Traditionally, start-ups write a business plan for three specific reasons: to express their vision for the business, to document how they plan to solve major challenges, and to present their business idea to potential investors.
But what if I told 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. Preparing comprehensive business plans is very time consuming, even if you are using business planning software.
- They quickly become obsolete. Your business plan quickly becomes obsolete as you run into operational and marketing issues.
- No one has time to read them. Potential investors and venture capitalists generally do not have the time or interest to dwell on 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 instead when launching your startup:
1. Prepare a great pitch for potential investors
Developing an engaging “pitch deck” to present 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 takes time. Therefore, it is crucial that a startup seeking funding absolutely nails its investor pitch and articulates a compelling and interesting story in the short amount of time it has during the presentation.
You want your presentation to investors to cover the following topics, roughly in the order shown here and with headlines like the following:
- Company presentation (give a brief overview of the company)
- Mission / Vision of the company (what is the mission and vision?)
- The team (who are the key players on the team? What is their relevant background?)
- The problem (what big problem are you trying to solve?)
- The solution (what is the solution you offer? Why is it better than other solutions or products?)
- The market opportunity (how big is the addressable market?)
- The product (give details about the product)
- Customers (who are the target customers? Why will there be a high demand from these customers?)
- Technology (what is the underlying technology? How is it differentiated?)
- The Competition (who are the main competitors?)
- Traction (early clients, early adopters, partnerships)
- Business model (what is the business model?)
- The marketing plan (how do you plan to market? What do you expect from customer acquisition costs versus customer lifetime value?)
- Financial data (actual and projected profits and losses and cash flows)
- The Ask (how much capital are you trying to raise?)
Too many startups make a number of preventable mistakes when creating their pitch decks for investors. Here’s a preliminary list of dos and don’ts:
To do on the pitch deck
- Include this wording at the bottom left of the pitch deck cover page: “Confidential and Owner. Copyright by [Name of Company]. [Year]. All rights reserved.”
- Convince the viewer of the reasons why the market opportunity matters.
- 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 some other online service because you are only preventing the investor from reading it.
- Schedule 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 an idea and that you have quickly developed the product, attracted customers or signed partners.
- Have a sound sample for investors to remember.
- Use consistent font size, color, and header style on all slides.
What not to do on the pitch deck
- Do no more than 15-20 slides on the pitch deck (investors have limited attention span).
- Don’t have too many wordy slides.
- Do not provide excessive financial details as this can 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 a lot of jargon or acronyms that the investor might not immediately understand.
- Don’t underestimate or belittle 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 (that’s why I avoid putting a date on the cover page at all). And you don’t want any information or metrics about your business to appear out of date or out of date.
- Don’t have a bad layout, bad graphics, or a shoddy look and feel. Consider hiring a graphic designer to make your pitch desk look more professional.
For additional tips and a sample pitch deck, check out How to Create a Great Investor Pitch Deck for Startups Looking for Funding and Want to Raise Fund for Your Mobile App Startup? Here is the Ultimate Investor Pitch Deck.
2. Focus on building a good prototype product.
Create 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. Without a doubt, version 1 of your product won’t be as good as version 2 or version 3, but you have to start somewhere.
In the beginning, your product should be at least good if not excellent. It must be differentiated in a meaningful and important way from the offerings of your competitors. Everything else flows from this key principle. Don’t drag your feet to get your product to market, as 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” test product works for many startups because they eliminate bugs from user feedback. As Sheryl Sandberg, COO of Facebook, said, “Better to do than perfect. “
3. Do extensive research on the market opportunity and your competition.
Make sure to thoroughly research market opportunities and competing products or services, 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 desirability and your competition. Any entrepreneur who says “we have no competition” will have credibility issues. So anticipate these questions from investors:
- What is the size of the addressable market? How much can the company realistically capture?
- Who are the company’s main competitors?
- What traction did these competitors get?
- What gives your business the competitive edge?
- How do you compare to these other companies 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 flow “burn” before you get a return on your cash flow, indicating the start-up capital you will need
- Present your key financial assumptions (price per product, cost of product development, marketing expenses, employee expenses, rent and overhead, gross margins, etc.) so that you and others can test the reasonableness of the assumptions
- So that these projections are ready and credible when investors inevitably demand them
Financial projections will generally cover a period of 3 to 5 years and will include:
- Income statement
- Statement of cash flows
- Detailed categories of income and expenses
- Balance sheet
- Underlying assumptions
Of course, your financial projections won’t exactly 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 the reasons 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 your pitch deck is disappointing
- You haven’t thought about the questions investors are likely to ask
- You just have an idea and you haven’t gotten any traction yet
- You don’t have the right management team
- You don’t understand the competition
- There are already strong competitors who are well capitalized
- 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 market and get customers profitably
- You don’t have a good prototype of your product
For more details, see 10 Reasons Your Startup Idea Sucks and Won’t Get Funded.
Remember, 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.
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