Home Business The 5-year business plan: a made up, yet necessary, step for startups 

The 5-year business plan: a made up, yet necessary, step for startups 

by uma

 

Anthony Rose, CEO and co-founder of SeedLegals discusses why founders would be lost without a plan

You’ve started your business, you’ve got your idea, and now you need to raise investment. Where do you start? Trying to find an ideal investor can be hard and being able to capture their attention is even harder. This is where your 5-year business plan comes in. You put everything down on paper, noting where you’d like to be in the years to come. 

However, the need for this has long been (and quite rightly so) questioned amongst founders. To be frank, much of the 5-year business plan is made up of your estimations without much to base it on. Regardless, investors can learn a lot about you from the plan you present. Despite it not being technically needed, investors still want one – and here’s why. 

  • You showcase your level of ambition 

From the numbers you provide, investors can gauge how ambitious (or not) you are. Even though it’s pretty much impossible to be accurate with your numbers five years from now, an investor can see just how far you see your business growing in that period. For example, if after 5 years you show the company doing a few million a year in revenue, then for you as a founder, that’s great! You’re going to be able to pay yourself a nice salary, pay your bills and your team. But for an investor, this isn’t necessarily an investable business. Investors want to see a massive return on investment, look for a x10 or even a x50 return on their investment to make it worth their while, particularly given the risks involved.

However, if you as a founder predict a growth of x1000 in your 5-year plan presentation or growth that would see your startup become one of the richest businesses in the world, then this can have the opposite of the desired effect and turn investors away. They may see you as somebody who is deluded, and does not understand how to grow a business. While it’s important to show a value that proves your ambition, you can’t just skip several steps without evidence of well thought out reasoning that supports your plan.

  • Your plan is a measure of the market opportunity

How you, as a founder, present your plan can indicate to investors how you see your business operating in whichever market industry you are in. If the investors see your numbers predicting quick growth in the first couple of years and then plateauing, that might be an indication that you could max out the local market. Unless you grow beyond that, it’s a limited opportunity from the point of the investor.

Plateauing is a sign that perhaps you’ve reached your level of ambition and that it cannot be taken any further and investors will not view it as an investable business. Investors are looking for growth and ultimately are in the game to make a profit. If you max out your local market then investors will see that as fulfilling your potential. 

  • You prove you’re a numerate founder

When you present your plan to investors, the numbers are vital. They don’t have to be entirely accurate, and the likelihood is that they will vary from what your plan predicts, whether it be higher or lower. However, what the investor will be looking out for is the numbers you present, how you got to that valuation, and whether it’s justified.

If your numbers don’t stack up and the figures show you continue to lose money, this is not a good look. They’ll say that if you can’t get those numbers right, you’re probably not going to run your business in a way that’s going to make money. If you can show that you are not going to run out of money too soon then this can be a very useful indicator for investors, as long as you are showing that you can get the numbers right.

  • You’ll need your plan to apply for SEIS/EIS schemes

SEIS and EIS advance assurance can make your startup more attractive to investors as they’re likely to get tax relief in exchange for investment in your business.

If you are applying for SEIS or EIS, then HMRC will want to see a condensed business plan in your pitch deck before accepting any application. They want to see that it is a real business and that you do have a plan to grow the business. 

Having a well thought out business plan can get investors on board and also give them confidence that your SEIS or EIS application will be approved.

Key takeaway for your business plan

The most important thing to consider when drafting a 5-year plan is that the investor ultimately is not taking it too literally. The numbers and stats you present aren’t the be-all and end-all. What the investor is trying to take in from your plan is that you are worth investing in. They want to make sure that you’re serious about your business and that you’ve used suitable reasoning to reach the numbers and projections that you’ve presented. You need to display that you are numerate and ambitious, without appearing to be deluded and out of touch.

You may also like