Venture Capital and Business Plans

You have a good idea for a start-up business. You've started to put together your management team. You've even convinced some friends and family to invest some money.

It's time to write your business plan. This column will touch on some of the most critical highlights to consider when writing a business plan. It's clearly not a comprehensive "how-to." YourFavoriteBookstore.com has numerous books devoted to the single subject of how to write a business plan. You'll have to turn to those books for the comprehensive detail.

Writing a business plan can seem like an intimidating and daunting task to even skilled executives. It needn't be. You may even find that it's a helpful exercise.

It may be useful because in developing the plan, you're forced to analyze some of the details of your business and its directions. Writing the plan may help you focus on some your weaknesses. As you develop better answers for the business plan, you can also be working towards turning these "better" ideas into reality.

Creating a business plan is not about writing a long and boring academic paper about a business. You shouldn't feel like you're revisiting your most dreaded college class--you know, the one with the big term paper requirement.

A good business plan conveys the exciting prospects for your company. It shouts with the enthusiasm that you feel for your ideas. It's the written outline of where you're taking your business.

Anyway, if I didn't make you feel better about having to do it, you still have to do it. So, get to work.

Confidentiality

One of the issues that my clients always raise is the confidentiality of the business plan. They typically want me to prepare a confidentiality agreement for a potential venture capitalist ("VC") to sign before they give the business plan to the VC.

Clients correctly point out that they have little or no protection if they give the plan to a VC without some kind of confidentiality agreement. The problem is that VCs typically won't sign the agreement.

The VC's perspective is that hundreds or even thousands of business plans may cross their desk in a year. They can't possibly sign all those agreements. They'd be creating problems for themselves if they fund one deal, but received several business plans that were arguably quite similar. The problem with this argument is that they're right.

I say that from the perspective of an attorney who represents those seeking funding, not the VCs. While a VC stealing your ideas or sharing them with a potential competitor is a bad risk to have to take, it's one that you'll have to accept. It's simply one of the rules of the game.

If you push too hard for a confidentiality agreement from a VC, you'll generally find that you'll have a business plan that didn't get read and you'll brand yourself as an amateur who doesn't understand the rules. Neither is a result that you want.

Now, please don't send me e-mails with stories of VCs who signed confidentiality agreements. I've seen them sign them too--occasionally. Still, VCs not signing is the norm.

Standing Out

The simple fact is that your business plan has to compete against more plans than you wish to imagine. You must find ways to make yours stand out from the pack.

Let's start with the executive summary. It must be as perfect as you can make it. Its purpose is to convince your reader to continue reading. If they're not captivated by your executive summary, they won't read the rest of your plan.

It's not an introduction and it's not a preface. It's your entire plan condensed to its most important one to two pages. It must leave your reader feeling that this is interesting and wanting to know the details.

In two pages or less, your market, your product or service, the strength of your management team, a summary of your projected numbers, how much money you're seeking and, most importantly, "why you." Yes, it's a bit much for so little space, but still it's the most important task.

I call it the "why you" section. Others refer to it as your "competitive and sustainable advantage" and simply an explanation of what makes you unique in the marketplace.

Your executive summary must have a great explanation of why you should be funded. You must explain what it is that you do better than anyone else in the marketplace and how you will sustain that advantage. You may have a great and new idea, but you must have a plausible explanation of how you will maintain it.

In the body of the plan, when you are dealing with "why you," you must detail how your advantage will survive reverse engineering, outright copying, and just being overwhelmed by the brute force capabilities of giants that may want to invade your space. If you believe that you have this type of sustainable advantage, you must persuade the VCs.

After the executive summary, many plans I see go into a history of the company followed by its current status and then a few pages about the charted course for the future. Others will jump into the technology or the marketplace. I don't recommend either approach.

Many VCs that I've talked to say that if they get beyond the executive summary, they flip through the plan to the section about the management team. Based on my informal survey, I would suggest that an extended section about the qualifications of the management team should follow the executive summary. You can put the detailed resumes in the back, but you should present your information in the order of interest to the typical VC.

If you tweaked them in the executive summary, you keep them reading by persuading them that your management team is solid, experienced, capable and dedicated. Don't make them flip to the back to learn this. Provide summaries of the qualifications of key members of your team right after the executive summary.

If they're still reading, the next thing they want to know is "why you." Now is the time to provide all of the details of your competitive and sustainable advantage. Explain why the monster companies in similar markets can't just jump in, use your ideas and wipe you out.

The Market

Now, continue to think like an interested potential investor. Let's assume that you got her to continue beyond the executive summary, convinced her that the management team was solid and committed, and that you could sustain your real and identifiable advantage in the marketplace. The next thing that she wants to know is that there is a market.

What is your market? How big is it? Where is it going? Who is your competition? You must do your homework and present solid answers to these questions. When you meet with VCs, you must be prepared to demonstrate solid research on these issues. You're not going to get very far pulling these answers from the sky.

Solid information to go along with your solid ideas is what you want your business plan to present. Use what I've told you to get you started, but now is the time to invest in some good and comprehensive guides to writing business plans.

Writing business plans is more art than science. There is no perfect plan or even a perfect formula for a plan.

Just remember to think like a VC and you may go far with your ideas. Always try to imagine what you would want to know before you invested lots of money with people you didn't know very well. Answer those questions to your own satisfaction and you will discover success in finding funding. Good luck.