This week sees ‘Part Two’ of our guest blog from Stuart Hillston, founder and CEO of Constellation Capital, which highlights common mistakes that entrepreneurs should avoid when writing a business plan. It is worth a read if you are thinking, or in the process of, writing a business plan to secure investment.
6. A guaranteed return for investors
You will have detected a theme here – a business plan is simple a prediction of what might happen. So it will actually be quite difficult, and potentially very expensive, to guarantee a return. Yet it is a frequently the case that plans include a guarantee, or at least a high degree of commitment, to particular outcomes.
Now you might think that this will appeal to an investor. It might, but not in the way you are expecting. You see, when you enter into an investment agreement, it is not uncommon for you to be asked to guarantee all the statements in your plan – and that means financially and with your job/shares. If the statements you make are false, you will be liable. That would normally exclude the financial forecast – because you wouldn’t normally be expected to guarantee it. Which is why volunteering to do so is a bad idea.
7. There is no competition
When I hear or read this statement, three things go through my mind. You don’t understand your market; there is no market; or you’re going to create the market. None of these is good news.
It may well be true that no-one does exactly what you do. You may absolutely make a product, or deliver a service, that no-one else does (yet). That does not mean there is no competition. The essence of business is the selling – you deliver something to a customer who pays for it. And that customer always has a choice of what they do with that money, and how they solve the particular problem you solve.
That means you must understand your market – knowing why your customers will choose you and what their alternative options are.
Of course, it is entirely possible that you have no competition because there isn’t a market. Some of the greatest technical innovations are sometimes pointed in the wrong direction. The brilliance of the product as an innovation does not automatically mean that customers need, want or will pay for it.
Naturally there is always the possibility that you are truly the first in a new market which no-one else can possible predict. At a presentation recently a member of the audience put Facebook in this category – I can point to the precursor of Facebook as a mix of technology such as bulletin boards, instant messaging, chat rooms… the elements existed, there was growing demand, it was simply that they became one of a number of new solutions to an existing problem, and then, later, became dominant.
If you really are the first, you have two issues. One is that it costs a lot more to create a market. And the second is that the first player is less likely to win in the long run.
8. 10 year financials
There are two reasons why you shouldn’t do this. The first, and most obvious, is that your prediction of the future will be based on the prior years. If you start with a low (or zero) turnover, then each successive year is compounding the flaws in your predictions.
Put another way, imagine I discount your numbers by 20% each year, and compound that amount each year. Do you know how quickly I will be reducing your annual forecasts by half? Its 3 years. By year 10 I am applying a discount of nearly 90%. In practical terms what does that mean?
It means that the further you predict into the future, the more I discount your numbers.
The second reason for not doing this is back to saving trees – acres of spreadsheets are printed in plans and never read.
My recommendation is that your plan includes a detailed monthly forecast for one year and that years two and three are done quarterly. If it will take you longer to get to revenue then focus on the detail for a little longer.
9. Huge salaries for management from the start
The truth is that you will no doubt have shares in the company, and you’ll probably need some income to live reasonably. You need investment to grow the business and senior management is part of that process. So a salary is a good thing, as are milestone based bonuses.
However “getting rich” before you have delivered does seem to be some entrepreneurs idea of success. I have seen start-up (no revenue) salaries of £180K for 4 key management positions, all funded out the investors pocket. And it’s no good bleating on about that is what you could command elsewhere – the answer is to go elsewhere!
So you will ask at this point what is “right”. Investors will vary in their opinion on this, but I would suggest that for the CEO around £4-5K per month and in extremis, £6K per month pre-tax. The less you spend on salary, the more you can invest in growing the business, and the faster your equity will increase in value.
10. Tpyos
We alll maek tehm, teyh re a tacf of life, but a prof read wont go amiess!
I do it all the time – but the one time you should do all you can to avoid them is in your plan – the old cliché about “you only get one chance to make a first impression” applies here, and this is a reflection of your business, do you really care about it?
The two golden rules are to use a spell checker and then have a third party, unconnected with the business, read it properly. Ideally someone with proof reading skills (I’d volunteer but my hourly rate might put you off!)
The most memorable example of this I have seen was a company that got its own name wrong on the cover sheet – classic!
Guest blog provided by Stuart W. Hillston, CEO of Constellation Capital.