3 Things Investors Actually Look For in a Business Plan

What Investors Look For

Freelance Business Writer & Columnist,...

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June 24, 2016

Getting your startup funded by an investor is every entrepreneur’s dream. Although having passion behind your idea can get your wheels in motion, it’s capital that will get it off the ground. Of course, bootstrapping and using your own funds are always an option. In fact, 80% of startups are self funded. But once that tap runs dry, or if you don’t have money to invest to begin with, you may be at a stage where you’re searching for outside investors.

When it comes to investors, your options aren’t limited to VC firms anymore. Sure, venture capitalists are still one option, but you may also consider pitching angel investors or even taking your funding needs to a crowdfunding source. At any rate, whether you’re pitching VCs or angels or complete strangers on Kickstarter, having a business plan alone isn’t enough to get you funded. In reality there’s three specific key areas you’ll need to nail before anyone will consider writing a check.

1) An all-star executive team. A large degree of startup failure can be traced back to a people issue, not a product or financial issue. So it makes sense that investors would be hyper vigilant about your executive team. VC firms are more critical of executive teams that are inexperienced, whereas angel investors tend to be a bit more lenient on investing in teams that show promise.

Most investors will also be working alongside your team to some degree, so it stands to reason that your team’s experience and personalities will play a role in whether or not you get funded.

“If an entrepreneur wants to make an impression, prove that there’s past experience and credibility behind the team. It’s your team that’s going to win me over, not your half-baked idea!” said John Rampton, an Angel Investor from Silicon Valley.

At the end of the day, most investors invest in people, not just in good ideas. Good ideas are a dime a dozen, but good ideas backed by an exceptional team is a lot more rare.

2) An idea that has been validated with market research. In previous years, investors prefered to invest in startups with a tangible product simply because products are easier to validate. However, with the boom in tech startups, online platforms and successful mobile apps, that’s changed in reason years. Whether you’re seeking funding for a product, service or web based platform, you’ll need to provide some reasonable validation that you’ve tested the market and have a viable idea.

At minimum your market research should include a reasonable estimate of market size, market segments, channels and a competitor analysis. Thanks to Google and an ever-increasing wealth of free information at your fingertips, DIY market research is easier now than ever. Or you could always hire a market research firm. Whatever floats your boat.

3.) Realistic business valuations. This one can be a slippery slope. You don’t want to undervalue your startup because that could be a sign that your startup doesn’t have enough potential. But if you overvalue your startup, it could be a red flag to investors that you have your head in the clouds and are unrealistic about your business.

As a rule of thumb, you divide the amount of the investment you’re seeking by the ownership percentage you plan to offer and that’s your business valuation. For example, if you’re seeking $3 million and you plan to offer a 25% stake in your company in exchange for the investment, your business valuation would be $12 million.

Other Tips From Investors

Investors are people just like everyone else, so what they look for in a startup can vary from VC firm to VC firm, angel investor to angel investor. Here are a few more things to consider before pitching investors;

  • An effective business model. Ideas are great, but without a business model that works, they’re just ideas.
  • A truly original business idea. Investors rarely invest in something that’s been done before. Make sure your product, service or tech idea at minimum has a unique take on a problem in the marketplace.
  • Financial performance history. If you’re a brand new startup, this may not be as relevant, but if you’re seeking additional rounds of funding, be prepared to show a positive financial performance history.
  • A clear exit strategy. No this isn’t counterintuitive; investors want to know how you plan to make an exit if things go south.

 

Bonus Tip: While it’s true that any investor will want to see a completed business plan before they even entertain speaking with you, there’s been a big shift away from traditional business plans in recent years. Many new startups have taken to presenting their business plans in a visual presentation, or opting for a Lean Model Canvas version of the old school 50 page business plan. Do your homework to learn about investor preferences before going to any meeting, but you may save yourself the time and monotony of pounding out those 50 pages by using one of these options in lieu of a long drawn out plan.

Approaching investors isn’t an easy feat. The good news is, it’s not an insurmountable task either. With the right idea, the right team, and the right amount of preparation you’re one step closer to getting a signed check. Thick skin and persistence doesn’t hurt either.

Byline: Blair Nicole is a Media Relations and Startup guru by profession and a writer by choice. She’s the CEO and Founder of Media Moguls PR; not your grandpa’s PR company. Blair is also a digital nomad, philanthropist and writer for a handful of high tier business outlets.

 


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