Does your Business Plan Make Sense?
The framework of success for entrepreneurs is measured through an innovative product and the vision and planning that perpetuates their idea into a company that will revolutionize the industry.
Innovative product design is the key to generating interest from investors & potential buyers. Securing the financing to manufacture a prototype and cover material costs are just a few of the challenges entrepreneurs must overcome when getting their business off the ground.
To fund a business without a line of credit or sufficient cash flow, you lack the ability to finance production costs. The challenge becomes even greater when projected production costs are well into the six-figure range and predictions suggest a lengthy development cycle.
These are the types of situations when entrepreneurs should seek investment capital from external resources. Without an influx of cash to get the operation moving forward, you’ll soon face the disappointment of losing any potential customer base you may have established, not to mention the impact it could have on overall market potential.
In considering the various resources to find investment capital, you might first want to take look into your own pockets. Bootstrapping and debt financing are highly effective for raising the capital you need to get the business going in the right direction. It does require committment and a dedicated work ethic to put in long hours each day, full of high energy tasks that make you feel like you’re married to the business, because in a way, you are. However, many business owners who bootstrapped their operation have stated that it was all the extra hard work and effort they put into start-up that keeps them grateful and appreciative of their success.
Bootstrapping a start-up means having a full commitment to the success of the business. It’s absolutely essential to have a strong personal desire to succeed, a self-motivated drive and a spirited determination that drives your passion for the product and its success in the marketplace. Within that commitment to succeed, ethical business practices need to be used which will help define the business with integrity. If the resourcefulness that bootstrapping requires isn’t feasible, or fails to produce the cash flow needed, then the next move for acquiring financial funding is either to approach investors, or look to a bank for a business loan.
Angel investors are typically preferred over venture capitalists due to the projected earnings of most small businesses being less that what venture capitalists typically have any interest in. Without a sales forecast of earnings in the millions, seeking venture capital is probably a waste of time. On the other hand, angel investors are affluent individuals that are more willing to provide the investment capital that entrepreneurs need to finance their business start-up. They are typically retired entrepreneurs or business executives who have a particular interest in products, services or industries that small business represent. Angel investors are willing to lend out their own money in exchange for a return on their investment, although deciding which angel investor to approach requires narrowing down a long list of potential investors into the ones who will have interest in your product or industry. Once you have a list of solid prospects, it’s all about having a solid business plan and knowing how to pitch your business proposal.
Angel investments have advantages for small business owners, providing an extra in-flow of cash that can be used for manufacturing, material or inventory costs, marketing initiatives or new product design, all of which helps stimulate growth. Normally angel investors are willing to loan small business owners no more than a couple of million dollars, but first they want to be assured that they’ll make a profit on their investment. When pitching a proposal to an investor, they also want a solid, well- designed business plan in hand that clearly articulates and projects the value in the product and the business. They want to see realistic financial projections that demonstrate how the business will be profitable.
Delivering an elevator speech has to be short and convincing. Even more important, it has to be received with optimism and confidence. If the angel investor is confident in the business proposal, the terms of contractual agreement will consist of the investor providing the business capital needed in exchange for a share of equity in the business. The agreement will include the investor’s expectations of a return on their investment while taking on the assumed risk that the possible failure of the business means a loss on their investment without any liability for the entrepreneur. For this reason, many times angel investors will take a more active role in management and operational strategy of the company.
For the entrepreneur, the cost of giving up a share of the business to an angel investor is the loss of total control over the business. Depending upon the investor, many times the strategy and vision for success may vary which can create conflict within the partnership. The best advice for the entrepreneur is to gut out the next 3 or 4 years, and take pleasure in knowing that a pre-condition of the agreement was an exit strategy for the investor that states once the business becomes profitable, and the investor earns a return on their investment, the share of business equity will be returned to the owner and the investor leaves the partnership.
