Know Your Investors: Customize Your Business Plans

Thursday January 10, 2013,

5 min Read

The key step in scaling up your venture is to acquire external funding. While newer and more affable avenues of funding are opening up the competition amongst fund seekers are also rising exponentially. Let me be very categorical here, investors whether it’s a bank or a private investment houses like venture capitalists or angel investor are in the business of investing. It has become almost impossible to raise funding just on the idea itself. A lot of factors play before a successful investment deal is made.

Not all ventures qualify for all kinds of investors. Your business plan and financial projections and obviously your implementation process plays an important role in identifying the right kind of investors. If you want to take up a franchise for a coffee shop it does not make any sense to approach venture capitalists. While if you are looking to develop a cloud application you can be assured that knocking at the bank funding is just going to be a huge waste of time. The business of investment is dependent on four factors Capital Required, Return on Investment (ROI), scalability and the risk associated.

So if you are planning to approach an investor, do not take a cookie cutter business plan. Invest in the planning phase, understand the risks and rewards of your business and be ready to answer all sorts of questioning to substantiate your business model. Take help of professional consultants if required. Having someone in the team to guide you through the process helps you save time and get it right the first time.

Let’s see what are the different sources of funding available and how you should customize your business plan according to different investor communities:

Bootstrapping: Gone are the days where you can expect to get funded based on your idea or concept. All startups needs to bootstrap initially. Bootstrapping involves starting up with limited resources ideally raised from your own saving, family and friends. Efficiency of your resource utilization is your key. When you pitch your idea to your close contacts to raise funding your plan must explain the idea, the risks and also the financial plan on how and when you plan to return the funds. Your business model, strategies and your overall business plan should be focused on organic approach and base minimum expenses.

Grants/Govt Loans: In certain extremely specific cases there is an option for a startup to raise money from grants or government aided loans. Government often releases policies to develop socio-economic causes. If you are looking to raise funding from these sources your plan must comply with the policy regulations. It is also imperative that your business plan establishes an adequate socio-economic development for the people in and around the geography you are planning to start.

Bank Loans: Majority of bank loans for businesses are based on collaterals. If you don’t have collateral to offer you should forget this mode of funding. However you can structure your capital requirements with a combination of bank loan and other investment modes based on the business model. Your business plan for a bank loan must substantiate the ability to pay off the loan raised along with its interest.

Angel Investors: Angels invest in your venture in lieu of equity. The capital requirement usually ranges upto 2 mn and they expect a 10 to 20 times return over a period of 5 to 7 years. There are two kinds of angel funding possible. More popular kind is the one where the angel is looking for an exit either by management buy out or dilution in the future round of funding. The other kind which is rare, the angels works as an active partner with you on the venture. The business plan focused towards an angel must have research to substantiate your venture and clear long term financial goals.

Venture Capitalists: Similar to the angels but focused on larger deals. Scalability is the key. The phase of the funding also plays an important role. The expected equity dilution for a seed stage would be much higher than an early stage. VCs usually aim at having a portfolio of ventures and each VC firm has their sweet spot for investment. You must research your investor in details before approaching them and tweak your business plan to ensure it matches what they are looking for. Valuations play an important role in VC funding so your business plan must substantiate the valuations rather than a guess. Your business plan should also visualize your scale up process clearly along with future funding requirements.

Private Equity: PEs are not exactly a startup option. PEs usually do not invest in startups. They usually look for mature businesses looking for an inorganic growth. If you are approaching PEs you must have your previous financials in your business plan along with your growth plans which relates to your previous financials.

Funding is not easy but it is not impossible to get. If you do the right kind of homework and your venture really has the potential, getting funding shouldn’t be a problem.

BPlanExperts can be reached out to for help.

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