Last week I got a call from a former colleague—a first-time founder building a mobile app. He explained that his prototype was live, and asked for introductions to several of the top venture capital firms and angel investors in the country. I asked how much money he needed, how he planned to spend it, and where the capital would get him. His response? “Um….”
Before deciding whether to raise capital, and deciding which investors to contact, entrepreneurs should complete all three parts of a business plan. First, you need to assess your idea and lay out “what” you’re going to do. Then, you need to develop an informed plan for “how” you’re going to do it. Today, I’ll cover the last part: describing what you’ll “need” to get your business off the ground. If you’d like step-by-step instructions for how to write your own business plan, UpStartBootcamp@Inc also has a popular online course on the subject. Once you have a plan, try our free business plan assessment tool to make sure you haven’t missed anything.
Projections. If your business requires capital, you should run financial projections—estimates of how money will flow in and out of your company over time. That’s true whether you’ll get funding from investments, a loan, savings, or even if you are bootstrapping. The level of detail required on your projections varies. Venture capital firms typically demand a set of three to five year projections for revenue, expenses, and cash flow. But if you are borrowing $10,000 from your aunt for inventory to get your boutique open, you may just need to run numbers showing how many dresses you need to sell in order to pay her back, and when you expect that to happen.
Capital requirements. Projections will give you sense for how much money it will take you to reach critical goals or milestones, like getting a product to market, or reaching profitability. That will let you think about how much money you need now, and how much you’ll need in the future. After working with my former colleague, he can now explain that he’s looking to raise $200,000 to cover his expenses and pay himself a small salary to get his company through the next 12 months, during which time he’ll hire a marketing director, close and activate deals with two mobile phone companies, and reach a monthly revenue rate of $20,000.
Exit strategy. Doting parents aside, most people or organizations that invest in your company aren’t doing so out of the goodness of their hearts. They expect to make a profit. So you need a plan for how and when you’ll turn their initial investment into a larger amount of money that’s liquid, meaning they can take it out of the company and do whatever they want with it. You might expect to issue them dividends, or turn their stock into cash when your company gets acquired or goes public. An e-commerce company might argue that it projects earnings of $5 million after five years, and that similar companies with comparable growth rates have recently been acquired for valuations of 10 times earnings. They should also be prepared to provide a short list of companies likely to buy them, and to explain a rationale.