Love at first web site – How to write an eCommerce business plan that makes your ugly startup look beautiful to Investors
It’s easy to have a great idea about selling something online. But turning ideas into a successful company also requires other inputs, including money from investors.
Let’s say you’ve already exhausted your personal savings and spent all the family-and-friend loans for your early development expenses.
Further, let’s also assume you’ve just sold your last PlayStation to pay for another month of web hosting.
It’s the worst of the worst-case scenarios: You have no valuable assets, and no managerial track record.
Without hard loan collateral or experience as a successful executive, it’s difficult to find “non-recourse” financing for an eCommerce startup.
If you’re truly desperate for seed money to build a business, you’ve probably already fallen victim to an “advance fee” commercial loan scheme at least once before.
You know the scenario: Hungry entrepreneurs pay thousands of dollars in “loan application fees” to shyster brokers who promise development money that never arrives.
So, how can you convince a real investor to finance your eCommerce startup?
It’s easy with a well-written business plan. A good plan can make any startup attractive enough to draw investors like flies, even when the underlying revenue model smells like crap.
In this article we’ll take a raw look at what bankers want to see.
We’ll show you how to write a business plan that makes eCommerce investors fall head over heels in love, even if the project is a bit ugly once you peel off its makeup.
A well-written business plan makes you look capable, even when you’re not
When you’re starting any new venture, the first step is to write down or record the important ideas about what you’re doing.
By documenting the details, you’ll understand things much better than by just dreaming or talking about it.
A good business plan shows investors you’re well organized and capable, even when you have no previous experience.
When investors see a well-written document, they tend to assume the underlying business is equally professional and likely to be successful.
If the quality of writing is good enough, you can easily bluff your way past the gatekeepers who screen access to decision-makers, even if your numbers are weak.
If you’re not a good writer and don’t know one, find a professional writer who can help prepare the plan and all your other business documents.
The winning elements
Although they may be called by other names and combined in various formats, these are the winning elements that eCommerce investors look for:
✔ Executive summary (“one-pager”)
✔ Clear description of the overall business & value proposition
✔ Compelling description of products & services
✔ Key personnel
✔ Management & operating structure
✔ Marketing & sales plan
✔ Financial projections (proforma if there’s no operating history)
How to write the best business plan for an eCommerce startup
Institutional investors receive tons of poorly-written plans. Secretaries and interns screen the email, and they may not be smart enough to recognize your brilliant concept for online sales.
Unless you can show a valuable asset or existing track record of successful operations, your business proposal will need to jump off the page and beg a tired reader for attention.
If your investor outreach is focused on banks, VCs and big funds you’ll need to instantly grip readers.
Make the plan short enough so a VC intern in Silicon Valley can read it all without yawning. And make it super-sweet for investors by promising them big equity and/or a unique technology franchise that can dominate the competition.
Quickly identify who you are and concisely describe the company, all within the first three or four paragraphs of the document.
Keep in mind the goal is to engage the gatekeeper well enough so they’ll approach a decision-maker on your behalf.
Here’s an example of the introductory description for Mango Aire, an eCommerce startup that makes investors hot to trot:
Mango Aire will be the leading US-based tokenized e-commerce platform serving only buyers and sellers of sustainable products. It will serve a wide demographic of sustainability-minded consumers, organic food producers, sustainable-product manufacturers and investors. To facilitate this goal, Mango Aire will tokenize the sustainable-products e-commerce platform with a digital utility token (the Mango) supported by appropriate blockchain infrastructure and technology platforms….
This type of summary description catches the eyes of investors because it clearly identifies the demographic and business objective. It also looks sexy because it’s a sustainable eCommerce project based on blockchain.
Answer the tough questions now instead of waiting until later
Successful investors can get rich by finding and fixing the weaknesses in others’ business models.
They can stay rich by avoiding entrepreneurs who don’t understand the strengths and weaknesses of their own business models.
So, in your plan be sure to answer these soul-searching questions. They’re the same questions that credible investors always use to drill down into the entrepreneur’s capability.
- What are my 5-year personal and professional goals for starting this business?
- Which products and/or services doI sell, and why?
- Who are the target customers?
- What is my unique value proposition?
- Why am I starting the business now? Is now a good time or bad time to start the business, and why?
- Where will the business operate? Locally, regionally, nationally or internationally?
- What are the potential challenges that could affect the business?
- How will investors be compensated? Will they receive equity, debt or both?
Highlight the unique competitive value of your products, services & experience
It’s nearly impossible for anyone to get startup financing for an online business without first having deep experience in the niche, or collateral for a loan.
Want someone to invest money into your new eCommerce business? A unique value proposition for consumers is the only leverage you have with credible investors.
That’s because they’ll only fund a startup if its products and services fill consumer needs not already met by competitors.
It seems like an oxymoron: Investors are looking for unique concepts that offer new competitive advantages in the marketplace.
Yet, they’re also very suspicious about fresh entrepreneurs with unusual ideas, which they fear will turn out to be expensive losers.
Here’s the brutal reality of eCommerce – If you create and sell a successful new product online, competitors will soon begin digging into your pile of cash. Investors know this, so they look for tech ideas and business models that resist competition.
It’s easy to create new products and services to sell online. But to get any love from investors you’ll also need to make sure that competitors can’t quickly knock off your success.
Just having a good new idea isn’t enough to lure investors. The best solution is to focus on the fattest niche of an industry where you’re already an expert, and sell a combination of products and experience that nobody else can duplicate.
Choose the single best money-making idea from your brainstorming. Then find ways to offer that product or service online in ways that your competitors can’t touch.
After establishing your products and services, the next step is to identify your target market. These are the people most likely to buy a product or service.
Have you ever noticed that successful investors are always great number-crunchers? Market viability is the first qualification that investors look for in an eCommerce startup.
Before going out on a date, they want to know whether your idea is marketable, and to whom at what price.
After that it’s easy to figure out potential revenue and profit. Just multiply sales estimates by pricing to reach estimated revenue.
Since investors always ask about target markets and sales projections, you should make realistic projections and be ready to defend those numbers later.
In the business plan, describe your target market segments:
- Psychological & behavioral
Be sure to define your target buyers according to age, gender, ethnicity and income level. By the time you’ve completed the market research across each of those 3 segments, you’ll have a clear picture of who they are.
For example, if you’re planning to sell eco-friendly handicrafts online, your demographic and geographic research might find a typical customer profile like this:
- Age 20 to 40
- Lives in a northeastern state
- Annual income between $35,000 to $60,000
Likewise, your research across the behavioral market segment will let you explain clearly to investors why these targeted audiences will buy your products, and what the prices will be..
Combine these details together with realistic sales projections into your eCommerce business plan.
Even if the projected sales figures aren’t impressive, don’t worry – Investors might still give you some cash if they’re convinced you have especially deep knowledge of the target marketplace.
Analyze your competitors
In order to be successful, you’ll need to know your competitors as well as the buyers. After researching the strengths and weaknesses of competitors, you’ll be able to explain them in your business plan.
Always confront the issue of competition head-on without any sugar-coating. You’ll lose credibility if you tell an investor that your startup will become an online category killer when the niche already supports multiple competitors.
From cattle call to beauty pageant
One key to success in writing a business plan is to differentiate between your startup and the rest of the crowd.
When a major investor funds a deal in the eCommerce space, entrepreneurs respond to the “cattle call” by offering many similar projects.
Even when your startup is in a hot development space, you’ll still need to stand out from the herd.
Why is your idea so special? The business plan should tell readers – in one sentence – the unique value proposition that makes you different from competitors.
The easiest way to differentiate your company is through price and/or quality, whether high or low.
You can also distinguish yourself by selling new inventions or technology that other entrepreneurs don’t have.
Investors love exclusivity – Get an exclusive product or the valuable licensing rights to sell something online, and your business model will become more appealing.
After researching buyers, competitors and marketplaces, you’ll know where your products and services can meet consumer needs.
If you can clearly explain how you’re better than competitors, you’ll score plenty of points with investors.
Dog sweaters that fit perfectly
For example, let’s say you’re planning to launch DogNitz, an eCommerce startup to sell your custom-made dog sweaters online.
Once you’ve researched prospective buyers and potential sales figures, you study the competitors.
In this example, let’s say you discover that there are about a half-dozen online competitors in your target niche.
But some of them have a reputation for wrong sizing, and the others are plagued by long turnaround times for shipping.
So, you’d highlight your company as a solution for problems the competitors can’t touch, as well as the additional valuable features that set your dog sweaters apart, such as built-in pooch cams and GPS trackers.
In the eyes of investors, anything you can do to set yourself apart from existing business models is a plus, as long as you have research data to back up your projections.
The dating game is based on your numbers
Ego alert: Investors don’t care how brilliant you are for thinking of a new way to sell widgets online. They’re only interested in seeing a convincing picture of how richly they’ll be rewarded for taking a chance on your ideas.
Successful investors are number-crunchers, and it’s hard to fool them with bogus sales projections.
Instead, it’s better to use optimistic-yet-defensible numbers for startup budgets and proforma financial projections.
Create simple spreadsheets to accompany your business plan, showing:
- Projected expenses
- Projected revenue & important assumptions
If your store is already running and has assets or revenue, then you should also include a Balance Sheet, Income Statement and/or Cash Flow Report within the business plan.
When calculating expenses be sure to include all ongoing and one-time startup costs to launch the business. Here are the main eCommerce expense categories you’ll need to consider:
- Servers & other equipment costs
- Hosting & other services
- Office & warehouse rental
- Legal fees
Put some makeup on your financial projections, but don’t lay it on too thick
Decision-makers rely on junior staff to screen business plans. They look at whether the numbers make sense at first glance, before sending qualified proposals to the boss.
Re-calculate your numbers repeatedly until you’re sure you can explain them with confidence, even if they’re a bit optimistic.
The cost and pricing assumptions upon which you base your financial calculations are critically important.
Don’t be greedy, but at the same time know that running out of money is the main cause of failure for startups.
An entrepreneur’s ability to explain and defend the planned revenue and expense figures is the main factor in convincing investors to come aboard.
So how do you calculate the proforma (expected) amounts for sales and profits? Once you’ve done the market research mentioned earlier, figuring out how much you’ll sell is easy.
Just add up the total number of potential customers in each separate target market niche you’ve identified.
Then multiple that pool of possible buyers by a realistic percentage of them that you think can eventually become your customers.
For example, let’s say your DogNitz research shows there are 1 million people in the US who might buy your custom-made dog sweaters at a net price of $50 each.
So, your target marketplace is worth at least $50 million.
We’ll assume that your goal is to reach 1% market saturation quickly. That is, based on your experience in the dog-clothing marketplace you think at least one dog owner out of every 100 could become a customer in the first few years of operation.
So, your first-stage target customer base is at least 10,000 dog owners.
To calculate sales revenue, just multiply the number of customers by typical order price.
1 million potential dog-sweater buyers x 1% market saturation = 10,000 customers
10,000 customers x $50 average order yearly = minimum $500,000 revenue per year
The next step is to look back at your expenses. If the dog sweater you sell for $50 costs a total of $30 to produce, then your net profit margin is 40% calculated this way:
$50 sale price – $30 total cost of production = $20 net profit
20/50 = 40% Net profit margin (NPM)
High profit margin means low risk for investors
If an eCommerce business plan can show proforma net profits of 30% or more, then investors are eager to get into bed.
That’s because a high profit margin means a low risk-to-reward ratio, which is exactly what investors want.
Bankers know that in poor market conditions a company might not reach profitability for 3 years or even longer.
So, unless you’re already selling online, it’s best to calculate conservative revenue projections spread over at least 3 years.
Another useful metric for calculating proforma financial projections is the eCommerce company’s expected sale price.
Successful eCommerce businesses typically sell for at least 3x annual revenues. That means if your venture is starting with zero assets, you’ll need to project the expected annual sales revenues to be at least one-third the amount of the expected funding from your investor.
Otherwise, your startup will appear over-valued.
Avoid making unrealistic revenue projections simply to catch attention – You’ll lose credibility with investors if the business doesn’t perform as expected.
Once the financial projections in your eCommerce business plan pass the initial screening process, congratulations – Your startup has won the first round of the beauty contest.
Who’s the best man
Having a good idea for online sales isn’t enough. As emphasized throughout this article, you’ll need to have experience in the target market, or have in-house talent that does.
To hook an investor, you must show that you have managers and key workers with operational capability and experience.
Ego alert: Regardless of how much you want to control the business, investors and creditors need to see depth of organization with multiple players on the team.
They won’t fund a one-man business because, like the old banker’s joke says, they’re afraid a single bad case of flu could kill the entire company.
Returning to the DogNitz sweater business example: If you show good enough numbers in your business plan to pass the initial screening process, investors will take a second look.
And if you, your managers or other key staff have deep knowledge of the fat-growing dogwear marketplace, then your startup has a much better chance of being funded.
That’s why it’s critically important to include the names and summary bios of all key players on your team.
First list your own bio as entrepreneur and founder. Then show which executive will be responsible for each key operational area.
Describe exactly how each team member will contribute to the company’s unique value proposition for consumers.
Your investor wears the pants
Be aware that without a proven track record of operating a business in a given industry, you’ll only get funding if you let the investor choose their own management team.
You can make the business plan stronger by keeping the structure flexible.
Ask potential investors for their input about hiring executives as well as other strategic decisions.
The best trick is to list your existing executives as “acting” in their roles.
Then ask investors to recommend their favorite eCommerce operating executives for those roles, to help ensure success. This gives you a reason to follow up repeatedly while working toward funding.
The marketing plan
The marketing plan is a central part of your overall business plan. A full description of eCommerce marketing is beyond the scope of this article.
Here we’ll just emphasize that a marketing and sales plan is the last critical component to be prepared for your overall business plan
The marketing plan always comes last. That’s because it relies entirely on your research and decisions about the other factors mentioned earlier –
- Target customers & marketplaces
- Products & services
- Pricing & competition
- Financial projections
Turnkey digital marketing
For eCommerce you’ll need a website as well as social media and advertising. If you want to focus on doing what you best – running your new business – then let the expert digital marketers do what they do best.
A leading agency like Voy Media can provide your site with full marketing support, including well-written authority content.
That way, you’ll rise quickly upward in Google search page rankings through the magic of SEO and social media marketing.
The same professional copywriters who dressed up your ideas and packaged them into a winning business plan can write your web pages and PPC ads too.
When you’re looking for investor love, it’s all about money and experience.
A well-written business plan for your eCommerce startup can help overcome almost any deficiency in assets or experience, at least enough to get a second look from bankers.
The only way an investor will fall for your eCommerce startup is if the products and services are sexy and unique, and your business model is hard for competitors to beat.
Likewise, investors favor highly experienced players instead of virgins.
Even without cash or industry experience, you can still attract investors by putting some makeup on your proforma financial numbers.
Just make sure you can defend those same numbers later, once you’re past the initial screening process.
Marketing is also essential for success, and the best strategy is to find a good digital marketing agency to work with.
That way you’ll have skilled copywriters who know how to write a business plan that investors love, as well as your advertising and web content.
Wedding Ring from Creative Commons https://ccsearch.creativecommons.org/photos/c75aed7c-5615-4869-9a7e-ab3da75ee721
“Mistakes to avoid when buying Wedding Rings for Church Weddings” by nparekhcards is licensed under CC BY-SA 2.0
Weak and Strong from Creative Commons https://ccsearch.creativecommons.org/photos/d703b758-3ff3-458f-9d5d-933dd207ff09
Dog Sweater from Creative Commons https://ccsearch.creativecommons.org/photos/a81428c2-6248-4fe5-985d-e2a97198666a
Lipstick from Creative Commons https://ccsearch.creativecommons.org/photos/079bc4de-2887-47ac-929a-1cd3ef6e82e1
Ball in Basket from Wikimedia Commons