I'm sympathetic to the entrepreneur who imagines the reception venture capitalists will give his business plan. His fantasy is like the one I have about publishers reading my book proposal: the precious document will reach someone who's smart enough to see the brilliance of my idea, intuitive enough to know that I can make the idea live and breathe, and enthusiastic enough to give me a ton of money for it. Preferably up front.
Alas, this is the reality, in the form of financier Daniel Lubin. When his eyes alight upon a fresh business plan, he says, "The first thing I look for is a lie or bad information -- a reason to throw it out."
Lubin is not a bad guy, really. It's just that he has a yard-high stack of business plans on his desk. And since he works at D. H. Blair & Co., a New York City investment banking firm that backs early-stage financings and prides itself on reading each of the 3,000 or so business plans it receives every year, he has to do his share. So those business plans are treated with all the patience you normally lavish on your junk mail.
With that in mind, I asked the bankers at Blair for a business plan that made their hearts sing and their collective wallet unfold. They gave me Pierce Lowrey Jr.'s plan for Imtech. Lowrey's formula, self-taught and refined by his experiences with 10 other successful start-ups in 15 years, emphasizes brevity. "Make it easy to read. They don't have a lot of time," he says.
Amen, say the folks at Blair. Also, remember that for money-raising purposes, a plan isn't supposed to showcase how much you know -- it's meant to get the VC salivating. Lowrey's ultimately won him $4.5 million in a Blair-backed initial public offering, in exchange for 28% of Imtech. Here are the high points of his plan and the low points of others that died in Blair's trash cans.
* Executive summary. The first point in Lowrey's favor: he had a summary. Many plans don't. The summary should describe the most attractive facets you can muster in as few words as possible. Lowrey hit three important buttons in his seven-sentence Statement of Mission. First: "Imtech has been founded to focus on one niche of the Information Output market . . ." A start-up without a proprietary edge is a me-too business that no VC will be interested in.
Next Lowrey mentioned two financial goals: reaching break-even by 18 months and achieving a pretax return of 20%. That told VCs he had a healthy interest in making money and his business had the fat margins they wanted.
Last came Lowrey's greatest strength -- his proven track record. Because VCs seek management ability above all, Lowrey's experience was a head turner. Still, he didn't give his whole rÃ©sumÃ©. He simply said he had started those companies and his last company was sold to NCR Corp. That last little fact was guaranteed to get attention. It proved that Lowrey's previous venture not only was successful but also rang the cash register -- music to a VC's ears.
* Analysis of the competition. Entrepreneurs don't like to admit they have any competition. Zachary Berk, a Blair vice-president, reviewed one plan that claimed its business was unique. Later he found 40 competitors. Investigate your market thoroughly, and present the facts. Use verifiable figures from annual reports, industry associations, and trade groups. If you ignore your competition, you'll look ignorant and discredit the rest of your plan.
Lowrey didn't shrink from the task. Imtech's business is running mailroom, word-processing, in-house-printing, and other information-output areas of large corporations and law practices. Although that was a new field when Lowrey sent out his business plan, Imtech did have three known competitors, all large and all with expansion plans. Nevertheless, the thoroughness of Lowrey's analysis ended up impressing Blair with Lowrey, not with his competitors.
* Information about the management. This was the longest section -- five pages, including an organizational chart. Lowrey's history contained no fluff. For example, he wrote of his first company: "The third computer output microfilm service bureau to open in the U.S., General Micrographics grew to sales of $7 million under Lowrey's management. Now part of a $180-million division of Anacomp."
What should a less experienced company founder do? Present your background in a way that emphasizes your ability to manage a business. That may be tricky for an entrepreneur with technical expertise but no business experience. Such a flaw should be recognized and addressed. Note in the business plan that a strong chief executive with complementary skills will be needed. Lowrey hadn't hired his critical staff members, but he included a detailed description of each position and its function.
* Financials. VCs are sensitive to juiced-up projections. The folks at Blair mention two red flags: When income-statement projections show steady proportional growth on every line, it's clear they're a product of someone's software program, not in-depth analysis. Second, says Lubin, too many business plan financials seem designed solely to work well in a VC's valuation model, which typically keys off of fifth-year projected earnings. "It gets my goat when you see losses in years one through four and then in the fifth year, huge profits," he complains.
Include a list of assumptions that you're using and pertinent footnotes. A recogniz-able accounting firm's name makes VCs feel more confident about the numbers they're looking at.
Though you should make your plan as realistic as you can, few venture capitalists will hold an entrepreneur accountable to the initial business plan. Blair's president, Kenton Wood, says, "Zero companies conform to their projections five years out."
Lowrey is bucking the trend. His projections called for sales of $27 million by the third year. Actual sales: about $25 million. He says, "It amazes me this plan is on target."* * *
Where to get money
Pratt's Guide to Venture Capital Sources 1990 Edition is a pricey but excellent source of information. It lists 800 venture capital firms in North America and begins with nearly 150 pages of guidance for capital seekers, including information on how to write a business plan. Price: $145, plus $5 for shipping. To order, call Venture Economics, in Needham, Mass., at (617) 449-2100.
Business plan no-nos
If the people at D. H. Blair & Co. wrote a recipe for failure for venture capital seekers, here's how it would read:
* Send a product sample that doesn't work. One entrepreneur who developed a "smart" phone manufactured a special batch for Blair's people to use. Within a week most of the phones were broken.
* Send a business plan that is handwritten. Or contains a lot of misspellings and grammatical errors. If you can't be bothered, why should they?
* Send articles about your company with sections blacked out. It won't exactly impress people with your openness.
* Have friends write letters saying how great you are. Besides being meaningless, they're hokey.
* Persevere until it hurts. One fellow camped out in Blair's lobby. He never got his money, although Blair's executives learned lots of new ways to get to their desks.