Investors and venture capitalists won't participate in your company until they know exactly what's in it for them.
The investment section of the business plan (usually a sub-category of the financial section) discusses investment details and describes how you are asking them to participate in your business.
You've put a lot of effort into the rest of your business plan, but if you drop the ball here it will cost you. To drive your plan home, you'll have to avoid common business plan investment section mistakes that scare off investors.
- Lack of detail. A strong investment section is all about details; it has to describe the investment offering in a way that provides incentives and safeguards for investors. At a minimum, your investment section should include coverage of investment amounts, equity ownership, exit strategies, how you will use invested capital, and the expected ROI for investors.
- Unrealistic valuation. During the investment round, ownership shares are based on the pre-money valuation of your company. As the owner, it's in your best interest to push for higher valuations and you might be tempted to inflate the valuation in the investment section of the business plan. Don't do it! If your valuation seems unrealistic or inflated it can cause investors to question the credibility of your entire business plan.
- Inadequate exit strategies. Your investment section should describe multiple exit strategies for you and your investors. There are no certainties in business and even though you have a specific exit strategy in mind, a single exit strategy isn't enough. Plan for contingencies by describing alternative exit scenarios in the event that your preferred exit strategy doesn't pan out.
- Faulty assumptions. Your investment section will be the culmination of assumptions that are described throughout the business plan. Miscalculations, math errors, and factual oversights can dramatically impact investment rewards – and quickly turn off investors.
- Low ROI. VCs are not lenders. They invest large sums of money in companies that banks won't finance because there is simply too much risk involved. But because they are willing to take higher risks, VCs also expect higher rewards. It's a huge mistake to underestimate your VCs expected ROI in the investment section. FYI . . . Most VCs expect a ROI in the 40% range.