If you intend to use a business plan to raise capital, it is important to understand the investor's basic perspective. You must see the world as the investor sees it—that is, you must think as the investor thinks. For most entrepreneurs, this is more easily said than done, as an entrepreneur generally perceives a new venture very differently than an investor does. The entrepreneur characteristically focuses on the positive potential of the startup—what will happen if everything goes right. The prospective investor, on the other hand, plays the role of the skeptic, thinking more about what could go wrong. One investor in small firms, Daniel Lubin, admits, "The first thing I look for is a lie or bad information—a reason to throw it out."4 Like most investors, Lubin receives a large number of business plans and gives most of them the attention the average person gives to junk mail. An entrepreneur's failure not only to understand but also to appreciate this difference in perspectives almost certainly ensures rejection by an investor. As noted. by William Sahlman at the Harvard Business School,
What's wrong with most business plans? The answer is relatively straightforward. Most waste too much ink on numbers and devote too little to the information that really matters to intelligent investors. As every seasoned investor knows, financial projections for a new company—especially detailed, month-by-month projections that stretch out for more than a year—are an act of imagination.
An entrepreneurial venture faces far too many unknowns to predict revenues, let alone profits. .Moreover, few if any entrepreneurs correctly anticipate how much capital and time will be required to accomplish their objectives. Typically, they are wildly optimistic, padding their projections. Investors know about the padding effect and therefore discount the figures in business plans. These maneuvers create a vicious circle of inaccuracy that benefits no one.
Don't misunderstand me: Business plans should include some numbers. But those numbers should appear mainly in the form of a business model that shows the entrepreneurial team has thought about failure. . . The model should also address the break-even issue: At what level of sales does the business begin to make a profit? And even more important, when does cash flow turn positive? Without a doubt, these questions deserve a few pages in any business plan.5
At the most basic level, a prospective investor has a single goal: to maximize potential return on an investment through the cash flows that will be received, while minimizing risk exposure. Even venture capitalists, who are thought to be great risk takers, want to minimize their risk. Like any informed investor, they will look for ways to shift risk to the entrepreneur.
Given the fundamental differences in perspective between the investor and the entrepreneur, the important question becomes "How do I write a business plan that will capture a prospective investor's interest?" There is no easy answer, but two things are certain: (1) Investors have a short attention span, and (2) certain features appeal to investors, while others are distinctly unappealing.