Realism vs. Optimism in the Business Plan

by: Dave Lavinsky

The most important function of a business plan is to create interest among investors so that they write a check. In achieving this goal, business plan writers are often challenged by determining the proper level of optimism in their plan. That is, they must create a compelling story to investors while maintaining credibility.

Optimism shows investors that a company is confident about the market opportunity, its ability to execute on the opportunity, etc. Over-optimism, however, leads investors to believe that the management team does not fully understand the opportunity or the tough road ahead. As such, business plans must be sure to limit over-optimism and show investors they are realistic and credible.

Realism, the opposite of over-optimism, should be used in business plans to portray sobriety and credibility to investors. Realism should manifest itself in management team bios that tell the actual accomplishments of managers, rather than fluff. It should manifest itself in credible market forecasts and sober assumptions of the company’s growth.

While business plans must excite investors so they take action, if they are too optimistic, investors will discount their merit. Conversely, if they are too sober, investors may not feel they will get an adequate return on their investment. As such, business plans should present a compelling, optimistic picture, but continuously refer to hard facts and realistic assumptions to build credibility and genuine excitement

About the author:
GT Business Plans has developed over 200 business plans for clients that have collectively raised over $750 million in financing, launched numerous new product and service lines and gained competitive advantage and market share. GT Business Plans is the sister site of GT Venture Capital

Circulated by Article Emporium

 

Pre-Money vs. Post-Money Valuation

by: Dave Lavinsky

When a company decides that it must raise capital, a key question that must be answered is how much the company is worth. For example, if the business needs $500,000 to get started and/or grow, how much of the equity in that company should $500,000 command? Once this question is answered, the company will go out and try to find investors. When doing so, a key question often arises as to whether the valuation is “pre-money” or “post-money.”

“Before the money”” or “pre-money” and “after the money” or “post-money” denote simple concepts. However, these simple concepts can even confuse even the most sophisticated analysts at times. If a company is valued at $1 million on Day 1, then 25 percent of the company is worth $250,000. However, there may be an ambiguity. Suppose the company and the investor agree on two terms: (1) a $1 million valuation, and (2) a $250,000 equity investment. In this case, the company may offer the investor 250 shares for $250,000. Immediately there can be a disagreement. The investor may have thought that equity in the company was worth $1,000 per percentage point, in which case $250,000 gets 250 out of 1,000 shares or a 25% equity position.

An assortment of United States coins, includin...
An assortment of United States coins, including quarters, dimes, nickels and pennies. (Photo credit: Wikipedia)

Conversely, the company may have believed that the investor was contributing to the enterprise which was already worth $1 million. Under this rationale, the $250,000 would give the investor 250 shares out of 1,250 shares or a 20% equity position.The critical issue was whether the agreed value of $1 million to be assigned to the company was prior to or after the investor’s contribution of cash (pre-money) or post-money.

In the above case, a pre-money valuation of $1 million and a post-money valuation of $1.25 million were equivalent. Because mixing up the terms could significantly increase the cost of capital raised, companies must be sure to understand the two metrics and agree with investors to the metric that raises them the capital at the appropriate price.

About the author:

GT Business Plans has developed over 200 business plans for clients that have collectively raised over $750 million in financing, launched numerous new product and service lines and gained competitive advantage and market share. GT Business Plans is the sister site of GT Venture Capital

Circulated by Article Emporium
——————————————————————————–

Enhanced by Zemanta