If there’s a commonality among entrepreneurs, it is optimism.
Most entrepreneurs are passionate about new ideas, growth and climbing to the top as fast as they can. Nowhere is this bullish thinking more evident than in the business plans that many entrepreneurs write to raise money from investors.
The thing to note, however, is that the business plans that quickly attract significant funding don't portray an easy run to the top. They don’t minimize the challenges of their uphill journey. They exhibit caution and restraint.
Here's why. Investors know they’ll lose their money if a young company goes out of business. It can happen swiftly, too, as business conditions change. To safeguard their cash, investors support the entrepreneurs who choose less risky routes in an effort to enhance their chances of business survival.
So, what can entrepreneurs do to reduce the perceived risk of their venture climb? Here are my top three strategies:
1.) Improve your gross profit margin. When startup entrepreneurs prepare their first projections, they spend a lot of time evaluating their company’s projected revenues and net income. While these are the fun numbers to look at, they are not the only predictors of startup business survival. What do I look at first? I look at a young company’s gross profit margin — the product sales price minus the cost of goods sold.
To attract investment capital, entrepreneurs have to present industry-leading gross profit margins in their business plans. Investors know that companies with high gross profit margins (preferably more than 50 percent) have more flexibility to fund new product development and advertising programs than companies with lower gross profit margins. Trust me, this is just what helps young companies stay in business.
You can impress potential investors by comparing your company’s projected profit margins to your industry’s averages in your business plan.
Of course, if your company’s profit margin lags behind your industry’s average, then it’s time to redesign your product line. Also, don’t assume that you’ll ever make up profit points with increasing volume. Investors know that a so-so margin product remains so-so whether you sell 10 or 10,000.
2.) Partner with strength. Most startup entrepreneurs assume that operating partnerships and joint ventures are for well-established companies. Not so! There are many ways startup entrepreneurs can save money and time through neat business alliances. Think about this. Can you share labor or space with another company in a mutually beneficial way? Can you package your new product idea as a "private label" of an established brand to build faster distribution and revenue growth? Can you partner with other complementary Web sites to reach a wider audience? Sure you can.
I encourage all entrepreneurs to think creatively about early partnership opportunities. Even if the negotiated deal seems small or local in nature, potential investors will value your mature, risk-adverse approach to business building. Here’s another reward to partnerships: Young companies that partner with bigger players receive higher per share price valuations than companies who are determined to go it alone. It’s a strategy that’s hard to beat.
3.) Anticipate your competition’s response. If there is one weakness of business plans, it is a foolish underestimation of the competition’s ability to copy great ideas. Entrepreneurs write "we have no competition" or "no one offers a similar product or service in the marketplace." While this may be true today, it may not be once your hot idea catches on in the marketplace.
Should entrepreneurs fear their competitors? Absolutely. It’s a productive mindset, because entrepreneurs who understand their vulnerability tend to work harder to make their products better. They also take proactive steps to tighten relationships with their customers through loyalty programs, long-term service contracts and skilled brand positioning. Best of all, entrepreneurs who have a more realistic understanding of competitive risks write sharper business plans that catch the eye of check-writing investors.
Here’s a worthwhile exercise to improve your tactical thinking: Name five or more ways your competitors can seriously undermine your business through blatant imitation or aggressive discounting (It will happen). So, after mulling over these scary thoughts, what steps can you take today to strengthen your position? Think it through. Every section of a company’s business plan benefits when entrepreneurs challenge themselves to outthink the competition.
From an investor’s perspective, "fundable" business plans are not the fanciest or the longest. They are not measured by the quantity of impressive graphics or a promise to turn a small investment into millions. Rather, business plans that are read cover to cover are well-researched, practical and precise. They don't have to be perfect, just representative of the entrepreneur's best strategic thinking.
Editor's note: This article originally appeared on the Microsoft® Office Live Small Business website, which is now Microsoft® Office 365.