What do you think is the most critical mistake entrepreneurs make in the business plans that they present to angel investors?
The entrepreneurs who responded to this survey question had, as a group, a remarkably thorough understanding of what can go wrong with a business plan. These entrepreneurs must be the ones who are out there writing the effective business plans.
Entrepreneurs thought the most critical mistakes made in business plans were as followed:
The respondents really took their fellow entrepreneurs to task for not presenting a realistic picture of the business opportunity to investors. They told us that nearly all parts of the plan are unrealistic, except perhaps the table of contents and the appendix.
The best business plans are those that are concise and to the point.
Incompleteness of presentation often stems from a lack of basic homework into the market and the competition. The plan is an ideal venue for the founders of the company to demonstrate their thorough knowledge of the market space they will be entering. Unfortunately, many times the business plan content demonstrates just the opposite.
This is a controversial part of a business plan. Depending on which “expert” you talk to, it is better to be extremely direct and specific about the proposed deal structure-how much equity you are willing to give up for how much capital-and about how you propose to let the investor get their money out of the venture. You might even go so far as to calculating a forecast rate of return for the angel investor. The other school of thought is to just describe how much capital you need to execute the plan, in what stages, and leave the specific terms for when you are actually negotiating with investors.
With financial projections, sometimes less is more. Because they are at most educated guesses, the projections section of the plan does not need to be 40 pages long. You want to show that you have a detailed estimate of the start-up costs of the venture, and that your profit and loss statement projections are backed up with sound assumptions that the reader can track through. And you want to answer the fundamental question: when will the venture reach positive cash flow?
For an entrepreneur to succeed in his/her mission of obtaining capital, the venture must be clearly set apart, and show to be superior, to both potential competitors in the market space, but also to other deals that are competing for the investors’ attention and dollars. Entrepreneurs tend to overlook the latter type of competition: other entrepreneurs are coming up with good ideas as well. That is why it is so critical to show a compelling need for your product/service in the marketplace.
It is truly amazing how many business plans contain a statement like the following: “There is no competitor in our market space who is providing the same service/product that we are; therefore we do not see any direct competitors.”
It is interesting that relatively few entrepreneurs cited this as the major weakness of a business plan, whereas investors overwhelmingly view this as the critical factor in making the investment decision.
When preparing a Business Plan for angel investors, it is best to err on the side of giving them a little too much basic information about the technology rather than giving them technical jargon or industry insider type information that may fly right over their heads. These entrepreneurs also spoke to the importance of seeking out angels who have already have an expressed interest in your type of company.
We tend to think of business model as simply a discussion of how revenues will be generated. But there is an equally important other component: what aspects of the business will lead to high margins and therefore profitability.