A business plan is like a roadmap. It tells investors, directors, potential employees and important stakeholders where you want to go, when you want to get there and the path you’ll take to reach your destination. But a poorly presented plan can hurt even the savviest entrepreneurs.
Below, I describe several important business plan mishaps that can be easily corrected. Avoid these mistakes, or else investors will avoid your company’s offering.
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 it and how the company will stay ahead of competitors. Lay off the hype.
Many early-stage companies believe that more is better. They explain how their product can be applied to multiple, very different markets, or they devise a complex suite of products to bring to market.
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 entire team to 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 to enrich and support the highly focused core strategy after the initial strategy has gained market traction. The business plan should hold the story together with a strong, compelling core thread. The rest should be supporting characters.
No matter how innovative your company may be, it has competitors, or at least potential competitors. It may not have a direct competitor in the sense of a company offering 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 Twitter DM. 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 that you don’t fully understand your market and your customer’s needs.
We understand that 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. In fact, they’ll barely skim a 20-page plan, so make sure you start the plan with a very 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.
If the investor is interested in your opportunity, they will request details later.
Entrepreneurs often mistakenly believe that investors will be more impressed by “conservative” financial forecasts. They reason 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 actually achievable, along with your justifications as to why you believe 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.
Investors expect you are putting your “best foot forward” when you submit your business plan to them. If it’s riddled with errors, they’re going to assume the worst about you and your business. Make sure you share your business plan with trusted advisors and ask them to poke holes in the plan. 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 different reasons, and the ones listed above are but a few. If you can avoid these important business plan pitfalls, you can present a much more legitimate picture to investors.
[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Turning an Idea Product Into a Business and Raising Capital: Negotiating with Potential Investors. This is an updated version of an article originally published in April of 2016.]
Akira Hirai is the founder and CEO of Cayenne Consulting, LLC, in Anaheim Hills, CA. He has over 20 years of experience in entrepreneurship, management, business planning, financial analysis, software engineering, operations, and decision analysis. Before founding Cayenne Consulting in 2001, Hirai started two Internet companies in Silicon Valley. Previously, he held various management positions…
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