Always make sure your business plan represents your company in the best possible light in the eyes of potential investors. Avoid common mistakes.
Forecasting Revenues Beyond A Reasonable Growth Rate
Basing The Revenue Forecast On Capturing Just 1% Of The Market
Including Irrelevant Or Unimportant Information
Dancing Around The Competition
Predicting a Baseless Exit Strategy
Overlooking Expenses and Overstating Profit Margins
Providing Too Much Financial Detail
Forecasting Revenues Beyond a Reasonable Growth Rate
Several factors go into growing a successful business, but unfortunately, most business plans base forecasted sales exclusively on the assumed size and growth of the market. Frankly, I don’t care if the size of your market is 20 billion dollars and growing at a rate of 50% per year. You are not going to grow your company from start-up to $300 million in three years, and no investor is going to believe you, if you say you will.
I see many business plans that show the company growing to $200 million, $300 million and even $500 million in three to five years. One even reached $1 billion in year three! When challenged, every entrepreneur responds the same way, pulling out the charts and market research in support of the size of the market. The typical analysis goes on to show why their company will dominate the market. The best part (worst, really) is that the entrepreneur is fully convinced of these “facts,” and is out raising money based on the need to meet those forecasts. This is a fatal error.
Irrespective of market opportunity, every company’s growth is constrained by a number of physical factors, namely capital, personnel, facilities, equipment, infrastructure, processes & procedures and corporate culture. All of these need to be put in place responsibly. You can’t physically grow a business at a breakneck pace without losing control and sacrificing effectiveness and profitability. Worse yet, if you grow too fast, you’ll jeopardize the very viability of the business. There are simply and undeniably, physical limits as to how fast you can put the structure in place and assimilate new employees. There are limits to how fast you can train employees. There are limits to how fast you can expand your warehouses and offices. There are limits to how fast you can build up manufacturing and shipping and customer support and accounting systems. And, if you are a company with a brand new technology, there are limits as to how fast the market will accept your product into the mainstream. (For more on this, read Crossing The Chasm by Geoffrey A. Moore, published by Harper Perennial)
Even if you can justify your growth based on market opportunity, you need to apply common sense and responsibility in forecasting your growth. You wouldn’t build a car without brakes and expect it not to crash and burn. You can’t build a business without brakes and expect anything different. You can’t grow your business so fast that you lose control, and you need to forecast your growth accordingly.
There is another reason to scale back your financial forecasts. It is now time for your corporate Miranda Rights. “Anything you say can and will be used against you.” Whatever you give your investors in the way of a financial forecast today, will become the yardstick against which you will be measured. Prepare a forecast that you can reasonably expect achieve, because if you fall short, you will have a lot of explaining to do to your board and investors.
Don’t compromise your credibility. Use reasonable and achievable sales targets, remembering that there are many factors that contribute to, or impede, the growth of a business.
Basing The Revenue Forecast On Capturing Just 1% Of The Market
Will entrepreneurs ever learn? If you want an investor to roll his or her eyes and discount you altogether, then tell them that you have a $10 billion market of which you only have to capture 1% in order to have a $100 million company. The only response you can hope to get from this argument is, “Here we go again.” Justify your sales forecast by using a bottom up detailed approach, showing the number of units you expect to sell each month and telling why you believe you can meet those numbers.
Including Irrelevant or Unimportant Information
“Your business plan is complete when there is nothing else to take out, not when there is nothing else to add in.”
You need to understand that your business plan is not an all-inclusive encyclopedia about your business. While your company history and background, its facilities and its accounting systems may seem interesting to you, they are not what will excite a potential investor.
Stay focused on issues that are important to investors, those issues that represent key success factors of your business. Eliminate everything else.
Do include:
Description of the product or service
The business model – how you actually intend make money
The market
Key members of the management team
Competition
Your competitive advantage and your intellectual property
Financial Highlights
Eliminate:
History and background
Facilities
Manufacturing processes (unless they create a competitive advantage)
Second-tier members of the management team
Financial Details
Anything that falls under the category of “nice to know”
Dancing Around the Competition
You have competition, so admit openly and honestly and address it head on. Competition is defined as any product or service for which a potential customer may spend money that would otherwise be spent with you. With this definition, you can certainly find competitors.
Far too many business plans make a claim of no competition, and I’ll let you in on a little secret. This is an absolute non-starter for an investor. None of them want to hear that you have no competition. They will conclude that you are either lying or amazingly naïve about your market. Do your homework, learn about the other companies in your space and explain why you have a competitive advantage.
Next:
11. Predicting a Baseless Exit Strategy
12. Overlooking Expenses and Overstating Profit Margins
13. Providing Too Much Financial Detail
© Copyright 2001 by Eli Eisenberg and Straight Line Management
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