There are two major reasons why any start-up or expanding company should have a business plan. The first is that a business plan is an entry-level requirement for a number of different methods of asking for capital, whether seed or growth. This applies when asking through a grant, SBA loan, the bank, angel investors or venture capitalists.
The second reason is that a business plan is regarded as a road map to a business’ next steps and ultimate success. It forces the entrepreneur to think of all strategic aspects of the business before execution. In order to write a business plan, the entrepreneur will define the company, research the market, assign tasks for the execution plan, and calculate the costs the company will incur and revenues the company will generate. By having this all down on paper, the management team can assess if the business will be profitable before they begin incurring costs. This can save individuals needed capital as many underestimate the cost of starting a business before undertaking such thorough research.
A business plan can act as a guideline for how the company will be built or a new product will be introduced. Business plans should be updated on a regular basis to include the newest information with regards to the market and progress with the execution plan.
While business plans are crucial strategic documents and play an important role in fundraising, they are cannot take the place of other capital raising documents. When the moment comes when you and your investors are ready to lay out the terms of the investment, you will need a private placement memorandum. As opposed to the business plan, the private placement memorandum (PPM) describes the securities to be sold and for what price, fees, and risk disclosures, in addition to many topics covered in the business plan.