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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  • Hi Nic,

    The executive summary of a business plan is akin to a covering letter with a resume or CV -so I think it is vital that entrepreneurs get that right up front- i.e. ensure it is concise, compelling and clear re what the opportunity is. This will often be as much as prospective investors will read when faced with a constant flow of business plans.
    I also believe that the process of writing the business plan is in itself a very worthwhile pursuit as it forces the author to think holistically rather than to focus myopically on ‘the idea’. Finally a business plan also serves as a useful starting point for business planning which relates to goal setting, cash flow management and setting milestones.

    Alan Gleeson
    Palo Alto Software

  • Hi Nic,

    It was good to meet you briefly yesterday at BVCA! Thanks for the info in this post, and will certainly be of use as we go down the funding route over the coming months. Would you say that the sections you focus on are typical of most VC’s, or can this be quite varied? (ie. others are keen to see the sections on team).

    Mark.

  • Good question. I would guess that we are typical, but can’t say for sure.

  • Laurence John

    I would agree with Alan, the business plan is probably of more use to the writer than the reader. It sorts the known issues from the unknowable and forces out the explicit logic. The reader can extract what he/she needs – so no rewrite for the reader is required. Thanks for the post.

    Laurence

  • Paul Walsh

    If VCs must (and I can understand why) skim through plans, isn’t it very likely that great opportunities will be missed as a result of the writer being a potentially great leader/entrepreneur and not-so-great writer? Do you think it would be advantageous to check the team to double check this possibility?

    Think of a CV – a good CV will increase the likelihood of getting hired. But a good employer will not make too many assumptions about the CV. A great employer will even go as far as to make provisions during an interview – at which point the interviewee is likely to be very nervous and not at their best.

  • Hi Paul – we try and look past the way a plan is written to the strength of the underlying business, but inevitably some good ones will fall through the cracks. I have yet to find a VC who can find a way through that problem.

    Cheers,
    Nic

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  • I needed this article at the beginning of this week. I’ve had at least 3 very heated, time-sucking discussions this week with entrepreneurs about why their 60+ page business plan is not going to get them funded. It’s hard medicine for them, as they’ve often spent many hours on the doc, and no one likes to hear their baby is ugly….or like you’re saying, “a lot of hope can be invested in it.”

    I do believe, as other readers do, that there is great value in doing a plan (for brainstorming, strategy, and actual ‘planning’). The hard part is converting this into a pitch document– these are two different animals. A couple techniques that help:

    -Scraping the full, rambling plan for just the really good bits, and then literally cutting and pasting those sentences onto a one page doc (and being disciplined about the length)

    -Keeping the whole plan, but formatting it in a way that is easily skimmable. Sometimes this means using selective bolding, or call-out boxes, or summary graphs, or a few other techniques. In the end, a prospective investor– rushed for time as you often are– can still get the gist of the pitch.

    Good article!
    Nathan Beckord
    VentureArchetypes LLC

    ps– love the cartoon caption

  • “Separating the business plan from the pitch document” – that is a great way to think about this conundrum. It is possible to do one without the other, but a pitch document will usually be stronger if the company has gone through the process of writing a plan.

  • A previous investor I had said he read only the Exec Summary, Financials and Risks.

    I would be interested in your comments.

    Shane

  • I think there is a lot of variation between VCs. Also, there is a difference between what is read before a first meeting (which might often be limited to the items you mention) and what is read subsequently (which will be more extensive).