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Why do most Business Plans Fail to Raise Capital?

Guest post by: Marcus Tarrant

Article Overview: As an expert business planning consultant for over 20 years, I have been surprised by what people are willing to show to potential investors. It is rare that you ever get a second chance, so it is absolutely critical that you put your best foot forward when trying to raise capital.

Why do most Business Plans Fail to Raise Capital?

Are all business plans created equal?

Most business plans have a similar structure, table of contents and look and feel. So why is it that less than 7% succeed as a capital raising document?

One 30 page business plan is not the same as another 30 page business plan.

What is the difference?

The key difference is the positioning of the document, and the way that the investment proposition is articulated. Most founders are either technology or product focused. Whilst technology and product are critical to the success of many businesses, it is the entity that an investor invests in.

I have seen many businesses where, regardless of the success of the product, the business will not make the required return on investment.

Many founders make the assumption that if their product/technology/service is successful, the business will be successful. Experience investors have learned from experience that

Product/Technology/Service Success ≠ Business Success

The reasons for this are many and varied, but the most common is the

Reason #1- Business Model that is used to extract value from the product/service or technology.

It is interesting that I am yet to come across a business planning template, or business plan prepared by others that specifically addresses the business model, yet this explains the relationship between what you have and what you are going to make. There have been some fantastic developments in business model design over the past 5 years, yet many ignore its importance. As the complexity and inter-relationship between businesses increases, so do the potential variety of business models. It is critical that the business model is clearly articulated in terms that the investor can clearly understand.

Reason#2 – Position in the value chain

Why is it that the potato farmers in northern Victoria are currently blockading the McCains factory? They have a terrible position in the value chain. Would you want to invest in a business that is contracted to only one customer, and furthermore prevented from ever selling their product to another company, and furthermore that one customer has total control over the price that they will pay you?

Again, very view business plans I have seen take account of value chain positioning, your position in the value chain can enable you to create significant strategic value at exit.

Reason#3 – The relationship between your Customer Value proposition and the Window of Opportunity

The timing is everything! If you are entering a new market, you need to create a niche value proposition that appeals to your customer NOW. Generic value propositions do not facilitate effective market entry, and are generally already used by existing market players. Without an understanding of how and why your opportunity is time limited, you are unlikely to drive immediate investor interest.

As a consulting firm, we have been hired by Venture Capital firms to assist in syndicating transactions with other VC’s. Generally they will hand us a 50 page document and say fix it! In these large scale projects where we are looking to raise $2m plus, we spend several months with the founder to re-orient the way that they think about and present their business. At the end of the process the document is still a 50 page document, with a similar table of contents, but it succeeds in raising capital.

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Article Tags: Angel Investment, Business Plan, Business Planning, Raising Capital, Venture Capital



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