What do investors really want to see in your business plan? If you’re an entrepreneur looking for funding, it’s the million dollar question. Today angel investor Reid Hoffman, who’s also the CEO and founder of LinkedIn, provides some insight into exactly what investors are looking for right now in a guest post over at TechCrunch:
“After five minutes of a pitch, I know if I’m not going to invest, and after 30 minutes to an hour, I generally know if I will. Many entrepreneurs are product-focused, which leads them to pitch the brilliance of the product. Others are money-minded, so they can over think the business plan. But neither of these approaches answer the first few questions I want to know as an investor.”
Hoffman says there are three key questions he wants answered before he’s writing any checks. For those of you looking for investor dollars, here’s what you need to address:
1) “How will you reach a massive audience?” While this question has less relevance if you’re not seeking venture investment, it’s critical if you are. Remember, VCs are looking for returns on the order of hundreds of millions. If you can’t attract the users or customers, they won’t get their ROI. Says Hoffman, “Thousands of products launch every month on hundreds of thousands of new Web pages. How does a company rise above the noise to attract massive discovery and adoption? YouTube did it through existing channels like MySpace, which already reached millions. Yelp had strong SEO, which found them a mass audience searching for restaurants and nightlife. Facebook’s University-centric approach landed them 80% adoption across a campus within 60 days of launch. Every Net entrepreneur should answer these questions: How do we get to one million users? Then how do we get to 10 million users? Then how will you get deep engagement by your users.”
2) “What’s your unique value proposition?” Simply put: there are millions of websites on the Internet, how’s yours different? Don’t get too meta with investors though—you don’t want to sound “so forward thinking as to alienate the user.”
3) “Will your business be capital efficient?” While this question may not have had as much relevance even a year or two ago, it’s what’s on every investors mind these days. “Even if you have a mass audience and unique value prop, a business fails without cash flow,” says Hoffman. “An initial round of financing is important, but how reliable is later financing? Will investors see the right elements in the next stage? Your product must scale intelligently.”
All these are questions that can—and should be—addressed one way or another in your business plan, as well as your pitch. And speaking of your business plan, Hoffman makes a strong argument for the case that you shouldn’t worry about the minor details, but instead should drill down on those points that investors really care about—something we touched on the other day:
“With these three elements in place – mass audience, unique value, stable funding – a startup has time to discover where it can make money. Few business plans ever pan out like their owners intend. PayPal started as a plan to beam payments between Palm Pilots. Google raised funds with a vision to capitalize on enterprise search and ended up in advertising. The formula is to build an audience with a great product – then secure enough funding to figure out how to make it pay.”
