Can You Answer These 3 Questions?

Here are 3 big questions you must answer in your business plan:

1. How much money do you need?

Do not just throw out a random number. Instead, use specific dollar amounts, and prepare to operate your business in different ways depending on how much capital you raise. Many venture capitalists ask what you would do with less money than you ask for. Prepare to answer this question by prioritizing what is crucial for your business to run, and what can be dispensed with.

Make the argument for your capital needs in your Financial Plan using base assumptions that are rooted in reality. And by “reality” we mean the deep research you will conduct for your Company Analysis, your target market (Customer Analysis), the trends and best practices of your industry (Industry Analysis), and your Competitive Analysis.

2. How much is your company worth?

This is called Valuation. There are two kinds of valuation: pre-money, or how much your company is worth without substantial funding; and post-money, or value of the company with funding.

Nowhere in your business plan will you specifically state how much your company is worth – but you will drop many hints throughout. Those hints will take such forms as:

A) Hard data pertaining to market size, needs, and growth rates;
B) Barriers to entry you have set up against the competition, i.e., aspects of your business that make you the only company that can handle the targeted customer need; and
C) The subjective but powerful proofs of how solid your management team is.

The best way to answer the question “What is the valuation of your company?” is to explain that you will let the investment market decide that figure. That is, you must approach many VCs at the same time to create demand for your company, which increases its value.

3. What is your exit strategy?

An exit is a liquidation event such as an IPO or buyout by another company. That is, investors usually get their return on investment when a company goes public or is acquired.

You cannot predict when such an event will occur. What you do have control over is how you grow the company. Know your company inside and out, and be prepared for any eventuality. You can demonstrate this throughout your entire business plan.

Do, however, have an understanding of the competition and the industry as a whole. That way you can describe to investors which companies may or may not be likely to purchase your company, once it has reached certain operational milestones. These milestones will speak for themselves in your Operations Plan and Financial Plan.