The overarching question that you must answer when writing a business plan for investors is this: what’s “in it” for the investor?
To accomplish this, you need to put yourself in the investor’s shoes to think about what they care about.
What should be “in it” for them is the opportunity to invest in a business that has huge upside potential and low downside potential. With regards to low downside potential, I’m referring to a low risk of failure.
The specific 6 questions to answer in your business plan to accomplish these goals are below.
Size of the Business Opportunity
The first question is how big the business opportunity is, and is it growing? To answer this, you need to provide information on the size of the market in which you’re competing and trends affecting the market.
Financial Implications of Investing
The next question that you must answer for an investor has to do with the financial implications.
- How much money are you asking the investor for?
- What are you going to do with that money?
- What are the projected financial results? For example, what do you expect revenues will be in year one, in year three, in year five? What are expected net income in year one, year three, year five? Etc.
Your exit strategy is critical when writing a business plan for investors since the exit strategy dictates how the investor will ultimately receive payback for their investment and get their money out.
Consider this example. You start a company and you grow it to $5 billion in sales. If you keep that company private, then an equity investor may not have the ability to get their money out.
So the exit plan details how the investor will cash out or make money. Usually, the exit plan is going public or more likely is selling your company. There’s a much greater likelihood that a company is sold than that it will go public. So if the prospect is you eventually selling your company, you need to answer questions in your business plan such as:
- Who are the likely buyers of your company?
- Why would they buy you? More specifically, why would they buy you versus possibly building a competing business or strengthening or growing their own business?
The next critical question to answer when writing your business plan for investors is who is on your management team and who will you add to your management team later?
This is key because most investors, or, at least, the smartest investors, are betting on the management team as much as they’re betting on the market opportunity. You see, even if you have the greatest business idea in the world, if the management team can’t execute on it, then the business will fail.
One of the great examples of this is the story of PayPal. PayPal was formed by great entrepreneurs including Peter Thiel, Elon Musk, and Max Levchin. Clearly PayPal had a great management team. However, the original PayPal concept which was to allow one PDA (Personal Digital Assistant like a Palm Pilot) to pay another PDA failed. It just didn’t catch on.
But the management team was smart enough to recognize that they could use their technology to allow one person to pay another person or a company online and they basically launched a new service which is PayPal as we know it today. PayPal became a huge success that was sold to eBay for over $1 billion.
So that’s why you need to answer in your business plan this key question: what is it about your management team that makes you qualified to execute on the business opportunity. Importantly, if you’re currently missing people on your team, document the qualifications of people you plan to hire to fill such positions.
Every business has risk factors, and the earlier on in your business, the more risk factors. For example, if you currently have an idea for a new product, risk factors include:
- Whether or not you will be able to design the product
- Whether you could cost effectively manufacture the product
- Whether consumers/businesses want/will buy the product
- Whether you can cost effectively market the product
- Whether you could build a quality management team that can execute on the opportunity
The more risk factors that you’ve already overcome, the better. And importantly, be sure to document each of these accomplishments in your business plan.
Barriers to Entry
A final question to answer for investors is what are the barriers to entry. Specifically, once you start growing your company, what is there to prevent others individuals and companies from stealing your customers?
The more you can show barriers to entry, how once a customer comes to you they’re probably going to stay for a long time, the better job you’re going to do in convincing investors to fund you.
Remember: Answer What’s “In It” For the Investor?
In summary, when writing a business plan for investors, be sure to answer the questions that help prove to the investor that your business that has huge upside potential and low downside potential.
The 6 key questions to answer, once again, are:
- How big is the business opportunity and is it growing?
- What are the financial implications of investing in your company?
- What is your exit strategy?
- Who’s on your management team?
- What risk factors have you already overcome?
- What are the barriers to entry?
Answer these questions well, and funding will be yours.
Writing Business Plans for Investors Infographic
Below is an infographic of this article for quick reference.
Writing a great business plan is key to getting investors to fund you. So you understand other helpful tactics and strategies, we put together the slide presentation below to show you “Sure Fire Ways to Impress Investors.”