Writing a Business Plan for Investors

If you want to write a business plan for an angel investor or a venture capitalist, you take a different approach from that used when you write a business plan for a bank. Business plans for outside investors like venture capitalists and angel investors, boiled down to their very essence, answer the following five questions that these prospective investors need to answer in order to decide whether they should invest:

Is a firm's product or service feasible?

For example, can the technology really be developed? Is the necessary legal and regulatory approval obtainable? Does the process work in practice? Obviously, if a firm is already operating, this question doesn't need to be asked and answered. But for many types of new ventures--especially technology companies--the question does need to be discussed.

Do customers want the product or service?

This question seems silly, maybe, but potential customers ignore many interesting and seemingly useful products and services.

Ideally, you can show that clients or customers are already buying a product or a close substitute that is inferior to what you're going to offer.

In some situations, you may need to rely on market research or focus group studies to show that people want what you're selling.

Is the basic transaction profitable?

Even if you have a feasible product that people want, you need to prove the item can be sold at a profit. Predictably, the way you answer this question is by providing a business pro forma financial statement that provides enough detail and goes far enough into the future that potential investors can confirm your venture is ultimately profitable.

Is the return on investment adequate?

Even profitable-on-paper businesses don't really work if they require too much capital relative to their profits. New businesses, therefore, must generate acceptable returns on investments.

Different categories of venture investors have different acceptable return thresholds. For example, wealthy individuals, or angel investors, may happily accept 20-25% annual returns, while professional investors, like venture capitalists, may expect at least 35-40% annual returns.)

Note: These returns get compounded annually. Using the example numbers given in the preceding paragraph, for example, an angel investor may want to double his or her money every three years. And a venture investor may want to double his or her money every two years.

One related note: Different sorts of investors often prefer to make different-sized investments in new ventures. An angel investor, for example, might be comfortable investing $25,000 or $50,000 (perhaps in collaboration with several friends). A venture capitalist might not be able to look at investments of less than $1,000,000.

Can the management team operate the business?

Even if you can answer yes to the first four questions, that's not really enough. A new venture will probably fail if the management team lacks the skills to successfully run the business. So the last part of a business plan written for an outside investor needs to describe the management team and why they're likely to succeed at executing a wildly successful business plan.

The ideal answer to this fifth question is, of course, to be able to show through past performance that the management team has successfully run a similar business.

I think you could use these five questions (or edited versions of the five questions) as the highest level headings in a new venture plan. A few paragraphs of well-written answers to the asked business planning question will give you a better business plan than most newbie entrepreneurs write. The only other headings you might want to add to such a new venture plan would be for an introduction and an executive summary.

Tip: A neatly, manually bound new venture plan is often 20-25 pages in length.