The Perfect PitchPosted on Wednesday, December 1st, 2004 by Doug Bartholomew
The Perfect Pitch
Today’s investors are looking for
something extra before they agree
to back a business. Find out how to
separate your plan from the
pack—and secure financing.
For Jim Poss, founder and CEO of Sea Horse Power Company, the third time was the charm.
While Poss was earning an MBA at Babson College several years ago, he and several colleagues drew up a series of ambitious business plans for a startup company that would provide renewable energy technology. Unfortunately, two different drafts fell on deaf ears. Investors weren’t interested. The problem, he says now with 20-20 hindsight, was that the initial business plans were too ambitious. “There’s a difference between an idea and an opportunity,” Poss explains. “What was reflected in those first two plans was an idea that was out of reach at that juncture.”
On the third go-around, however, Poss harnessed the clean energy concept to a specific product, a solar-powered waste compactor. The result: The plan not only won the $20,000 first prize in Babson College’s Douglas Foundation Graduate Business Plan Competition, it also enabled Poss and his colleagues to grab investors’ attention and launch Sea Horse Power with $250,000. Today, the Somerville, Mass.-based venture has rolled out its solar compactor and is preparing to wow investors with another, far larger quest for financing. Meanwhile, the fledgling firm has been named a finalist in Fortune magazine’s small business contest. “That third business plan took us across the finish line,” Poss says.
Business Plan Basics
So, just what exactly is a business plan and why do you need one? Simply put, a business plan describes and analyzes your business, forecasts its future and lays out its finances, including—and especially—future projections. The idea is to present a clear and compelling picture of the business and its plans for growth and capital spending.
Plan documents come in many sizes, and businesses often produce several versions that may differ in length. Poss, for instance, put together a 20-page plan along with two- and five-page summaries for potential investors who hadn’t the time nor interest to wade through the entire document.
The primary purpose of such a document is to raise money from angels (individual investors), venture capital firms, banks and institutional investors to finance the launch of a business or move an existing company to the next level. Then, too, a solid plan provides additional benefits such as attracting new employees or ensuring that you as a business owner keep your eye on the ball.
In theory, at least, one business plan is pretty much like another. After all, they all contain basically the same kind of information and follow the same guidelines:
• An executive summary that provides a description of the business concept.
• A description of the target market and the competitive advantages of whatever service or product is being touted.
• The all-important financial projections, which include cash flow analysis, a break-even chart and the crucial estimate of investor return. Potential investors and bankers not only want to know exactly what you plan to do with the cash you’re asking them to put up, but how, when and how much they will be repaid.
That said, the vast majority of business plans often don’t get their entrepreneur-authors out of the starting gate, let alone across the finish line. Indeed, the business plan so powerful that it reaches out and grabs the investor or lender by the purse strings is rare, especially among those seeking funding for startups. “It’s very hard for one business plan to differentiate itself from the rest of the pack,” says M.R. Rangaswami, venture capitalist and managing director of the Sand Hill Group in San Francisco. “At the peak of the high-tech bubble, I saw about 150 business plans annually, and I still look at about 50 a year. I’d say only about one in 50 might warrant a personal meeting or a follow-up telephone call.”
There’s no magic formula for coming up with a winning plan, but effective business plans do have certain things in common. “To be truly effective, a business plan has to address all the critical issues,” says Michael Pierce McKeever Sr., author of the book, How to Write a Business Plan (Nolo Press, 2003, Sixth Ed.). “What makes your business plan stand out from the others is not the plan itself, but how well it shows people that you’ve thought through all the things that can happen—rightly or wrongly—to the business.”
“The best business plans are able to present the entrepreneur’s personal objectives, to define the business and to lay out what they plan to accomplish,” adds Jeffrey Babin, entrepreneurial fellow at the University of Pennsylvania’s Weiss Tech House. Wharton, like Babson, offers a $20,000 prize for students who come up with a blue ribbon plan. “They also must present a compelling business idea that somebody wants and is willing to pay for,” he continues. “Just because I like something doesn’t mean there’s a market for it.”
Above all, though, business owners and entrepreneurs should be brief and to the point. “You’re telling a story,” advises Babin. “Sometimes we call it the ‘elevator pitch,’ meaning that you should imagine that you’ve got a few moments with a venture capitalist on an elevator, and you’ve got to tell your story in that time frame.” The point? Tell a very simple story. If it’s so complex that you can’t explain it in a few sentences, Babin says, “No one’s going to want to buy it or invest in it. It’s got to be compelling.”
Learn as You Go
Convincing yourself of a startup’s viability is the first test of any business plan. If through the rigorous exercise of creating a business plan, you discover that there are serious gaps or flaws—competitive, marketing, financial or otherwise—that may tell you something about your idea or your notion for expansion. “A great many business people owe their ultimate success to an earlier decision not to start a business with built-in problems,” McKeever says
If you do discover flaws, however, it doesn’t necessarily mean that your idea has to go down in flames. You should view the plan as a dynamic document that you can continually tweak. When Poss was making the rounds of angel investors, he used the process to his advantage. “When we were going around to raise money, we were learning along the way,” he says. Poss was surprised by the extensive amount of due diligence that the angels had done in researching Sea Horse’s financial projections. “This was for a small company asking for a relatively small amount of money.
“They also asked good questions that were very helpful. For instance, the preliminary investors demanded to know exactly how Sea Horse planned to service its widely dispersed solar compactor units and how exactly the company intended to set up the partnerships that it described in the plan. “I danced around the questions,” Poss admits. By the time he met with the next prospect, however, he’d thoroughly worked out the service and partnership issues and had made sure Sea Horse’s numbers were rock solid.
A Leg Up
Those who already have an existing business and who are seeking capital to expand have an advantage, Babin points out. “You have the ideal scenario,” he says. “This is somebody who is already a proven success, who already has made a personal investment in the business, and who already has customers.
“That’s a great foundation,” Babin adds. “You have a good solid business and you are looking to grow into a new area.” In this case, he says, the owner should use the business plan to show how the money will be used to expand, and how the investor or lender will gain from the investment. “You’re essentially saying, ‘If you invest in me, here’s what you’re going to get out of it. Revenues will increase by this much, and profitability will increase this much, and here’s the return you will get back on your money.’”
The section of a business plan devoted to describing the management of an existing company is the most telling for McKeever. “If you are going to a bank for a loan to expand your business, management is the most important thing because you already have a proven idea,” he says. One tip: It doesn’t hurt to first sit down with your accountant or CPA to do a careful workup of the business’s finances.
“You need to know exactly how the business works financially, so that if a banker or investor asks you what the effect will be of adding a new story or a new product line, you’ll have the answer,” McKeever says. “The bottom line is that if you want money to grow, you need to demonstrate first to yourself that you can make a profit on this added investment. Then you can convince others.”
Even for someone with an existing business that has been pieced together and built from savings and available cash flow, the decision not to over-reach for that big loan—one that could well lead to becoming overextended—can make all the difference.
“One of the main things I tell people starting out is not to grow too quickly,” says entrepreneur Dave Schwartz, founder of the original Rent-A-Wreck in Los Angeles, now a successful franchised business with hundreds of outlets. “Often it’s better to grow slowly, and when you do expand, try to grow with cash flow.”
In fact, Schwartz questions the need for a business plan for the sake of obtaining financing to grow. His reasoning? He’s seen too many small companies go under from the burden of too much debt, combined with too little management of day-to-day operations by an overextended founder. “I see people go under all the time because they get in trouble by borrowing too much money,” Schwartz says. “I tell Rent-A-Wreck franchisees not to overextend themselves.”
The good news? Despite the long odds, a high-impact business plan can serve as just the impetus you need to get started or move up to the big time. In drawing one up, take advantage of all the resources that are available to you. Bookstores are packed with tutorials and the Internet can offer valuable information, as well. Classes through the Small Business Administration or other organizations can further add value. There are investors out there hungry to find an entrepreneur with a great idea and an even better business mind. Why shouldn’t you be one of them?