50 Questions: What are the most common mistakes in a business plan?

Twenty-ninth in a series of weekly posts by myself and Nicholas Lovell of Gamesbrief which answer the fifty questions you should ask before raising venture capital.  We expect the series to run for a year after which we will collate the posts into a book.  You can find the rationale behind the series here, and the list of questions here.  We welcome your comments on any and every aspect of what we are doing.

—————————————

This is the first post in this series after a four week break due to the summer holidays, and the subject this time is common mistakes that entrepreneurs make when producing documents that describe their companies.  I referred to ‘business plans’ in the title of the post for brevity, but everything below applies equally to executive summaries and introductory Powerpoint decks.

Earlier today I polled my partners with the question “what are the common errors people make when writing their business plans?” and the following list is an amalgam of their responses and my own thoughts.

  1. Hard to pick out the key messages – either because the document is too long, lacks a concise executive summary, is poorly structured, or is poorly written.  Some of the worst business plans look more like novels than whilst the best ones resemble well organised text books.
  2. Poor financials – the most common mistakes are either to miss out the financials entirely (including the amount of money to be raised), to have too short a period of time before the money runs out, or to have absurdly optimistic growth projections.  One of my partners said that once revenues are over $1m per month growth greater than 200% pa takes a lot of explaining.
  3. Over reliance on a financial model – too many companies create overly detailed spreadsheets and then put too much reliance on them when it comes to forecasting revenues.  Much better to have a simple model and a good intuitive grasp of the drivers of growth.  Sorry to all you Excel junkies out there, but for small companies detailed models are overkill.
  4. Not understanding the competition – the most common symptoms are claiming no competition, dismissing competitors based on a single feature or company attribute without saying why it’s important, and not explaining why they have a sustainable competitive advantage.  A poor understanding of the competition often comes across as arrogant and may negatively impact the impression of the team.
  5. Hiding weaknesses and key risks – they will come out in the end and the VC may well be aware of them anyway.  Much better to be upfront and have a clear plan for mitigation.
  6. Plan poorly written and presented – anything that is not well written or looks sloppy will have the VC wondering whether other areas of the business suffer from the same problem.

Finally – following this high level guidance will help avoid most of the mistakes above: “Creating a business plan is not about bullshitting a document. Its about thinking through the issues in the business and how you’re going to solve them”.

For a more positive slant see my earlier posts in this series:

Enhanced by Zemanta
  • Hi Nic

    There are a few more that I also encounter:

    Plans that are too product /service focused i.e. lacking balance. These plans tend to give a very detailed analysis of the
    feature set with very little emphasis on other crucial aspects i.e. the benefits arising from the features or the market opportunity, team or route to market.

    Another common mistake is to gloss over the demand side. For most businesses, the plan need to demonstrate some evidence of demand be it through demand of substitute products, proxies or market research. (Of course there are always exceptions e.g. the iPad).

    No evidence that the plan has been discussed with impartial 3rd parties or prospective customers. Too many entrepreneurs are afraid of disclosing their idea or having someone critique the plan early on. Friends and family are poor reviewers given the fact they may lack the necessary industry knowledge to challenge assumptions and are unlikely to want to criticize.

    regards
    @alangleeson:twitter
    http://www.paloalto.com/uk

  • Thanks Alan. The first two points are very good ones. We will weave them in when we make this into a book.