The Best Business Plan is in your hands. You applied for capital funding. Then why is your Business Plan rejected?
Despite having a great idea for a new product or cutting-edge service, many aspiring business owners ask, “Am I ready?” Of course, it’s a logical question to consider how much there is to accomplish when launching any business. But, before you get overwhelmed, take a step back and remember, “These questions are what a business plan is for.”
A well-crafted business plan is a blueprint that guides your actions and prepares you for unforeseen contingencies. It will save you a lot of hassle as you work to make your dreams a reality when done thoroughly. Unfortunately, your business plan is often the first impression potential investors get about your venture. But even if you have a great product, team, and customers, it could also be the investor’s last impression if you make any of these avoidable mistakes.
Investors see thousands of business plans yearly, even in this challenging economic market. Apart from a referral from a trusted source, the business plan is the only basis they have for deciding whether or not to invite an entrepreneur to their offices for an initial meeting.
With so many opportunities, most investors simply focus on finding reasons to say no.
The reason is that entrepreneurs who know what they are doing will not make fundamental mistakes. Every mistake counts against you.
The Best Business Plan doesn’t have Content Mistakes:
Failing to relate to a real pain or real market opportunity. Pain comes in many flavours: my computer network keeps crashing; my accounts receivable cycle is too long; existing treatments for a medical condition are ineffective; my tax returns are too hard to prepare. Businesses and consumers pay good money to make the pain go away. You are in business to get paid for making the pain go away. Pain, in this setting, is synonymous with market opportunity. The greater the pain, the more widespread the pain, and the better your product or service alleviates the pain, the greater your market potential. The Best Business Plans place the solution firmly in the context of the problem being solved.
The Best Business Plan doesn’t Inflate Valuations:
Phrases like “unparalleled in the industry,” “unique and limited opportunity,” or “superb returns with limited capital investment” – taken from actual documents – are nothing but assertions and hype. Investors will judge these factors for themselves. Layout the facts – the problem, your solution, the market size, how you will sell it, and how you will stay ahead of competitors – and lay off the hype. Forget the jargon! Don’t oversell it! And whatever you do, do not make claims you can’t back.
The Best Business Plan doesn’t Try to Be All Things to All People:
Many early-stage companies believe that more is better. They explain how one can apply a product to multiple, very different markets, or they devise a complex suite of products to bring to a market. Even worse, many start-up companies think they can be a large conglomerate from Day 1. I come across so many wannabe entrepreneurs (I refer to them as “Wannapreneurs”) that want to offer services across multiple industries to various markets. For example, a Wannapreneur offers Construction Services, Cleaning Services, Farms with Cattle, Install Solar Panels, Transports Coal, Design Websites, and Book Flights and Hotels. This is nothing short of ludicrous.
Most investors prefer a more focused strategy, especially for early-stage companies: a single, superior product or service that solves a troublesome problem in a single, large market sold through a single, proven distribution strategy. That is not to say that additional products, applications, markets, and distribution channels should be discarded. Instead, they should be used to enrich and support the highly focused core strategy.
You must hold the story together with a strong, compelling core thread. Identify that, and let the rest be supporting characters.
The Best Business Plan has a Go-To-Market Strategy:
Business plans that fail to explain the sales, marketing, and distribution strategy are destined for one thing – the trashcan! The key questions must be answered: who will buy it, why, and most importantly, how will you get it to them? In addition, you must explain how you have already generated customer interest, obtained pre-orders, or made actual sales and how you will leverage this experience through a cost-effective go-to-market strategy.
The Best Business Plan Never States that “We Have No Competition”:
All I can say is Ha Ha Ha!
No matter what you may think, you have competitors. Maybe not a direct competitor – in the sense of a company offering an identical solution – but at least a substitute. Fingers are a substitute for a spoon. First-class mail is a substitute for e-mail. A coronary bypass is a substitute for an angioplasty. A travel agent is a substitute for planning a trip yourself. Competitors stated, consist of everyone pursuing the same customer Rands.
To say that you have no competition is one of the fastest ways to get your business plan tossed or, even worse, get laughed out of the room – investors will conclude that you do not fully understand your market. Your business plan’s “Competition” section is your opportunity to showcase your relative strengths against direct competitors, indirect competitors, and substitutes.
Besides, having competitors is a good thing. It shows investors that a real market exists.
The Best Business Plan is not Too Technical:
Business plans – especially those authored by people with scientific backgrounds – are often packed with too many technical details and scientific jargon. Initially, investors are interested in your technology only in terms of how it:
- Solves a really big problem that people will pay for;
- It is significantly better than competing solutions;
- Can be protected through patents or other means; and
- It can be implemented on a reasonable budget.
These questions can be answered without a highly technical discussion of how your product works. Experts will review the details during the due diligence process. Keep the business plan simple. Document the technical details in separate white papers.
The Best Business Plan includes a Risk Analysis:
Investors are in the business of balancing risks versus rewards. So some of the first things they want to know are the risks inherent in your business and what has been done to mitigate them. The key risks of entrepreneurial ventures include:
- Market risks: Will people buy what you have to sell? Will you need to create a major change in consumer behaviour?
- Technology risks: Can you deliver what you say you can? On a budget and on time?
- Operational risks: What can go wrong in the company’s day-to-day operations? What can go wrong with manufacturing and customer support?
- Management risks: Can you attract and retain the right team? Can your team pull this off? Are you prepared to step aside and let somebody else take over if necessary?
- Legal risks: Is your intellectual property truly protected? Are you infringing on another company’s patents? If your solution does not work, can you limit your liability?
This is, of course, just a partial list of risks. Even though you may feel that the risks are negligible, potential investors will feel otherwise unless you demonstrate that you have given a lot of thought to what can go wrong and have taken prudent steps to mitigate these risks.
The Best Business Plan is not Poorly Organised:
If you want your plan to be seen as the Best Business Plan, it should flow nicely, organised fashion. Each section should build logically on the previous section without requiring the reader to know something presented later in the plan.
The Best Business Plan doesn’t have Financial Model Mistakes:
- Forgetting Cash: Revenues are not cash. Gross margins are not cash. Profits are not cash. Only cash is cash. For example, suppose you sell something this month for R100, and it costs you R60 to make it. But you must pay your suppliers within 30 days, while the buyer probably won’t pay you for at least 60 days. In this case, your revenue for the month was R100, your profit for the month was R40, and your cash flow was zero. Your cash flow for the transaction will be negative R60 next month when you pay your suppliers. Although this example may seem trivial, very slight changes in the timing between cash receipt and disbursement – just a couple of weeks – can bankrupt your business. When you build your financial model, make sure that your assumptions are realistic to raise sufficient capital.
- Lack of Detail: Your financials should be constructed from the bottom-up and validated from the top-down. A bottom-up model starts with details such as when you expect to make certain sales or when you expect to hire specific employees. Top-down validation means examining your overall market potential and comparing that to the bottom-up revenue projections. Round numbers – like one million in R&D expenses in Year 2 and two million in Year 3 – are a sure sign that you do not have a bottom-up model.
- Insufficient Financial Projections: Basic financial projections consist of three fundamental elements: Income Statements, Balance Sheets, and Cash Flow Statements. All of these must conform to Generally Accepted Accounting Principles or GAAP. Investors generally expect to see five years of projections. Of course, nobody can see five years into the future. Investors want to see the thought process you employ to create long-term projections. A good financial model will also include a sensitivity analysis. This will show how your projected results will change if your assumptions turn out to be incorrect. This allows you and the investor to identify the assumptions that can have a material effect on your future performance so that you can focus your energies on validating those assumptions. They should also include benchmark comparisons to other companies in your industry – things like revenues per employee, gross margin per employee, gross margin as a percentage of revenues, and various expense ratios (general and administrative, sales and marketing, research and development, and operations as a percentage of total operating expenses).
- Conservative Assumptions: Nobody ever believes that assumptions are conservative, even if they truly are. Develop realistic assumptions that you can support, refrain from using “conservative” or “aggressive” in your plan, and leave it at that.
- Offering a Valuation: Many business plans err by stating that their company is worth a certain amount. How do you know? The value of a company is determined by the market – by what others are willing to pay – and unless you are buying, selling, or investing in companies, you probably don’t have an acute sense of what the market will bear. If you name a price, two things can happen: (a) your price is too high, and investors will toss your plan; or (b) your price is too low, and investors will take advantage of you. Both are bad. The purpose of the business plan is to tell your story in the most compelling manner possible so that investors will want to go to the next step. Of course, you can always negotiate the price later.
The Best Business Plan and Final Thoughts on Mistakes:
- Poor Spelling and Grammar: If you make silly mistakes in your business plan, what does that say about how you run your business? Use your spelling and grammar checkers, get other people to edit the plan, and do whatever it takes to purge embarrassing errors.
- Too Repetitive: All too often, a plan covers the same points repeatedly. A well-written plan should cover key points only twice: once, briefly, in the executive summary, and again, in greater detail, in the body of the plan.
- Appearance Matters: At any point in time, an investor has dozens, if not hundreds, of plans waiting to be read. Get to the top of the pile by ensuring that the cover is attractive, the binding is professional, the pages are well laid out, and the fonts are large enough to be easily read. On the other hand, don’t go too far – you don’t want to give the impression that you are all style and have no substance.
- Execution Mistakes: Waiting until too late. The capital formation process takes a long time. In general, count on six months to a year from the time you start writing the plan until the time the money is in the bank. Please don’t put it off. Your management team should be prepared to invest about 600 hours into the plan. If you are too busy building your product, company, or customers (arguably a better use of your time), consider outsourcing the development of the business plan.
- “Over-tweaking”: You could spend countless hours tweaking your plan to pursue perfection. This time would be better spent working on your product, company, and customers. You need to pull the trigger and get the plan out in front of a few investors. If the reaction is positive and they want to move forward, great. If the reaction is negative (assuming that the investor was a good fit, to begin with), you may have been heading down the wrong path. Get feedback from a couple of investors, and if a consensus emerges, go back and refine your plan.
Read More: Why do Investors Reject your Pitch Deck
It’s a tough investment climate, but good ideas backed by good teams and business plans are still being funded. So give yourself the best possible chance by avoiding these simple mistakes.
Remember, the primary purpose of a fund-raising business plan is to motivate the investor to pick up the phone and invite you to an in-person meeting. It is not intended to describe every last detail.