When investors talk about their need to see a real business plan, what they mean is this: we want to understand the fundamental strategy, logic and assumptions of how a business is going to invest capital and generate cash or value at a rate of return that will be consistent with the investor’s objective. We want to see the words and not just the numbers.
The dream business plan has the following four key elements:
- The statement of uniqueness
- The value creation process and strategy with key financial assumptions and results
- The management team detailed description & synergies
- The profitable result for the investor & the basis for the starting valuation
1. Statement of Uniqueness
The statement of uniqueness is a very important but often overlooked element. It explains why your product or service is unique.
The great investor Peter Lynch once wrote: “all value is created in the future and is based on the uniqueness of the product or service.” And indeed, if you look at the most successful companies that have rocketed from startup to stardom like Amazon and Google, we really don’t see another company quite like it in its market. Certainly the uniqueness of the Google algorithm has eclipsed all of the competitive search engines, so much so that it has created a virtual monopoly…..perhaps the most powerful monopoly the world has ever known…..the monopoly of information.
2. Value Creation & Financial Assumptions
The business plan should start with a statement of uniqueness and the strategy for exploiting that uniqueness. But ultimately the business plan is the narrative description of why the company is going to create value in the future.
Too often when I have asked for a business plan, I have received an excel pro forma spreadsheet with no words of explanation. That type of presentation should serve only as an illustrative attachment. If it’s presented in numbers without underlying assumptions, it is virtually worthless. It is in essence an imaginary extrapolation of mathematics without a necessary relation to reality. Therefore, for the financial presentation to be meaningful, there must be a thoughtfully articulated statement of assumptions.
Management Team Description and Synergies
We also need to see detailed management team bios. The detailed bios should be attached, but in the body of the plan should be a statement about why this management team is the right team, describing how the various talents and strengths intertwine to produce a synergistic whole.
One of the greatest pitfalls for every venture is the dysfunctional management team. Therefore, to attract an experienced investor, every effort must be made to show that the team is truly synergistic and not dysfunctional.
Profitable Result for Investor & Valuation
The business plan does not have to be of any particular length. Ideally, all of the key points can be covered in 5-10 pages.
Investors do not need a tome or a dissertation or a document buried in details. What is important is that there must be a clear narrative description of why the inexorable business logic of the company’s products and services will result in a clear profit to the company and the investor.
Finally, it is critically important to be able to articulate the basis for the current valuation of the enterprise. The valuation should, absent special circumstances, be consistent with the historical averages for comparable companies.
If all of these guidelines are followed, the investor should be delighted to find a real business plan that can be evaluated in a meaningful way. Unfortunately, it is rare to find a company that offers the investor a business plan that meets these requirements at the outset.