Understanding how a business plan is read

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I was at the BVCA conference in Manchester yesterday (which was a good event btw) and one of the sessions was an interview of Stefan Glaenzer (founder of online auction company Ricardo and Executive Chairman of Last.fm).  He said a number of interesting things, not least that his biggest mistake was allowing himself to be persuaded by the public market investors in Ricardo that he should expand internationally, but the one that most struck a chord with me was:

We all know that business plans are a sub-genre of science fiction

I’m picking up on this quote for a couple of reasons – firstly I liked it because it is true on a couple of levels.  1) the one thing we know that won’t happen at any start up is that it will hit the plan.  Something will change and the numbers will come in under or over.  Guaranteed.  And 2) a lot of business plans are written with a view to raising investment and contain a lot of forward looking thinking designed to excite and inspire – like science fiction.

But secondly, and this is the real reason I’m writing this post, this one liner from Stefan got me thinking about how I read the business plans that get sent in to us at DFJ Esprit.

Nine times out of ten when I’m looking at a new business plan I’m rushed and my aim is to quickly work out whether it makes sense to meet the company behind the plan or whether we should politely let them know we are not interested, with a brief explanation as to why.  As you would expect, we review many more business plans than we take meetings – I have never run the numbers but a back of the envelope estimate suggests that excluding plans from entrepreneurs who are well known to us the ratio of meetings to business plans received is in the region of 1:10, and lower still from entrepreneurs we have no connection with.  With these sorts of ratios it is important for our productivity that we get to a decision quickly.

From the entrepreneur’s perspective situation is very different.  The business plan and accompanying email is an important document, the one shot to impress a potential investor and try to get a meeting.  Hence a lot of work goes into the business plan, and a lot of hope can be invested in it.

Clearly there is an undesirable asymmetry here – entrepreneur spends a long time creating the business plan, investor reads it quickly.  I am writing this post to address that issue.

I am not anti-writing business plans by any means, and I think they serve important purposes beyond getting a first meeting with investors:

  • writing a business plan typically helps to clarify and enhance thoughts and plans about the business
  • investors will look to the business plan for information at later points in the process (hopefully including a more thorough read prior to the first meeting, assuming there is one)

However, I thought it might be helpful to highlight the parts of business plans I zoom in on when deciding whether to go for that first meeting:

  • Summary of product
  • Evidence of momentum – e.g. user traction or customers
  • Summary financials
  • Evidence of ambition
  • Maybe a description of the market dynamics (often I feel comfortable enough with the market already)

The astute amongst may have noticed that despite the fact VCs always harp on about the importance of ‘team’ it isn’t on this list.  That’s because we form our opinion on people from meeting them much more than from reading about their history.

If this post was of interest you might also find Approaching a VC by email useful.

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