July 30, 2021 | 4-minute read (770 words)
A carefully crafted business plan is crucial for the success of your startup. This document not only outlines goals and a roadmap you commit to following, but it should also help your business capture future interest from investors.
But to garner eventual financial support for your idea, your business plan must address the needs of investors in addition to company goals and benchmarks. Beyond a great idea and clear articulation of key financial metrics, the plan should make them feel confident that the potential reward from investing in your business is worth the risk.
To help you map out a winning business plan, we have culled five critical things investors look at before writing a check.
Whether they’re venture capitalists, wealthy individuals or average folks, one factor that all investors prioritize is traction achieved.
Similar to a “proof of concept” that determines whether a business idea is viable, the amount of traction is the momentum your business has attained. This helps confirm its validity and potential. Traction can be determined by having a measurable set of users or paying customers for your product or service.
The higher the traction, the lower the risk for the business and for investors. Companies with good signs of traction are more likely to obtain funding and with better terms.
Here’s an example: One company has a mobile bookkeeping app idea. The other company has already built the mobile app and acquired 10,000 users, and 1,000 users have also bought a premium subscription. Clearly, the latter company has already eliminated multiple risk factors and is a stronger contender for investment.
For startups, it can be challenging to demonstrate traction in terms of paying customers. Consider producing a prototype or research confirming customer interest in your business idea. The more creative you get in conveying traction, the more likely you will pique investors' interest.
Investors need to know your proposed use for funds sought and to see realistic financial projections. They want to know if your business can grow significantly.
Clearly present expected sales, expenses and revenue for the next five years in your business plan. Be sure that your projections are reasonable and defensible to boost investors’ confidence.
Here’s an example: A company may assume that they will see $5 in revenue in five years. But investors will want to know the rationale for this projection. Perhaps the company belongs to a serial entrepreneur, or the founder’s last company made $5 million. But you must provide solid reasoning for your projections to be deemed reasonable in the eyes of investors.
Invest time and effort in research that bolsters your assumptions and credibility in the eyes of investors. If they push back, your knowledge will help you give a cogent, thoughtful response.
Ideally, the marketing section of your business plan discusses the four Ps: product or service, price, place and promotion strategy. Make sure you elaborate on these elements with figures based on reasonable assumptions.
Here’s an example: You plan to promote your product online through pay-per-click advertising that costs $2 per click. You assume 1 of every 100 clicks will turn into a customer, meaning customer acquisition cost will be $200.
Investors want to see whether a market exists for your product or service, who your target customer base is, how you plan to make sales and what your strategy is to attract new customers. Additionally, they want to know your cost of attracting a new customer, the expected lifetime value of your customer and whether there’s room to scale.
Based on the components of the marketing plan, investors will assess whether your business offers a sizable and profitable opportunity.
When evaluating whether to invest, investors look at whether the company has any competitive advantages. By definition, competitive advantages are unique attributes or structural aspects of a business that enable it to outperform competitors. A competitive advantage could be the location, economy of scale, differentiated technology or anything that helps you siphon business from competitors.
Documenting your competitive advantages throughout your business plan will help you generate greater value and likely get investors interested right away.
The final thing investors consider in your business plan is research. If done right, your research should support your financial projections, marketing plan, competitive advantages and other key sections.
Research that will grab investors’ attention includes a market and trend analysis in the industry analysis section, studies of target customers’ wants and needs in the customer analysis section, analysis of competitors’ strengths and weaknesses, and any further research that substantiates financial assumptions.