I have worked with everyone from high tech startups to Broadway shows helping them figure out how to brand themselves, craft their marketing message and create a pitch deck that gets an investor's attention (and money). Time and again, I see the same mistakes being made.
If you have a small idea brewing at the back of your brain that could become big business, your journey on the road to entrepreneurial stardom will probably include a round of fund raising or a visit to a venture capitalist (VC) -- business plan in hand.
Here are four ways that you can make certain you craft a business plan that can skillfully take you from start-up to success and make investors sit up and take notice.
Make it about the management.
Howard Hartenbaum, a general partner at August Capital, says that one of the most important elements in a business plan is the strength and relevant experience of the management team -- not just the founder.
The mistake most entrepreneurs make is that they feature one guy or gal with a good idea in their plan. But as we all know, it takes a village to get a start-up off the ground and growing.
In one survey, 300 venture capitalists were asked what makes them decide to invest in, or decline, a particular project? Overwhelmingly one of the biggest mistakes the VCs mentioned was that the entrepreneur did not go far enough in explaining why the particular management team they had put together would be successful.
Go beyond technology.
"For a business plan to succeed, you need to show that you have more than just technology; you need to demonstrate an understanding of the market you're in," says
Hartenbaum, who points to Skype (a company he invested in as a VC) as a prime example. "As soon as I saw their backgrounds in the business plan, I was willing to meet them immediately," says Hartenbaum.
The Skype founders had worked together previously at a company called Tele2 -- a European telecom operator. One of them ran the international business development for years, and between them, they knew all about the telco industry.
Their business plan also outlined how the two founders had previously designed a consumer product called Kazaa -- a peer-to-peer music service.
"At the time I met them," says Hartenbaum, "Kazaa was the most downloaded piece of consumer software in history. Now they wanted to build this new company called Skype, based on the same peer-to-peer software model. I wanted to meet with them just to hear what they had to say," he says.
Use a bottom-up financial model.
Michael Gurau, a managing partner at Clear Venture Partners, advises that a good business plan has two sections -- a narrative one (which includes the opportunity, management team, etc.) and a financial one. "One place where entrepreneurs miss the mark," says Gurau, "is to write the financial segment of the plan from a top-down perspective."
Most of the plans that come across a VC's desk start by talking about the overall market size in a given sector and what share of that market the new venture plans to capture over a five-year period. But the problem with this type of financial analysis is that it lacks the detailed set of assumptions necessary to convince a VC that the would-be mogul knows what it will really take to make the proposed venture profitable.
For example, an entrepreneur will put in their business plan that there are "15 million people in a given market, and that if we can just sell 10 percent of them, we will make a fortune."
Instead of this broad-brush stroke approach, write the financial part of your plan from a bottom-up point of view. Figure out the granular set of assumptions. For example:
How many sales will each salesperson have to make per year to make your revenue goals? How many meetings will it take each salesperson before they close a sale? What percentage of these sales will be at full price? At a discount?
By researching and making a detailed set of assumptions in such areas as sales, operations, support and marketing, you will be able to tell the VC how the business can succeed -- line item by line item. Just remember, "Every spreadsheet tells a story," says Gurau.
State a precise problem and offer a specific solution.
One of the most critical mistakes entrepreneurs make is that often their business plans don't make the case clear as to why a business makes sense.
The problem has to be large or significant enough to create a business around. For example: Google's pitch to investors positioned the problem they wanted to solve as an explosion in the amount of information available on the Internet, with no way for the average person to search for or retrieve it. "There is way too much throat clearing," says Hartenbaum. "Just state what it is you are proposing to do, early on," he says.
As with most things, a well-put-together business plan requires research, effort and energy. Just remember that putting in the investment of your time on the front end could earn you funding on the back end. It's not called sweat equity for nothing.