How is the business plan used by potential investors, and what are the four (4) anchors they are attempting to validate?
Most of the investors use the business plan as the first step to decide if the project is actually something they can add value to and if it’s actually a viable one. This also helps them decide if they actually want to invest in the project and jump on board (Mason & Stark, 2004). Most of the investors won’t invest or won’t get in the project if they feel that they can’t add much value to it even if the project is exceptional. So, they use that to direct those entrepreneurs to someone else in their network who would be of help to them.
Investors also use the business plan to analyze the business and their team dynamics. The work ethics and commitment of the team is also displayed by the business plan which they look at. Further, how hard they have worked to give it a shape, customization aspect and all those things give an idea of how serious the people are and if they’re manageable.
Four anchors that the potential investors are attempting to validate would be as follows:
They add value or create one for the end users: The customers in today’s economy aren’t dedicated to a certain company or product if they don’t get the value they desire. Thus, as an entrepreneur, it’s significant to ensure that the value that you’re offering through the product or service is clearly conveyed to the end customer (Teece, 2010). For example, Tyro City provides subject-based notes for students of high school. Thus, the platform provides a solution to the need of taking full notes in a classroom instead of grabbing what’s being taught or even in the situations when you’re not able to make it to the college.
They do so by solving a significant problem for which the end users are willing to pay a premium charge: There’s a common example used in the business world of you being stuck in a desert with no water and days away from crossing it. It’s extremely hot, and you’re sweating a lot, someone offered water to you but at a charge, how much are you willing to pay for it? That bottle of water is your life saver and thus you would be willing to pay a premium price for it. Similarly, Tootle, Sarathi and other such companies have emerged to provide a ridesharing, taxi platform for the users to solve the problem of overcrowded public vehicles. These modes even though are priced a bit high, people still are willing to pay the premium.
They have a robust market, margin, and money making traits: Consider that you have a very innovative product that no one has even thought of. It is something everyone needs at a cost, your market study proves everyone is willing to buy. There is a robust market. And, a decent margin gaven that you can sell it for four times more than your expense for a product. With maximum sales, it definitely holds money-making traits. Aren’t you willing to go forward with this type of business? It looks into both SWOT and PESTLE analysis for the business given clear idea of what the goods and bad are that need to be stressed, improved and as such.
The founder(s) and management team are a good fit at that given time in the market along with it having a good risk-reward balance: No matter how good the idea or opportunity is, if you don’t have a right mindset with the right team, the idea or opportunity will generate no huge impact. You need the perfect blend of skills and command within the team. It is also equally necessary to have a product or service that is the need of the market or be able to generate one. Right product at a wrong time calls for a lot of struggle and need for surviving admits a lot of challenges in the market when the time for it might come. Further, once both those factors are considered, the risk-reward balance is also looked into in this anchor to see this factor (Brinckmann, Grichnik & Kapsa, 2010).
Thus, the above listed four anchors are often looked into by the potential investor to see the viability of the business plan and if they would like to invest in it or not.
Brinckmann, J., Grichnik, D., & Kapsa, D. (2010). Should entrepreneurs plan or just storm the castle? A meta-analysis on contextual factors impacting the business planning-performance relationship in small firms. Journal Of Business Venturing , 25 (1), 24-30.
Mason, C., & Stark, M. (2004). What do Investors Look for in a Business Plan?: A Comparison of the Investment Criteria of Bankers, Venture Capitalists and Business Angels. International Small Business Journal , 22 (3), 227-229.
Teece, D. (2010). Business Models, Business Strategy and Innovation. Long Range Planning , 43 (2-3), 172-173.
As an aspiring entrepreneur, we always focus on how we can convince our investors, what they want, what benefits they get from there. So we should also clearly define there what benefits and it’s typed, he/she wants benefits in terms of revenue or social pride. So first we clearly understand the problem of our user after that we come to the solution and design a prototype then we validate it from users, after that they give feedback and we modify the product as per our customer demand. And we just show all those process clearly, concisely and systematically in a paper. In our business proposal we just focus on the one specific things so that we can easily connivance them through our business proposal.
Then after we must read the mindset of our investor what they want and why they are investing us? So we should have clear understanding about investment types and we should clearly mention there what we expect from them (Money, or Human Recourse). So we must define all these things in a three parts business concept, market plan section, and financial analysis. Business connect clear them what the product/service, what are the process, who are the team and what are their qualities, what value they get from the business, who are their customer and so on. In market plan section we should clearly define what are the distribution channel and communication channel, who are the competitors, what strategies we apply in the business, SWOT analysis etc. In financial analysis we should clearly mention how much cost is required at first, how much in fixed cost and variable cost, when the money will be back and how long time the business will be sustained. Based on those three parts we fit our business plan in a format of 8 different key components and these are Executive Summery, Business Development, Market Plan, Production Plan, Operation and Management and Financial Analysis in three different parts in a business plan like business concept, market plan section, and financial analysis. These all are equally important and our major duty is we should clearly mentioned in detail in our business proposal. We should keep in mind investors have not lots of time to read this proposal so that we frame it in a very interestingly so we can grape their attention very easily.
There are 4 anchors of potentials investors and these are: All investor want to earn money in a business by adding a certain value to their customer (Osnabrugge. M & Robinson, 2000), First they try to find the problem and when they get deeper insight of problem then they are able to find its appropriate solution so this solution definitely add certain value to their customer and it will be new USP for the company. They always ready to solve a problem so that customer can pay premium price (Barrow & Barrow, 2001)we have everywhere problem but we just superficially/ surficial analyze the problem but if we are motivating our investor then we go deeper to the problem then try to find its appropriate solution which daily affects human working environment if we are able to design an innovative product then our customer could definitely pay premium prize. For example, we have a traffic problem in Kathmandu and the time management problem is a big issue for them and we manage the all traffic light in an innovative way could be a possible solution and if we are able to do that they can ready for using our smart app system. The third one is, There is a good market, enough human capital and now the world become globalize any investor can outsource their works in different countries, they are not limiting only inside human manpower so we mention our proposal who could be best human capital and what will be the possible team for us. At last, they should have a team and team could from all sectors like one from a financial expert, another is from a technical expert and another is processed expert other is operation experts. So if we are able to make a diverse team to our business it could attract our investor towards the business. So if aspiring entrepreneurs mention all those things clearly in a business proposal then we could able to motivate our possible investor. The investor also wants to learn how we are committed in this business and our experience. So we compulsory mention those things in our business plan.
Barrow, C., & Barrow, P. (2001). Business plan to our Angel Investor. The Business Plan Workbook 4th edn. London: Kogan Page.
Osnabrugge. M, V., & Robinson, R. J. (2000). WRITING A WINNING BUSINESS PLAN. The Guide for Entrepreneurs, Individual Investors, and Venture Capitalists.
Obtaining funds is by far one of the most important and challenging task for a small company and may fell more difficult that the R&D. It is important to understand that these funding is not a onetime thing but a long term process and so planning is very important as this is what entices potential investors to help fund your company (Rapson, 2005).
"The type of independent accountant’s report accompanying the financial statements remains at the discretion of entrepreneurs and thus is a chosen signal to investors based on cost versus benefit considerations. Owing to its nearly ubiquitous inclusion in business plans, financial information represents an important criterion for investor evaluation (Foster, Garrett Jr, & Shastri, 2016).” Business plan explains the problem statement it is trying to address, the value proposition, team members and financial projections including investment, among others that show if a business is feasible or not in the eyes of potential investors. Based on these they option to either invest or reject it. Therefore even though the business idea is feasible and good, business plan should be equally good.
The four anchors they try to validate are
Does the business plan provide added value proposition to the customers.
Does it fix a real problem in the market, something that is truly a pain felt by the market needs to be addressed.
The urgency with which the customers need it and are willing to pay for it.
Will the market absorb it, and give back a healthy profit margin. These needs to be proven by the entrepreneur.
Investing decision on new ventures are full of risk and uncertainty. Investors thus have certain aspects that need to be see or just minimum bench marks that needs to be checkout by business plan of new ventures to be considered as viable investment opportunity. They therefore look at the four anchors to validate the business plan.
Foster, B., Garrett Jr, R., & Shastri, T. (2016). Independent accountant’s reports: signaling and early-stage venture funding. Managerial Auditing Journal; Bradford , 362-382.
Rapson, M. E. (2005, December 2). Commentary: Funding for the small biotech company. The Daily Record; Baltimore, Md. , p. 1.
The potential investors use business plan to evaluate whether the proposed idea is worth investing or not by analyzing what is in it for them. They go through the business plan to have insight about the business idea, people involved in the team, potential market, competitors, scope for growth and expansion, amount entrepreneurs want them to invest, return they are expected to receive and payback time. If they feel that the business adds value to the customers and investors alike, the business is worth investing. So, it is important to back up the information presented in the plan with fact and figures. The potential investors articulate merits, requirements, risks and potential rewards based on the content of business plan and then the investment decision follows (Spinelli & Adams).
Investing money involves certain degree of risk so they want to be sure that their investment will not go in vain before taking the decision for which business plan is used as a tool. The four anchors they are attempting to validate through business plan as given by Geiser (2016) are:
Value Creation or Addition: The business plan should highlight the value to customers which means it should communicate the benefits of the products, not the features, technologies and processes. For example: If the business plan of a data analytic company is to upgrade the system they are currently using to speed up the task of processing data, it should mention how the upgradation will add value to the customers and make their task easier instead of explaining about how they are going to do it. If the value addition is significant to address the customers need in more effective way, the investors will be willing to invest their money.
Problem Solving: The business plan should be able to communicate how the proposed product will solve the problem or satisfy the need of the customers. But it is necessary to note that we cannot solve the problem of every people at once. So, it is important to identify the target segment and address the pervasive need of that particular segment by offering something for which customers have sense of urgency. This will increase customers’ willingness to pay for that product making it an attractive opportunity for investors.
Growth Margin and Profitability: The investors will not be willing to invest in a project if it does not have robust market, growth margin and profitability. The projected cash flows, revenues, profit, returns etc. should be clearly communicated in order to make the investors believe that they will be getting decent return in their investment.
Team: The background, experience, skills and experience also influence the investors’ decisions. If there is a team with collective domain expertise, investors are willing to provide then with required fund. For example: There are two business plans for running a restaurant. Among which, one has a team consisting of one people each hospitality, finance, quality assurance and marketing background with some years of work experience while the other team consists recent graduates who are highly passionate about the business but do not possess any knowledge about that particular sector, the team will complementary set of skills has the higher chance of getting the investment.
Thus, the business plan should incorporate these four anchors to gain the trust and fund from the investors.
Geiser, M. (2016, October 6). Four Anchors of Superior Business. Retrieved from LinkedIn: https://www.linkedin.com/pulse/four-anchors-superior-business-marjorie-geiser-mba-rd-bcc
Spinelli, S., & Adams, R. J. (n.d.). New Venture Creation: Entrepreneurship for the 21st Century (Nineth ed.). Irwin: McGraw Hill Education.