Fund Raising Business Proposal

Banks, venture capitalists and investment companies see thousands of business
proposals each year and apart from a referral from a trusted source, the business
proposal is the only basis they have for deciding whether or not to invite an
entrepreneur to their offices for an initial meeting to discuss the proposal. The
same goes for grant bodies for whom these plans are also written. With so
many applications, most simply focus on finding reasons to say no. They reason
that entrepreneurs who know what they are doing will not make fundamental
mistakes.

The first section of this factsheet lays out an outline for any finance raising
proposal, followed by a crib sheet on common errors to avoid, to make sure your
plan gets past the first hurdle. Remember every mistake counts against you.

An ideal proposal is 20-30 pages and most financial analysts prefer the lower
end of this range. A business proposal for fund raising should have four main
sections:

• Executive summary
• Background analysis
• Development plan
• Risk analysis

Executive summary
This should summarise the key features of the proposition outlined in the other
sections. Remember to put in the 'elevator pitch' and 'sell the sizzle'! It should
also contain historic and forecast financial results, a summary of the existing
financial structure and funding required. An ideal executive summary is no more
than 1-3 pages. (Remember the Executive Summary should be written after all
other sections.)

Background analysis
This section should keep to description of past & present as the future is
described in the Development Plan. It is the background to the proposition to
explain in general terms the market situation including its size and the
circumstances leading to the development of the plan. Include market research

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analysis wherever possible. It may also include a technical explanation for a
complex product.

The next six sections must be included as part of the analysis if the business has
already started.


The business: when started, results to date, borrowing history, existing
commitments, current bankers and borrowings.

Markets: description of the existing customers and the sales cycle (i.e.
how are customers brought to a position to buy the company's services?)
If significant, give market penetration.

Product or service: details of product or service on offer, state of product
development.

Management: key personnel, their experience, knowledge of the industry,
age, education and training (if near retirement explain succession plans).

Operations: describe how the business now operates - people, premises,
key equipment, authorisations.

Competition: who may be offering services/products which potential
customers may be buying instead? Any financial backer will put
considerable weight on this section as it will give confidence that the plan
below can be delivered.

Development plan
This section should refer to intended actions and implementation
.
Objectives and strategy: business objectives, timetable and
assumptions, risk factors, longer term plans.

Marketing strategy: sales forecasts should be supported by hard
evidence and research wherever possible, explain how the business will
succeed in the market against competition.

Product/service development strategy: explain how the product/service
will be designed, trailed and brought to market (not necessary for business
without product/service changes).

People strategy: how and when will people be brought in to help achieve
the plan.

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Operational strategy: describe any changes to operations of the
business.

Financial assumptions: a narrative description of the projections below.

Financial projection: projections of at least one year's future
performance on a monthly basis (In many cases further information is
needed for later years) together with supporting assumptions and
evidence (order books, customer enquiries). Projections should include
profit and loss account, monthly cash flow projections, balance sheets and
capital expenditure budget.

Finance required: total funding required based on projections, application
of those funds, repayment assumptions. Purpose of finance, detailing
capital expenditure.

Security available: what assets are available as security (personal assets
as well as business assets) also, what assets have been used as security
elsewhere. Eligibility for the DTI Small Firms Loan Guarantee Scheme
should be stated. In start-ups and those raising risk capital, the personal
financial commitment of the entrepreneurs should be clearly stated.

Management information systems: accounting systems used by the
business, ability to produce regular management accounts.

At this stage an experienced finance adviser should be able to confirm the
viability of the proposed financial structure by reference to:

• The ability to pay interest and capital repayments of all debt
• The security available for all debt
• The capital gearing, i.e. the relationship between equity and debt that is
funding the business, should be reasonable. (Equity is any finance that is
not subject to interest and capital repayments)

The matching of appropriate expenditure with appropriate financing instruments
(If third party equity is sought) the likelihood of reasonable equity returns, an
understanding of the need for a shareholder's agreement and an appropriate exit
opportunity or strategy. If the proposed financial structure is not viable then the
development plan section needs change and adjustment to bring it within normal
parameters.

Risk analysis
Principal risks: most likely areas of risk and ability to cope with these.
What happens in event of sickness or injury to key personnel. What if
competition turns difficult? What is the back up plan?

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Common business plan mistakes to avoid
When writing a business proposal there are some common mistakes you need to
be aware of.

Content mistakes
Failing to relate to a true problem - problems come in many guises - my
computer network keeps crashing; existing treatments for a medical condition
are ineffective; my tax returns are too hard to prepare. Businesses and
consumers will pay good money to make their problems go away. Problems
equal market opportunity, the greater the problem the greater your market
potential if your product alleviates the problem.
A well-written business plan places the solution firmly in the context of the
problem being solved.

Value inflation
Phrases like “unparalleled in the industry;” “unique and limited opportunity;”
or “superb returns with limited capital investment” are nothing but assertions
and hype. Investors will judge these factors for themselves. Lay out the facts
- the problem, your solution, the market size, how you will sell it, and how you
will stay ahead of competitors - and lay off the hype.

Trying to be all things to all people
Many early-stage companies believe that more is better. They explain how
their product can be applied to multiple, very different markets, or they devise
a complex suite of products to bring to a market. Most investors prefer to see
a more focused strategy, especially for very early stage companies. A single,
superior product that solves a troublesome problem in a single, large market
that will be sold through a single, proven distribution strategy will be more
likely to meet their requirements.
That is not to say that additional products, applications, markets, and
distribution channels should be discarded. Instead, they should be used to
enrich and support the highly focused core strategy. You need to hold the
story together with a strong, compelling core thread. Identify that, and let the
rest be supporting characters.

No go-to-market strategy
Business plans that fail to explain the sales, marketing, and distribution
strategy are doomed. The key questions that must be answered are who will
buy it, why, and most importantly, how will you get it to them? You must
explain how you have already generated customer interest, obtained pre-
orders, or better still, made actual sales and describe how you will leverage
this experience through a cost-effective go-to-market strategy.

“We have no competition”
No matter what you may think, you have competitors. This may not be a
direct competitor, in the sense of a company offering an identical solution, it

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may be that a similar product is being offered. Fingers are a substitute for a
spoon. First class mail is a substitute for e-mail. Competitors, simply stated,
consist of everybody pursuing the same customer pounds. To say that you
have no competition is one of the fastest ways you can get your plan thrown
out. Financiers will conclude that you do not have a full understanding of your
market. The “Competition” section of your business plan is your opportunity
to showcase your relative strengths against direct competitors, indirect
competitors, and substitutes. Having competitors is a good thing, it shows the
money men that a real market exists.

Too long
Investors are very busy and do not have the time to read long business plans.
They also favour entrepreneurs who demonstrate the ability to convey the
most important elements of a complex idea with an economy of words. An
ideal executive summary is no more than 1-3 pages. An ideal business plan
is 20-30 pages. Remember, the primary purpose of a fund-raising business
plan is to motivate the investor to pick up the phone and follow through on
your proposal. It is not intended to describe every last detail. Document the
details elsewhere in your operating plan, R&D plan, marketing plan, white
papers, appendix, etc.

Too technical
Business plans, especially those authored by people with scientific
backgrounds, are often packed with too many technical details and scientific
jargon. Initially, investors are interested in your technology only in terms of
how it solves a really big problem that people will pay for, whether it is
significantly better than competing solutions, if it can be protected through
patents or other means and can be implemented on a reasonable budget. All
of these questions can be answered without a highly technical discussion of
how your product works. The details will be reviewed by experts during the
due diligence process. Keep the business plan simple. Document the
technical details in separate white papers.

No risk analysis
Investors are in the business of balancing risks versus rewards. Some of the
first things they want to know are what are the risks inherent in your business
and what has been done to mitigate these risks.
The key risks of entrepreneurial ventures are:

Market risks: Will people actually buy what you have to sell? Will you
need to create a major change in consumer behaviour?

Technology risks: Can you actually deliver what you say you can on
budget and on time?

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Operational risks: What can go wrong in the day-to-day operations of the
company? What can go wrong with manufacturing and customer support?

Management risks: Can you attract and retain the right team? Can your
team actually pull this off? Are you prepared to step aside and let
somebody else take over if necessary?

Legal risks: Is your intellectual property truly protected? Are you
infringing on another company’s patents? If your solution does not work,
can you limit your liability?

This is, of course, just a partial list of risks. Even though you may feel that the
risks are negligible, potential investors will feel otherwise unless you
demonstrate that you have given a lot of thought to what can go wrong and
have taken prudent steps to mitigate these risks.

Poorly organised
Your idea should flow in a nice, organised fashion. Each section should build
logically on the previous section, without requiring the reader to know
something that is presented later in the plan. Although there is no single
“correct” business plan structure, the one already outlined is a very successful
structure.
You may wish to add a showcase of a strong past track record, and describe
key checkpoints for the future. Provide basic facts about your company -
where and when you incorporated, where you are located and brief
biographies of your core team. As stated earlier, there is no “right” structure -
you will need to experiment to find the one that best suits your business.

Financial model mistakes

Forgetting cash
Revenues are not cash. Gross margins are not cash. Profits are not
cash. Only cash is cash. For example, suppose you sell something this
month for £100, and it cost you £60 to make it. But you have to pay your
suppliers within 30 days, while the buyer probably won’t pay you for at
least 60 days. In this case, your revenue for the month was £100, your
profit for the month was £40, and your cash flow for the month was zero.
Your cash flow for the transaction will be negative £60 next month when
you pay your suppliers. Although this example may seem trivial, very
slight changes in the timing difference between cash receipt and
disbursement can bankrupt your business. When you build your financial
model, make sure that your assumptions are realistic so that you raise
sufficient capital.

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Lack of detail
Your financials should be constructed from the bottom-up, and then
validated from the top-down. A bottom-up model starts with details such
as when you expect to make certain sales, or when you expect to hire
specific employees. Top-down validation means that you examine your
overall market potential and compare that to the bottom-up revenue
projections. Round numbers - like one million in R&D expenses in Year 2,
and two million in Year 3 - are a sure sign that you do not have a bottom-
up model.

Unrealistic financials
Only a very small handful of companies achieve £10 million or more in
sales only five years after founding. Projecting much more than that will
not be credible, and will get your business plan dropped faster than almost
anything else. On the other hand, a business with only £1 million in
revenues after five years will be too small to interest serious investors.
Financial forecasts are a litmus test of your understanding of how venture
capitalists think. If you have a realistic basis for projecting millions in Year
5 you are probably a good candidate for venture financing. Otherwise,
you should probably look elsewhere.

Insufficient financial projections
Basic financial projections consist of three fundamental elements: Income
Statements, Balance Sheets, and Cash Flow Statements. All of these
must conform to Generally Accepted Accounting Principles, or GAAP.
Investors generally expect to see five years of projections. Of course,
nobody can see five years into the future. Investors primarily want to see
the thought process you employ to create long-term projections. A good
financial model will also include sensitivity analyses, showing how your
projected results will change if your assumptions turn out to be incorrect.
This allows both you and the investor to identify the assumptions that can
have a material effect on your future performance, so that you can focus
your energies on validating those assumptions. They should also include
benchmark comparisons to other companies in your industry - things like
revenues per employee, gross margin per employee, gross margin as a
percentage of revenues, and various expense ratios (general and
administrative, sales and marketing, research and development and
operations as a percentage of total operating expenses).

Conservative assumptions
Nobody ever believes that assumptions are conservative, even if they truly
are. Develop realistic assumptions that you can support, refrain from
using the words “conservative” or “aggressive” in your plan and leave it at
that.

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Offering a valuation
Many business plans err by stating that their company is worth a certain
amount. How do you know? The value of a company is determined by
the market, by what others are willing to pay and, unless you are in the
business of buying, selling, or investing in companies, you probably don’t
have an acute sense of what the market will bear. If you name a price,
one of two things can happen: (a) your price is too high, and investors will
reject your plan, or (b) your price is too low, and investors will take
advantage of you. Both are bad. Avoid and stick to your story.

Stylistic mistakes
Poor spelling and grammar are killers. If you make silly mistakes in your
business plan, what does that say about how you run your business? Use
your spelling and grammar checkers, get other people to edit the plan, do
whatever it takes to purge embarrassing errors.

Repetition
All too often, a plan covers the same points over and over. A well-written
plan should cover key points only twice - once, briefly, in the executive
summary and again, in greater detail, in the body of the plan.

Appearance matters
At any point in time, an investor has dozens of plans waiting to be read.
Get to the top of the pile by making sure that the cover is attractive, the
binding is professional, the pages are well laid out, and the fonts are large
enough to be easily read. On the other hand, don’t go too far - you don’t
want to give the impression that you are all style and no substance.

Execution mistakes

Waiting until too late
The capital formation process takes a long time. In general, count on 6
months to a year from the time you start writing the plan until the time the
money is in the bank. Don’t put it off. Your management team should be
prepared to invest a lot of time into the plan. If you are too busy building
your product, company, or customers (which is arguably a better use of
your time), consider outsourcing the development of the business plan.

Failing to seek outside review
Make sure that you have at least a few people review your plan before you
send it out - preferably people who understand your market, sales and
distribution strategies, etc. Your plan may look perfect to you and your
team, but that’s probably because you have been staring at it for months.
Good, objective reviews from outsiders with a fresh perspective can save
you from myopia.

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Overtweaking
You could spend countless hours tweaking your plan in the pursuit of
perfection. A lot of this time would be better spent working on your
product, company, and customers. At some point, you need to get the
plan out to a few investors. If the reaction is positive and they want to
move forward, great. If the reaction is negative (assuming that the
investor was a good fit to begin with), then you may have got it wrong.
Get feedback from a few investors and if a general consensus emerges,
go back and refine your plan

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