If you’re looking for investors, you need a business plan and not just any business plan. You need one that is well crafted, concise and exciting. But how do you know what venture capitalists want to see in a business plan and how can you avoid what they feel are the top seven critical mistakes? We asked venture capital companies across the United States how they evaluated the business plans presented to them. The VCs were asked: What is the worst mistake an entrepreneur can make when completing their company’s business plan?
Seven Critical Mistakes
- Lack of Clarity VCs believe that entrepreneurs are not clear in explaining the opportunity. Why the business made sense, why the business model would be successful. Entrepreneurs can avoid this mistake by simply asking several people who aren’t familiar with their company to read the business plan. If they don’t "get it", it’s unlikely an investor will.
- Unrealistic Projections In second place is a mistake that is difficult for entrepreneurs to avoid: unrealistic projections. While it’s true that the company must produce enough revenue to be able to generate the 30% to 40% yearly returns that VCs expect, those projections have to be reasonable and achievable. Apply common sense. You can get an idea of whether your projections are in the ballpark by looking at the annual reports of public companies in your industry.
- Simplistic Assumptions Simplistic assumptions are closely related to unrealistic projections. Avoid the ‘all the tea in china’ syndrome. You know the logic of ‘there are 80 billion Chinese people, if we sell just one tea bag to only 10% of them we’ll make a lot of money’. Justify your assumptions, base them on as much research as you can.
- Competition Analysis The analysis of competition and the failure to describe a sustainable competitive advantage are killer mistakes in business and business plans. Many entrepreneurs do not make the effort, or find it too difficult, to research their competitors. Entrepreneurs often say there is no competition, or underestimate the strength of competitors. Their business plans do not describe a competitive advantage for the company, or how to achieve a competitive advantage.
- Mistakes and errors These appear frequently in business plans, according to the VCs. Rely on more than just the spell checker in your word processing software. If you aren’t very good at spotting grammatical errors or incorrect spelling, hire someone to act as a copy editor.
- Lack of Management Strengths Management strengths were overstated in the plan, with one VC even saying that entrepreneurs "lie" about their credentials. Venture capitalists always complete thorough background checks. If your management team is weak, try to assemble an advisory board that has the strengths in the areas your team lacks.
- Incompleteness This includes leaving sections out of the plan, or not including sufficient support data. One interesting response was that the entrepreneur failed to provide the name of anyone in the company to contact. He or she must have been in quite a hurry to get the plan in the mail!
By Dee Power
Co-author with Brian Hill of "Attracting Capital From Angels: How Their Money and Their Experience Can Help You Build a Successful Company, published by John Wiley and "Inside Secrets To Venture Capital" published by John Wiley & Sons 2001 available in bookstores nationwide amazon.com, barnesandnoble.com, borders.com Dee Power is Co-Author of "Business Plan Kit". Packed with over 70 pages of critical information, examples for Dot.Com companies, an Excel spreadsheet to forecast 3 years of expenses and revenues, Business Plan Worksheets and lots more.