"Plans are useless but planning is indispensable." –Dwight Eisenhower
When investors look at a company’s business plan, the one thing we know is that it's wrong. No one can predict the future; things will go better or worse than planned.
What investors really want to understand is the thought process behind the plan. In particular, there are three key areas investors are looking at: the market, the strategy, and the operational plan.
Starting with the market
The market is the most important component of a strategic plan. The opportunity has to be large enough to support a case for investment. And a large, untapped market creates a lot more room to make and correct executional errors than a niche market does. Investors will be evaluating how well you understand the market and how large it is (or will be in the future). Who are your target customers? Do you understand who the decision makers are within those customers (ie what role they are in)? Do you understand their personal incentives (which may or may not align with their employer’s corporate incentives)? Do you have hypotheses on where you can expand beyond your initial product and market?
The market is the area where strategic plans most often fall short. A well thought-out strategic plan starts with a market hypothesis. The next step is to identify what could disprove the hypothesis. The best CEOs have a hypothesis and a plan for testing it. They're actively looking for signals that they're wrong—because they want to make corrections and optimize product and process. They are asking themselves the question, “Why hasn’t anyone else done this before?” Only when you understand why it hasn’t been done and have a clear view of why that reason is no longer valid, or is overcome by your product or company, can you have confidence that you are headed in the right direction.
Defining your strategy
Once you have identified a market, your strategic plan should lay out your core strategy. What is the key insight or differentiation that your company has that will be the key to your success? How will you continue to maintain that advantage as competitors react? How you operationalize that strategy may change, but the core strategy should stay intact.
Investors looking at your plan will be evaluating whether that strategy aligns with what they are seeing in that market - whether it is differentiated from other competitors, whether it is aligned with customer behaviors, etc. And most of all, does your strategy align with your own strengths as a company? Are you uniquely able to execute on that strategy, or could someone else copy it and do it better?
Operationalizing your strategy
Operational planning is equally as important as the strategy. Investors want to understand the key drivers of your success; what are the most important variables in the operational plan, and how can you measure and monitor them? The operational plan also shows investors how well the company understands the cost structure necessary to accomplish your goals. Is it realistic in terms of spend and headcount necessary to drive and manage the predicted growth? Do your investments reflect your priorities? For example, if you’re a software company whose strategy depends on always having the highest-performing product, the plan should probably show the most significant investments around the development team.
In terms of detail, investors are not interested in the minutiae of every dollar you're going to spend. Your plan doesn’t need to be as detailed as you might think, though this depends on the stage of the company. In early stage companies, there's a greater amount of uncertainty and thus less value in a detailed future plan than with a company at a later stage that has a meaningful history of revenue and operations. In addition, in early stage companies, investors do not expect a perfect operational plan. If the market is large enough, and there is a clear strategy for winning in that market, weakness in the ability to operationalize that strategy is not going to scare investors away. They can help you hire the right executives to fill gaps.
In either case, operational financial models typically cover approximately 24 months. Anything beyond this time frame is difficult to predict. While strategy may remain consistent for five years, the financial model and operational plan need to be consistently updated.
If your strategic plan identifies a large market, a differentiated strategy to win that market, and realistic operationalization of that strategy, you're on the right track, and investors should respond favorably.
Philip Eliot has been a venture capital investor for the last 20+ years, primarily in the enterprise software sector and more recently in the social impact sector as well (environmental sustainability, health, and economic mobility). He’s managed companies as a board member at all stages of growth from pre-revenue through $200M+ acquisitions and guided them through the challenges that companies at those stages face: keeping stakeholders aligned (board members, investors, founders, and management); leading CEO transitions when necessary; helping to build out management teams and operational best practices; developing strategic partnerships; raising capital; and negotiating their acquisition by other companies or funds.
Philip can be reached at pe@orchid.black.
