The Inc M.B.A.

It's straight-shooter time in the search for investors. No fluff. No dodges.

In January 2000, when Patricia Adams started looking for outside funding, she put together a business plan that was just 15 pages long. The CEO of College Capital, a two-year-old business based in Scottsdale, Ariz., knew what investors were looking for: "a short, quick, fast read explaining what [the business] is and explaining how much money you want," Adams says. What she herself needed was $1 million to move her college-preparation services onto the Internet.

Two months after Adams started sending out her business plan to venture capitalists and angels, the Internet bubble popped, and suddenly investors were guarding their checkbooks more closely. In the end it took Adams a year and a half to find the money. By then, summer 2001, her business plan filled two three-inch binders. "It's a little bit of overkill," Adams admits.

CEO PATRICIA ADAMS: When the market changed, so did her business plan -- drastically.

Indeed, 25 pages is a more typical length for business plans, even now. Still, the business plan that impresses investors today is a very different beast from the one that pulled in the dough two short years ago. These days it's back to basics with a vengeance. So what makes a business plan truly bulletproof at a time when the air seems to be thick with bullets? Here's our take on the "new" fundamentals.

The Executive Summary
Investors are looking for a clear, solid business model that makes a profit or will make one soon. So among other things, you need to describe the business in an understandable fashion.

That was the advice that Donald Spero, director of the Dingman Center for Entrepreneurship, at the University of Maryland at College Park, gave Chesapeake PERL. The first time he read its plan's executive summary, he thought it was too technical -- not an uncommon problem. So Chesapeake president Terry Chase revised the summary, rinsing out the jargon and using much simpler language: "Our manufacturing system changes simple insect larvae into efficient mini-bioreactors that produce recombinant proteins at both high quality and low cost."

"It tells you something about what they do even if you don't understand what a recombinant protein is," says Spero. "Second thing, she explains that this can reduce the time by a lot and the cost by maybe an order of magnitude to produce stuff that sells for between $1,000 and $3,000 per gram. That's a way of saying there are good gross margins in this business."

The Market Analysis
Simply citing a study about total market size from Gartner or Jupiter Media Metrix "isn't very compelling to investors today," says Brad Weirick, partner and chair of emerging technologies at Gibson, Dunn & Crutcher, who works with many West Coast start-ups. "They've seen the same glowing reports for every company they've funded, and yet a lot of investors are having problems with those companies."

Instead, talk about your competitors in detail in your business plan: identify direct, indirect, and even potential competitors and describe their offerings, their percentage of the market, their funding, and their pricing, distribution, and promotion strategies. Most important, the plan should be crystal clear about how your own offering is different and why it gives customers a better value.

Some evidence that customers will buy your product -- and buy it at the price you're charging -- is essential in a business plan today. Take the plan of a former General Motors engineer who went to angel Carl Meyering recently looking for funding to produce a new electronic monitoring device to protect battered spouses. Though the engineer's business was promising, Meyering didn't agree to fund it until the entrepreneur secured a $250,000 order from an Ohio court system.

If start-up founders can't produce full-fledged paying customers, they might do well to provide information on beta customers, who have used a test version of the product. Results from focus groups made up of potential customers can also provide some proof of demand.

Finally, when it comes to sales and distribution, entrepreneurs shouldn't rely on an if-you-build-it-they-will-come model any longer, cautions Kathy Elliott of the Boston angel group Renaissance Partners. Today a business plan should include information about the industry's principal distribution channels and typical sales cycles and a well-thought-out -- if possible, proven -- model for the company's own sales and distribution. Elliott cites the example of one start-up that recently won over Renaissance after switching its plans from hiring an expensive sales force to using already established value-added resellers.

One model that angel and venture capitalist Patty Abramson of Women's Growth Capital Fund and, in Washington, D.C., likes to see is sales and distribution partnerships with larger, more established companies. They bump up a young business's credibility, she says, not just with investors but also with customers.

The Management
The good news about a stalled economy is that it's easier to find strong management talent. The downside is that investors expect to see a highly qualified management team in place.

Still, a start-up that's raising an angel round probably doesn't have the cash for a full slate of vice-presidents. Elliott suggests that entrepreneurs figure out the three or four most important functions for their particular business and fill those first. At a minimum, you need an experienced and proven CEO. One big hint: don't cut corners on the sales-and-marketing side.

Further, your management team doesn't need to be full-time or actually drawing salaries. It's possible to bring in an adviser with a certain expertise to fill a hole on the management team -- say, a chief financial officer -- at least temporarily. If a start-up can't afford to make certain prospective hires -- who are still employed at other jobs -- until after the funding comes in, it's acceptable to submit blind rÉsumÉs in the business plan, says Jeff Gonyo of Wind Point Partners, a private-equity investment firm in Chicago. Spero notes that one company in his incubator has several top managers who are moonlighting from day jobs. Do the investors mind? Not terribly, says Spero. They like the fact that the company's burn rate is only $15,000 a month. And although stock options aren't the carrot that they once were, VCs still want to see that management teams are getting equity as an incentive, Abramson says.

"We used to say that you could raise money if you had an A idea and a B team, or a B idea and an A team," Abramson adds. "Now you need A's for both."

The Financials
As potential investors leaf through your business plan, the biggest questions in their minds will be, How soon does this company get to breakeven? When will it be profitable? Are the numbers real?

"One thing venture capitalists are doing that we didn't do before is really getting under the covers," says Abramson. She looks hard at gross margins, as does Spero. Cash flow is equally important. Gonyo wants to see detailed monthly projections "that demonstrate a well-thought-out way to get to cash-flow break-even level."

The path to profitability has to be both clear and short -- a year to 18 months. As a rule of thumb, angel Cal Simmons, coauthor of Every Business Needs an Angel, advises that entrepreneurs should plan to reach profitability within half as much time as they're raising money to cover: six months if they're raising a year's worth of funding, for example. Company founders can no longer count on another round of financing to get to breakeven, as they once did. At the same time, with valuations scraping the floor, raising too much money may mean giving away the store.

Savvy entrepreneurs will also want to include the slowing economy in their assumptions. Sales cycles, especially when selling to large companies, have always run longer than entrepreneurs assume, says Abramson, and they're running even longer now. Pricing is tricky. Some investors say they don't like to see prices at or above industry norms. On the other hand, Spero warns against trying to compete on price, even though that route is tempting for a start-up. "A business that is forced to compete on price is a commodity business, and commodity businesses usually don't do well in a downturn, and don't do well as venture investments," he says.

One thing hasn't changed since the boom: investors still want to cash out in five to seven years. IPOs are out and acquisitions are in. Investors like to see potential acquirers named in the business plan because it shows knowledge of the market.

In short, today's investors are looking for experience and profitability, with an emphasis on profitability. Those are exactly the same things that investors were looking for five years ago, before dot-com mania changed the rules. But now, because so many angels and venture funds have lost serious money in the past 18 months, the basics count more than ever.

Emily Barker is a senior staff writer at Inc.

Hands On

And What Can I Do for You Today? In a business in which simply selling boxes is the norm, Digital Photo Imaging Inc. (DPI) distinguishes itself by offering ridiculous levels of service. Director of sales Mark Oster says things like, "We'll stand on our heads and wiggle our ears for our clients," which makes him sound like a Crazy Eddie commercial. But he's the genuine article: the digital-imaging-system company sends a support person along with equipment rentals, offers unlimited phone support, and provides same-day swap-outs for misbehaving cameras. Purchase premium service, and DPI will send a technician to visit you two to three times a year. Those visits also serve as what Oster calls "warm sales calls," giving DPI a chance to sell add-on products. The approach seems to work: seven-year-old DPI had sales last year of about $3.8 million and has recently more than doubled its staff. --Peter Krass

The Whole New Business Catalog

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