“Your executive summary gives you the opportunity to provide more detail about your business. The key is to do so in a way that is compelling to a potential investor.” 

Here are our suggestions for preparing what we believe is the Perfect Executive Summary:

• THE EYE-CATCHING INTRO. The first paragraph of an Executive Summary should be compelling and capture the reader’s attention. Take your best shot. Play your strongest card by stressing that single feature of your business that is its most eye-catching and distinctive characteristic. Don’t rely solely on what you think is your strongest feature; ask others to tell you what they think. Here are some examples:

The replacement of textbooks with a whole new learning paradigm begins this fall at more than 30 colleges and universities with the first time, classroom use of EduSmith’s internet-based electronic textbooks. The cost of electronic vs. printed text is low, the enhanced learning features are high, many of which are much more difficult to obtain, and the target market is well defined. LitmusWorks was profitable in its first year, earning $65,000 on sales of $650,000 last year, and will generate profits on sales projected at $4 million this year and $9 million next year.

When our salespeople call on restaurants that are using one of the 2-3 national brands, they try ours, and 6 out of 10 restaurants switch and begin ordering our product through their distributor. The reason? Taste and appearance, never price. We now have 30% of the New England market and are expanding down the East coast. Does the consumer like our product? We have more than 1,000 emails and letters on file received from consumers over the brief life of the company.

Both of the above businesses successfully raised the funding they were seeking.

• BUSINESS DEFINITION. Your second paragraph or section should define your business, leading off with a clear statement of what your product or service is, and for whom it is targeted. You should then expand on the products or services and the variations so that the reader has a full appreciation of the company’s breadth of product line. This should be short. Any paragraph containing excess words, as most plans and executive summaries are guilty of, dilutes instead of enhances the impact you are seeking. You should also talk about products you plan to develop. All too often a firm seeking capital will describe the market, the industry, the competition, etc., leaving a reader to guess what the business does until they are well into the document. Do this clearly, indicatingWhat the company does, for Whom.
  • Example. Jamesco manufacturers 1/2 to 2” stainless steel check valves for the petrochemical industry.
  • Example. iMakeNews (now renamed IMN) is a powerful and easy-to-use content management system and Web site authoring tool that enables businesses and organizations of all types to work together via the Web to publish interactive on-line newsletters.
• THE INVESTMENT YOU SEEKING?.Right up front indicate how much capital you are seeking, and to what use the proceeds will be put to. This quickly allows the reader to assess the financial parameters of the investment and this puts into context what follows. Most plans avoid discussing what funding they are seeking until the end, if at all, which frustrates the professional or institutional investor. Often they will scan the document looking for that number, and aren’t engaged in the flow of your pitch. You want to keep them reading every paragraph and not feel frustrated. Their needs differ from yours – you want to tell how wonderful the business is, whereas the investor wants to know how much you’re seeking, and who else thinks highly of you . . . more on that will follow.
  • Range of Valuation. You might wish to indicate a range of value you place on the company, so the reader is aware of what equity interest they may receive for the proposed investment. Most firms are reluctant to do this, as they are afraid of putting too low a value on the Company, or conversely, too high a value, thus discouraging potential investors. That is why we recommend a range, albeit a rather wide range, with some discussion of the basis for such a valuation. Of course it is subject to negotiation, and circumstances may change, such as receipt of an important order that might necessarily increase the valuation prior to your reaching an understanding with an investor. The key is to get the firm interested in participating in the process, and not discouraging interest too early with an excessive valuation.
  • Formal Documents. Some firms prepare an Offering Document or registration statement that is quite formal in appearance, having been prepared by an attorney. More often than not, this turns off an institutional or professional investor, because it says that the offering has been prepared from the Company’s perspective, not the investor’s. It also implies that the offering is intended for individual (retail) not institutional investors. Most serious investors will pass when they receive an offering that is so rigidly outlined.
• MANAGEMENT. Management is the single most important part of an Executive Summary in the eyes of most investors. Yet most firms put the section describing management towards the end of the document or executive summary. You can always attach detailed biographies at the end in an appendix.
  • Be Creative. You should look for an imaginative way of describing your management early in the document or executive summary.

The four key managers of the firm have worked together in prior firms. They have built a close working relationships that has previously been tested under the strain of managing and growing a previous business within a large company.

• • Address the CFO. Having a fulltime CFO is premature for an early stage company, but when millions of dollars are to be placed in the hands of an entrepreneurial company, the question will arise as to who will manage the funds, maintain the books, and be accountable for the use of proceeds. A part time CFO might be a far more economical answer, engaging one for the first 2-3 years, and then considering hiring a full time CFO.
  • Vacancy. If you have a key vacancy in your management team, try to fill it before you seek financing. If you cannot afford to fill the void prior to funding, try to identify someone who has agreed to accept the position subject to funding, and ask if he/she is willing to meet with the investors beforehand.
• BOARD OF DIRECTORS (OR ADVISORS). You are judged substantially by the company you keep! Or attract. Very young companies may find potential directors reluctant to take a board seat because of the potential liability they would bear, however they should be willing to accept a position on an advisory board, with the understanding that if the company achieves certain goals and milestones, then they mightbe offered a board seat. Realistically, a young company that has yet to prove itself cannot attract strong leaders that it would like to bring onto its board in 2-3 years, so it is better not to offer anyone a board seat until you’ve seen them in action while serving on your advisory board.
  • Seek Diversity. As you build your board, seek people with diverse backgrounds so that you have one strong sales orientated executive, one strong financial executive, and one strong operating executive . . . perhaps VP’s of their own companies as you may not be able to attract CEO level executives.
  • Not Only Investors. One mistake often made is to load a board with investors. One company we invested in had 6 board members, 4 of which were from venture capital firms, plus one angel investor, and the CEO. The meetings focused excessively on financial performance and issues and not enough on sales and business development. The company witnessed a better funded company with a competent board of directors soar past them and win the race.
• FINANCIAL PERFORMANCE. Too many executive summaries place the historical and projected financial performance at the very end, whereas most investors want to know what the expectations are for the company in terms of how large will the firm become, and how soon will it be profitable. We recommend using a summary table that shows one or two years of historical performance where it exists, and five years of projected performance, and only 3 key variables such as revenue, gross profit and EBIT or net profit, as shown below:
  • Explain Key Drivers. A brief explanation should accompany the table, describing those events that are the cause of a projected spike in revenue or change in profitability or poor previous performance.
  • Profitability. How soon should your Company show a profit? That depends on your type of company and the industry you are operating in. If yours is an exceptional venture, i.e. within the top 1 or 2 % of companies that venture capitalists look at, then you might show losses for more than 2 or 3 years. Biotech companies typically show losses for many years. However many investors like to see profitability within a year or two.
  • Sensitivity. Prepare your financials for good times and bad – building in financial projections for you doing better and doing worse than your initial projections. This also comes in the form of a conservative, moderate and aggressive plan.
• FINANCIAL MODELING. Today a financial model consisting of a simple income statement is unacceptable. Cash management is essential from the onset and an investor needs to see evidence that the company has built a fully integrated financial model before investing. This should be a fully integrated income statement, balance sheet and cash flow statement, extending out 3-5 years. It should be dynamic, that is, if certain variables are changed, the effect flows through the entire model so that it does not have to be rebuilt each time the assumptions are changed. Very early stage companies may not need a fully integrated model but all companies will eventually require one, not just to evaluate the investment proposal, but to manage and plan for the company’s cash needs going forward.Cash planning is very important – It may sound hard to believe, but companies have gone out of business because they were too successful and could not meet the working capital needs of the business. A good financial model that is developed to raise capital can be adapted to forecast the cash needs of the business going forward, and enable it to see when it will need to raise the next round of funding.Who should do the financial modeling? Later stage companies should have a CFO or competent controller able to model. Early stage companies may not have such a financial executive and may want to hire someone to do this. Accounting firms offer this service but expect to pay $15,000 or more, and it may take 2-3 months before it is fully functioning. There are a handful of capable consultants that specialize in doing this, quickly and competently, for $5,000-7,000. If you can possibly contract it out to a consultant, do so, because they know how to incorporate the bells and whistles that go well beyond what you thought you knew about Excel, and it will look more professional and not contain the circular references and other errors that you could spend hours trying to resolve. We use a consultant and can recommend him. He is fast, reasonably priced, and creates models that can be used for fundraising and then used to forecast the cash needs of the business on an ongoing basis.A venture investor will typically build their own financial model for the company or they may use yours and vary the assumptions. For starters they will ratchet down your sales forecast to a level they believe achievable. This Forecast may drive their own valuation model from which they will calculate how much of a return they expect to receive if they make a certain investment.
• MARKET. By now you should have the reader’s attention, and he/she is steeled to the task of reading the rest of the Executive Summary or requesting a copy of the full business plan. Now you should describe the addressable market that you serve, segmenting it so that it is sufficiently narrowed to the market you serve. As you describe the size and growth rate of the market you serve, you should reference the source for each number or each statistic you present for credibility. Too often we receive plans or summaries that dramatically size the industry or market well beyond the company’s ability to service, and does so without any reference to sources for where the numbers came from.You should forecast the market size and growth rates for each segment in which you compete, not the entire industry. Be focused because investors will query you deeply on your target market.Here’s where companies fail most often . . . characterizing the competition. You identify the competitors are within your market segment as well as those firms that might logically enter the market in the future. The remark, “We really don’t have any competition,” shows naiveté. Every business has competition and a statement like that will lead to a rejection.Then characterize the competitors in substantial detail, because this demonstrates that you respect your competitors, understand their strengths and weaknesses, hence their competitive advantage.

Create a competitor matrix listing each competitor along the top, and the characteristics that describe each along the left side. You should start with the basics: sales, estimated profitability, estimated market share, location, whether venture backed, independent or corporate-owned or publicly, plus many other characteristics such as technology, customer focus, relative cost versus the completion, unique features or attributes, etc.

Try to use outside data to support this competitor matrix. Opinions or guesses will not stand up to scrutiny, and here is an area in which investors will drill down. If you can’t fill in a cell in the matrix, put N.A. or Cannot Determine or Unavailable. Conversely, if you are preparing this analysis solely from your own experience in the marketplace, with no 3^rd party independent validation, your rankings or comparisons will be viewed with reservation unless you qualify it with a strong statement as to your knowledge of the industry.

Most investors do their own market due diligence, and if their findings differ materially with your conclusions, questions will be raised concerning your lack of knowledge within your market, and further due diligence may be suspended. State clearly what you know, and why, and also what you do not know.

The possibility of a large firm entering the market at some point in the future might cause you to hesitate about mentioning that possibility. For example, Google is often mentioned as a likely entry into many businesses, and that can give investors pause. On the other hand, an investor may see such a firm as a strategic partner, investor or perhaps an acquirer for the company. Also a large competitor could add credibility to what your firm is or proposes to do, and might accelerate acceptance of your product or service.

Finally, you should briefly describe your firm’s competitive advantage, if any. This might be because of your location, technology, patents, cost advantage, etc.

• SALES & CUSTOMERS. If you are currently generating revenue, list your key customers and their purchase history and volume, and the outlook for future orders. There is no greater test of the credibility of a business than the existence of paying customers who, by their purchases, validate the business concept. Given the large number of pre-revenue companies seeking financing, if you have revenue, mention this up at the front of the executive summary to set yourself apart.Perhaps the largest mistake companies make is forecasting sales, and second, forecasting profits. We see plans in which companies show sales growing by 4X in the year after funding, 3X the following year, then 2X, 1.5X, etc. First, it takes time to hire people needed to scale up. Sales people are in great demand, and take time to recruit, train, and weed out those who can’t contribute. How could a company possibly build sales that quickly, unless it is one of those rare consumer products that fly off the shelves.Persuading new customers to buy from you, particularly if they are being asked to switch from an existing provider, is difficult. Switching costs or other factors may deter a customer from moving his business to you. This is why investing in pre-revenue companies is so risky. Even beta tests may not sufficiently confirm the marketability of a product or service.We recommend that a company develop a detailed sales plan in a document separate from this Executive Summary. This could be a 5-10 page document, prepared by the sales executive responsible for delivering revenue. Achieving the sales goals should be a sizable portion of the sales executive’s compensation. In a well-run company, we’ve heard CEO’s express pride in the fact that the sales VP earns more than they do. Sales personnel are motivated by current dollars more than equity, so put together a generous program that rewards sales performance.
• TECHNOLOGY. For companies in which technology is a key component of the story, describe it in your plan and how you plan to remain current or ahead of the rest of the industry. However be sensitive to the fact that a confidentiality agreement may not have been executed by the reader of your Executive Summary. Venture capitalists may be reluctant to sign a confidentiality agreement unless it is their own. They are unlikely to divulge what they learn from you as it could affect their reputation within the financial community. Individual investors are less careful and need to be cautioned as well as required to sign a confidentiality agreement. Corporate investors may resist signing one, but ultimately may agree to sign yours if you sign theirs. Be careful what you reveal to a corporate investor as they can afford to mount a defense and can outlast you long after you’ve exhausted your funds in litigation.Patents are a good thing, but they are very costly to defend or pursue patent infringement.

A medical device company had patented devices however a substantially larger and well-funded company did not hesitate to offer products on the market that were a clone of the company’s products. The cost to litigate was well beyond the company’s means. Ultimately the larger company saw additional value in the rest of the company’s business and acquired the company for a respectable sum.

Another company possessed a technology, which it licensed out to 23 firms and was receiving royalties. However another 50 firms freely employed the technology and ignored requests to obtain a license and pay royalties. The Company had already spent more than $3 million to take 10 of those firms to court and require them to license the technology, but they were facing a long and costly battle, which, if they lost, would result in the other licensees cancelling their royalty agreements. IP Litigation is very costly.

If technology is a critical part of your company’s appeal, you might wish to place your description of the technology nearer the beginning of the Executive Summary. Keep in mind that most readers are not technically inclined, and too detailed an explanation may imply: that the business is being run by techies and not business people, hence it is a risky investment lacking in good managers/marketers; or the business lacks revenue or other indicators of success, which is why the company emphasizes technology rather than revenue accomplishments.

Ideally, the business will have some proprietary technology, but in its plan the company stresses its marketing and sales prowess, and its ability to advance the technology beyond its current state.

• CLOSING PARAGRAPH. Why do so many Executive Summaries or business plans on a flat note? So often they do because the writer has run out of steam, or simply is not highly skilled at composing narratives. Think about it: none of your sales letters to prospective customers end on a flat note, nor would an written appeal to anyone that you are seeking any favorable decision from. Yet most executive summaries do just this, and end without having made a compelling closing statement and ‘asking for the order’.

The Executive Summary should summarize the essence of the opportunity, and invite action such as a meeting, a conference call, or a request for additional information.