Do I really need a business plan to raise capital?

FORGET THE BUSINESS PLAN.

Your PowerPoint & Financial Model can close the deal for you.

The role of the business plan in raising money is overrated. In fact, a 2007 survey conducted by Babson College of 116 businesses launched by its alumni between 1985 and 2003 found no statistical difference between the success achieved by those businesses that started with a formal business plan and those that forged ahead without one. In addition, Brad Feld, one of the most successful VC’s in the high tech industry, indicated that he hasn’t looked at a business plan in 15 years. Here is the link to the on-demand version of this interview & show.

The reality of raising money is that business plans play a much more limited role than most might think. While there are many key factors in obtaining funding, one of the most important things to demonstrate to investors is your mastery of the business model and your understanding of the detailed cash flow projections for your business. A very effective method of accomplishing this is to walk a prospective investor through a PowerPoint deck that tells your story in a thoughtful and engaging manner and convinces them that you’ve got what it takes to build a profitable business. Then you can further emphasize your ability to succeed in making money for your investors by presenting your financial model.

A PowerPoint deck is essentially a marketing document and so it should have all the same attributes that good marketing pieces have, including the ability to rise above all the other noise that’s out there. Typically, business leaders seeking funding don’t create these types of marketing pieces because they are completely exhausted after writing their business plans, but they should because they do a better job of getting potential investors enthused about an opportunity. Guy Kawasaki’s blog “How to change the world” has an old but good blog post that gives some great advice on making your PowerPoint the best that it can be: “The 10/20/30 Rule of PowerPoint” says:

  • 10 – Ten is the optimal number of slides in a PowerPoint presentation
  • 20 – You should give your ten slides in twenty minutes
  • 30 – Your font size should be at least 30 points

When pitching your business to investors, sharing a well-designed financial model is very important because how a financial model is designed helps investors learn some things about you and your business: it provides insights into how you think about your business, helps clarify the main assumptions that drive it and also implicitly sends messages about how you are approaching the business. Getting to know you and your financial mindset is a top priority for investors.

In Colleen DeBaise’s recent Wall Street Journal article, “Starting Up…Without a Business Plan”, she quotes Jennifer Hyman, who founded “Rent the Runway” in November 2009 with her Harvard Business School classmate Jennifer Fleiss, as saying the two “had a rule from the very beginning to never write a business plan, because we think that’s a waste of time.” Hyman goes onto say “Starting a business is a series of iterative tests…each test eliminates some of the risks of starting a business.”

Finally, a May 14, 2009 article that appeared in the New York Times titled “Investors Pay Business Plans Little Heed, Study Finds” stated “Go ahead and write that 50-page business plan about your fledgling venture if it helps you to focus. Just do not bother showing it to venture capitalists, because it will do nothing to improve your chances of getting financing.”

In conclusion, while there may be value in the business plan development process; to help clarify the business model and think through the underlying assumptions, presenting a high impact PowerPoint along with a professionally developed financial model may just yield better results.

If you like this information, you’ll really like “Top 10 Mistakes That Cause Investors to Shoot Down Deals”.

About the author: David Brode is a Principal at the Brode Group. An economist by training, Brode has over two decades of experience helping ventures develop and communicate business strategies through financial models so they can launch, grow, and sell businesses. Brode’s financial forecasting models have been through due diligence dozens of times and have been successful in securing over $11 billion in financing for projects worldwide. Brode has a B.A. degree in Economics from the University of Michigan.