How Investors Determine If Your Business Is Worth It
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One of the first and most important steps you will take as an aspiring entrepreneur is to develop a solid business plan. A business plan will not necessarily predict the future of your business, but it will serve as a blueprint for the early and middle stages of your business development. It will also serve as a tool to help you attract financing and, potentially, new customers.
If you want your business plan to be even more reliable and even more attractive, you must think like an investor when writing this document. But why is it valuable and what is the best way to do it?
Why think like an investor?
For starters, you’ll get inside the heads of people you may be trying to persuade. For many entrepreneurs, a business plan will work as a presentation document. Understanding how investors think and writing your business plan accordingly can increase your chances of finding a good candidate.
But more than that, thinking like an investor can help you become more objective and focus on the practical financial aspects of your business. Although there are a variety of different investment strategies that investors can follow, almost all investors will be interested in a company’s objective potential performance. If you can adopt this mindset, you’ll be less likely to have your business plan work through your emotional attachments and personal biases.
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The first step to writing your business plan with an investor mindset is to understand what investors’ priorities are. Here are some of the most common focal points of investors reviewing business plans:
- Profitability. Every investor wants to contribute to companies with high potential for profitability. Profitability is never a guarantee, even in a business with a great idea and a reliable target market. Sophisticated investors are less interested in the merits of the idea and more interested in its practicality; what are the costs and how soon will it start making money?
- Scalability. Investors are also generally concerned about scalability. Your business may be home-based, serving a single neighborhood, and it can make a lot of money. But if you don’t have expansion plans, or if you can’t somehow multiply your income, there’s a hard cap on how much the business can earn.
- Risk mitigation. Every business involves risk, but good investors do everything possible to analyze the risks and mitigate them. There will always be a chance of failure, but the closer those chances are to zero, the better.
- Novelty. On some level, investors also appreciate novelty. Active venture capitalists sometimes review dozens of different business plans a week and hear hundreds of ideas each month. They gravitate towards things that stand out.
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The investor prism
How can you take the investor’s objective and use it to reshape your business plan when writing it?
- Research and objective data. For starters, leave your biases and hunches at the door. Focus on research and objective data to back up all your conclusions. If you make a claim in the business plan, you should be prepared to back it up with numbers and quotes. If you cannot find support for your claim, do not file the claim.
- The full picture. Your product may be very sexy, but that doesn’t mean it’s practical. You may have a reasonable scaling plan, but your launch strategy may have fundamental flaws. Investors want to see the full picture; they don’t want a “smoke and mirror” show that obscures dirty details. Do not leave anything to chance.
- Honest thanks. Investors love to see profitable models, but they hate to see dubious or unrealistic numbers. It’s better to honestly acknowledge the risks and limitations than to pretend they don’t exist.
- The long term future. You might have a solid plan for the first year of your business, or even the first five years. But what could this company look like in a decade? The further into the future you plan, the better (as long as you are flexible enough to adapt to changing variables such as changing technology or adaptive consumer preferences).
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Differences between individual investors
Each investor is unique. What makes perfect sense to one investor may stun another, and one investor may prefer to see optimistic scenarios while another prefers to see more pessimistic scenarios. If you are going to make presentations to a specific investor, it pays to get into that specific investor’s mindset; don’t be afraid to make major adjustments and changes to your business plan to better suit your target audience.
Overall, thinking like an investor can help you build a stronger, more detailed business plan. Not only will this be more attractive to investors, but it will also lay the foundation for a stable and more profitable business.