Traditionally, startup businesses draft 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 told you that business plans for startup companies are usually not worth the effort?
My many years of experience working with startups, entrepreneurs, and venture capitalists has led me to conclude that business plans are largely a waste of time for the following reasons:
- They are time consuming. Thorough business plans take a long time to prepare, even if you use business planning software.
- They get outdated quickly. Your business plan quickly becomes obsolete as you encounter operational and marketing issues.
- Nobody has time to read them. Prospective investors and venture capitalists don’t usually have the time or interest to slog through such a document. They review hundreds if not thousands of startup opportunities, so you have to grab their attention with something much shorter.
So instead of wasting your valuable time preparing a business plan, I suggest that you do these five things instead when launching your startup:
Business plans for startup companies are usually not worth the effort. Learn what you should be focusing on instead.
1. Prepare a Great Investor Pitch Deck for Prospective Investors
Developing an engaging “pitch deck” to present your company to prospective investors instead of a business plan is the new norm. The pitch deck typically consists of 15–20 PowerPoint slides and is intended to showcase the company’s products, technology, and team to the 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 interesting story in the short time it has during the presentation.
You want your investor pitch deck to cover the following topics, roughly in the order set forth here and with titles along the lines of the following:
- Company Overview (give a summary overview of the company)
- Mission/Vision of the Company (what is the mission and vision?)
- The Team (who are key team players? what is their relevant background?)
- The Problem (what big problem are you trying to solve?)
- The Solution (what is your proposed solution? why is it better than other solutions or products?)
- The Market Opportunity (how big is the addressable market?)
- The Product (give specifics on the product)
- The Customers (who are the target customers? why will there be a big demand from these customers?)
- The Technology (what is the underlying technology? how is it differentiated?)
- The Competition (who are the key 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 anticipate for customer acquisition costs vs. the lifetime value of the customer?)
- Financials (actual and projected profit & loss and cash flow)
- The Ask (how much capital you are trying to raise?)
Too many startups make a number of avoidable mistakes when creating their investor pitch decks. Here is a list of preliminary do’s and don’ts to keep in mind:
Pitch Deck Do’s
- Do 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.”
- Do convince the viewer of why the market opportunity is large.
- Do include visually interesting graphics and images.
- Do send the pitch deck in a PDF format to prospective investors in advance of a meeting. Don’t force the investor to get it from Google Docs, Dropbox, or some other online service, as you are just putting up a barrier to the investor actually reading it.
- Do plan to have a demo of your product as part of the in-person presentation.
- Do tell a compelling, memorable, and interesting story that shows your passion for the business.
- Do show that you have more than just an idea, and that you have gotten early traction on developing the product, getting customers, or signing up partners.
- Do have a sound bite for investors to remember you by.
- Do use a consistent font size, color, and header title style throughout the slides.
Pitch Deck Don’ts
- Don’t make the pitch deck more than 15–20 slides long (investors have limited attention spans).
- Don’t have too many wordy slides.
- Don’t provide excessive financial details, as that can be provided in a follow-up.
- Don’t try to cover everything in the pitch deck. Your in-person presentation will give you an opportunity to add and highlight key information.
- Don’t use a lot of jargon or acronyms that the investor may not immediately understand.
- Don’t underestimate or belittle the competition.
- Don’t have your pitch deck look out of date. You don’t want a date on the cover page that is several months old (that is why I avoid putting a date on the cover page at all). And you don’t want information or metrics in the deck about your business that look stale or outdated.
- Don’t have a poor layout, bad graphics, or a low-quality “look and feel.” Think about hiring a graphic designer to give your pitch desk a more professional look.
2. Focus on Building 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 some 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 need to start somewhere.
When starting out, your product has to be at least good if not great. It must be differentiated in some meaningful and important way from the offerings of your competition. Everything else follows from this key principle. Don’t drag your feet on getting your product out to market, since early customer feedback is one of the best ways to help improve your product.
Of course, you want a “minimum viable product” (MVP) to begin with, but even that product should be good and differentiated from the competition. Having a “beta” test product works for many startups as they work the bugs out from user reactions. As Sheryl Sandberg, COO of Facebook has said, “Done is better than perfect.”
3. Thoroughly Research the Market Opportunity and Your Competition
Make sure you are thoroughly researching the market opportunity and competitive products or services, and keep 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 any new information about those companies appears online.
Expect that prospective investors in your company will ask questions about the market opportunity and your competitors. Any entrepreneurs who say that “we don’t have competitors” will have credibility problems. So anticipate these questions from investors:
- How big is the addressable market? How much of it can the company realistically capture?
- Who are the company’s principal competitors?
- What traction have those competitors obtained?
- What gives your company the competitive advantage?
- Compared to these other companies, how do you compete with respect to price, features, and performance?
- What are the barriers to entry in your market?
Read Also: How Digital Disruption Will Eliminate Small Businesses And What Small Businesses Can Do
4. Prepare Detailed Financial Projections
It can be important to prepare detailed financial projections for the business, for the following reasons:
- To determine whether the business will ultimately be profitable
- To determine your cash “burn” before you get cash flow profitable, showing how much startup capital you will need
- To lay out your key financial assumptions (price per product, cost of developing the product, marketing expenses, employee expenses, rent and overhead, gross margins, and much more) so that you and others can test the reasonableness of the assumptions
- To have those projections ready and credible when investors inevitably ask for them
Financial projections will typically be for a 3–5 year period and will include:
- Profit and loss statement
- Cash flow statement
- Detailed categories of income and expenses
- Balance sheet
- Underlying assumptions
Of course, your financial projections will not be perfectly matched with your actual results, but your financial projections can be revised as you move through the stages of your business.
5. Make Sure You Have Thought Through the Reasons Why Startups Don’t Get Funded By Investors
There are a variety of 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 executive summary or pitch deck is underwhelming
- You haven’t thought through the questions that investors will likely 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 aren’t convincing about the need for your product or service
- You don’t articulate how you plan to cost-effectively market to and obtain customers
- You don’t have a good prototype of your product
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.
Richard Harroch is the Managing Director and Global Head of M&A for VantagePoint Capital P… He writes about startups, venture capital, mergers and acquisitions and Internet companies.
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organizations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution, and data analytics both in Nigeria and across the world.
Facebook: https://web.facebook.com/Afrikanheroes/