Contrary to popular belief, business plans do not generate business financing. It is true that there are many types of financing options that require a business plan, but no one invests in a business plan.
Investors need a business plan as a document that communicates ideas and information, but they invest in a company, in a product and in people.
Myths about financing small businesses:
Venture capital is a growing opportunity for business financing. In reality, venture capital financing is very rare. I will explain later, but I assume that only a few high-growth plans with powerful management teams are business opportunities.
Bank loans are the most likely option for financing a new business. Banks don’t actually finance business start-ups. I’ll have more information about that later, too. Banks should not invest depositors’ money in new businesses.
Business plans sell investors. Actually, they are not well written and a convincing business plan (and launch) can sell investors on your business idea, but you will also have to convince investors that it is worth investing in you. When it comes to investments, it’s as much about whether you’re the right person to run your business as it is about the viability of your business idea.
I’m not saying you shouldn’t have a business plan. You should do it. Your business plan is an essential piece of the financing puzzle, explaining exactly how much money you need, where you are going to go, and how long it will take you to get it back. Everyone you talk to will expect to see your business plan.
But, depending on the type of business you have and your market opportunities, you should tailor your funding search and approach. Don’t waste your time looking for the wrong type of financing.
Where to look for money
The process of finding money must match the needs of the business. Where you are looking for money, and how you are looking for it, depends on your business and the amount of money you need. There is a huge difference, for example, between a high-growth Internet-related business looking for second round financing and a local retail store looking to fund a second location.
In the following sections of this article, I’ll talk more specifically about the different types of investments and loans available to help you raise funds for your business.
1. Venture Capital
The venture capital business is often misunderstood. Many start-ups resent venture capital firms for not having invested in new companies or venture capitalists. People talk about venture capitalists as sharks – for their alleged predatory business practices, or as sheep – because they supposedly think like a herd, all wanting the same kind of deals.
This is not the case. The venture capital business is just that: a business. The people we call venture capitalists are business people who invest other people’s money. They have a professional responsibility to reduce risk as much as possible. They should not take more risks than are absolutely necessary to produce the risk/return ratios that the sources of their capital ask of them.
Venture capital should not be considered as a source of financing for any other company, except for a few exceptional start-up companies. Venture capital cannot afford to invest in start-ups unless there is a rare combination of product opportunity, market opportunity and proven management. A venture capital investment has to have a reasonable chance of multiplying the value of the company by ten within three years. You need to focus on newer products and markets that can reasonably project increased sales at huge multiples in a short period of time. You need to work with proven managers who have been successful in the past.
If you are a potential venture capital investment, you probably already know. You have members of the management team who have been there before. You can convince yourself and a room full of smart people that your business can grow ten times in three years.
If you have to ask if your new business is a possible venture capital opportunity, it probably is not. People working in new growth industries, multimedia communications, biotechnology, or high-tech products usually know about venture capital and venture capital opportunities.