What are some of the biggest mistakes that entrepreneurs make when writing a business plan? I’m Barry Horowitz, and I’m a growth strategy consultant. I want to talk to you about very basic mistakes that often come up so you can try to avoid them.
One of the things you’ll find is that most venture capitalists and angel investors have a favorite list of “great lies” that entrepreneurs tell investors.
The 2 Percent Lie
One of the biggest ones actually has to do with the market size. Many times we hear, “It’s a huge market! There are a million people,” or maybe “There are millions of people and all I need is 2 percent. If we had 2 percent of the market we’d be huge!”
It’s a somewhat lazy calculation for us, and it really doesn’t have any evidence that you’ve thought through how many of those people really do have this problem. How would you get them? Can you even reach? I mean, there are 1.3 billion people in China. If you could get a can of Coke into each of their hands that would be a lot of cans of Coke. But how would you get there?
In order to do that, you really need to think bottom up. How did you arrive at those numbers? How would you get to those numbers? Why is it reasonable to think that they’re real? If it happens that with careful calculation it’s 2 percent of the market and that’s a large number, that’s great.
The Billion Dollar Market Lie
There’s also a perception that if you need to be going after billion dollar market if you want venture capital. Coincidentally, a lot of business plans have markets that are a billion dollars.
If it’s not quite a billion dollars, don’t say it’s a billion dollar market. Find what the number is. Be able to justify how you’ve arrived at how big the market really is.
The No Competitor Lie
Our favorite one is “We have no competition.” Everybody has competition. Sometimes competition for the solution to the problem you solve is just doing nothing and simply doing what they do today. But generally if you say there is no competition, investors will assume that you either don’t understand your market well or you haven’t spent the time to try to figure it out. There is always competition. It’s important to understand who the key wants are and why you are better than them. Finally a lot of times people say “We do have big competitors, but they’re too big and too slow and they’re not going to react.” Big companies may move more slowly than entrepreneurs, but they have a lot of resources. If there’s really something there worthwhile to change, they can turn very quickly. Again, it makes you look like you really haven’t thought it through.
The Conservative Projections Lie
Last one that is their favorite is people always when explaining about their financials say “Our projections are conservative of course.” You say that while achieving $50 billion in revenue in five years. They’ve seen that many times they will discount it. They will always assume that you’ve overshot.
Entrepreneurs tend to be very enthusiastic and very optimistic. You may feel that you’ve made conservative projections but I wouldn’t say that.
So the key thing is do your homework. Understand your markets, understand your segments, understand your numbers, and just be straight with the investors. Don’t try to pretend there’s something there that there isn’t.