Editor’s Note: New angel investors often place significant focus on a startup’s business plan. This is justifiable — you want to learn all you can before making your first investment and want to make sure the startup knows where it’s headed. This post is intended to help new angels who want to look for some of the most basic elements of a functional startup. But keep in mind that everything in the plan is subject to change. From the business models and company processes to the competitive landscape, nothing will remain static forever. Once you gain more confidence and experience in the angel business, you may want to focus instead on the way the entrepreneur presents her business ideas. That is, the way she pitches you. Just replace “business plan” with “pitch” in this post and you’ll get a general idea of what to look for in a pitch. More on that later.
It’s tough to know where to put money these days. Interest rates are low, the markets are all over the place, and the price of gold is through the roof. It could be that you’ll find some of your best opportunities as an angel investor supporting a start-up company. If that’s the path you’re taking, you will naturally spend time reviewing business plans to identify an appropriate candidate. Take your time, and ask the right questions. The business description should answer a couple of big ones.
The first questions you might want to ask of your prospective are “What?” and “Why?” That is, what is the purpose of this enterprise, what does it do, and why is it destined to be a winner? The business plan should make very clear the concept behind this start-up. It should identify the firm’s competitive market or industry and it should describe that industry’s playing field and the firm’s position on the field. Most important, it should explain why this particular firm will succeed in its market.
An anecdote from US history may help to illustrate. Once upon a time, in the 19th century, an enterprising gentleman built and buried a large statue of a man, and when it was “discovered,” he convinced locals they were looking at the remains of a giant. People lined up to pay for the privilege of looking on this marvel, the so-called Cardiff Giant. After attempting unsuccessfully to acquire the statue for his own use, promoter P.T. Barnum built a statue of his own, proclaimed it to be the one true giant, and won an even larger following.
Mr. Barnum may or may not have produced a formal document that detailed his “giant” project, but there can be little doubt he had a plan, one that included a very clear concept and purpose. He knew his industry – entertainment – quite well, and he knew that the Cardiff Giant had already proved to be entertaining. He also understood his challenge: to make his second giant even more attractive to thrill-seekers than the original. A person might suppose that New York State wasn’t big enough for two phony giants, that Barnum and his statue would fail to find a niche. Not so. He played to his strengths and carved out a niche using creativity and ingenuity.
The point is this: your start-up client should tell you up front in his business plan where his company is situated in the world of business and how he plans to compete successfully with the other guys. He should tell you exactly what the company is and how it is special in its industry. In short, when you have finished reading your start-up’s business description, you should have a sharp picture of the idea behind the business, the product or service it proposes to market, and its competitive advantage. The second giant should make perfect sense as a business proposition.
* For series, references are published in the last installment of the series.
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