Entrepreneurs Survey: How to Avoid Business Plan Mistakes

What do entrepreneurs think is the most critical mistake entrepreneurs make in their business plan? By Dee Power and Brian Hill

From the Entrepreneur’s Point of View

Entrepreneurs were asked “What do you think is the most critical mistake entrepreneurs make in the business plans that they present to angel investors?” The entrepreneurs who responded to this survey question had, as a group, a remarkably thorough understanding of what can go wrong with a business plan.

1. Unrealistic 27%
   The respondents really took their fellow entrepreneurs to task for not presenting a realistic picture of the business opportunity to investors. They told us that nearly all parts of the plan are unrealistic, except perhaps the table of contents and the appendix.
   
   Entrepreneurs said:
   • “Not being practical & pragmatic”
   • “Underestimate the time and amount of money needed to develop a product”
   • “Overestimate potential and underestimate competitive pressure’s”
   • “Too much BS and inflated guesses on the numbers”
   • “Inflating the numbers or expectations, the–‘if I sold 1 cup of tea to every person in China syndrome”

2. Lacking in Clarity of the Presentation 16% The best business plans are those that are concise and to the point. The trend these days is toward shorter business plans. The 100-page magnum opus of the past has given way to a sportier, twenty-five page document.

   Entrepreneurs said:

   • “Unclear and overoptimistic projections of the expected results”
   • “Too involved in the details and forget to sell the sizzle”
   • “Too much useless information, too many numbers, not precise about what is being offered”
   • “Not being able to present their reason for funding in a simple and concise manner”
   • “Being clear and concise about what they are all about and excess of knowledge about the idea but many difficulties giving a good and easy explanation about the real business”

3. Incomplete 15%
   Incompleteness of presentation often stems from a lack of basic homework into the market and the competition. The plan is an ideal venue for the founders of the company to demonstrate their thorough knowledge of the market space they will be entering. Unfortunately, many times the business plan content demonstrates just the opposite.

   Entrepreneurs said:

   • “Not showing profit timeline”
   • “Poor presentation (business plan incomplete)”
   • “A lack of defined ives and poorly presented executive summary”
   • “Insufficient explanation of marketing and sales strategy and approach”

4. Valuation and Exit Strategy 10%

   This is a controversial part of a business plan. Is it better to be extremely direct and specific about the proposed deal structure- how much equity can be given up for how much capital? Or be flexible and not state a projected return on investment and exit strategy? The experts and the investors disagree.

   Entrepreneurs said:

   • “Exit strategy is unclear of overly optimistic”
   • “Do not show how they will generate ROI for investors nor an exit strategy for them
   • “Weak business plan (i.e. no clear ROI)”
   • “Lack of return on investment figures”

5. Financial Projections 8%

   With financial projections, sometimes less is more. Only 8% of entrepreneurs responded that unrealistic financial projections was the most critical mistake while both angel investors and venture capitalists ranked unrealistic financial projections as the number one most critical mistake.

   Entrepreneurs said:

   • “Too long and involved in financial numbers.”
   • “Presenting vague or ambiguous assumptions regarding their projected cash flow statements”
   • “Not understanding their business start up costs, possibly due to lack of research”

6. Market Need 8%

   For an entrepreneur to succeed in his/her mission of obtaining capital, the venture must be clearly set apart, and show to be superior, to both potential competitors in the market space, but also to other deals that are competing for the investors’ attention and dollars. Entrepreneurs tend to overlook the latter type of competition: other entrepreneurs are constantly coming up with good ideas as well.

   Entrepreneurs said:

   • “Inadequate presentation of market need and value proposition”
   • “Do not identify the size of the market, nor the particular niche they will compete in”
   • “Failing to explain what is different about the ‘solution’ that they offer”

7. Competition 8%

   It is truly amazing how many business plans contain a statement like the following: “There is no competitor in our market space who is providing the same service/product that we are; therefore we do not see any direct competitors.”

   

   Image via Wikipedia

   Entrepreneurs said:

   • “Not understanding their competition”
   • “Not thorough enough analysis of competitive landscape”
   • “They think they have no competitors”

8. Management Team 4%

   It is interesting that relatively few entrepreneurs cited this as the major weakness of a business plan, whereas investors overwhelmingly view this as the critical factor in making the investment decision.

   Entrepreneurs said:

   • “Don’t focus enough on their management team and what experience they bring to the new venture”
   • “Lack of information on management or inexperience in their field”

Methodology
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The angel investor survey information presented here is based on a survey completed by Brian Hill and Dee Power, founders of Profit Dynamics, Inc., in June 2001. 50 individual angel investors completed the survey and resided in various geographic areas of the country including Southern and Northern California, Pacific Northwest, Southwest, Midwest, the South and the East Coast.

The responses of the angel investors were compared, in some cases, to the responses of a series of surveys of 250 venture capitalists and of over 100 entrepreneurs actively trying to find capital. The venture capital surveys were conducted each year from 1998 through 2001. The entrepreneur survey was conducted in April and May of 2001.