6 Important Business Plan Mistakes to Avoid

These Business Plan Red Flags Will Turn Investors Away

A business plan is like a roadmap. It tells your investors, directors, potential employees, and essential stakeholders where, when, and how you’ll reach your destination. However, a poorly presented plan can hurt even the savviest entrepreneurs. Considering the extreme economic uncertainty and growing caution among investors, entrepreneurs can ill afford to make preventable mistakes.

Below, are several important business plan mishaps that can be easily corrected. Avoid these mistakes, or else investors will avoid your company’s offering.

1. Value Inflation

Entrepreneurs are rightfully enthusiastic about their product or service. However, phrases like ‘unparalleled in the industry,’ ‘unique and limited opportunity,’ and ‘superb returns with limited capital investment’ — taken from actual documents that we’ve reviewed — are nothing but hyperbole.

Let investors make these judgments for themselves. Clearly and objectively state the facts: the problem (from your customer’s point of view), your solution, the addressable market size, how your company will market and sell its products and or services, and how it will stay ahead of its competitors. Lay off the hype.

2. Trying to Be All Things to All People

Many early-stage companies mistakenly believe that casting a wide net is advantageous. They often try to demonstrate how their product can cater to various, distinct markets or introduce a complicated array of products simultaneously.

Most investors prefer to see a more focused strategy, especially for early-stage companies: a single, superior product that solves a troublesome problem in a single, large market that will be sold through a single, proven distribution strategy. This laser focus helps the team push towards a common, well-articulated goal.

That is not to say that additional products, applications, markets, and distribution channels should be discarded. Instead, they should be used after the initial strategy has gained market traction to enrich and support the highly focused core strategy. The business plan should hold the story together with a compelling core thread. The rest should be supporting characters.

3. Claiming You Have No Competition

No matter how innovative your company may be, it has competitors or at least potential competitors. It may not have a direct competitor because a company offers an identical solution, but there is at least a close substitute. Fingers are a substitute for a spoon. First-class mail is a substitute for a text message. A coronary bypass is a substitute for an angioplasty. Competitors, simply stated, consist of everybody pursuing the same customer dollars.

Claiming that you have no competition is a big red flag that tells investors you don’t fully understand your market and its needs.

4. Business Plan Too Long

We understand your startup is your baby, and you want to tell everyone everything about it. However, investors have limited time to evaluate new opportunities. They aren’t going to spend all day reading a 100-page business plan. They’ll barely skim a 20-page plan, so start the plan with a concise one to two-page executive summary. Keep the plan short and to the point. Focus on answering the following important business plan questions and ditch the rest:

• What is the problem?
• What is the solution, and what makes it unique?
• How will the company make money?
• Who will buy the product, and how will you sell it to them?
• How will your management team help the business succeed?
• What is the management team’s track record?
• Who are the competitors, and why are you better?
• What are the economics of the key metrics?
• What are the risks to investors?
• How much capital is the company trying to raise, and how will it be used?

If the investor is interested in your opportunity, they will request details later.

5. ‘Conservative’ Financial Assumptions and Forecasts

Entrepreneurs often mistakenly believe investors will be more impressed by ‘conservative’ financial forecasts. The reason is that investors will think the upside must be even higher if the numbers they are looking at are conservative. However, investors would much rather see what you think is achievable, along with your justifications as to why you believe this so and a realistic plan for making it happen. You can then define upper and lower limits for each assumption so that the investor can review the entire range of possible outcomes.

6. Typos, Grammatical Errors, and Inconsistencies

Investors expect you to be putting your ‘best foot forward’ when you submit your business plan to them. They will assume the worst about you and your business if it’s riddled with errors. Ensure you share your business plan with trusted advisors and ask them to poke holes in it. You should also consider hiring a professional editor to go through your plan line by line. It’s an investment that will pay off in the long run.

Investors can ‘go cold’ on a potential investment for many reasons, including the ones listed above. If you can avoid these critical business plan pitfalls, you can present a more legitimate picture to investors.

We think you’ll also like:

1. Four Reasons Effective Marketing Strategies Require Patience
2. The Term Sheet: An Overview of Investor Rights and Controls in VC Investments
3. Makin’ It Rain: Successful Startups are Investible Startups

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Understanding Risk Management Basics for Business Owners
2. Focus on Manufacturing
3. Focus on Retail

This is an updated version of an article originally published  January 9, 2020 and updated on November 18, 2022. This article was most recently updated by the Financial Poise Editors.]

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