If your plan is intended to help your company raise money, you will almost certainly come under questioning and scrutiny from the financiers. How can you be so sure that you will achieve the market penetration you project? Have you given enough credence to the competitive pressures you’ll encounter? Aren’t you perhaps underestimating your sales and administrative expenses? How certain are you that you’ll collect 60% of your receivables in 30 days? And on and on.
Some of the questions and criticisms you encounter will be sincere concerns based on the battle-hardened inquirers’ previous experiences with smaller growing companies. Some, though, will be negotiating ploys. The amount of financing abanker or investor is willing to commit is linked to his or her assessment of the plan’s overall credibility.
In certain instances, the business plan’s projections may affect negotiations. If you are seeking funds to provide essential cash to carry you through a growth spurt, financiers will see in your plan the potential impact on the company of a failure to raise the funds. They will also be well aware that if certain assumptions made in the plan don’t work out, your company’s situation could be even more desperate. Venture capitalists, in particular, have been known to let negotiations drag out intentionally in the expectation that entrepreneurs will become increasingly desperate to make a deal.
Of course, the more solid a case your plan makes, and the stronger your negotiating stance, the better your chances of getting what you want. Your success depends partly on what you are seeking from financial backers. And partly it depends on hooking up with the most appropriate financiers.
In the case of Software Publishing, Fred Gibbons was looking for $250,000 of investment in exchange for 25% of the company. That meant he was asking the backers to accept a $1-million valuation of the company. The plan he wrote made an extremely convincing case. Clearly he matched up well with the financial types because he had offers from three venture capital firms for funding and selected the one he liked best.
The venture capitalists, of course, knew what they were doing. The company by 1989 had a value in the public markets of $250 million, making that 25% stake acquired for $250,000 worth $65 million. “That’s a 250-to-1 return, which by Silicon Valley standards is phenomenal,” says Gibbons. “A 10-to-1 return is a good base hit and a 100-to-1 return is a home run.”
Keep in mind. . . You don’t have a deal with bankers or investors until you’ve signed a final agreement and received a check. No matter how strong the expression of interest or support you get from potential backers, keep as many options open as long as possible. There’s nothing wrong with negotiating two or three deals at once, so if something falls through, you’ll still have alternatives.
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