is that market”. It is incredibly important to realize that each question from an interested investor is actually another nibble on the hook. The art of fundraising is knowing how much information to give, in what format, at what time, and in what order to maximize the interest of the investor. Not every question deserves to end with “Will you read my business plan?”.

A successful progression should follow a pattern similar to the following:

“We solve the problem of X”

“How do you do that?”

“Is there any money in that?”

“How big is that market?”

“Who else plays in that space?”

“Who are your customers?”

“Who do you mean by ‘We’?”

“How far along are you in the process?”

“What makes your product better than X?”

Notice that along the spectrum of tools discussed in the previous posting, the correct answer to these questions still do not involve the business plan. These investors are still nibbling at the bait, are very cautious about the “free meal” and will scurry away quickly at any sight of the net / business plan.

If you have answered four or five of the previous questions and think that the investor may be genuinely interested it might be appropriate to offer to send a BRIEF executive summary (no more than 2 pages, preferably 1 page). The business plan is still a later-stage document and my next post will talk a little more about how investors actually view the business plan.