When writing your business proposal for investors there are many things to consider. No matter what, it absolutely has to be rooted in reality.
Yes, there may be huge potential for your idea. You have to walk the fine line between showing full potential and being realistic.
You want to give your investors a full picture without scaring them away by including lofty assumptions. Investors are often quick to make a judgement on a business plan based solely on the projections they see. To ensure this doesn’t happen, there are a few points you should focus on.
When writing a business proposal for investors, I suggest honing in on three key errors that people often make:
#1. Avoid HUGE numbers that assume majority market share quickly. This can be a red flag as the chances of any business capturing majority market share upon launch are low. It also may indicate to investors you haven’t done enough research on your micro and macro industry.
#2. Steer clear of flat-line financials that are almost the same year over year. Investors want to see growth and believe they’ll receive a solid return on their investment over time.
#3. Don’t have multiple years of declining revenue or profits. Presenting a business plan that doesn’t illustrate a steady increase in revenue or profits isn’t going to instill confidence in your potential investors.
To avoid these mistakes, here are my top recommendations to help ensure your business proposal is well-received by investors.
Choose the Right Data and Language
Keeping your data in the sweet spot so you can show you have a smart financial plan is one of the more challenging things you’ll face when you prepare a business proposal for investors.
I recommend making use of hockey stick graphs that show lower revenues in the early years and higher revenues in later years. As long as the majority of the years show healthy and positive cash flow, including one year of negative cash flow is okay. Particularly in a startup scenario, recording a loss in the first year is fairly common, so don’t be concerned if this is what your data illustrates.
One of the best things you can do with your business proposal for investors is pack it full of words, phrases, and data that will create the impression you want. A few examples include:
- The projections included in this business plan are “conservative”
- I/we project breakeven to occur when we achieve xx number of sales / acquire xx number of customers
- Our focus in the first 3 years is to grow healthy profit margins as a priority over simply growing revenues
Essentially, your phrases should reflect that you are projecting to grow your business strategically, that you have a clear understanding of the revenues needed to cover your costs, and that you are focused on being profitable.
Meanwhile, including certain red flag phrases in your business plan can scare investors away. Some red flag phrases include:
I/We will go “viral”
There are very few cases where aiming for going ”viral” is a good (or even reasonably attainable) thing. Many great companies have failed in their attempts at virality. After putting mounds of cash into a marketing campaign or a minimal viable product (MVP) in hopes of achieving a viral outcome, countless businesses simply run out of cash before ever achieving the viral goal. Investors are watchful for these money-pit-business types, and some will end discussions immediately if an entrepreneur insists that the top priority is to go viral.
I/We don’t know our valuation
This is a tricky problem, one that every entrepreneur will run into when looking for investor funding. Valuation, or what your company is worth today, is a challenging thing to determine as a startup or pre-revenue business. However, there are methods to use for coming to a fair valuation for your company. This valuation will then determine how much equity you should give away, and how much cash you can reasonably ask for from an investor. If you are not sure about getting to a clear valuation, consult with a business plan professional for personal help.
I/We will get xx% of the market
Capturing a percent of any market is a great goal, but it is an alarming thing to announce to an investor – especially at the pre-seed, seed, or series A rounds of funding. (Not sure what stage of funding you are in now? Check out this post!) It can show an investor that you are ambitious, but that you may lack a clear strategy for customer acquisition. Targeting a percentage of the market is not the same as having a clear plan to capture that percentage. Avoid focusing on “getting 1% of the market” and instead share your plans for how many customers you will get from each of your marketing initiatives.
Final Advice: Let Your Research Tell Your Story
The first thing to consider is whether your numbers are smart — meaning your numbers tell the story you want without raising red flags to investors.
Investors are used to seeing big numbers so those alone aren’t going to scare them, but your numbers need to be backed up with data. Investors want to see the research that supports those big numbers.
Big goals and numbers are fine, as long as they are rooted in logic and reason, and you have the facts to back them up. A great way to illustrate this is to include an example of a growth curve experienced by another company as your baseline.
Showing that your coffee shop will mirror some elements of the first year the Starbucks model was operational as a franchise, for instance, can help your investor see where you are going with scale in your assumptions.
Bottom line? Don’t skimp on your research.
The second mistake you want to avoid is thinking you can leave out information about your competition. Showing you’ve completed extensive competitive research shows your business proposal for investors is based on reality and you are in tune with the competition in your industry.
If you find yourself in a position where there doesn’t seem to be much direct competition, then you can include indirect competitors. Choose companies of a similar size who are filling a need in the marketplace in a different way.
Most importantly, don’t badmouth your competition. They’re already in business so they must be doing something right!
Writing a compelling business proposal for investors is all about including the right information, so with some research and a thoughtful plan, your investors will be able to see the merits of why they should choose you to invest in.
How about a little more help:
Tip #2 touches on your conversation about competition. To know how to correctly discuss competition in your business, consider this free bonus download.