Financial Poise

Business Plans, Part Two: 4 Business Plan Red Flags

This article takes a different approach from the previous one. Here I tell you about common omissions, mistakes and red flags in business plans, any of which should make you cautious about the company’s offering.

1. Value inflation.

Phrases like “unparalleled in the industry,” “unique and limited opportunity,” and “superb returns with limited capital investment” — taken from actual documents — are nothing but assertions and hype.

Investors will judge these factors for themselves. Lay out the facts — the problem, the solution, the market size, how the company will sell it, and how the company will stay ahead of competitors — and lay off the hype.

2. Trying to be all things to all people.

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 a market.

Most investors prefer to see a more focused strategy, especially for very 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.

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. The business plan should hold the story together with a strong, compelling core thread. The rest should be supporting characters.

3. “We have no competition.”

No matter how innovative the company claims to be, it has competitors, or at least potential 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. Competitors, simply stated, consist of everybody pursuing the same customer dollars.

4. “Conservative” financial assumptions and forecasts.

The business plan should present realistic assumptions that the company can support, without using the word “conservative.”

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About Akira Hirai

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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