07/14/2014 02:09 pm ET Updated Sep 13, 2014

Hard Truths About Business Plans and Angel Investors

Courtney Keating via Getty Images

Earlier this year I reviewed submissions on more than 30 businesses for our angel investment group in two days. Yes, I was cramming! No, I didn't read the business plans, just the summaries. And I watched how my fellow angel group members did basically the same things I did. So here's what I saw about business plans, summaries, and angel investors.

I always want to know there's a business plan available, even if I'm not reading it immediately. In fact, even when I do look at it, I'm not going to start at Page 1 and read straight through to the end, anyway. But I want to have it available as a resource when I want to go from "general" to "specific." In other words, I read the summaries first; but then the business plan has to back them up.

What am I looking for? Like most of my fellow angel group members, I look first at the backgrounds of the management team. Angels want to minimize risks, and one of the best and most obvious ways to do that is to bet on people who have startup experience. Even past failure is better than having never done a startup before.

Then I look for signs of potential high market growth. A good startup for investment is one that can double every year for the next few years; and doubling means either in revenue or meaningful web traffic. That almost always takes the ability to scale up in products or traffic without adding proportional numbers of people -- product or tech businesses often can, service businesses usually can't. And it takes some secret sauce, whether that's trade secrets or copyright or something else (patents rarely work, but that's the general idea), to protect the business against imitators with more money to spend.

And almost always there are other factors that depend on the specifics of the plan. For example, if you're proposing a business-to-business startup, I want to make sure all parties understand the sales cycle, how receivables affect cash flow. In a lot of plans, I'm curious about the percentages represented by expenses...and pretty much all the time, I want to see what the founders will get paid.

All of those factors have to show up in the summary, and be backed up in the details of the plan.
So I "dip into" the plan quickly, with a targeted destination. I read what I'm looking for, then I leave: it's "guerrilla" reading. But it's crucial ammunition in this particular guerrilla operation, and if I can't find the information I'm after -- or if it isn't there at all -- I'm considerably more likely to rate your startup lower than one that has all the "ducks" in the row.

Now, notice I said I wouldn't be reading your whole business plan "immediately." That doesn't mean, however, that I don't plan to read it, ever. The two sides to that coin are that I can comfortably say "no" to a startup without reading its business plan -- but I'll never say "yes" until I do. Our group divides due diligence into teams; the team looking a company over will always read its business plan thoroughly, and usually more than once.

Conclusion? Many experts say investors don't read your plan.

That's half true: Investors will reject a submission from just the summary, and in that case they don't read the plans. But when they like the summaries, then they start a process, called due diligence, that includes reading the plans in detail, plus a lot of research into the key factors the plans include.

And, of course, there are always exceptions. That's what makes this hard to write about, and interesting to do.