By Matthew Cushen
Over 12 years of seed investing I’ve read hundreds, probably thousands, of investment proposals.
But ‘read’ could be a quick skim-and-bin or getting pulled in and absorbed by the story. So what’s the secret of creating a compelling plan and attracting investors?
There is no ‘one size fits all’ answer. Over recent months I and my colleagues at Worth Capital have been poring over submissions to the Start-Up Series we launched with Startups.co.uk, where one company each month will be selected to win a £150,000 equity investment.
It’s fair to say, every business has different strengths to highlight and should be getting across their own tone of voice.
Nothing puts me off more quickly than seeing a business plan template pulled off the web and populated with words but no personality. However, there are some components that should feature in any investment story.
1. The insight
No idea is ever born fully formed, they grow and evolve over time. Often it is the need being addressed that is the constant whilst the product or service morphs and matures.
At Worth Capital we put more faith in a good understanding of the market, the consumer and their needs and desires.
Effective insight will paint an irresistible picture for investors. Normally with qualitative and quantitative points of view. What was your ‘aha’ moment where you saw the opportunity? I doubt this was a market research report full of numbers.
Tell investors the personal experience you had or that was close to you. Human stories, about consumers and their needs for example, create an emotional connection to the market.
Support these with the rational numbers to illustrate market size and growth as well as the part of the market that is addressable and you will pull investors into the opportunity.
It is also essential to address competition, and in its broadest sense. Is the market fragmented or are there significant large dominant players? Are there other start-ups looking at the space? You’d be surprised how often very similar looking propositions are looking for funding within weeks and months of each other.
2. The big idea
If an investor has appreciated the market need, by now they are desperate to hear the answer.
Bring the idea to life as much as you can. Even a rough sketch will say much more than many words.
Describe how the idea addresses the market need, how differentiated it is from the competition, and how protectable it is – patents, trademarks or proprietary technology or process. However, be careful not to publicly publish anything about an idea for which you are subsequently looking to file a patent request.
3. The business model
Not every popular product or service is set up to make money. And there are usually many choices for how to maximise revenues and minimise costs.
Illustrate the planned business model – with some numbers. Describe channels to market, production, logistics, price, promotion, partners etc., and how they add up to a profitable operation.
At seed stage you are unlikely to have it all worked out, so explain the choices you have made and be clear about any assumptions made prior to experimenting with the reality. Any early evidence will add credibility, as will your plans for how to quickly validate outstanding assumptions.
4. Brand and marketing
Particularly for consumer businesses, but also for any other, an investor will want to see your talent to excite your audience and articulate your proposition.
This includes some rationale stuff like a marketing plan – how you will get the message out and how much it will cost.
But be aware of the sub-conscious cues on how well you represent the brand and have been relentless with a compelling brand tone of voice in all communications.
5. Financial projections
I rarely believe the numbers in a start-up’s business plan – it usually needs a few months of trading to put together a credible forecast.
But I look hard at them as I want you to demonstrate you have a good sense of finance, understand your commercial model and are ambitious while not deluded with an unrealistic level of growth.
Any business looking for funding should have a three-year profit and loss account and at least a 12 month cashflow forecast. (Only in highly capital intensive businesses is a balance sheet particularly useful.)
6. The team
Investors will value a team with experience in their chosen market and someone experienced as an entrepreneur growing a start-up. A successful exit is most highly valued but any entrepreneurial battle scars will add credibility.
It’s important to show how a team’s strengths add up to more than the sum of the parts. If there are known gaps in a team, or because there is just one entrepreneur, it adds credibility to point out your weaknesses, with a plan for addressing them.
7. The deal
If you are raising funding in return for equity, you may circulate a proposal without having decided a valuation. If so then make clear it is to be negotiated.
As soon as you have a firm valuation then help the investor and yourself by making it clear what funding you are asking for and at what valuation – i.e. to be clear about what equity you are giving up in return.
In next month’s column we will talk about setting a valuation. In all cases you should state whether you have SEIS/EIS assurance or expect to get it (last month’s column) and any minimum investment level.
Some words about exit, ideally backed up with some industry benchmarks, will give investors comfort that you will look out for opportunities to give them a return on their investment.
Hopefully these points will help you get over the hurdle of starting with a blank sheet of paper. But it is useful to see what others have done – particularly when they have been successful. You can easily Google ‘pitch decks’ for various sites with lots of examples.
However, watch out for heavy tech and US bias – and don’t follow any slavishly (see comment above). You can sign up for crowdfunding sites and consider why is one campaign is funding and another not? Ask experienced investors to share their favourite examples (where they are confident they wouldn’t be breaching confidentiality).
It’s helpful to have several versions of an investment proposal. You might have a one or two-page summary, a PowerPoint deck of a dozen or so slides, a full document and/or maybe a video – so you can target the occasion and the investor in the most appropriate way.
However, regardless of format all but the shortest of summaries should address more of the points above and be dripping with personality and a brand tone of voice that brings the opportunity to life.