In order to launch a successful business and raise the capital needed to do so, a startup needs to consider several aspects of the business including the management team, the size of the opportunity, the product/service/technology, the market/sales/distribution channels, the competitive environment and several other factors. Another key factor is how these business concepts are portrayed in the startup’s business plan. Below is a list of the 10 most common mistakes, or sins, that we have encountered with entrepreneurs and past clients when trying to raise capital.
1. Focusing on Technology
The technology behind your startup’s product and service (especially for tech-based startups) is certainly important to investors. They need to understand the technology and why/how it is better than that of your competitors. Speaking towards your competitive advantages, it will take more than a patent to attract seasoned investors. They want to see competitive sustainable advantages — aspects about the company that are not easily copied/implemented by your competition. Once you have succinctly presented the technology and convincingly demonstrated your sustainable competitive advantages, move on to other sections of the business plan. Many first-time entrepreneurs or entrepreneurs with strong tech backgrounds waste too much business plan real estate on the technology section and only manage confusing the reader as a result.
2. Missing the Mark on Assessing the Opportunity
If your target market is so broad that a 1% adoption rate will make for a successful business, then your target market definition is likely way too broad. Investors want to see that you have a narrowly defined market with sales and market strategies tailored to target this specific market. You can have a large addressable market that you hope buys your product, but it is important to demonstrate that you understand the importance of launching a business with clear and actionable target market.
3. Ignoring the Competition
All good business plans put considerable attention on the competition for several reasons. 1) Understanding the competition can help you understand your position/niche in the market and how to tailor your product, target market, pricing, marketing, etc. 2) Demonstrating the strengths and weaknesses of your competition allows you to contextualize your positioning in the market while demonstrating your competitive advantages. 3) A detailed competitive analysis shows investors that you are a thorough entrepreneur when it comes to business planning and that you are confident enough in your product that you aren’t afraid to discuss your competition.
4. Ignoring Market Need/Traction
Demonstrating market need and/or market traction will vary depending on the stage of your startup. If you are pre-revenue then it will be difficult to portray market traction unless you have the budget to conduct customer surveys. However, you can still demonstrate market need by highlighting comparable products or services. You should also demonstrate the problem in the market that your product solves. For startups with past sales it is important to demonstrate current sales and sales growth since launching.
5. Practicing Top-Down Sales Forecasting
Top-down sales looks at the overall market and uses this information to identify your company’s projected sales, typically as a percentage of the market. It is important to know the market size and the percentage of the market that you are projecting to capture in order to validate your model. However, your model should not be based on a percentage of the market and will raise red flags for sophisticated investors. Investors want to see a growth/revenue model that uses sales data and assumptions that predict sales by product and region. They also want to see a ‘growth driver’ upon which your sales are generated. This may be the number of sales representatives, website traffic and conversion rates, size of email lists, number of licensees, etc.
6. Unrealistic Exit Strategy and Multiple
“We expect to be acquired by Microsoft for a 50X EBITDA multiple” is not a good exit strategy. Rather, provide some statistics of recent exits from comparable firms and provide data such as sale price, revenue at time of sale, revenue/EBITDA multiple. Provide a range in the multiple size that you anticipate being able to attract based on these statistics and provide a description of key milestones that will demonstrate when you think the startup is likely to be acquired.
7. Unrealistic Valuation
First and foremost, investors may lose interest if your startup is offered at an unreasonable price as this poses an obstacle for negotiations before they even begin. Additionally, if/when you need to raise the next round of capital, you dont want to risk taking in money in a down round because you overvalued the company early on.
8. Ignoring Milestones
Milestones are discussed in other sections of this blog but it is important to highlight them on their own as well. Milestones, both past and projected, help to build value, establish credibility and project goals. They show investors what you have accomplished to date (this also gives you legs to stand on when defending your valuation). They show investors how you will spend their money. They show investors that you are a sophisticated entrepreneur and that you understand what it is going to take to build a successful business.
9. Junk and Fluff
If the sentence, picture or graph does not, in some way or another, tell investors why they should invest in your business then leave it out. Investors are busy and you’ll be lucky if you can get them to read half of your business plan in their first read through. Don’t ruin your chances by including unnecessary junk or fluff as chances are these will be the choice lines that the investor decides to read.
10. NDA Insistence
In short, investors don’t sign NDAs. Asking them to do so will make you look like you don’t know what you’re doing. Investors are more interested in finding good entrepreneurs, not good ideas. Investors know that anyone can come up with a good idea but that very few have the ability to actually pull them off. Good ideas come down their pipeline all the time and they will not be afraid to overlook yours because of an NDA.
Investors look at hundreds of deals a month. You are competing for their time. Don’t waste precious minutes of their attention or risk not getting their attention because of an NDA that provides little to no benefit. That’s right, an NDA provides little to no benefit. If your idea is so easily stolen that justh earing the concept is enough to allow anyone to replicate it, then the investor likely wont be interested in the first place. In any case, your business plan does not need to include the secret sauce and you should be able to openly share the concept of the idea of anyone. Lastly, the power of any legal agreement is tied to your ability to enforce it. Unless you are prepared to sue investors if you feel they stole your idea, why waste having them sign an NDA?