How Investors Determine Whether Your Business Is Worth It
If you want to write a successful business plan that gets you the funding you desire, you'll first need to put on your investor cap.
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One of the first and most important moves you're going to make as an aspiring entrepreneur is putting together a solid business plan. A business plan isn't necessarily going to predict the future of your business, but it's going to serve as a blueprint for the early and middle stages of your business's development. It's also going to serve as a tool to help you attract funding and, potentially, new clients.
If you want your business plan to be even more reliable and even more attractive, you should think like an investor when drafting this document. But how is that valuable and what's the best way to do it?
Why think like an investor?
For starters, you're going to get into the head of people you might be trying to persuade. For many entrepreneurs, a business plan will function as a pitch document. Understanding how investors think and writing your business plan accordingly can increase your chances that you find a good fit.
But more than that, thinking like an investor can help you become more objective and focus on the financially practical aspects of your business. While there are a variety of different investing strategies that investors can follow, almost any investor is going to be interested in the objective potential performance of a business. If you can adopt this mindset, you'll be less likely to have your business plan worked by your emotional attachments and your personal biases.
The first step to writing your business plan with an investor mindset is understanding what investor priorities are. These are some of the most common focal points of investors reviewing business plans:
- Profitability. Every investor wants to contribute to businesses with high potential for profitability. Profitability is never a guarantee, even in a business with a great idea and a dependable target market. Savvy investors are less interested in how exciting the idea is and are more interested in how practical the idea is; what are the costs and how soon is this going to start making money?
- Scalability. Investors are also typically concerned with scalability. Your business might be right at home serving a single neighborhood, and it might make a lot of money doing so. But if you don't have expansion plans, or if you can't multiply your income in some way, there's a hard ceiling on how much money the business can make.
- Risk mitigation. Every business is going to come with risks, but good investors go out of their way to analyze risk and mitigate that risk. There will always be a chance of failure, but the closer those chances are to zero, the better.
- Novelty. On some level, investors also appreciate novelty. Active investors in the venture capital field sometimes review dozens of different business plans a week and they hear hundreds of ideas every month. They gravitate to things that stand out.
The investor lens
How can you take the investor lens and use it to reshape your business plan when you're writing it?
- Research and objective data. For starters, leave your biases and intuitions at the door. Focus on research and objective data to back up all your conclusions. If you make a claim in the business plan, you need to be prepared to support it with numbers and citations. If you can't find support for your claim, don't make the claim.
- The full picture. Your product might be very sexy, but that doesn't mean it's practical. You might have a reasonable plan to scale, but your launch strategy might have fundamental flaws. Investors want to see the full picture; they don't want a "smoke and mirror" show that obfuscates the dirty details. Leave no stone unturned.
- Honest acknowledgments. Investors love to see profitable models, but they hate to see questionable or unrealistic numbers. It's much better to honestly acknowledge risks and limitations than it is to pretend they don't exist.
- The long-term future. You might have a solid plan for the first year of your business, or even the first five years. But what could this business look like a decade from now? The further ahead you plan into the future, the better (as long as you're flexible enough to accommodate changing variables like evolving technology or adaptive consumer preferences).
Individual investor differences
Every investor is unique. What makes perfect sense to one investor might flabbergast another, and one investor might prefer to see optimistic scenarios while another one prefers to see more pessimistic scenarios. If you're going to be making pitches to a specific investor, it pays to get in the mindset of that specific investor; don't be afraid to make tweaks and major changes to your business plan to better accommodate your target audience.
Overall, thinking like an investor can help you make a more robust and fully detailed business plan. Not only is it going to be more appealing to investors, but it's also going to lay the groundwork for a stable and more reliably profitable business.