Whether you're starting a business or already have an established company, there's a good chance that at some point you will be looking for money, either debt or equity, or combination of both. This article should help to properly prepare the materials presented to investors, thus increasing chances of successful funding.
Investors have money, but they don't have much time to sit and read through 27-pages business plan. If your initial presentation is more than 2-3 pages long, most likely it will end up in a waste basket. Under best circumstances you will receive a call from investor asking to briefly explain what do you actually want. Therefore, lengthy business plan is just as effective as a business card with contact information. It doesn't mean that eventually you won't need a comprehensive document, but not for the initial introduction.
Do not overburden the document with technical details because majority of investors simply don't care how raw material A transforms to end product B. Majority of investors speak financial language and the executive summary should be written in a language that they understand. Depending on type of financing you're looking for, include only relevant information. For example, if you are going after assets-based loan, include total value of assets, preferably both estimated orderly liquidation value (OLV) and forced liquidation value (FLV), and skip on principals' bios, because they are not relevant for this type of loan. It is also good to know that you can expect somewhere between 60% and 8% loan-to-value (LTV) depending on type of collateral.
Lets start with 1-5 paragraphs about your project, when it was started and how you've got to this point. Be precise, clear and concise.
Next, tell investors what you're looking for. What is the total amount? Should it be debt or equity, or both? What are the expected terms? Do you need a lump sum, or can receive money in tranches?
Now, lets put on investor's shoes. What savvy investors are looking for... what is the common denominator? Simply put, investors are looking for high return on investment (ROI) and low risk. Every project that investor evaluates should pass ROI-Risk test. Therefore, the presentation materials should contain information addressing these two subjects. Principals are usually pretty understanding to ROI requirements and reflect it in the documentation, however risk assessment is often overlooked. Needless to say that very often risk is the decisive factor.
It is critical for a principal to understand that 100% financing is very, very rare. It comes with hefty price tag and substantial collateral requirement. Usually investors want to see principal having some "skin in the game" to mitigate the risk. It's much less likely for a principals to fail if their own money are involved. Save yourself a lot of time by realistically evaluating the investment opportunity.
Regarding due diligence fee - be prepared to pay for direct expenses, like travel, food and lodging, hiring local counsel or documentation processing service, etc. Just make sure that such expenses are not padded a lot; ask for due diligence fee breakdown.
