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Thursday, April 19, 2012

What not to say in Business Plan 04-20

What Not To Say in a Business Plan

By Barry Moltz, Entrepreneur and Consultant

Sometimes I find that the company's founder is so far 'outside the box' that they 'stretch the envelope.' As an angel investor, I review more than 500 business plans each year. Unfortunately, many are so riddled with economy lingo, business jargon and clichés, that they do not communicate any real business value. In my opinion, terminology, such as disintermediation, sweet spot, ASP, best of breed, and win-win should be outlawed for the next 100 years. For building a real business, these terms are meaningless. Another challenge when reviewing business plans is that the introductory sentences sometimes stretch for an entire paragraph as the entrepreneur looks for that all-encompassing way to describe their business. 

Forget it! There isn't one. 

Many times I want to strangle the writer to simply tell me what they do in five words or less. Poor choice of words: This business makes mechanical gasoline fueled devices used for transportation more efficient by periodically sending them through an applied for patent machine to loosen the terra firma from these vehicles to make them more conducive at performing their task. Solid choice of words: We run a car wash. Another frequently used practice is to create a business plan using template software or by working from an existing plan. I do not recommend this practice and like to refer to William Sahlman in his Harvard Business case study "Some Thoughts on Business Plans." This case study has continuously inspired me to see beyond clichés and catch-phrases and better interpret misleading statements within business plans.

If the plan says: "Our numbers are conservative." 

I read: "I know I better show a growing profitable company. This is my best case scenario. Is it good enough?" Since all numbers are based on assumptions, projections in business plans are by their very nature a guess and are not conservative.

If the plan says: "We'll give you a 100 percent internal rate of return on your money." 

I read: "If everything goes perfectly right, the planets align, and we get lucky, you might get your money back. Actually, we have no idea if this idea will even work." No one can predict what an investor's return will be. Let them decide.

If the plan says: "We project a 10 percent margin." 

I read: "We kept the same assumptions that the business plan software template came with and did not change a thing. Should we make any changes?" Ensure you have developed your financial projections from the ground up.

If the plan says: "We only need a 5 percent market share to make our conservative projections." 

I read: "We were too lazy to figure out exactly how our business will ramp up." Know what it will cost to acquire customers. Gaining 5 percent market share is not an easy task in a large market.
If the plan says: "Customers really need our product." I read: " We haven't yet asked anyone to pay for it." or "All our current customers are our relatives" or "We paid for an expensive survey and the people we interviewed said they needed our product". The definition of a business is when people pay you money to solve their problems. This is the only way to prove people "need it".

If the plan says: "We have no competition".

 I read: Actually... I stop reading the plan. Always beware of entrepreneurs that claim they have no competitors. If they are right, it's a problem and if they are wrong, it is also a problem. Every business has competitors or else there is a current solution to this customer need. If there are no competitors for what the entrepreneur wants to do, there is a good chance there also is no business. So what should an entrepreneur do? Write the plan in plain and proper English. Please understand that the reader comes to the plan with no knowledge of your business. No fancy words, clichés or graphs will make them want to invest. Understand every part of your plan and be able to defend it. Use your own passion to describe your plan. Make your plan your own.

The 11 things that matter in a business plan:
  • What problem exists that your business is trying to solve. Where is the pain?

  • What does it cost to solve that problem now? How deep and compelling is the pain?

  • What solutions does your business have that solve this problem?

  • What will the customer pay you to solve this problem? How solving this problem will make the company a lot of money.

  • What alliances can you leverage with other companies to help your company?

  • How big can this business get if given the right capital?

  • How much cash do you need to find a path to profitability?

  • How the skills of your management team, their domain knowledge, and track record of execution will make this happen.

  • What is the investors' exit strategy?
Please remember, the business plan is basically an "argument" where you need to state the problem and pain, then provide your solution with supporting data and analogies.

Barry Moltz

Barry Moltz has founded and run small businesses with a great deal of success and failure for more than 15 years.

After successfully selling his last operating business, Mr. Moltz has branched out into a number of entrepreneurship-related activities. He founded an angel investor group, an angel fund, and is a former advisory member of the board of the Angel Capital Education Foundation.

Mr. Moltz is a nationally recognized expert on entrepreneurship who has given hundreds of presentations to audiences ranging in size from 20 to 20,000. As a member of the Entrepreneurship Hall of Fame, he has also taught entrepreneurship as an adjunct professor at the Illinois Institute of Technology. He has appeared on many TV and radio programs such as The Big Idea with Donny Deutsch, MSNBC’s Your Business and NPR’s The Tavis Smiley Show. He hosts his own radio show, Business Insanity Talk Radio, and writes regularly for the American Express Open Forum, and Crain’s Chicago Enterprise City.

Material in this work is for general educational purposes only, and should not be construed as legal advice or legal opinion on any specific facts or circumstances.

Shyam's take on this article,

Direct from the horse's mouth.Could this help people prepare more VC friendly Business Plan???

My thinking is that the Business Plan should not be made with VC in mind. The plan should be closer to your dreams and objectives.and align seamlessly with the aspirations of the target group of the populace.

Do not allow a a VC to dictate how your Business Plan should be and what it should contain.

Once your Business Plan drives performance, you will have the VC chasing you. Then you can write an article for VC on 11 things that matter before approaching a start-up.

Let not VC shackle your creativity and entrepreneurial spirit.If you need to choose between a Business Plan and VC. Shelve the VC.For, you know your project better than anyone even the VC.
Let not your plan be the one among the 500 that VC peruse every year,

Let the VC firm be the one among the ten that have approached you that year. fearlessly bargain with them. if some one has to comprise, it has to be a VC not you or dream. If can't get a VC, downsize your planned outlay,raise money through private funding, if it is not you, it will be your success that will bring the VC to doors sooner or later.

Treat VC and their ideas with respect.Most of the VC are owned by people who have extraordinary business acumen and success.

And when you succeed, try to be a VC that promotes creativity & entrepreneurship.
Be a Vinod Khosla.

Don't stop at writing about Business Plans. Work to transform innovative, creative, bubbling raw talent into successful entrepreneurs.

A VC work is not all about how many Business Plans they successfully rejected, it is all about how many ordinary looking ideas they have transformed in to deliverable projects.

My sincere thanks to Barry, whose article has motivated me to write this comment.


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