Anyone investing in a new venture has four principal concerns:
- Rate of growth
- Return on investment (RoI)
- Degree of risk
Investors are generally betting that the value of their ownership interest in the business will increase over time at a rate greater than another type of investment or of a bank account. They want to know how fast the business is projected to grow, when that growth will take place, and wheat will ensure that the growth actually occurs as predicted.
For this reason, they tend to look for market-driven companies rather than product or technology driven companies, because they are interested in such things as short payback periods for customers.
They expect that predictions will be based on solid evidence in the market place and on thorough knowledge of the target market.
Investors are generally concerned about when and how the principal portion of their investment will be repaid and how much gain on that investment will accrue over the time they are invested in the company.
The answers to these concerns are largely a function of the structure of the investment deal: whether it involves a limited or general partnership, or preferred or common stock, and so forth.
Investors want to understand thoroughly the risks they face in investing in the new venture; principally, they want to know how their original equity will be protected. They expect the entrepreneur to present the potential dangers facing the new venture, along with a plan for mitigating or dealing with them to protect the investors against loss.
Finally, investors want to know how their equity will be protected if the business fails and how the business will protect its assets from seizure by creditors.
Although a business plan is vital to investment decision making, it is not only the piece of information considered. In one survey of 42 venture capitalists, 43% claimed to having invested in a venture in the previous three years without the benefit of a business plan. Only 36% reported that the business plan was “very important” in their evaluation. And perhaps the most revealing statistic of all was that 96% preferred to learn about a potential investment through a referral from someone they trusted.
Furthermore, investors found that the primary flaws in most business plans were overly optimistic financial projections, too much hype, poor explanation of the business model, and no demonstration of customer demand.