November 2020 – Harbor Capital Group Inc.

Avoidable Mistakes Made Preparing Business Plans For Investors: Part Three

Posted on November 13, 2020 by harborcapitalgroupinc

Financial Model Mistakes

Only cash is cash

Suppose you sell something this month for $100, and it cost you $60 to make it. But you have to pay your suppliers within 30 days. But the buyer probably won’t pay you for at least 60 days.

In this case, your revenue for the month was $100, your profit for the month was $40, and your cash flow for the month is zero. Next month your cash flow will be -$600 when you pay your suppliers.

Although this example may seem trivial, very slight changes in the timing difference between cash receipt and disbursement of just a couple of weeks can bankrupt your business.

When you build your financial model, make sure that your assumptions are realistic.

Lack of detail

Your finances should be constructed from the bottom up and then validated from the top down. The bottom of the model starts with details such as when you expect to make specific sales or hire more employees.

Top-down validation means that you examine your overall market potential and compare that to the bottom of revenue projections.

Round numbers like 1 million in R&D expenses in your two, and 2 million in your three, are you sure sign that you do not have a bottom-up more.

Unrealistic financials

Only a small handful of companies achieve 100 million or more in sales only five years after founding. Projecting much more than that will not be credible and will get your business plan canned faster than almost anything else. On the other hand, a business with only 25 million in revenues after five years will be too small to interest serious investors. Financial forecast or a litmus test of your understanding of how venture capitalists think.

If you have a realistic basis for projecting 50 to 100,000,000 in five years, you probably a good candidate for venture financing; otherwise, you should probably look elsewhere.

Insufficient financial projections

Basic financial projections consist of three fundamental elements: income statements, balance sheets, and cash flow statements. All of these must conform to generally excepted accounting principles or GAAP.

Investors generally expect to see five years of projections. Of course, nobody can see five years into the future. Investors primarily want to see the thought process you employ to create long-term projections.

A good financial model will also include sensitivity analysis, showing how your projected results will change if your assumptions turn out to be incorrect. This allows both you and the investor to identify the assumptions that can have a material effect on your future performance to focus your energies and validate those assumptions.

It should also include benchmark comparisons to other companies in your industry, things like revenues per employee, gross margin per employee, gross margin as a percent of revenues, and various expense ratios (general and administrative, sales and marketing, research and development, and operations as a percent of total operating expenses.

Conservative assumptions

Nobody ever believes that assumptions are conservative, even if they truly are. Develop realistic assumptions that you can support, refrain from using words “conservative “or aggressive “in your plan, and leave it at that.

Offering a valuation

Mini business plans here, stating that their company is worth a certain amount. How do you know? The value of a company is determined by the market, by what others are willing to pay. Unless you are in the business of buying, selling, or investing in companies, you probably don’t have an accurate sense of what the market will bear.

If you name a price, one of two things will happen to tell you that your price is too high, and investors will toss your plan, or thar5 your price is too low, and investors will take advantage of you. Both are bad. The purpose of the business plan is to tell your story in the most compelling manner possible so that investors will want to go to the next step. You can always negotiate the price later.

Stylistic mistakes

Poor spelling and grammar

If you make silly mistakes in your business plan, what does that say about how you run your business? Use your spelling and grammar checkers, get other people to edit the plan, do whatever it takes to purge embarrassing errors.

Too repetitive

All too often, a plan covers the same points over and over. A well-written plan should cover key points only twice, once briefly and then the executive summary, and again in greater detail, in the plan’s body.

Appearance matters

At any point in time, an investor has dozens, if not hundreds of plants waiting to be read. Get to the top of the pile and making sure that the cover is attractive, the binding is professional, the pages are well laid out, and the fonts are large enough to be easily read.

Execution mistakes

Waiting until too late. The capital formation process takes a long time. In general, count on six months to a year from when you start writing the plan until the money is in the bank. Don’t put off your management team should be prepared to invest about 500 hours into the plan. If you are too busy building your product, company, or customers (which is probably a better use of your time. Consider outsourcing the development of the business plan.

Failing to seek outside review

Make sure that you have at least a few people review your plan before you send it out. Preferably people who understand your market, sales, and distribution strategies, the DC market, etc.

Your plan may look perfect to you and your team, but that’s because you’ve been staring in for months. Good objective reviews from outsiders with fresh perspectives can save you from myopia.

Over tweaking

You could spend countless hours tweaking your plan in the pursuit of perfection. A lot of this time would be better spent working on your product, company, and customers. At some point, you need to pull the trigger and get the plan out in front of a few investors. If the reaction is positive, and they want to move forward, great.

If the reaction is adverse, assuming that the investor was a good fit to begin with, and you may have been heading down the wrong path. Get feedback from a couple of investors, and if a consensus emerges, go back and refine your plan.

Conclusion

It’s a tough investment climate, but good ideas backed by good teams and good business plans are still getting funded. Give yourself the best chance by avoiding these simple mistakes.

Avoidable Mistakes Made Preparing Business Plans For Investors (part two)

Posted on November 13, 2020 by harborcapitalgroupinc

Do not be too technical.

People with technical backgrounds or specialized products often fill the document with jargon and concepts with no meaning for the non-technical person. Investors are interested in how the product works, but only in reference to how it solves the problem.

For example, when Steve Jobs introduced the iPod, it had 5 gigabits of storage. No one other than engineers knew what 5 gigabits were, so the way he explained it was to say with the iPod, you could put 1,000 songs in your pocket.

If investors are interested in your opportunity, they will have engineers look at the technology in depth. You can also detail the technology in a separate document.

No risk analysis

Investors are in the business of balancing risks versus rewards. Some of the first things investors want to know are the risks inherent in your business and what has been done to mitigate the risks.

The key risks of entrepreneurial ventures

Market risks: Where people actually buy what you have to say, will you need to create a major change in consumer behavior?

Technology risks: Can you actually deliver what you say you can? On a budget and on time?

Operational risk: What can go wrong in the day-to-day operations of the company? What can go wrong with manufacturing and customer support?

Management risks: Can you attract and retain the right team? Can your team pull this off? Are you prepared to step aside and let somebody else take over if necessary?

Legal risks: Is your intellectual property truly protected? Are you infringing on another companies patterns? If your solution does not work, can you limit your liability?

These risks are, of course, just a partial list of risks.

Even though you may feel that the risks are negligible, potential investors will feel otherwise unless you demonstrate that you have given a lot of thought to what can go wrong and can take prudent steps to mitigate these risks.

Poorly organized

Your plan should flow in an excellent organized fashion. Each section should build logically on the previous section, without requiring the reader to know something presented later in the plan.

Although there is no single correct business plan structure, one successful design is as follows:

Cover page: This is the first thing the reader will see, so keep it simple and professional, and be sure to include your contact information so the reader can reach you easily.

Executive summary: This is a brief, 1 to 3 page summary of everything that follows in the plan. It should be a standalone document as many readers will make their initial decision based on the executive summary alone.

Background: If you are in a highly specialized field, you should provide some knowledge in layman terms since most investors will not have advanced degrees in your area.

Market opportunity: Describe how businesses and consumers are suffering and how much they are willing to pay for a solution.

Products or services: Describe what you do and how your solution fits into the marketing opportunity.

Market traction: Describe how you have succeeded in attracting customers, marketing and distribution partnerships, and other alliances that demonstrate that experts in your market are betting on your solution.

Competitive analysis: Identify your direct and indirect competitors, and describe how your solution is better.

Distribution and marketing strategy: Describe how you will get to market, how are you will price your products etc.

Risk analysis: Identify primary sources of risks, and describe how you are mitigating them.

Milestones: Showcase a strong past track record and describe key checkpoints for the future.

Company and management: Provide the basic facts about your company – where and when you, Inc., where are you are located, and give a brief biography of your core team.

Financials: Provide summaries of your P&L and cash flows and the assumptions used to come up with this. Also, describe your funding needs, how are you are using the proceeds and possible exit strategies for investors.

As stated earlier, there is no right structure; you will need to experiment to find the one that best suits your business.

This article completes part two. The third and final article deals with the financial aspect of the business plan.

Avoidable Mistakes Made Preparing Business Plans For Investors (part one)

Posted on November 13, 2020 by harborcapitalgroupinc

Your business plan is often the first impression you make on investors, and it could also be the last impression the inverter gets if you make the kinds of mistakes illustrated here. If you don’t get a referral, your business plan is how the investor will judge whether or not to invite you to the office for an in-person meeting.

With the hundreds of “opportunities” investors get every month, they are looking for ways to say no. Therefore, you mustn’t make a lot of mistakes. Every mistake will hurt your chances.

.The following list of examples is from Cayenne Consulting.

Content mistakes

Failing to identify a real pain

Identifying and solving real pain that customers are willing to pay to get solved is not necessarily easy. Check out these posts: https://https://harborcapitalgroupinc.com/wp-content/uploads/2024/07/Braintopview-1.jpg.com/the-critical-first-step-toward-new-product-success/ and https://https://harborcapitalgroupinc.com/wp-content/uploads/2024/07/Braintopview-1.jpg.com/part-two-how-to-get-product-validation-and-commitment/

On the other hand, pain is synonymous with market opportunity. And the more widespread the problem is, the greater your potential market. Businesses and consumers pay good money to make pains go away. Your business plan is how you tell this opportunity story.

Overstating the impact your company will have

Phrases like unparalleled in the industry or unique and limited opportunity or superb returns with a limited capital investment are only hype. Investors will determine your company’s impact based on their specific criteria.

You should simply lay out the facts: the problem, your solution, the market size, how you will sell the product, and how you have a competitive advantage and will keep it.

Stretching the potential uses of your product

To impress investors, entrepreneurs often try to show that their product can be applied to multiple, very different markets or explain they can have a complex suite of products to bring to the market.

They don’t realize that most investors prefer to see a focused strategy, especially for a very early-stage company. Investors want a single, superior product that solves a big problem in a large market sold through a proven distribution strategy.

Additional products, applications, markets, and distribution channels don’t have to be left out; they can be used to enhance and support a highly focused core-strategy. Tell your core-story and let everything else play a minor role.

No, go to market strategy.

Business plans that fail to explain the sales, marketing, and distribution strategy are doomed. Be sure to answer these questions: Who will buy it, why, and most importantly, how will you get it to them?

Also, explain how you have already generated customer interest, obtained pre-orders, or better yet, need actual sales. And describe how you will leverage this experience through a cost-effective go to market strategy.

We have no competition.

No matter what you think, you have competitors. Maybe not a direct competitor who offers an identical solution but at least a substitute. First-class mail is a substitute for email.

Competitors, simply stated, consist of everybody pursuing the same customer dollars.

To say that you have no competition is one of the fastest ways you can get your plan tossed. Investors will conclude that you do not have a full understanding of your market. The competition section of your business plan is also your opportunity to showcase your relative strength against direct competitors, indirect competitors, and substitutes. Besides, having competitors is a good thing; it shows investors that a real market exists.

Your business plan is too long.

Investors are very busy and did not have the time to read long business plans. They also favor entrepreneurs who demonstrate the ability to convey a complex idea’s critical elements with an economy of words.

An excellent executive summary is no more than 1 to 3 pages. An ideal business plan is 20 to 30 pages, and most investors prefer the lower end of this range. Remember, the primary purpose of a fundraising business plan is to motivate the investor to pick up the phone and invite you to an in-person meeting. It’s not intended to describe every last detail.

Document the details elsewhere in your operating plan, R&D plan, marketing plan, white papers, etc.

The end of part one. This information is a lot to contemplate. That’s why we divided this vital block of data into three parts. Be sure to read part two, which covers more things to avoid doing, and part three covering financial information.