Venture Financing - Reality versus Rumors with Dick Brown
Q & A: FOR ENTREPRENEURS ONLY
We receive mail from many of our TNN readers. Often, they are seeking funding and they ask incisive questions. I try to respond to them within a day or two. In this month’s column, I selected their questions about Business Plans.
If you have questions, comments or suggestions, send them along. (Contact me at American World (dick@amerwld.com). You’ll get an answer.
I attend a class at Stanford’s Summer Institute for Entrepreneurship. During one of the discussions, the instructor said, “Nobody writes business plans anymore since nobody uses them or ever reads them.” Another student told me he’d heard the same thing. Are business plans obsolete now?
The next time someone says this, ask him/her, "Have you every tried to raise money?" The vast majority will say “no,” immediately disqualifying them as “hands-on experts.” A few may say “yes.” If so, ask them, “What was the first document your potential investors requested?” Guess what they’ll say? That's right. The BP. I sometimes think that the people that start such rumors must be entrepreneurs seeking capital that want to avoid the real work that’s required to prepare a professional BP.
“Inside Investor’s Heads” and BPs
Any competent investor will tell you, “I invest in people. Not ideas, conjecture, inventions, market trends, technology, phases of the moon… or business plans… people!"However, as prudent investors we know that successful entrepreneurs think ahead before launching their ventures. A good BP shows us that careful thought and great efforts have been spent trying to find the best strategy and tactics to succeed. A sloppy, thrown-together plan is one warning of slovenly thinking and a potential disaster. Examining a BP gives us real insight as to the character and maturity of the whole management team. BPs are valuable evaluation tools. We investors continue to insist on a complete, coherent one before committing a dime of our money – sometimes we’ll even work with management to achieve a complete, coherent BP.
Look at it the other way. Do you think we’re going to invest real money in a venture without having confidence in what the management team intends to do?
I have an old friend, Gene Carter (one of the Apple founders) whose favorite expression was
“If you don’t know where you’re goin’. Any road will take you there.”
Even the most hurried, casual investor will at least glance through the following sections of the documents included with most BPs:
| The Executive Summary | Keep it brief, clear and have a little color | ||
| What’s this? | What is the basic business of the venture? | ||
| Resumes of the People | Who are they? What’s their experience/track record? | ||
| Financial Summaries | How much money is required? What’s the ROI? How much will the team pay itself in salaries? | ||
| Risks & Competition | Do these seem researched and realistic? | ||
| Big Brother | Do they have any powerful Clients or Allies? |
Entrepreneurs forget that investors are interested in making money. Largely, the “money people” don’t care about the technology, scientific advancements, industry awards, fame, peer acclaim or any other factor. It’s money they care about.
Yet, not one Executive Summary or BP in a hundred points out the potential financial returns of any venture. This should be prominently featured with as much substantiation as possible, such as pro formas and ROI analysis. (“Our conservative estimates show that $1.00 invested today will be worth $11.35 in less than four years.”) These forecasts can not be left out, or over emphasized!
Several occur over and over. I have seen all of the below multiple times.
- Detailed descriptions of technical “gobble-gook” that only the most dedicated engineers understand.Solution: When describing complicated issues, find a writer that can make them understandable. Edit down to brief “overviews.”
- Text, text and more textSolution: Color, pictures, maps, graphs (It’s “show biz.” Use the colorful tools!)
- Spelling and EnglishSolution: Nothing shows carelessness more that PhDs that won’t use spell checker or simple software that corrects their grammar errors.
- Internal Conflicts. Having what’s stated in one section disagree with another.
- Arithmetic errors in the financial projections!
- Unrealistic financial estimates and/or ratios. (E.g.: Gross margins of 90% etc.)
Each BP, regardless of the sophistication of the principals that prepared it, should have a complete review by outside people, prior to being shown to investors. These “editors” should have extensive business experience and hands-on knowledge of many ventures. My company, American World, has such a service and many clients have said that the modest fee charged saved them from committing some obvious errors or omissions that would have risked acceptance by their targeted investors.
AW News: Dick’s company, American World, has just published his new book: How to Raise Money, Insider Edition. Dick feels he put in “everything you’ll ever need to know to raise money.” It includes extensive directions on how to write a BP, and is available at www.amerwld.com.
If you have questions, comments or suggestions, send them along. (Contact Dick at American World (dick@amerwld.com). You’ll get an answer.
For more information, please visit Dick's TNNWC Bio.
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1 comment:
Dick, this is a very useful and informative article. I will definitely use it as reference when the need arises for someone in my network to raise money.
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