Top 10 Business Plan Fails For Startups

Some mistakes are pardonable. A messy business plan is lethal, especially in a cut throat competitive funding environment. Ideas may be blue ocean, but it’s red ocean territory when it comes to actualizing the prototypes and securing funding to do so.  There are scores of flaws present in most business plans sent to investors; the flaws below are by far the most poignant.  Also not noted in this list is any flaw to do with grammar or presentation: that is a given! Listed from pardonable to sacrilege, we have:

No. 10:  Overemphasizing Partnerships with Well-Known Companies.

Partnerships by themselves have limited value. Instead, list the partnership terms that are truly meaningful and create value. For instance, short term joint ventures with a large company such as Google helps to bring recognition, but a longer term financial partnership with a lesser known but stable firm in the business may prove to be very valuable. The business plan must explain the partnership terms, the extent to which each partner will contribute to improve operations and/or sales, and the structure of the partnership.

No. 9: Stressing First-Mover Advantage.

Not everyone is the next Facebook, or the inventor of the wheel. However, to claim a first-mover advantage would need a lot of proof in the pudding; sound intellectual property, patents and prototypes. If there is first mover advantage, ensure that the business model is secured, all copyrights are acquired and legal is involved from the planning phase well into exit strategy. A company that has further innovate the wheel is not a first mover, but may be well deserved for development (think early Microsoft vs. Apple). Show the strengths of value added, no matter if the startup is a late competitor in the industry.

No. 8: Minimizing Threat of Competitors.

Unless the startup is about to create a monopoly from its inception, competition exists. Too many entrepreneurs try to convince investors that their ventures are unique, and skip over the competitive analysis. Not good. If few companies are in a market space, it could mean that there is not enough customer pull needed to support the company’s products or services.  In simple terms, a product that no one really wants.

The identification of successful competitor companies in the market can be a positive sign, since it indicates a sizable market. It also assures investors that the management team really knows the industry, and that product sales would yield substantial profit.

No. 7: Focusing Too Much on the Future.

Investments and valuations are based on a firm’s projected future performance. However, if the startup has traction, by all means, present this point! Business plans should show what milestones and accomplishments a venture has achieved, even if it needs to focus on how the startup has procured executable contracts or pre-orders. Past success in achieving goals provides investors the confidence that the team will execute future plans.

No. 6: Skimpy Management Biographies.

People run a company. People make the company what it is. The management team section should include biographies of key team members and describe their roles and responsibilities. Since different skill sets are needed to launch, grow and maintain a venture, biographies should be tailored to the startup’s particular current growth stage.

No. 5: Asking Investors to Sign a Nondisclosure Agreement (NDA).

This is a huge bone of contention in the venture capital and private equity world. To NDA or not to NDA. We personally thought NDA’s a waste of time, since although signed, they are hard to execute, and need strong legal representation. Most investors hesitate to sign an NDA because most business strategies typically are not really confidential and could cause unnecessary legal problems.

Many would argue this point, but a serious investor will review the actual technology during the final due-diligence process, and discussions regarding signing an NDA are appropriate at that point.

No. 4: Changing the Business Plan Over and Over…and Over.

This pointer is actually my personal choice for the top business plan fail. It is true, investors have different tastes, investment parameters, risk tolerances, and due diligence methods. Yet, startups should not rush to incorporate each potential investor’s comments into their business plan. The original product or service concept is your unique blueprint! Don’t change that. Instead, have several trusted advisors and strategic partners review comments received and then decide what fits with the startups’ culture.

No. 3: Focusing Too Much on the Venture’s Proprietary Technology.

If truly proprietary technology is confidential, the business plan should not discuss the confidential aspects of the technology (engineering). However, the plan should explain the benefits of the technology; particularly how the technology provides “transitive value” and satisfies customer’s needs.  Many startups fail because they don’t understand customer needs and problems. Identifying, defining, and understanding customer wants is a critical first step to ensuring that you have not developed a product that does not specifically fit a market.

No. 2:  Presenting Large, Generic Market Sizes.

Again, target market size and scope needs to be well researched, and well tailored. A broad market size does not look smart to investors, and will not be well executed, no matter how much funding is obtained. Segment the market and then limit all discussion to the total addressable market.

No. 1: Making Financial Projections Too Aggressive.

“We will have revenues of one billion dollars in one year.” Maybe, but more than likely not.  Many investors go straight to the financial section of the business plan. The assumptions and projections in this section must be realistic. If market penetration, sales forecasts, operating margin and financial pro forma are poorly structured, the credibility of the entire business plan and the executive team is questioned.

Make use of scenario analysis to forecast a range of most probable outcomes – worst case, best case and most likely case financial scenarios are appropriate. Also, senior management should not simply leave financial projections to accountants. The CEO must be fully cognizant and participating in planning the financial future of the startup.

The passion and enthusiasm a startup shows for its product and service is the first sign of a fundable venture. Don’t let avoidable business plan mistakes get in the way of a beautiful entrepreneurial journey.

 

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