What are the big mistakes entrepreneurs make in their business plans if they're looking for money?
BY Rhonda Abrams
Writing a Business Plan mentor Rhonda Abrams responds: "I don't need five reasons to reject a plan -- I only need one." That's what Eugene Kleiner once told me. As a founder of top venture capital firm Kleiner Perkins Caufield & Byers, Kleiner saw thousands of business plans. When you have to look at that many business plans, you eliminate the ones with glaring mistakes.
So if you're preparing a plan to seek funding, here are things to avoid:
Don't get key facts wrong. One of the worst mistakes you can make in a business plan is to make a mistake. If the reader of your plan knows that a statement you've made is not true, you have lost credibility, even if the mistake was inadvertent. Potential funders are going to undertake their own due diligence, checking the major assumptions of your plan -- size of market, number and strength of competitors, interest of potential customers, etc. Do not make mistakes of fact.
Don't lie. Lying is, of course, worse than making a mistake. If you intentionally misrepresent a situation, the history and experience of the founders or key executives, etc., you're not only going to be eliminated if you're caught -- the word will get around the funding community that you're not trustworthy.
Don't hide important facts. In the course of developing your business, you may discover unpleasant information: Similar companies have failed, big competitors are considering launching a similar product, or the industry you're in is experiencing a major downturn. If you think you can keep your funders from discovering those facts, you're wrong.
Don't omit information about other investors and equity ownership. Investors want to know what percentage of ownership they will have in return for their money. If you have already promised equity to other investors, employees, strategic partners, etc., you need to disclose this. Investors deserve to know with whom they'll be sharing ownership of the company.
Don't forget to discuss an exit plan/liquidity scenario. How will investors get their money back? Will the company go public, be acquired, or make enough money to produce substantial dividends? You have to show that you understand what's in it for the investors.
Don't be a control freak. Does your plan make you look like you're the only one who can ever run this company, that you're unwilling to bring in others in key positions? Investors, especially sophisticated ones, are leery of working with entrepreneurs who seem unwilling to make compromises and share leadership -- necessary traits for building a successful company.
The easiest way to avoid the big mistakes is to be honest, conservative in your estimates of growth and income, and able to support your assumptions.