Q: I’m attempting to seek funding for my venture and I’ve been told that I need a business plan.  I was told there were some key things to include if I was going to make it “investment-grade.”  Could you tell me what specifically this refers to?

 A:  We have assisted people with their business plans for many years.  It’s common for individuals to ask us if they really need ANY business plan unless they are looking for an outside investor. Our response is that a business plan is needed primarily by the individual and secondarily by investors.  For an individual, your business plan serves as the blueprint for your company, a way to gauge progress and a communication tool for your idea.  For an investor it serves as an evaluation tool to determine if the venture is worth their time and money.  So what do investors want to know?  The following 10 items will give you some food for thought.

 What’s the problem?  Every plan must start with the problem you’re solving.  Explain it in terms your Mom would understand and quantify the “cost-of-pain” in dollars or time. Statements like “every customer needs this” and “next generation platform” should be avoided as they are too vague.  Be very specific in what the issue is because investors want to know what the need is.  If you can’t define the problem you may scare away those who can fund your concept.  No investor wants to wait years for their payback or fund the time it takes for you to figure out the market need.

 How do you solve said problem? This is where you give an explanation of how and why your concept works, including a customer-centric quantification of the benefits.  Skip the technical jargon but do describe your intellectual property and “secret recipe” in this section.  Clearly define the customer, channel, and revenue model associated with the solution.

 How big is the industry and market?  Start with the evolution of the overall industry, market segmentation, market dynamics, and customer landscape. Remember that investors like industries that have a billion dollar opportunity, and a double-digit growth rate. Data from accredited market research groups is required for credibility.   Also, don’t fall into the typical trap that most entrepreneurs make.  Don’t define the market opportunity so broadly in one breath and then in the next assess your competition narrowly or nonexistent.   Investors aren’t impressed by claims that everyone on the planet needs one but no one else has exactly the right features to compete with you.

 What’s the business model?  Tell people how you will make money, who pays you and what your gross margins will be. Be passionate, but realistic, about revenues, profits and volume growth. Try to avoid generalizations such as “all our concept has to do is get 1% of the market.” There are two issues with a statement such as this. First, no investor is interested in a company that is only looking to get 1% of a market.  Remember, they want to fund something that will earn them a return on investment (ROI) and a substantial one at that.  Second, that first 1% is the toughest part of any market to capture so you’ll look naïve implying it’s easy to get.

 What’s your competition and sustainable advantage?  Tell investors just who your competition is (both direct and indirect) and make sure to include customer alternatives (i.e. complementary products). Asserting you have no competition is about as credible as the Easter Bunny and will get you laughed out of a room faster than you want. Make sure you detail out your sustainable competitive advantage and highlight any barriers to entry that will keep your competitors at bay.

 Another common mistake that entrepreneurs make is that they downplay big competitors as being “too big/slow to be a threat.” The reality is that big companies are often not a threat when the market is small.  However,  investors know that sleeping giants wake up the moment your company shows traction in the market place. Competing with PepsiCo, Microsoft, P&G and other large companies should never be minimized.

 What’s the plan for marketing, sales and strategic partners?  Describe your market penetration strategy, sales channels, pricing, and strategic partnerships.  This is also a good place to include a rollout timeline with key milestones. Convince investors that you have lined up sales channels, strategic partners, and a viable marketing strategy.

 Who’s calling the shots? Investors invest in people, not just ideas. Convince investors that your team is experienced and have great expertise in the selected business concept or industry. If all the members have no experience in the area where the concept will exist, highlight the expertise of the board of directors, advisory members or other strategic partners.  If you are brining someone in from the outside, be careful with statements like “A world-class CEO will be joining us after funding.” Rest assured that potential investors will ask for names, and place some calls.  Soft responses from your candidates will definitely kill your credibility.

 How much money do you want? This is where you want to show how you calculated the funding requirements and how you plan to use the funds. Quantify existing skin-in-the-game from insiders and outsiders, including sweat equity and capital. If available, include a current valuation estimate as third party analysis always goes a long way in establishing viability.   If you are doing your funding estimate, follow this simplistic approach: model the volume, cost, and pricing parameters based on what you believe is achievable and note where your cashflow bottoms out. If it bottoms out at negative $600K the first year, add a 25% buffer and ask for $750K funding.

 What do the financials look like?  Project both revenues and expense totals for next five years, and past three years, if relevant. Show breakeven and growth assumptions. Details should be available in a separate financial model, but do not need to be included in this particular section (i.e within the Appendix).  Remember that investors are looking for large, scalable, high-growth opportunities. Attractive deals show double-digit positive growth per year and revenues that are projected to $20M or more within five years.

 How do we get our money back? This section outlines your exit strategy and is only really required when you expect outside investors. Investors want to know that you are thinking about a liquidity event (e.g. IPO) and when/how they’ll get their money out (with a hefty ROI of course).  For a family business it isn’t necessary to project an exit, but you should always think of what your “end game” is for a business.  Most business owners don’t make a ton of money when the own the concept, but see the return when they sell it off, take it public, etc.

 In summary, an investment-grade business plan is a professionally prepared document, preferably about 20 pages, to satisfy both angel investors and venture capitalists. In preparing it, try to look at your project through the investors eyes. If your plan is missing one or more of the above elements, it will likely be deemed not “fundable” and rejected.  The best plans are not usually the fanciest or the longest. They are not measured by the quantity of impressive graphics or the size of the revenue projections. Investment-grade ones attempt to answer every question an investor could possibly ask, except maybe “where do I sign?”