Raising Funds: No Plan Required? Think Again

“They don’t require me to have a plan.” I hear it more and more. It seems that the new thing is not to have a plan. You can certainly have a business without a plan. You can make a pitch to potential investors (those who are experienced or those who are newbies) without a plan. However, if you are serious about succeeding, then you must have a plan. Whether you have a formal document with all the i’s dotted and the t’s crossed or not, the importance of formulating your plan from strategy, to the analysis of competition, to the calculation of the financial information (how much you need and when, as well as how much you plan to make and when) cannot be overlooked.

Perspective on Planning

In light of the Wall Street mayhem of 2008, banking bailouts, and the Madoff Ponzi scheme, investors at all levels should (yes should) be getting back to basics, particularly if they were among those who previously abandoned them. They need to be asking for content: facts and forecasts supported by documentation and assumptions in plans that are backed by more than smoke and mirrors and dog-and-pony shows.

“I believe” isn’t enough. “We think” doesn’t justify a revenue projection. The ability to develop a sound plan and articulate a business model that is capable of making money requires businesses to answer the tough questions. First, you must know those questions are recognized and that the business has the expertise and experience—or the realization that they need to acquire them—to get the answers and make things happen.

If you want to gamble, buy a lottery ticket or go to Vegas and play blackjack. You can risk your money on the roll of the dice or the turn of a card. Business investing should have better odds than a Vegas long shot.

Calculated Risks and Projected Rewards

Investors like to know whom they are doing business with. They also like to know what you know and what you don’t know about business (as well as the product/technology) you’re developing. They want to know how their money is going to be used and, even more importantly, when the money will begin coming back and how much will they have gained in value of stock, earnings, and/or interest on the investment. They want to know the risks and the rewards of the venture. The business plan is the mechanism that provides the framework for developing this information for the organization. You may not be asked for the actual document by a potential funder but you will need the answers the business planning process provides.

The business plan also serves as a central document in more formal (i.e., regulatorily compliant) fundraising efforts. When you are engaged in raising funds across multiple states and are subject to federal and state securities regulations, the business plan and its financial statement projections are included in the disclosure documents as the minimum level of information. The more complex securities offerings go beyond the basic business plan to more robust and detailed documentation of the business’ expectation, and this evolves into a private placement memorandum. The document serves as the cornerstone for the risk assessment and for communicating management and founder perspectives on the potential the company has the strategy for pursuing the opportunities, and how those opportunities will be monetized by the company and for the investors.

A Business Plan Communicates the Answers to Key Questions

The business plan may not be required reading for some investors, but they do (or should) expect the business to have a plan and to be able to answer these critical questions:

  • What is your product/service/technology?
  • What market/customer need, desire, or demand does it meet?
  • What size is that market?
  • Is the customer willing to purchase a product to fill that need?
    • If so, at what price?
  • Who will you be competing against?
  • What will be your competitive advantage?
  • How much money do you need to do this?
  • When will you be profitable?
  • How will investors make money?
    • What is the exit strategy?

Do You Need a Plan?

So you’ve heard you don’t need a plan: Not true! Successful businesses have plans. They have answers to the critical questions. They may not be handing the plan out to every person they talk to about investing, but the plan is undoubtedly embedded somewhere in the information related to the business and any investment offering being made. A well-run, successful business is never without a plan; it may not always be a formal plan, but a plan exists somewhere, even if it is only in the minds of one or two key people (then pray hard nothing happens to those people)! If a business plans to raise funds from savvy investors, then expect to be formal with your plan. Those investors and your advisors (securities attorneys and others) and regulations will require you to put information into the relevant documents related to your securities offerings. More importantly, you need a cohesive operational and financial plan that keeps you and your team on track and focused on the vision you have for your organization. If you don’t have a plan, it is all too easy to get distracted by opportunities that are attractive and possibly lucrative, but that ultimately just get in the way of your success. Get a plan and get on track for results.

Copyright © 2009 F.O.C.U.S. Resource, Inc.

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