How to Write a Business Plan That Investors Want to Fund
By Mitchell Harris
Emphasizing the Right Things
While it is true that a business plan is essentially an information product that has to be sold like any other product, it is important to place the selling emphasis properly. Most people place the selling emphasis on everything other than those issues that are important to investors.
The bottom line prospective of the investor is whether he or she can decipher how your business model will generate a growth in sales and a growth in assets. The growth in sales and the growth in assets metrics contain nearly every variation of question that an investor could ask. That's right; not answering these two simple calculations can mean the difference between your great ideas never getting funded. This is because growth in sales and growth in assets are the only two reliable metrics of 'value' that an investor can rely on.
When these metrics are presented in your business plan, they stick out like a sore thumb. So, whenever you want to make the point of how much value your product of service delivers it better be in the context of those two metrics.
Now notice that I said, "...how your business model will generate a growth in sales a growth in assets," NOT how your product or service generates growth in sales and assets- there's a big difference. Many people, but particularly people with technology concepts, have a knack for generating a lot of interest (typically in the form of traffic) but never actually make any money. In most cases, advertising revenues alone won't cut it, so it's important to have multiple revenue streams.
So, how does one demonstrate sales growth and asset growth? The short answer is the business model or the economic framework where sales occur and assets are invested.
So, what the secret sauce? How does a person come up with a business model compelling enough to get funded by an investor?
Well, what if I told you there's this huge database where some of the largest and most successful companies describe their business models, products and markets and also describe which products and markets are growing the fastest. Oh and what if I told you that this database is free!
Well, this grand ole database does exist; it's called The U.S. Securities and Exchange Commission.
The U.S. Securities and Exchange Commission (SEC)
The Content Development
There is a fundamental line of thinking, as a matter of public interest, about the securities in the United States that is incredibly useful when writing a business plan. That line of thinking is that: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it.
The SEC requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular security.
So why is this important? It's important because securities represent pieces of larger businesses. Thus, all persons in the market for securities have a right to information about the larger business. We can really use this fact to our advantage. Say you have a technology concept for a new search engine, web based auction, software, or cloud computing. How useful would it be to you to see the strategy, business model, markets, products, and financial statements of Google, Yahoo, Amazon, eBay, Oracle, Red Hat, and VMware?
Well, you can, in about 4 or 5 key strokes.
Part of The Securities and Exchange Commission's responsibility is to oversee corporate disclosure of important information to the investing public. These disclosures include annual and quarterly filings, so the content you have access to is very up-to-date and generally reflect the business climate of that particular business segment. These periodic filings disclose a MASSIVE amount of information about not only the company's business practices but also the market.
The Key Elements of the Annual Filings
Lucrative Development Sections
Businesses (or registrants, as the SEC calls them) are required to disclose a myriad of information for the privilege of listing their company's securities on public exchanges. These disclosures are systematic and ordered, which makes searching for content really easy.
Information about the Business
Registrants are required to disclose information about their business, some of which can be very useful in writing you business plan. They are:
- A general description of the development of the business over the past five years
- The company's business segments
- A report of the financial information for each business segment
- Revenues from external customers
- A measure of profit or loss
- The company's total assets
- A narrative description of the company's business
- A description of the business done and intended to be done
- The geographic segments in which the company operates
- A disclosure of financial information about geographic areas for each of the last three fiscal years
- A description of risks associated with foreign operations and any segment's dependence upon such foreign operations.
A Description of the Risk Factors
Also, registrants are required to provide risk factors, generally the risk factors are related to a negative impact of sales or an 'impairment' of assets. This type of information is extremely valuable! If there has been a recent regulatory development or a change in market conditions, the registrants will typically spell it out in this section, so you don't have to do all the heavy lifting by yourself.
The company is required to discuss the most significant factors that make their security/company speculative or risky. The company explains how the risk affects them or the securities being offered, outlined under a sub-caption that adequately describes the risk.
Management's Discussion and Analysis of Financial Condition and Results of Operations
In the annual filing, the company's management is required to discuss and analyze the financial condition and results of operations. You can really gain a tremendous amount of insight about your current or future business from some of the most powerful people in business! It includes discussions on:
- Capital resources
- Results of operations
- Off-balance sheet arrangements
- Disclosures of contractual obligations
- Interim periods
- Safe harbor
Often, the company's management will go above the requirements and include things like strategy and key factors affecting financial performance. THIS INFORMATION IS PUPPYCHOW FOR INVESTORS!
Qualitative information about market risk
One of my favorite sections in these annual filings is when businesses describe their primary market exposures. They describe:
- How those exposures are managed, which include a discussion of the objectives, general strategies, and instruments, if any, used to mange those risk exposures
- Changes in either the registrant's primary market risk exposures or how those exposures are managed, when compared to what was in effect during the most recently completed fiscal year and what is known or expected to be in effect in future reporting periods
Financial Statements and Supplementary Data
The registrants are also required to include financial statements and supplementary information. Financial statements of the registrants and its subsidiaries consolidated are also filed. These include profit and loss, balance sheet and cash flow statements.
How To Write A Business Plan That Investors Want To Fund, we outline provides a step-by-step approach to employing this freely available content. Let's Get Started!
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