When you’re trying to raise capital from investors, you’ll need to address and answer three important questions in your business plan.
How much capital is necessary?
Never resort to tossing out a random figure. Instead, your business plan should specify precise, realistic dollar amounts. Plan ahead for altering your business operations if necessary, depending on how much funding you actually raise. A lot of potential investors will want to know your plans if you receive less capital than you’re requesting. Establishing the priorities for your business – what is essential and what is not – will help you prepare for this question. In your Financial Plan, explain your needs for funding, but make sure your underlying assumptions are realistic. By “realistic”, we mean based on the thorough research you’ll be conducting to prepare your Customer Analysis (target market), Company Analysis, Industry Analysis (the trends and best practices pertinent to your industry), and Competitive Analysis.
What is the value of your company?
There are two types of business valuation: pre-investment (a company’s worth without any significant capital infusion); and post-investment (a company’s worth taking into account a capital infusion). Your business plan will not overtly specify your company’s value, but it will contain hints to that effect. You might, for example, discuss hard data about growth rates, market size and business needs. The best way you can answer the question “What is the value of your company?” is by explaining you plan on letting your investors decide. This means you must plan on creating demand and increasing the value of your company by approaching multiple venture capital firms simultaneously.
What are your plans for an exit strategy?
An initial public offering and a buyout by another company are two types of liquidation events which allow investors to exit from a company they’ve funded. Investors typically obtain a return on their investment when a funded company goes public or is acquired by another business entity. It’s impossible to predict the timing of a liquidation event, but you can exert control over the growth of your company. Know your company thoroughly, and plan for anything that might happen. Different sections of your business plan can be used to display your knowledge and thorough planning. Remember, however, that you must know your competition and your industry as a whole. That knowledge will allow you to inform your investors regarding which companies might be interested in acquiring your company once certain milestones have been fulfilled. Your Financial Plan and Operations Plan will specify those operational milestones.