Something that almost all entrepreneurs need to deal with, when embarking on a new venture or when expanding, is raising funds.
When you have a clear vision of where you want to take your company, your financing strategy will go along with your company growth story.
A good strategy can accompany you for a long time and save you significant time and money in the long run. Potentially, you can also adapt your strategy to the limits imposed by the market and target specific financing opportunities with the right business model.
Financing requires having a plan in place to prove a possible return on investment, communicating effectively with investors before and after the investment.
When planning for your business, the typical business plan includes the following sections. Something that many forget, is to link all decisions taken when writing the business plan, to the financial plan, and have a structured process that can help you both validate your business model, and monitor progress.
You can also produce two versions of the business plan, one which can serve as a sales document, and one which you can use internally to monitor progress and write notes.
Power point or similar programmes provide a great tool to create a beautiful branded business plan, which fits the computer screen, and allows to quickly jump from one section to another, as well as to hide internal pages. Remember that most people nowadays will not print out your business plan, but they will view it onscreen. Also remember to send the document externally only in pdf version!
Most viewers may only read your Executive Summary, so make sure that it’s engaging.
The Company Overview can be an introduction to your business and history, but it’s also a great exercise to assess what your team capabilities are, your achievements and resources so far, and to set the general vision of the company.
The Market Opportunity is useful to have as a separate chapter when the business plan is about a new company or product, and go deep into the problem, solution and market momentum.
Product & Service Offering illustrate your product features, development and pipeline.
In the Market Overview it’s useful to analyse wider market trends and then focus on the specific markets targeted, calculate the size of the target markets, which can be customer groups or regions, as well as consider the competition you are facing.
Once you have selected the target customers, setting the Strategy includes the sales and marketing strategy, the metrics to monitor, the retention and growth strategy.
An analysis of Operations involves a deeper analysis of the business model, internal processes, staff, and contracts.
All of this information then flows into the financial model, and the Financial Analysis helps display key findings and analysing key data.
Now that your growth story is complete, the Financing Strategy will illustrate the suitable financing possibilities to pursue and summarise key information for investors.
However, there are many additional analysis that are very helpful in planning your business and in targeting key areas where your plan is weaker. These are:
- A Gap Analysis for internal project tracking and decision making
- The Analysis of new company incorporation and shareholders’ issues
- The Validation process
- A Pricing and Revenue model analysis
- A Detailed competitors’ analysis and USP
- The Go-to-Market and Expansion Strategy
- Goal-setting and Risk management
- A KPIs analysis and metrics to track
- A Scenario analysis
- The company valuation
- Investment highlights
- A strategy to approach investors and track progress
- A value maximization strategy for later stage businesses
- An analysis of impact specifically for impact investments
- The investment process planning
- And Strategic investments
The reason why it is important to know where your company is going and which choices are available to you, is that different strategies create different valuations, and very different financing possibilities. Some early-stage investors, for example, tend to invest only in potential unicorns.
Also, a start-up or small business investment, to some degree, comes from personal interest and experience, so many are unlikely to invest in sectors that they are not familiar with, unless the business can generate a short-term return and provide synergies.
A good story is important to get the attention, but it also needs to hold in terms of numbers. Demonstrating that your assumptions are realistic with data will help you gain trust.
There are various document options when approaching investors, which can change depending on your stage and the type of investor you are approaching. Many investors have specific requirements regarding what type of information they want.
Many will not get to read your business plan without previous knowledge of your business. That’s why an elevator pitch in an email, together with a pitch deck, executive summary or investment teaser are used to arouse interest and tell a story.
All of these documents can have different types of content, length, graphics, and uses for early-stage stage and growth-stage businesses.
Before investing, especially at more advanced stages, investors may want to look at the financial plan you prepared in excel, and during negotiations (or sometimes earlier) they may ask for an estimate valuation or an independent valuation, especially for larger businesses.
Your ideal financing strategy is closely connected to your milestones.
This is an example of milestones for a startup, they do not represent how funding rounds take place in all situations. This depends on a variety of factors.
It‘s also possible to have multiple smaller seed rounds, as it‘s happening now in the market, and larger rounds once sufficient revenue is generated.
As you give away shares at different rounds, naturally your shares and mostly those of early-stage investors, get diluted.
Depending on your stage, different financing sources will be available, but there are many more factors that determine what kind of funding is available to your company.
These options are also not available under the same conditions in all locations, and actually vary greatly from country to country depending on liquidity, knowledge of startup investments and the economy. On top of milestones and stage, the main factors affecting the level and funding available are: Sector, Location, Market trends, Competition, Strategy, Timing and Investor role.
The size of the funding rounds we‘ve seen before might be typical for a platform. Sector determines the funding amount needed for each expansion or for product development: for example, a hardware startup easily needs millions before entering the market.
Location is fundamental. The early-stage financing market, including grants, determines the number of companies that will be funded, the sectors, and the stakes given away, and ultimately determines the success of many startups. The sophistication of investors also helps in the way funding contracts are structured and also the exit possibilities. Investors‘ rights and protection, which are not guaranteed everywhere, as well as transaction costs, tax breaks for investors and of course the business risks connected to the location have a strong effect on investment flows. You, as the owner, can also decide where your company will be based to take advantage of this.
Market trends also change financing flows. Funding rounds requirements, specialisation of VCs and other financiers on earlier or later stage companies, the life cycle of sectors from inception to maturity change the size and characteristics of funding rounds.
Do not underestimate competition: if you want to compete with well-funded companies, you need a somehow comparable level of funding, or a fantastic competitive advantage that money cannot acquire.
Your strategy is of course relevant too: how big do you want to grow, how fast and in which direction you want to expand determines how much money you will need.
Timing refers to how you structure your different financing rounds and your timely preparation. You can choose bigger and more rare funding rounds, or smaller rounds, when you have the possibility to choose. Raising funds when you have no money left, in addition, may force you to accept the first offer on the table at unfavourable financing conditions.
The investor role affects your financing strategy. They might help you grow and influence future financing rounds, or push for a faster growth that would lead you to adjust your strategy.
The development of technology is uncertain, new industries can be created by the market leaders, the commitment and implementation skills of the team are difficult to foresee, much of the investment decision comes down to negotiations. Considering all this, why bother looking into the numbers and planning in detail?
All of these factors that form part of a company’s potential can be measured, not precisely, but they are observable.
Projections can help in a variety of strategic decision, in finding investments or selecting the right investments.
The process of valuing the company, for example, gives you fundamental information about your company’s future, when to plan fundraising rounds, and how to present return possibilities to investors. By understanding your financial projections, you can choose a suitable financing strategy and plan the timing for fundraisings where possible. Understanding that your value is a function of future profit, growth and risk (for you or your future acquirer) can shift your attention towards validating future strategies and potentials markets, and towards reducing risks, instead of focusing only on what has been achieved so far, or on how good your idea is: it creates more realistic expectations and leads to fairer negotiations on both sides.
Preparing your financials, first, helps you have a more structured approach to your company, measure your ideas and progress as you develop your product. New ideas can be translated into numbers to measure their viability or to understand how to adjust new ideas to make them profitable or valuable to future buyers.
Your strategy is also relevant to your exit strategy, as you can choose whether you want to focus on maximising profits, on an early exit. Understanding what brings value according to your chosen strategy helps you focus on the right factors from early on, instead of getting off track. In fact, some markets and some expansion decisions carry some risk that may deter some investors, so an option that might look positive in the short-term could potentially be detrimental to the long-term strategy.
If you are ever planning to sell the company, you can prepare yourself in advance by reducing your risks, simplifying your structure and therefore maximising the company’s value over time. In this instance you can analyse your competitive landscape by determining the timing at which it is worth selling and by understanding how your valuation changes with time.
You can also understand your competitors better by assessing whether they are building value with branding, users, technology or other processes, and by observing their fundraisings or potential exit strategy. Then you can compare your USPs and measure whether what your competitors are doing affects your future strategy or exit potential.
Identifying suitable investors also means figuring out what type of investors can recognise the value that you see in your company. If you understand your financial strategy and landscape you can understand whether a rejection depends on your business‘s low potential, whether it‘s just too early for receiving funding, whether it’s not the right investor for you or whether it just depends on how you sold yourself. This is important to understand, as it’s typical for founders to overestimate their potential without even considering the need for investors to achieve a positive return, and blaming others for not understanding this potential. It is also typical for others to get demotivated by rejections when they might be simply targeting investors not suitable for the company.
Therefore, securing funds not only depends on showing how amazing your product is, but also on turning your company into a great investment.
GAP ANALYSIS & PERFORMANCE TRACKING
When creating a business plan, you can choose to create a document for internal use, or one for sales purposes to send to investors. You can also choose both options by having some extra internal pages that you can hide when sending the document externally.
Because most entrepreneurs create business plans for investors, it’s very easy to compile the document and then never use it again. Instead, especially when many decisions are still outstanding, the business plan helps entrepreneurs keep track of progress.
Many business plans are also confusing, describing a business goals or traction as achieved, when it’s often only planned. It’s easy here for the reader to be confused about what has been achieved and what is still only wishful thinking. On the other hard, may entrepreneurs forget to write about all the steps and achievements that they have already taken and achieved, which is arguably one of the most important pieces of information to communicate.
Creating a customised gap analysis for your business plan solves this problem. Whereas the detailed operational plan may be uninteresting for an external reader, it is very important to you. So while writing a convincing business proposition, you can add a gap analysis at the end, together with a list of activities, to keep track of how much you have completed so far, and how much is still outstanding.
Here you can list your initial resources and situation, and compare them to your goals, you can list missing information or open questions or decisions, that you can get back to later. You can also list the key information in every chapter when you have longer or information-rich documents, which helps you write an executive summary at the end.
I recommend doing this for every chapter of the business plan, so that in the end, you will have an operational plan divided by subject. This is something that you can extract as a separate document and use in your day-to-day activities.
Additionally, business plans may have to be reused for new business partners or investors fairly often for early-stage businesses. Having an operational plan linked to your business plan, and keeping it up to date, makes it a lot quicker to update only the relevant sections of the document when needed.
Every chapter also provides important financial information. Creating a realistic financial plan is a step-by-step process, and every section or function of your company (Company Overview, Validation, Product, Market, Strategy, Operations, Financial & Investment Highlights) will have specific goals. In order to reach those goals, there are expenses, which can take place regularly or as a one-off investment: keeping this in mind when planning helps ensures that no important expense is forgotten, and that it is linked to a specific start date, in line with your operational plan. Doing this exercise helps prioritise budgets and calculate more precise cash flows.