How to Assess the Potential of Your Business Idea Ask yourself these questions before you start fundraising.
This is part 3 / 10 of Write Your Business Plan: Section 2: Putting Your Business Plan to Work series.
Before seeking investors, you need to know exactly what you are seeking and where that money will be spent. Not unlike justifying expenses when sending your taxes to the IRS, you need to justify the amounts you are asking for and be specific. Investors are not simply writing out checks with no idea of where the money will be spent. Sure, you can ask for a little more than you need in hopes that the negotiating brings you down to the amount you truly need for funding . . . or something reasonably close. It's also important to maintain your credibility because you will probably need additional funding as your company grows. Therefore, if you squander the money your investors have provided, you can be pretty sure you won't get a round two when you need additional funding.
Having justification for what you put in your plan is essential for winning over someone reading it. Random ideas get random results. Well-thought-out, justified ideas get serious consideration.
Assessing Your Company's Potential
It's also advantageous to take a few minutes to make sure that your company has the potential to succeed before digging for those hard-to-get dollars. For most of us, our desires about where we would like to go are not as important as our businesses' ability to take us there. Put another way, if you choose the wrong business, you're going nowhere.
Luckily, one of the most valuable uses of a business plan is to help you decide whether the venture you have your heart set on is really likely to fulfill your dreams. Many, many businesses never make it past the planning stage because their would-be founders, as part of a logical and coherent planning process, test their assumptions and find them wanting.
Test your idea against at least two variables. First, financial, to make sure this business makes economic sense. Second, lifestyle, because who wants a successful business that they hate?
Find Your Realistic Potential
Answer the following questions to help you outline your company's potential. There are no wrong answers. The objective is simply to help you decide how well your proposed venture is likely to match your goals and objectives.
- What initial investment will the business require?
- How much control are you willing to relinquish to investors?
- When will the business turn a profit?
- When can investors, including you, expect a return on their money?
- What are the projected profits of the business over time?
- Will you be able to devote yourself full-time to the business
- What kind of salary or profit distribution can you expect to
- take home?
- What are the chances the business will fail?
- What will happen if it does?
- Do you have a backup or alternative plan?
So, when you assess your company's potential, what are you and your readers supposed to learn from answering these questions?
- If you can devote the time you need to grow your business full-time.
- How much money you'll need to start the business so that you know if you already have enough money or how much you need to raise.
- If you're willing to give up some control to investors, or you prefer to bootstrap financing of the business with your own money as well as friends and family if they're willing.
- Understand how your business will make money and how you will pay yourself, your employees, and your investors.
- What plans you will put in motion if the business shows signs of failure.
"Investors want more than just an idea," writes Noah Parsons in his article How to Write a Convincing Business Plan for Investors. "They want evidence that you are solving a problem for customers. Your customers have to want what you are selling for you to build a successful business and your business plan needs to describe the evidence that you've found that proves that you'll be able to sell your products and services to customers. If you have traction in the form of early sales and customers, that's even better."
Related: Business Plan Book
Show What You Know
As Noah Parsons says business plans aren't just words on a page — they are proof that you are serious and knowledgeable about your idea.
"The business plan document itself isn't what's important to investors. It's the knowledge that you've generated by going through the process that's important. Having a business plan shows that you've done the homework of thinking through how your business will work and what goals you're trying to achieve.
When you put together a business plan, you have to spend time thinking about things like your target market, your sales, and marketing strategy, the problem you solve for your customers, and who your key competitors are. A business plan provides the structure for thinking through these things and documents your answers so you're prepared for the inevitable questions investors will ask about your business.
Even if investors never ask to see your business plan, the work you've done to prepare it will ensure that you can intelligently answer the questions you'll get. And, if an investor does ask for your business plan, then you're prepared and ready to hand it over. After all, nothing could be worse than arriving at an investor meeting and then getting a request for a business plan and not having one ready."