One of the great capital raising myths is that investors will carefully dissect the contents of your business plan before they decide to commit funds to your business.
The same belief holds true for the business plan’s partner in crime—the information memorandum (IM)—the more common disclosure document used by private companies in Australia when raising capital.
Start-ups and emerging companies have been lead to believe that these documents are a necessity. NEWS FLASH—investors are busy and they don’t have time to read these documents.
An IM is an IM, is an IM
While writing a business plan or IM may help you think through some of the more complex assumptions of your business, no serious investor will ever read it. By writing a business plan, entrepreneurs can identify potential holes in their business idea, but a lengthy business plan will not be of any real value to investors.
Business schools the world over teach their eager students (myself included) to write business plans because it can be broken down into a list of steps that are easy to teach, test, and grade. In the academic world, writing and publishing papers is how success is usually defined.
In the real word, clarity mixed with brevity is far more important when it comes to the art of raising capital. This doesn’t mean you have to sacrifice on substance or quality. You can get the same results with a more targeted set of presentation materials.
Of course, when we are talking about disclosure, we are not referring to a prospectus—a compulsory document required by limited companies when raising capital from retail investors in Australia—we are talking about the requirements for proprietary limited companies; Pty Ltd, the primary vehicle of choice for start-ups while in their infancy.
Chapter 6D of the Corporations Act—better known as the ‘fundraising provisions’—regulates the way in which capital can be raised in Australia without issuing a formal disclosure document. A disclosure document is required in most cases but there are two very important exceptions.
If you are raising less than $2 million, from less than 20 investors, in any rolling 12 month period, then you are not required to issue a disclosure document. The same holds true if you are raising capital from sophisticated investors—people with more than $2.5 million in net assets, or whose gross income for the past two financial years is at least $250,000 per annum.
This legislation is set to change soon with the introduction for new rules for crowdfunding platforms. But these are the key provisions for now. And they clearly state that a formal disclosure document is not required in some circumstances.
Throwing the book at you
Nearly 10 years working in financial markets, and heavy involvement with a number of start-ups attempting to secure seed or expansion capital, tells me that formal documents are the last thing on the mind of investors’ before they invest in your business.
Investors will not read your business plan for the same reason that you don’t buy the first book that you are interested in buying. What you buy initially is the title and the look of the cover; then, if interested, you might proceed to the blurb on the back cover, made up of lavish praise from high-profile individuals, or perhaps go to Amazon and read some online reviews first.
If you’re still interested, you might read the summary of the book on the inside of the book jacket, or maybe even read a few paragraphs from the opening chapter. Then you might make up your mind. But reading the entire book? Forget it.
Reading a book front-to-cover is an entirely different matter, something that happens much later, or perhaps never, as many lonely books gathering dust on your bookshelf can attest to. And even when you do read the book, it typically happens long after you have purchased it.
Say more with less
So if producing a business plan or IM for investors is a futile exercise then what do you do?
At IEVOKE, we work with clients one-on-one to help them produce an essential kit of presentation materials. These include:
If you don’t get to your point quickly then investors will ignore you—just as you tend to ignore long rambling messages when you receive them. Investors have little if any sense of duty to read what you put before them. And remember one thing: investors are busy--very busy.
This article is general in nature and some of its content cannot be regarded as legal advice. It is general commentary only. You should not rely on the contents of this article without consulting professional advice from a commercial lawyer or advisor.