This seems so strange to me. My business plan marathon has turned up several plans calling for way more money than the plan itself says it needs. How can that happen?
For example, a plan calls for $3 million investment for 2010 and its projected cash balance at the end of 2010, and again at the end of 2011, never goes below $2.5 million.
Why would investors ever say yes to that? They’re being asked to take money from their bank account and put it into some startup entrepreneur’s bank account instead; and there it sits. Unused.
That’s just strange. Sure there’s uncertainty, but don’t tell investors you want their money in your bank account. Do a “use of funds” table if you have to, and lay out where the money is going.
And if it’s in the cash balance at the end of the year, then you didn’t need it. Revise your plan. Sure, a reasonable cushion is fine, but I’ve seen a bunch of them this year, asking for money that ends up all, or mostly, in the end of year cash balance. That doesn’t work.
There’s supposed to be a match: the investment is as close as possible to what the company needs to grow on. The money is your best guess on what you need to spend to launch the company. It doesn’t sit in the bank.
If your business plan cash flow has disproportionate ending cash balances, then the fix is obvious. You should be asking for less money from investors. You’ll suffer less dilution.
Yes, I know, there are people out there advising entrepreneurs to seek more money than they think they need. That’s not horrible advice, if you have the kind of startup that can pull those amounts in. But hey, please, don’t insult your readers’ intelligence: show the money being spent on growth. Don’t show it in your projected cash balance.
True story: at one of the business plan contests I’ve judged (and I won’t say here which, or when) one of the contestants was challenged by one of the judges:
“But why do you need $600,000,” he asked? “Your plan doesn’t support that.”
“Oh, I know that,” the entrepreneur answered, “that’s peace of mind money. I need a cushion in case things go wrong, so I can sleep at night.”
The room went silent. After a pause, one of the other judges said the obvious:
“So you’re asking us to write you a check from our money so you can put it in the bank as your money?”
That’s a true story.