Business
Never underestimate the five-year business plan – here’s why
Global Banking & Finance Review®
Company
By Anthony Rose, CEO and co-founder of SeedLegals explains the power of a business plan and why you need one
Investors will have dozens or even hundreds of founders all pitching to them, competing for their time and investment. A 2021 survey suggested that for each deal a VC closes, they consider on average 101 opportunities.
One impactful way to stand out is to create a strong, bullet-proof five-year business plan that investors will find hard to turn down. Both you and the potential investor know your plan is a work of fiction and the predictions you make are estimated. So what’s the point, if your plan – and that of every other founder – is just made up? How can an investor get anything of value from your five-year plan?
Investors can extract more from a five-year plan than you might imagine – here’s what your plan needs to show to make the difference between securing investment or investors walking away.
You’re rational and realistic
Investors thrive off confidence. Show that you’re self-assured and optimistic about the growth of your business. Investors will be impressed with your ambition and be more inclined to put their money behind you, as long as it’s justified. You can’t just create a plan that predicts your new startup is going to make millions in a very short time – that would be unrealistic and an instant turn-off for investors.
But you don’t have to be too modest with your future valuations. Your plan still needs to show confidence and a strategy to reach an amount that makes investing worthwhile. Your investors want to see the potential for a x10 return on investment (for angel investors) or x50 return (for VCs) to be worth their while. Investors use the predictions in your plan to determine how ambitious and motivated you are.
The path to a unicorn is often thought of as ‘triple, triple, triple, double, double’ in five years. For example, if you start with revenue of £1 million a year, if you can triple that year-on-year three times, and then double it twice for the next two years, after five years, you’d have over £100 million a year in revenue… and that equates to a billion Pound valuation.. If you can keep your sights on that, it’s a good starting point. This model means that your business plan might show growth of 3x year-on-year for the first few years and then 2x year-on-year after that, because for all businesses, growth starts to slow after you’ve reached a certain level. If your growth shows 1.5x growth year-on-year then that sounds good but lacks ambition.
You know what you’re talking about
Your pitch and business plan help investors decide whether they want in or not. When you present your pitch deck, you want a page with a graph perhaps that clearly shows your ambition and goals. An astute investor is likely to ask ‘how did you get those numbers?’ This is where you need a separate spreadsheet that shows your five-year plan including: team costs, office costs and all the other costs of running your business, together with your revenue projections, market sizes, how you expect revenue to grow year-on-year, the cost of acquiring customers, lifetime value of a customer, and everything that underpins the graph in your pitch.
It’s unlikely you’ll present this much depth to an investor to begin with, but this doesn’t mean you can cut corners. Investors who are interested in your projections are likely to ask for these details so be prepared or you might come across as embarrassingly amateur.
Although your projections are estimations and you want to appear ambitious, you need to be careful. A few years later, if you’re not delivering the numbers you predicted, then you can bet that your investor will pull out the first pitch deck you sent them and hold you to account. If your projections are realistic, then you’ll avoid that difficult conversation.
You’re a charismatic and numerate leader
There’s one thing that brings everything in your pitch, plan and proposal together – you. Of course, your potential investors are analysing your documents – they’re also analysing you. While the promise of untold riches can be alluring to anyone, investors won’t invest if they can’t visualise you as the charismatic person who can deliver that promise.
If your numbers don’t add up or the figures show that you’re losing money, then the investors will believe that you’re not ready for investment. They expect you to know how to manage the numbers.
Do you have a clear and balanced vision? Make sure that’s clear to investors. They’ll only invest if they’re convinced your vision will lead to success. An investable proposal must strike the right balance between ambitious and realistic – and that’s what you need to show in your five-year business plan.
A business plan is a formal document that outlines a company's goals, the strategy to achieve them, and the resources required. It serves as a roadmap for the business and is often used to attract investors.
Venture capital is a form of private equity financing that is provided by venture capital firms to startups and small businesses with long-term growth potential. It typically involves high risk but can yield high returns.
Investment return refers to the gain or loss made on an investment relative to the amount invested. It is usually expressed as a percentage and can include income from dividends, interest, or capital gains.
Revenue projection is an estimate of the amount of money a business expects to earn over a specific period. It is based on historical data, market analysis, and anticipated sales growth.
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