The more precise you can be in identifying and quantifying expenditures for which investment funds are required, the more confidence you inspire in the investor that you have thought through the requirements of your business and have translated broad business planning objectives into discrete operational initiatives. There are numerous ways in which inconsistencies can creep into a plan, but here are two of the more typical.
Statements to the effect that funds are required for working capital
Sure… working capital will inevitably be required, but be specific (as far as you can) about key initiatives and the funds required to execute them – such as recruitment of sales executives; development of marketing collateral; establishment of US office etc.
Each such initiative will require further detail in the body of the business plan that provides the investor with an understanding of how the associated costs were derived.
Ultimately the investor wants to know that you have a clear plan for utilising the investment funds and that the strategy is appropriate for the business. In short, do you know what you’re doing or are you just looking for a lifeline!
Inconsistencies between the investment funds sought and the business’s financial projections
I’ve lost count of the number of J-curves I’ve seen where funding is sought to underwrite years one and two of cash burn and yet revenue/profit projections suggest a breakeven point reached inside 12 months. So why is funding required for year two
Could it be that the founders don’t believe their own projections
Everyone knows that the only thing certain about an early stage business plan is that the projected numbers will not be achieved – usually worse, sometimes better, but never as predicted. Built-in contradictions, however, should be avoided at all costs. It just doesn’t look professional.
It boils down to being properly prepared… financials matching initiatives, results tracking strategy and conversion assumptions supported by market evidence.
Sounds simple, but I know from personal experience that when you deep dive into the establishment of a new business, stepping away from it to articulate everything and trying to map the future against current realities can be a very annoying distraction.
It’s a good idea to get someone with relevant experience to provide you with a sanity check before you pitch investors – just to make sure your story is tight and that you have set up the proposition to withstand typical investor scrutiny.
Doron Ben-Meir has been an active venture capital manager for the last eight years. He founded Prescient Venture Capital and prior to that was a consulting investment director of Momentum Funds Management. He was a serial entrepreneur over a 12 year period, co-founding five new technology based businesses.
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