Garnering investors is a crucial element in achieving success in your industry. Failing to do so can be detrimental to your emerging business.
A common mistake is assuming that just because you’ve had a competent business idea that’s accumulated some general interest, your business is automatically investable. The reality of the situation is that you need to do a lot more than that to prove you’re worth investing in.
Mike McKie, CEO of Bayleaf Angel Investments, has provided us with his essential advice in preparing an impressive business plan and proving to any potential investors that your brand is worth supporting.
Understand the purpose of your plan
A business plan needs to be written with a clear objective in mind. Are you writing it to provide a roadmap for the internal management of the business? Are you aiming to secure investment? Perhaps your end goal is to hire key staff, or maybe to win customer accounts?
What you must remember is: if you write it for everybody, you write it for nobody. Different stakeholder groups hold different interests; what may be essential information for one, could be a huge waste of time for the other. So, whilst the core of the plan may remain the same, the focus and emphasis will be – and should be – very different.
Discuss client acquisition in depth
The single, most commonly neglected area in the business plans that we see at Bayleaf Angel Investments is the area of client acquisition. If your business is operating in an established market, it’s incredibly likely that your potential clients already have a solution and you need to persuade them that your version is better. If it’s a new market, you need to explain to clients what your product is and why they should be interested in it.
Business plans that assume a client base will magically adopt the service just because you’re launching an app, a site or a product are naive, and will never appear investable.
Why will customers choose your product or service?
It seems as though having an answer to this question would be an obvious necessity to any budding SMEs eager to receive investment, but many potential partners of ours don’t understand just how important this is. Can you clearly explain why your prospective customers will want your offering versus the others out there?
There is a substantial over-reliance on “brand” or “logo” as a source of competitive advantage. In our experience, brand supports product advantage, it doesn’t generate it.
Your business plan needs to explain the inherent and objective benefits of your solutions and why you will get repeat and sustainable sales.
Show you understand the market
Spend some time discussing the market as it exists today with your investors. Competition, discounting, pricing, routes to market – it’s all important. Also, be sure to research other start-ups. How did they do? Is anybody crowdfunding in your market? Any mergers or acquisitions?
It’s important to any investor that you understand, not only your own business, but the wider environment in which your business operates.
Answer the next questions!
Once you have written the plan, share it with a trusted friend or colleague and see what questions they ask – and then answer them in your second draft. No matter how good you think your plan is, there will be obvious questions that jump out, things you have forgotten, numbers that don’t add up.
Get some feedback and build it in. Your document will be stronger for it.
An over-reliance on social media is naive
It’s exhausting to constantly be told, “we will just use social media,” as if that’s a silver bullet to finding clients. A recent premium beverage start-up estimated that their cost-per-paying client on Instagram was more than $100. Likes and followers are – in themselves – vanity metrics; unless the likes turn into sales, it isn’t a relevant measure.
Know your finances
The financial statements of your company are the health checks and the scorecards all rolled into one. If you share a plan with an investor and your answer to a question on the finances is, “I need to ask our accountant”; they will almost certainly walk away from the deal. An investor needs to know that you can look after THEIR money. If you can’t demonstrate that you are closely looking after your own funds (before investment), then they won’t be encouraged to provide you with more.
If you don’t understand finance, take an online class and learn it. Learn why cashflow and profit are not the same thing. Understand why your business is funded by debt, or equity. It’s your business, not your accountant’s.
Valuation is not an absolute
Your valuation of your business is not a fact, it is an opinion, and an investor will almost certainly have a different (probably lower) valuation. Don’t be offended by that and don’t be defensive about your figure.
But equally, be prepared to explain – calmly and factually – how you arrived at your valuation. Going in high, with seemingly no rationale, just as the first step in a ‘haggle’, will give the impression that you are trying to squeeze every pound out of the negotiation without any real thought process. Arm yourself with other acquisition deal details and their multiples, show why your business is valued at the same – or higher – multiples, and present your information strongly and calmly.
Finally, “my business will be worth £10 million in 5 years time” is not a reason for the investor to invest at £10 million today. Future growth of the business, with a consequent growth in the value of the shares, is why the investor wants to take the risk; telling them that they need to pay today at the value of what the business will become in the future is not a sensible approach.