Guest Post by Bryan Brewer, Business Plans Northwest
There has been talk recently in local startup circles that “you don’t need a business plan to get angel funding.” It may be true that some investors – especially those who are business owners themselves – will back an early stage investment opportunity based solely on a pitch from an entrepreneur.
But don’t be fooled by those anecdotal stories. While a few startups may boast that they didn’t need a formal business plan to get funded, the truth is that they did need to do the thinking that goes into a business plan. Whether or not you reduce your plan to a formal document – and I highly recommend that you do– it’s the thinking that counts.
So what should you be thinking about for your business plan? I have boiled it down to the “Seven M’s” – seven mnemonic words to describe the essentials that every startup needs to cover.
MATCH. You need a good match between the problem your business addresses and the solution you offer. It’s not either one alone that counts; it’s how they match up. One business might be solving a real problem with a solution that doesn’t fit. Another business may have the classic “solution in search of a problem.” Make sure you are addressing a real problem with a viable solution.
MARKET. Angel investors like big and growing markets. A market potential of at least $1 billion is good. Even better is a rapidly growing market, because they are more forgiving. If you miss your mark after launch, you can pivot your business model and go after the steady stream of new customers who continue to enter your niche.
MESSAGE. This refers to both the quality of your marketing message and how you reach your target audience. The simpler the customer value proposition the better. (Hint: make sure you talk to prospective customers to learn why they will buy from you, then tailor your message to that motivation.) Further, how cost-effective is your marketing spend? Low cost of customer acquisition means bigger net profit margins.
MODEL. Your revenue model must be realistic. Will customers actually pay your price? Do you have high enough gross margins? Can your business scale? Do you have the right revenue stream diversity? If necessary, can you pivot your model quickly?
MUSCLE. What are your strengths against competitors? It helps to have at least two major differentiators. Do you have sustainable competitive advantages? Investors want to know what edge you have in the marketplace.
MANAGEMENT. Many say management is the most important factor. But what if you don’t have a stellar team? There’s no excuse for not having a credible and active Board of Advisors. And find ways to demonstrate passion, which can count for a lot.
MONEY. Finally, it’s all about the money. Make sure you can defend the rationale behind your financial projections. Is your valuation realistic? (Note: A great source of information about the current market for term sheets is your corporate attorney, especially one from a firm that sees a lot of angel deals.) Do you anticipate additional rounds? How much cash have you and your co-founders invested in the company?
Writing a business plan does not need to be difficult … once you have done the thinking and have answered these questions.
I will cover these topics and more in my popular NWEN eIQ seminar on Business Plan Writing on Thursday July 14, 2011. Click here for more details. And thanks to the team at Davis Wright Tremaine for their consistent and generous support of the Northwest Entrepreneur Network over the years.