Sci0039 – What Investors Look For Part 3? Getting Into Details

July 24, 2013 in Financial Skills, JWEF Newsfeed.

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timthumb-2In our last article we wrote about how important it is to investors to see a strong business plan. We spoke about certain key areas that they look for, namely: opportunities, threats, market size and market share, customers, marketing strategy, competitors, suppliers, risk analysis, financial plan, and cash flow. Today, we will look at them in detail, to see where we can improve the business plan to seem appealing to the investors. We recommend using the following guide from Mr Inderjit’s Book, The Art and Science of Entrepreneurship, to reflect over your business idea.

‘Opportunities

In your business plan, you will need to try to address the following issues:

  • Have you identified all the possible opportunities available? Has it been communicated clearly.
  • Have you been realistic in identifying the areas you can participate in, particularly if you are targeting an industry with many existing players? 
  • Are you just doing this for the sake of doing it or is there a real opportunity for a new player like you to tap into and benefit from?
  • What is so unique about you and your plan? (Why are you the best person to take on the challenge?
  • Are you a “me too” entrepreneur? (Are you doing this because all your friends are doing it too?)

The more you differentiate yourself from others, the more convinced others will be of your ability to succeed. The more clearly you have defined the opportunities, the easier it will be for others to see it too.

Threats

Your ability to identify all the possible threats will show how well you understand the industry and how widely you have thought about things, and hence, ensure a better chance of succeeding with your plan. Your ability to convert the threats others may see in your industry into opportunities for your business to tap will further strengthen your credibility as a true entrepreneur.

  • Have you been realistic in identifying the possible obstacles that will impede the execution of your plan, and how do you plan to overcome these obstacles? 
  • Have you been thorough in identifying these threats?


Market Share

One impractical approach some people use when discussing what market share they hope to capture is to come out with an arbitrary percentage.

For example, they will show what the whole universe of market is available, and say, “If I can capture just a small percentage of the market, my business will be so big.” So, market data might show that there are 500 million mobile phone users in the world today. And the company intends to sell software to be used in phones for $1 each. Then they will say, “All I need to do is capture five percent of the market share, which will make my revenue $25 million.” Looks easy? But how do you really do the “all I need to do is capture” part? It is the most difficult part, and while five percent looks like an easy target for a product that sells for only $1, it is never that easy to sell something.

So, I encourage entrepreneurs to avoid using such a simplistic approach to tell investors what market share they intend to capture and what level of business they can generate. The investors have heard it all, so just avoid it and come out with a better analysis of how you intend to do it.

Have a realistic plan.

  • Have you conducted the relevant market surveys and understood the size of the market you want to tackle?
  • How realistic have you been in identifying what proportion of the market you want to gain and are your plans realistic enough to achieve market penetration?
  • Did you consider the fact that your competitors may also be thinking of capturing the same market share?
  • Is there double counting of the market opportunities? This is one important area others will assess – your ability to clearly identify your market and how you plan to address the market.


Customers

It is not an easy task to capture market share by engaging customers. It is important to assume that customers have built some loyalties to their existing suppliers, and it is not an easy task to take the customers away from existing competitors who already have built relationships with their customers. These factors regarding loyalty, trust, and proven track record should not be taken lightly.

  • Who are your potential customers? 
  • Have you identified enough of a pipeline that you can have a better chance of executing and engaging at least a first group of customers early? 
  • Have you understood what the customer needs are and what they will be looking for in you as a supplier? 
  • Have you developed a realistic plan as to how you can engage the customers? 
  • Why would the potential customers engage you and have you identified the success factors for winning customers? 


Marketing Strategy

Many companies fail badly in this area, thus it is important to spend the time to flesh out a good strategy and put in place the best resources to execute the strategy. Without an effective marketing strategy, the best product in the world will lead you nowhere. In fact, more companies fail because of a poor market strategy rather than a poor product strategy. Entrepreneurs tend to underestimate the importance of the marketing role in the whole chain of activities of a business. Often, they assume a good product or service will be able to sell by itself. Most of the time, this is not the case.

I have seen marketing as typically one of the weakest attributes among many entrepreneurs. If the entrepreneur has a weakness in the area of marketing, he or she needs to find someone who can plug this gap in the management team. The investors will definitely make an assessment of whether there is a good marketing person in the team.

  • In line with your plans to engage your potential customers, have you been able to develop a meaningful and exciting marketing strategy? 
  • Is your marketing strategy differentiated enough to allow you to beat your competitors?
  • Do you understand how to build a strong marketing and sales team? 

Competitors

I mentioned the factors of loyalty and an established track record as being difficult to overcome, and customers will have to see a much more compelling reason to switch suppliers than a promise of a better product. While a new start-up may identify a compelling reason why their potential customers should switch suppliers, it should not be assumed that their competitors will remain at a status quo position. The competitors will also be improving themselves, and they too will have secret weapons to win in the market place.

  • Have you understood the industry well, especially who you competitors are or are you operating in a vacuum?
  • Have you identified the success factors of your competitors and therefore understood how you can work around those factors to win customers away from your competitors? 
  • How will you as a new player be able to beat your competitors, who will be after your skin the moment they discover there is a new entrant? 


Suppliers

Suppliers are your partners for success. Identifying the key suppliers who can help you succeed is important.

  • Will the suppliers be willing to support you and do they have confidence in you? 
  • What is your value proposition for the suppliers to want to work with you? 
  • Will your suppliers be willing to bet on your plans? 

Often, suppliers are neglected as an important success factor in many business plans, as well as in many operating businesses. The fact is that suppliers can make a very big difference in how a company executes the business.

For example, sometimes suppliers are willing to give very good payment terms, which will help minimise the company’s cash drain. In other cases, suppliers can help a company with technology that comes with the equipment they provide, which can then help better the execution of the production process.

Suppliers who develop partnership relationships with their customers will also give advance information about new products, equipment, and technologies, which may make a difference in how a company executes its business. For instance, if there is new and much more capable equipment in the pipeline, one may want to wait for the new equipment to be released instead of purchasing older equipment, which may become obsolete sooner than expected. There are many other benefits to be derived from partnering a few key suppliers.

Risk Analysis

There are many types of risks, and every business has some. The key question is whether you have identified the right risks that could affect the success or failure of your company.

  • Have you been thorough and realistic in identifying the risks and also in identifying how you plan to address or divert away the risks? 
  • Have you identified the right contingency plans should things turn out differently from what you had anticipated?
  • Do you have a recovery plan should things start to go terribly wrong?

In almost all cases, companies never follow the original path indicated in the original business plan. Things change, and as reality sets in, many changes need to be made.

Unless the business plan had identified the areas in which things could go wrong and a planned change of the execution takes place if such adverse events did indeed occur, a new company will rarely succeed. All of this should be clearly illustrated in the risk analysis section. Others looking at your plan will also have a feel for the type of risks your business will potentially face. It is useful to align your risk expectations with that of the investors.

Financial Plan

The financial plan measures the lifeline of your project or company. Your ability to prepare a financial plan that can communicate how you will be utilising the incoming funds is important.

  • Have you been able to show a realistic set of financial numbers that tie up with what you have outlined in the qualitative section of your business plan?
  • Have you considered all the nitty-gritty of how the expenses will be made?
  • Is your financial plan realistic compared to the industry norms?

This is one part of your plan in which investors will spend quite a substantial time on. The financial plan basically reflects how successfully you will be when you put the rest of your business plan into operation. It measures the outcome of your plan and therefore gives the investors a feel for how rewarding their investment is going to be. With the financial plan, the investors will do all their rate-of-return analysis and decide how viable an investment in your company will be for them. Remember, they are not putting in their money because they like you or because they are doing charity work – they are in it to make money, and the more they can make, the more excited they will be to invest in your company.

Cash Flow

This is one of the most important parts of your financial plan. Many businesses fail because they failed to plan and execute their cash flows well. The investor will therefore be very interested to assess your ability in controlling your cash flow.

How well will you be utilising your cash and how well you can generate a positive cash flow when your business starts to run will determine the difference between success and failure.

Investors worry a lot about how cash is utilised in the company. It is therefore very important to pay special attention to the cash flow plan.’ - The Art and Science of Entrepreneurship by Mr Inderjit Singh

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