What investors look for in a business plan

By Charles Hopkins Published 04/7/2006 | Business and Finance

If you are seeking investments for your business you need to know what investors look for in a business plan. Among other things the investors want to know the size of the market, the strength of your products or services, your competitive advantage, the track record of your business team, the basic financials etc.

Investors are of different types. At the lower end there are family and friends. In the middle there are a large number of private investors, who are called angel investors. At the higher end, there are scores of venture capitalists working for venture capital firms.

Venture capitalists can be the most demanding, and thorough. They invest other peoples money, so they have to be even more careful about minimizing the risks. They fund only a few thousand proposals a year and are not likely to even look at your application, unless you are introduced to them.

They are very professional in their approach and are unlikely to steal your ideas. They may refuse to fund you because you lack experience. Your plea that you need money to get experience is of little use. In such situations, you have no other option but to fall back upon friends, family, or angel investors.

Venture capitalists look for a tangible product, with a competitive advantage. They are rarely interested in funding a service business though there are exceptions to this.

A reasonable valuation is more likely to get a positive response from a venture capitalist. If you mention a very high valuation they are likely to conclude that you are not realistic. Seek the advice of an accountant or a person in the business to make a demand that is reasonable.

Venture capitalists are interested in proposals for investment of at least 3 million or more. They make sure that the funds are really needed and that their use has been planned in detail. Venture capitalists may find a proposal attractive if the value of a company is projected to grow to approximately 100 times its present value in three to five years.

If several other investors are interested in investing together in a business, it will be more attractive to a venture capitalist. They avoid being the only investor in a business because this reduces the level of risk.

Venture capitalists like to have a clearly defined exit strategy that specifies how they are going to get their money back.

Angel investors consider most of the factors that venture capitalists look at, though they are more likely to invest alone and to consider smaller investments. They tend to specialize in specific types of business, because they understand them well.

Friends and relatives invest money for their own personal reasons. Treat them the same way you would treat any other investor. A start-up business can fail and you dont want to loose your relationships with your family and friends, along with your business.

Private investments are governed by laws and you must take the advice of an attorney before you take any type of investment for your business. This is necessary whether you take funds from friends or family, from an angel investor, or from a venture capitalist. The attorney will ensure that the investment is structured properly.