So what are the essential elements of a fundable startup business? It is grounded in a business model has the potential to make a significant amount of money by solving a real customer problem and adds significant value for the target customer. The solution the startup business offers has a sustainable competitive advantage, and the market has the potential to large and to grow fast. When I speak with many entrepreneurs I ask, “What do you lose sleep over at night?” The typical answer is “Raising my next round of funding.” Maybe sometimes they will say, “I need help on my investor pitch.” But typically, there are deeper issues below the surface that are more foundational in the process of raising a round. In fact, there is an ascending set of requirements for raising outside capital for your company.
Implementing a strategic planning process that unearths all the information that investors seek about your business is the foundation of the requirements for raising capital. It is the foundation of a business plan, your executive summary, your pitch deck, and your elevator pitch. Doing this level of homework aids in building credibility with investors, and gives you a clear idea of your key milestones and areas where you need to expand and grow your team. As Benjamin Franklin said, “By failing to prepare, you are preparing to fail.” Make sure to set goals that will assure you the ability to “scale” your plan to a set of reasonable accomplishments over time.
The Strategic Planning Process
It all starts with the Situation Analysis, which is a clear understanding of your markets, customers, and competitors, and how you expect them to evolve over time. Next you look at a reasonable set of financial constraints and goals, and what Winner’s Solution you can reasonably expect to accomplish with that set of constraints. Then you look at the Gap from Point A, where you’re at today, to Point B, where you want to go over the next three years. Next, you look at the ways to resolve those Gaps, and you can then articulate your plan.
Here is the analogy that I like to use. Let’s say that you’re going shopping at the mall. You want to go to Macy’s but there’s no parking in that part of the mall. You walk into a different entrance and you typically look for one of those maps of the mall. Sometimes it has a red dot that says, “You are Here.” The situation analysis is like this map. It is a topographical map of the market, customer, and competitive landscape, and a description of where you fit into that landscape. If you are going to get anywhere, you need to know where you are starting, and where you are going. If you have a plan to go to Macy’s, then you need to know which stores you’ll pass along the way, and the best route to get there.
Another way to look at it is if you’re climbing a mountain or going on a long hike. You need to understand the terrain; the likely obstacles and how much ground you need to cover to reach your goal. You need to plan-out your provisions. How much food and water will you need? What kind of clothing and shelter? That’s the same thing as a strategic plan in business. It’s not a super complicated thing but it does take detailed analysis. We’ll talk about some of the things that make up a really good strategic plan.
As Yogi Berra said, “If you don’t know where you’re going, you’ll end up someplace else.” That’s definitely been the experience of a lot of people that I know.
Translating the Strategy into a Business Plan
Let’s get into the key components of a startup business plan. If you look online for startup business plans, there are a variety of different sources including The US Small Business Administration, Entrepreneur magazine and Forbes magazine. They all have very similar outlines. This tells you a couple of things. The first is that investors are used to getting information in a very consistent way. My recommendation is, even if you’re a highly innovative entrepreneur, save your innovation for your products and services. Do not try to innovate a new business plan outline. This is just going to hurt you. It’s going to be very confusing for potential investors.
Second, although there is a ton of information out there in books and on the web about the components of a startup business plan, there is very little information about what the key content needs to be. There are outlines and content descriptions, but what I’m going to focus on today is what the content consists of, and how you develop that content to make it a killer business plan that is actually fundable, especially by early-stage investors.
A solid strategic planning process provides the INFORMATION you need for a solid startup business plan. You are then ready to take the information up a level. Dealing with Angel Investors and Venture Capitalists is “short attention span theater”. You will not get prospective investors to read your business plan or give you an opportunity to be heard by a larger audience unless they have seen an executive summary, so let’s look at that in-depth.
Purpose of the Executive Summary
Anytime I reach-out to one of my venture capital friends about a startup business investment idea, they ask me two questions, “Are you investing?”, and “Can you send me an Executive Summary?”. An executive summary is just that, a summary. So you write it last. Because it’s at the beginning of a business plan, I think a lot of very new entrepreneurs try to write it first, and it really doesn’t work well. It is a summary. You need to have the experience of going through a strategic business planning process to write a really good executive summary.
The executive summary is really designed to grab potential investor interest. It highlights the overall strengths of your business, explains where you’re at today and where you’re going. It also shows why your business idea will be successful. If you’re developing a startup business that you plan to get funded by either angel investors or venture capitalists, you need to have a business model that has the potential to deliver a 10X return on investment. We’ll talk in detail about that later. That’s what you measure success by. Do you have a startup business that can grow, create value and deliver a return on investment at that level?
The executive summary also demonstrates that you’ve done a thorough market analysis, which is critical. “Thorough” means, not only that its there, but also that you’ve done it with a critical eye. You’re not overly optimistic or overly pessimistic about your business opportunity. You must demonstrate that you have a grounded yet passionate view of your business opportunity.
It also allows you to clearly explains the customer’s pain points, the problem that you’re solving for customers, the unmet need, your unique value proposition and why you have a sustainable competitive advantage with the value proposition that you’re offering.
Key Elements of the Executive Summary
I found two resources about writing executive summaries that are worth checking-out: First Steps to Writing the Executive Summary for your Business Plan in Entrepreneur magazine, and How to Write a Great Business Plan: The Executive Summary in Inc magazine. Both of the articles point out these basic components of an executive summary:
There is the mission statement. This is really a description of your idea. What is your business all about? The mission statement is typically several sentences to a paragraph.
You’ll also include a company description, which is information about your company, when your business was founded, the names and roles or the founders, the key employees, the number of employees and business locations.
There are growth highlights. If you’re pre-revenue and pre-product, there is still an opportunity to talk about growth in terms of the target markets that you have. If you can make most of this information graphical and visual, it will be extremely helpful for your audience. As they say, a picture is worth 1,000 words. If you have a combination of good pictures and graphics, that sometimes makes things a lot easier for investors to understand. If you can explain things as bullet points, then you will make it easier for the reader.
It should also include a brief description of your product and services and the features and benefits. You want to include a summary of your future plans. What are the goals for the business? Where do you want to take it over the next year and three years? If you are planning to raise money, you want to include a funding request.
Finally, it should include financial information about your company’s historical financials and your projections. You should also include any information about your current bank and investors and a cap table if you’re planning on raising equity capital.
The Elevator Pitch
Based on the executive summary, you’ll need to craft an “elevator pitch”. For those of you who aren’t familiar with this term, you’re taking a ride up an elevator that could last thirty seconds to two minutes. In that time, you need to clearly describe what your company does, how you’re going to win in your target market, some of your specific customers and the competitive advantage of your products versus the alternatives in the business. Work on this elevator pitch until you are very comfortable explaining it, and have passion for what you’re explaining, every single time.
The Investor Presentation
Your presentation should include the essential information of what investors need to know in order to make an intelligent decision about investing in your company. They need to understand your idea. They need to understand the problem being solved, your solution to solving that problem and the value of doing that. The value is typically based on how it’s being done today. You need to decide, “This is how I’m going to make money. This is how I’m going to change the world.” They need to understand the market opportunity. How big is the market? What’s the competitive advantage that you have? How crowded is this space? Are there a lot of other competitors going after it? What is your basic product roadmap? What have you accomplished to-date? What are the key milestones over the next six, 12 and 18 months? Why are they significant?
I meet with a lot of startups and entrepreneurs in my business. Many entrepreneurs, especially technical founders, want to spend 90 percent of the time talking about their product, their solution. Don’t do this! Investors want to spend 80 percent of the time talking about the business, and maybe 20 percent of the time talking about your solution. And when they talk about the solution, they want to hear about it in the context of the critical problem that it is solving for real customers. By working on a strategic plan that can translate into a solid business plan, creating an executive summary and an elevator pitch from the executive summary, and making sure you can present an impactful message to investors, you will be set yourself up for success in having a truly fundable startup business.
This is Patrick Henry, CEO of QuestFusion, with The Real Deal…What Matters.