Startups with a solid business plan and great pitch deck have a far greater chance of gaining investment. In this essay by one of Mercia’s Fund Principals, Ian Wilson, Ian talks about the sorts of things he and the team are looking for when plans come to them for review. Republished with permission.
The best business plans help investors understand the opportunity, the risk, and of course the potential return. Across the Mercia Group, our teams evaluate almost 3000 business plans a year, but from that we only make around 200 investments. The one thing which is common across every one of these 200 deals is that each investment is supported by a well-articulated business plan which clearly addresses the opportunity, the risk, and the return.
Writing a plan does not need to be a daunting task. There is plenty of support available through advisers such as accountants, lawyers and investment professionals. There are also regional initiatives such as growth/accelerator hubs which can signpost entrepreneurs towards those able to offer feedback or assistance.
Preparation is key
When putting together a business plan, preparation is everything; working with a professional investor is a partnership. Spend some time understanding their preferences, any portfolio gaps and the right terminology to use in your plan. Plenty of information is available on the Mercia website through our Insights section.
Investors want to know how much you understand your business opportunity, so before putting fingers to keyboard, a SWOT analysis (strengths, weaknesses, opportunities, and threats) is a key starting point, highlighting internal and external factors that can affect your business.
When examining strengths, consider:
- The product or service’s unique selling points (USPs)
- The market dynamics and the resulting opportunities
- The management team
- Any early traction
- The competitive advantage
- Barriers to entry that will help you to sustain your competitive advantage
Investors will also want to understand how you plan to overcome weaknesses and threats. For example, perhaps some of the investment you wish to raise is to be used to fill any gaps within your team. Regulation could be deemed a threat for many companies, but GDPR and the Bribery Act support can be given by consultancies or legal advisers around these topics.
Presenting a business plan
While teaching at Alliance Manchester Business School, I ran an informal experiment by presenting two business plans: a good investment opportunity that was badly-presented, versus a bad plan that was well-presented. Interestingly, the majority of students selected the well-presented plan, although the written content was lacking in detail and evidence. This illustrates how making a document easy-to-read and visually attractive helps to engage a reader.
In terms of length, there needs to be a good balance between brevity and detail. Typically, a document of no more than 30 pages is sufficient.
Do ensure that the information flows properly. Use imagery, if appropriate, to illustrate your product or service. Tables and charts help bring numbers and words to life. Try to avoid unnecessarily emotive language, keep jargon to a minimum, and explain industry specific terms at the first use.
The key elements of a business plan for investment are:
- Executive summary
- The opportunity
- Market analysis
- Management team
- Strong and realistic financials
- Funding requirement and utilisation of funds
1. Executive summary
The brief executive summary provides a concise overview of your business plan, and should be completed after all other content has been assembled and ideally condensed into one, but certainly no more than two pages.
After reading it, the prospective investor should have a clear view of your current situation, ambition and the business opportunity, and you should avoid unnecessary detail that is explained later in the document.
2. The opportunity
The business opportunity includes information on your market, management team, and financials including the business model, anticipated returns, funding requirement and utilisation of funds.
Whatever funding stage your business is at, use the executive summary to clearly outline the objective, whether that be a future round of funding or potential exit routes, whether they are a trade sale, management buyout (MBO) or initial public offering (IPO).
3. Market analysis
Your business should address a market need. In this section provide details on market size, barriers to entry and a clear understanding of main competitors.
It’s helpful to provide evidence of market acceptance where possible. Avoid unsubstantiated claims that your company can achieve a certain percentage of market share based on nothing more than a sweeping assumption. An example is identifying a market worth £1billion, and estimating that your company will gain 0.5% market share, without giving route to market information to support this claim. Better here would be a realistic figure, based on actual resources within the business.
Be careful when claiming that your product or service is unique, as other companies may already have a solution on the market.
Within the marketing section of your business plan, investors will want to see evidence of market testing. Ideally you will summarise feedback from potential targets about market desire/need for your product or service. As part of the research, feedback on price, ease-of-use and potential improvements is also useful.
Sustainable competitive advantage
Your ‘value proposition’ is something which explains the value you provide to your customers; it must be compelling and your business plan should take a long-term view, ensuring that any claims of value are measurable.
A cost/benefit analysis for customers can evidence how any competitive advantage is not easily surpassable. As well as a thorough competitor analysis, remember to highlight any barriers to entry that limit competition, including both formal barriers such as patents, trademarks, contracts, and informal barriers such as knowledge, expertise and designs.
4. Management team
Central to any investment opportunity is the management team. Investors understand that the full management team may not be in place. But the existing team should demonstrate a combination of technical knowledge, track record and relevant skills.
Profiles of key individuals are necessary as is identification of any positions to be filled.
If members of the management team have invested their own money into your business, this is a positive sign and details should be provided.
5. Strong and realistic financials
Much of the investment decision will be made on the strength of financials.
Profit and loss, balance sheet and cash flow details need to be included for the last three years (where available) alongside a financial forecast for the next three years. Some reference to the underlying assumption is essential to understand how the figures were formulated.
Realistic potential returns are of vital importance to investors, and therefore the assumptions that underpin figures should be sensible and in line with resources.
I’d recommend undertaking a sensitivity analysis to understand the impact if sales levels are increased or decreased. This will inform the business plan, especially around amount of funding required, but does not need to be included in the document.
In this section, try to use visual tools such as pie charts and graphs rather than complicated spreadsheets.
6. Funding requirement and utilisation of funds
Be clear about how much funding is required, what time period it will cover, and your plans for the investment. For example, is it to unlock financial growth or support your international expansion?
When asking for the funding amount, be precise, as giving a wide range may highlight a lack of financial due diligence.
If you have existing investors, this is often seen as a positive, so they need to be listed.
Always consider that fundraising can be distracting. It’s important to raise enough cash to allow the management team to concentrate on delivering the plan without having to think about the next round of investment. I’d recommend any business raises cash for at least 18 months.
Summary – make your business plan stand out
Stand out and differentiate your business by writing a well-researched, evidence-based, realistic and visually engaging business plan that balances brevity and detail to secure an investor meeting … and ultimately the funding to grow your business.