Monday, December 3, 2012

What Investors Value

The Capital Cycle - Made with OmniGraffle Pro
Usually I read business plans. Today I write one.

While the specifics of my plan are private for now, my review last week of Kawasaki's and Goetz's processes have me thinking about what investors value.  What parts of my business plan would I value most as an investor?

Here are my top five:

1. Repayment and Profit Mechanics

"What goes in must come out."  How will my investment and experience benefit the company, and when and how will the company return the favor?  Are the pieces in place for the company to take what I put in and make it into more?  Once there are profits, will my equity stake continue to grow or can I take it back out to put elsewhere?  Will there be dividends?  Will there be a liquidity event where I can get money for my shares together with all other investors or by selling them on the open market after an IPO?  If there is no clear path to profit for the investor, why invest?  Other opportunities are sure to offer clear pathways to profit.

2. Risk Mitigation

Are the entrepreneurs aware of the risks and what have they done to mitigate them?  It is often the risks we are unaware of that create the most problems because we do not plan for them.  Are there risks such as tax and healthcare policies that are not business environment friendly, out of their control and mine, and am I willing to accept those risks?

Also, what is the attitude of the entrepreneur toward risk?  Are they going to run the company right to the breaking point before they get a sale or are they planning for cashflow both short and long term?

For companies with burn rates that exceed cashflow, how long before the company can sustain itself through sales?  What are the chances it will take longer than expected to make cashflow exceed expenses?

3. About the Entrepreneur

A car performs based on the kind of fuel in the gas tank.  So does a business.  High octane entrepreneurs make all the difference in execution.  Will a business, like a car, sputter across the finish line or will it roar all the way?  This is something you can get an idea of from the management bios.  The entrepreneur him or herself does not know everything.  Henry Ford did not.  But does he or she know how to pick a good team and lead it to profits?  Likewise, if there is a collision, will the entrepreneur collapse on the tarmac or pick up the pieces, fix the engine, and finish the race?

4. What will it cost?

Will I be the only investor in this project?  If so, is the amount reasonable given my other priorities and the risk it may entail?  Is there any chance I will need to add more capital to make this work and get my original capital back?  Are the likely benefits worth the price of admission?  What are the opportunity costs, especially better deals I may have to pass up to do this one?  What will this investment cost me in time and attention, and will I get a return on my time and attention?

5. Is this opportunity for me?

What factors in this plan fit or do not fit my personality and written rules for investing?  Is this a company I can assist with more than money?  Are there people or processes or contracts I can add that will increase the rate at which I will see a return and am able to invest in the next great opportunity?

Capital is a cycle.  You earn it, you invest it, you receive it back with profits, and you continue to invest as long as there are opportunities that grow your capacity to invest and otherwise give back.

Beyond a good financial fit, will I be proud of this company?  As I help to build its brand, will it build my brand and legacy of success?  What else about this company seems like a good fit for my portfolio and positive ambitions?

Kawasaki and Goetz have been in the shoes of both entrepreneur and investor.  We would do well to get to know both sets of footwear, too, if we are to maximize our investor-entrepreneur relationships and profits, financial and beyond.  Will my plan address my own questions, were I the investor?  As I write, I will keep the perspective of both entrepreneur and investor in mind.

If you would like more information about and resources for writing capital attractive business plans, I suggest the following links:

Business Plan Pro - Professional business plan development software by Palo Alto Software.  There is a new online version for those of us who no longer buy PC's.

The New York Times Pocket MBA: Business Planning: 25 Keys to a Sound Business Plan - Lots of traditional advice in audio format.

The Art of Giving: Where the Soul Meets a Business Plan - Download the free reference guide!

The Social Network Business Plan: 18 Strategies That Will Create Great Wealth - While technically not about business plan writing, this book has great implications for how we write the marketing portion of our business plans.

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