Why Business Plans Fail

by Dave Lavinsky

Pitfall #10: Excluding Successful Companies in the Competitive Analysis

Too many business plans want to show how unique their venture is and, as such, list no or few competitors. However, this often has a negative connotation. If no or few companies are in a market space, it implies that there may not be a large enough customer need to support the venture's products and/or services. In fact, when positioned properly, including successful and/or public companies in a competitive space can be a positive sign since it implies that the market size is big. It also gives investors the assurance that if management executes well, the venture has substantial profit and liquidity potential.

Pitfall #9: Over Emphasizing Partnerships with Well-Known Companies

Forging partnerships to improve market penetration and/or operations has become commonplace, particularly for "new economy" businesses. The fact is that, regardless of whom the partnership is with, partnerships by themselves have limited value. Rather, what are meaningful are the partnership terms. For instance, while it sounds great to have a partnership with Microsoft, Cisco or Yahoo, it is the details of these partnerships that investors find important. The business plan must explain the partnership's equitable terms, the extent to which each partner will improve operations and/or sales, and the structure of the partnership.

Pitfall #8: Focusing Too Much on the Future

Investments and valuations for growth companies are based on a firm's projected future performance. However, the best indicator of future performance is past performance, or a venture's past track record. Business plans must show what milestones/accomplishments a venture has achieved. Past success in achieving goals gives investors the confidence that the team will execute in the future.

Pitfall #7: Not Tailoring Management Team Biographies to the Venture's Development Phase

The Management Team section should include biographies of key team members and detail their responsibilities. These biographies should be tailored to the venture's growth stage since different skill sets are needed to launch, grow and/or maintain a venture. A start-up venture should emphasize its management's success launching and growing ventures. On the other hand, a more mature venture should emphasize how team members have successfully operated within the framework of larger enterprises.

Pitfall #6: Asking Investors to Sign an NDA

Most investors will not sign NDAs (Nondisclosure Agreements). This is because a business' strategy and/or concept are typically not confidential. It is possible that a key partnership is confidential, for example, but for the most part the execution of the strategy and concept is what will make the company successful. If the concept and/or strategy must remain confidential, this often implies that there are no barriers to competitive entry. If a competitor or host of competitors can quickly copy the concept, then the business model is probably not sustainable. On the other hand, proprietary technology is confidential. The business plan should not discuss the confidential aspects of the technology but should discuss the benefits of the technology and how these benefits fulfill a large customer need. A serious investor will review the actual technology during the due diligence process. A discussion regarding signing an NDA would be appropriate at this point.

Pitfall #5: Indiscriminately Incorporating Investor Feedback into the Business Plan

Investors, like the rest of us, have different tastes. One investor may love a concept and/or business plan while the next may hate both. It is important to understand this as business plans are working documents and are always undergoing iterations. Management teams must not rush to incorporate each potential investor's comments. Instead, have several investors, partners and other business colleagues review the plan and provide feedback. Incorporate common concerns and probe other comments to determine if they are valid.

Pitfall #4: Stressing First Mover Advantage

A business plan must include strategies that demonstrate the venture can and will build long-term barriers around its customers. Simply claiming a first mover advantage is not compelling in today's funding environment. The methods through which the venture will retain customers should be detailed in the business plan. Such methods could include implementing customer relationship management (CRM) tools, building network externalities (e.g., the more people that use the product or service the harder it is for a competitor to penetrate the market), ongoing value-added services, etc.

Pitfall #3: Focusing Too Much on the Venture's Proprietary Technology

While proprietary technology is a significant factor in investment decisions, it is much more important to show how this technology satisfies a large, unfulfilled customer need. Many unsuccessful ventures fail because they do not understand the needs of their customers. Understanding true customer wants and needs, identifying which target markets most exemplify these needs, and outlining a plan to penetrate these markets are critical to funding and execution success.

Pitfall #2: Presenting Large, Generic Market Sizes

Defining the market size for a venture too broadly provides little to no value for the investor. For example, mentioning the trillion dollar U.S. healthcare or B2B markets are generally extraneous since no venture could reap $1 trillion in sales in either market. Rather, a more meaningful metric is the relevant market size, which equals the venture's sales if it were to capture 100% of its specific niche of the market. Defining and communicating a credible relevant market size, and a plan to capture a significant share within this market is far more powerful and believable to investors.

Pitfall #1: Making Financial Projections Too Aggressive

Many investors skip straight to the financial section of the business plan. It is critical that the assumptions and projections in this section be realistic. Plans that show penetration, operating margin and revenues per employee figures that are poorly reasoned, internally inconsistent or simply unrealistic greatly damage the credibility of the entire business plan. In contrast, sober, well-reasoned financial assumptions and projections communicate operational maturity and credibility. By accessing and basing projections on the financial performance of public companies in their marketplace, ventures can prove that their assumptions and projections are attainable.