Traditionally, start-ups write a business plan for three specific reasons: to articulate their vision for the business, to document how they plan to solve key challenges, and to pitch their business idea to potential investors. .
But what if I tell you that business plans for start-ups are usually not worth it?
My many years of experience working with startups, entrepreneurs, and venture capitalists have led me to conclude that business plans are largely a waste of time for the following reasons:
- They take time. Thorough business plans take a lot of time to prepare, even if you use business planning software.
- They quickly become obsolete. Your business plan quickly becomes outdated as you run into operational and marketing issues.
- No one has time to read them. Potential investors and venture capitalists usually don’t have the time or interest to go through such a document. They review hundreds, if not thousands, of startup opportunities, so you need to grab their attention with something much shorter.
So instead of wasting your precious time preparing a business plan, I suggest you do these five things when launching your startup:
1. Prepare a great pitch deck for potential investors
Developing an engaging pitch deck to pitch your business to potential investors instead of a business plan is the new normal. The pitch deck typically consists of 15-20 PowerPoint slides and is intended to introduce the company’s products, technology, and team to investors.
Raising capital from investors is difficult and time consuming. Therefore, it’s crucial that a startup seeking funding absolutely nails its investor pitch deck and articulates a compelling and compelling story in the short time it has during the pitch.
You want your investor pitch deck to cover the following topics, roughly in the order shown here and with headings like the following:
- Business overview (give a brief overview of the business)
- Mission/Vision of the company (what is the mission and the vision?)
- The team (who are the main players in the team? what is their relevant background?)
- The problem (what big problem are you trying to solve?)
- The solution (What solution do you offer? Why is it better than other solutions or products?)
- The market opportunity (how big is the addressable market?)
- The product (give details of the product)
- Customers (Who are the target customers? Why will there be high demand from these customers?)
- Technology (What is the underlying technology? How is it differentiated?)
- The competition (who are the main competitors?)
- Traction (early customers, early adopters, partnerships)
- Business model (what is the business model?)
- The marketing plan (how do you plan to market? What do you plan for customer acquisition costs versus customer lifetime value?)
- Financial data (actual and projected profit and loss and cash flow)
- The demand (how much capital are you trying to raise?)
Too many startups make a number of avoidable mistakes when creating their investor presentations. Here is a preliminary list of do’s and don’ts to keep in mind:
Pitch Deck Do’s
- Include this wording at the bottom left of the pitch deck cover page: “Confidential and Proprietary. Copyright by [Name of Company]. [Year]. All rights reserved.”
- Convince the viewer why the market opportunity is important.
- Include visually interesting graphics and images.
- Send the pitch deck in PDF format to potential investors before a meeting. Don’t force the investor to get it from Google Docs, Dropbox, or another online service, because you’re just putting an obstacle in the way of the investor reading.
- Plan to have a demonstration of your product as part of the in-person presentation.
- Tell a compelling, memorable, and interesting story that shows your passion for the business.
- Show that you have more than just an idea and that you got quick traction on developing the product, securing customers, or signing partners.
- Have a sound bite so investors remember you.
- Use a consistent font size, color, and header title style across all slides.
Pitch Deck Don’ts
- Do no more than 15-20 slides in the pitch deck (investors have short attention spans).
- Don’t have too many wordy slides.
- Do not provide excessive financial details as this may be provided in a follow up.
- Don’t try to cover everything in the pitch deck. Your in-person presentation will give you the opportunity to add and highlight key information.
- Don’t use too much jargon or acronyms that the investor might not immediately understand.
- Don’t underestimate or underestimate the competition.
- Don’t make your pitch deck look outdated. You don’t want a date on the cover page that is several months old (which is why I avoid putting a date on the cover page at all). And you don’t want information or metrics about your business that seem outdated or outdated.
- Don’t have a bad layout, bad graphics or a poor quality “look and feel”. Consider hiring a graphic designer to give your pitch desk a more professional look.
For additional tips and an example pitch deck, see How to Create a Great Investor Pitch Deck for Startups Seeking Funding and Want to Raise Funds for Your Mobile App Startup? This is the Ultimate Investor Pitch Deck.
2. Focus on creating a good prototype product
Build version 1 of your product. Having a prototype of your product makes it easier to sell your vision to investors. It also gives you momentum and traction and helps you recruit partners and employees. Undoubtedly, version 1 of your product will not be as good as version 2 or version 3, but you have to start somewhere.
In the beginning, your product must be at least good if not excellent. It must be significantly and importantly differentiated from your competitors’ offerings. Everything else flows from this key principle. Don’t drag your feet in marketing your product because early customer feedback is one of the best ways to improve your product.
Sure, you want a “minimum viable product” (MVP) to start with, but even that product has to be good and differentiated from the competition. Having a “beta” testing product works for many startups because it weeds out bugs from user feedback. As Sheryl Sandberg, COO of Facebook, said, “Done is better than perfect.”
3. Research the market opportunity and your competition thoroughly
Be sure to research market opportunities and competing products or services thoroughly, and stay on top of new developments and announcements from your competitors. One way to do this is to set up a Google alert to notify you when new information about these companies appears online.
Expect potential investors in your business to ask questions about the market opportunity and your competition. Any entrepreneur who says “we have no competitors” will have credibility issues. So anticipate these questions from investors:
- What is the size of the addressable market? How much of it can the company realistically capture?
- Who are the company’s main competitors?
- How much traction did these competitors get?
- What gives your business the competitive edge?
- Compared to these other companies, how do you compete in terms of price, features and performance?
- What are the barriers to entry into your market?
4. Prepare detailed financial projections
It may be important to prepare detailed financial projections for the business for the following reasons:
- To determine if the business will ultimately be profitable
- To determine your cash “burn” before profitable cash flow, indicating how much start-up capital you will need
- To present your key financial assumptions (price per product, product development cost, marketing expenses, employee expenses, rent and overhead, gross margins, etc.) so that you and others can test the reasonableness of the assumptions
- Have those projections ready and credible when investors inevitably ask for them
The financial projections will generally cover a period of 3 to 5 years and will include:
- Income statement
- Cash Flow
- Detailed income and expense categories
- Balance sheet
- Underlying assumptions
Of course, your financial projections won’t perfectly match your actual results, but your financial projections may be revised as you progress through the stages of your business.
5. Make sure you’ve thought about why startups aren’t funded by investors
There are various reasons why investors turn down startups and entrepreneurs. So understand these reasons and make sure they don’t apply to you:
- The business idea is too small
- Your summary or presentation is disappointing
- You haven’t thought through the questions investors are likely to ask
- You just had an idea and you haven’t gotten any traction yet
- You don’t have the right management team
- You don’t understand the competition
- Strong and well-capitalized competitors already exist
- Your financial projections are unrealistic
- You are not convinced of the need for your product or service
- You don’t explain how you plan to profitably market and get customers
- You don’t have a good prototype of your product
For more details, check out 10 Reasons Your Startup Idea Sucks and Won’t Get Funded.
Remember that you don’t need a long business plan for your startup. There are more important things you can do to build a successful business.
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Copyright © by Richard D. Harroch. All rights reserved.
Richard D. Harroch is a managing director and global head of mergers and acquisitions at VantagePoint Capital Partners, a leading San Francisco-area venture capital fund. He focuses on internet, digital media and software companies, and he was the founder of several internet companies. His articles have appeared online in Forbes, Fortune, MSN, Yahoo, FoxBusiness and AllBusiness.com. Richard is the author of several books on startups and co-author of Poker for Dummies and Mergers and Acquisitions of Privately Held Companies (Bloomberg), and a Wall Street Journal bestseller on small business. He was also a corporate and M&A partner at the law firm Orrick, Herrington & Sutcliffe, with experience in startups, M&A and venture capital. He has been involved in over 200 M&A transactions and 250 startup financings. He can be reached via LinkedIn.