What Investors Look for in Science Business Plans?| Pipette & Chart
Data from the Bureau of Labor and Statistics show that 2 out of 10 new businesses fail within one year of starting their operations. This dismal statistic is also reflected in the 2020 State of Global Startup Economy, which indicates that 4 out of every 10 startups are in the red zone. The same report also shows that 72% of startups experienced a drop in revenue at the onset of 2020, and only 12% are experiencing significant growth.
For startups and entrepreneurs, these data points underscore the importance of getting ample resources such as funding from investors at the right time.
One way to increase the chances of acquiring such resources is by having a comprehensive business plan. But what do venture capitalists, angel investors, and other early-stage investors look for in a business plan? To get backing from seed investors, you need to understand what exactly they want to see in a startup and incorporate these into your business plan.
Who needs a business plan?
Startup founders, entrepreneurs, and anyone else embarking on a business needs a business plan. It is a necessary tool for seeking funding, gaining capital, and operating a business. After all, a business plan is the largest dataset of your business.
Aside from this, a business plan also serves as a roadmap for your business. It shows where you currently are and directs how you plan to achieve your business goals. It serves as your guide in making sound business decisions for success and sustainability.
Anyone involved in running a business must understand the importance of having and updating a comprehensive plan when starting a company, taking a business public, attracting investors, and growing the venture. Having a business plan can double your chances of surviving the daunting first year and growing a profitable enterprise.
What investors want to see in a business plan
Regardless of industry, products, or services, potential investors would want to see a well-thought-out business plan that clearly illustrates the feasibility of a business venture. Your business plan must include the following:
A thorough description of your products and services, and market research that shows sufficient demand for them
A competitive analysis that illustrates your potential market share, sales projections, and competitive advantage
Well-prepared business, marketing, and financial plans that provide a clear understanding of your objectives, strategies, and financial viability
These three are the basic elements that should be in any business plan. Depending on your niche, there will be other specific elements, such as a tech startup business model, that investors will look for.
A good business plan always tells a story: it conveys what your ambitions are and how you plan to achieve them. The specifics obviously depend on the stage your project is currently at. In the early days it should probably focus on validating your hypotheses about Problem – Solution fit, Product – Market fit and Business Model fit. Later on, it will show your approach to scaling up and executing on the growth of your business. From the investors’ point of view, it is always interesting to see how the plan translates to numbers and whether these numbers have a chance of adding up in the real world. There is a saying that “more fiction is written on Excel than Word“ – so be ambitious with your plans, but always have a reality check.
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Keep two things in mind: Business plan is not a formality and the length should not worry you too much. In the beginning, you may start with a one-page business plan and as you get better orientation in your business, you’ll expand from there. Don’t forget to update your business plan frequently, especially in the early stages of your startup. And finally, treat your business plan as a valuable IP asset - it contains a lot of know-how. We recommend keeping two versions - a confidential - and a briefer, non-confidential one.
What investors look for in a business plan for R&D startups
As mentioned in the previous section, investors would look at essentially the same thing, whether a business is science-driven or not. So, strive to answer these three questions before you proceed with the rest of your business plan: Why me? Why this solution? Why now?
It’s not the story you need to worry about in the first place, it is your target audience that should be understood first. As soon as you grasp how deep you can take them into your rabbit hole, you can start crafting key messages and supportive evidence. Personally, I don’t think you need to think of storytelling to financiers as „downgrading” of what you are doing. It is actually a key discipline to be able to explain complicated things or technology in a simple, yet fitting way.
R&D business plans require more substantive proof to back engineers and market researchers. Millions of dollars are needed in an R&D startup budget, so investors take utmost diligence in deciding which ones to invest in. An R&D business plan must be set in a context that provides a solution to a real, quantifiable problem. Its science must be well translated into an understandable narrative that includes proper metrics, such as IP, publications, and credentials.
For your R&D-driven ventures, make sure to include these elements in your science business plan. These can help increase your chances of getting noticed by investors and receiving substantial funding.
Indicate whether your product is in the prototyping or roll-out stage, if it is single-purpose, and what platform technology you are utilizing. Be as detailed as you can to show expertise in the field.
Intellectual property rights
A solid intellectual property portfolio makes your business more attractive for investors. Aside from protecting your brand and your innovations, patents increase your business value.
Show investors that your innovative idea creates a lucrative market opportunity. Provide an overview of the current and potential market, including recent transactions concerning similar technologies at a similar stage.
I always try to look at key drivers at the side of buyers. Can the business model scale? What are the conditions that are needed to create the unit economy that will allow the company to grow? What is the churn? R&D startup founders are sometimes so drowned in their lab and groundbreaking results that they completely lock themselves out from their potential customers. My biggest advice is to talk more to your future clients, maintain these meaningful conversations and try to understand the needs of your clients. That’s where the best marketing briefs and business plans are born.
- Vaclav Pavlecka, Managing Partner at AirVentures
Evidence and publications
An R&D startup is a scientific business and must be research-driven. You must show that your breakthrough discovery is backed by thorough research and validation.
Regulatory, manufacturing, and distribution pathway
Taking a new R&D product from research to market can be challenging. Show investors that you have a clear pathway that takes into account regulatory issues and manufacturing concerns.
Seed investors might not provide funding for a company that only has a single product in its business plan. You need a steady pipeline of new products to indicate future prospects of your company. If you have multiple applications in your pipeline programs, list these down to improve your projected value.
Schedule and budget
R&D products can take years before commercialization. Set a feasible projected product development time to give investors a clear idea of when your product is likely to go to market and what resources are needed to create a sufficient runway.
Map out where you stand among competitors in your niche. Benchmark your product against the top competitors and show growth opportunities. Make sure that these are based on market research.
The R&D industry opens vast opportunities for high-profit levels but also has high failure rates for startups. Investors understand these but you need to show them that you have prepared responses for risk factors and are taking precautionary steps to mitigate risks.
Demonstrate who you engaged with and who showed to believe in your solution. A testimonial, letter of support from a key opinion leader, or even a grant count in the very early phases of your venture.
Management and scientific teams
Your team should include a CEO with strong business leadership, a CSO with excellent scientific or technical expertise, a CFO with keen financial management abilities, and a Scientific Advisory Board with academic scientists of stellar reputation in the industry.
What are the primary considerations of an investor in a business plan?
In a nutshell, investors primarily consider the uniqueness of a product or service, its market potential, and your capability to manage all aspects of the business venture. You need to establish your expertise and knowledge in the industry and prove that your product can generate cash flow in a wide market. Your business plan must show all these and map an effective business model that can thrive in a competitive landscape.
Craft a business plan that attracts investors
Creating a science business plan can be overwhelming. It needs to be thorough, accurate, proportionate to your stage of development, and backed by research. Without a proper format, investors can easily lose interest in going through the entire proposal.
Many R&D-based startup founders have a problem with adequately estimating the product time to market and financial needs before profitability. This always costs more and takes longer than initially estimated, and very often leads to problems with cashflow and fundraising in the future. I would advise any early stage R&D startup to talk to experts and investors from their industry and ask them for their inputs regarding these things as well as include a buffer in the business plan.
If you’re uncertain about crafting a business plan, work with a consultancy group that has experience in developing such plans for R&D startups. They can work on making your plan readable and more presentable for investors.
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