Entrepreneur Myths (12 page)

Sometimes the market might be ready for the new offering, but the customer can’t afford it. I funded a transportation company that rode the environmental market at the right time; however the cost of the product was too high for one their largest customer segments — the college market. The students loved the product but consumer financing was a challenge.

Being second, third or fourth is often better. Groupon did not invent the social buying concept. They re-introduced the modified concept at the right market time, 10 years later.

Brain Candy: questions to consider and ponder

(Q1)
How important is being first to market for your venture and your sector?

(Q2)
How does differentiation play out for your product or service if you’re not first to market?

(Q3)
What variables do you consider when analyzing the differentiation of your product or service from the competition?

(Q4)
Does your differentiation matter to the buyer? Does the buyer recognize the difference?

(Q5)
Have you ever failed due to being too early? What would you do differently?

(Q6)
Do you know how to ride an emerging market? What are the variables to consider when riding an emerging market?

(Q7)
What can you learn about financial or technology markets by studying nature?

(Q8)
How can you apply Darwin’s principles to startups?

(Q9)
Have you analyzed the competition for each product or service you offer?

(Q10)
Have you analyzed the key value points for your product or service?

(Q11)
Take the time to look at a specific market and determine whether the current leader of the category was first to market or a follower?

Entrepreneur
Myth 19
| The business plan is critical

Do you hate writing business plans? Good. I hate reading them. The most painful part of the investor due diligence process is reading the business plan. With all the advice available on how to write a business plan, they should all look like gold.

The problem: Business plans take too much time to write. They’re usually too long, look terrible, artistically; and quickly become outdated.

I prefer to see an executive summary, usually 3-pages long, plus a 15 to 20-page presentation. If you suck me in with these materials, I’ll want to see your financial model — in a spreadsheet format. Then I’ll talk to you face to face.

I recently told an investor, “I don’t do business plans anymore.”

The investor was shocked. Amused, he asked, “What do you have?”

“I have an executive summary, presentation, financial model and prototype,” I told him.  “That’s all I got and there will be no business plan. I don’t have a month to spend writing a business plan. I’ve done more than 30 in my life.”

When I run across investors who are adamant about seeing a business plan — even after I spent hours explaining the business, providing an executive summary and financial sales projections, whose numbers most likely I got out of my ass since it is difficult to predict the sales future (discussed in Myth 20) — I tell the investor I just don’t have time to be in the business plan writing business. If they don’t like it, fuck them.

I funded one entrepreneur, for millions of dollars, who had a fantastic business plan. I funded another entrepreneur, for millions of dollars, who had no idea how to write a business plan, but had products and revenues. I also funded an entrepreneur, for hundreds of thousands of dollars, who built a prototype but had no business plan, no presentation (except for the prototype), and no executive summary. I came from the technology sector so it was easy for me to see the immense value of his prototype.

In my younger years, I’d take a month or longer to write a business plan, hoping some financial asshole was going to read it and invest millions. I discovered the hard way that investors talk a good fucking game, but they really don’t read business plans. This becomes obvious when during your pitch meeting they ask you a million questions you already addressed in the business plan. I have been most successful in raising money when I didn’t have a business plan.

Investors don’t read business plans? This might be hard to believe. But as an investor, when an entrepreneur hands me a business plan, I shove it back to them and give them a long-ass speech about saving trees and saving the planet, just for kicks.

Business plans for investors are passé. If you insist on writing one, keep it short and sweet. More than once, entrepreneurs provided me with business plans over 120 pages. That’s right — more than 120 pages fucking long.

One entrepreneur who pitched me thought that wasn’t enough. He also handed me two voluminous books of additional information. Basically, he gave me supporting documentation to his supporting documentation. Impressed with the size of this business plan, I decided to use it to prop open my office window. I didn’t read one fucking page, nor did I invest. The problem was the entrepreneur couldn’t answer my questions in real time. When I asked questions, he kept referring me back to the business plan. I referred him to the exit door.

Follow my investment logic. Business plans take time to produce. By the time an entrepreneur has written one and pimped it out to a few investors in hopes of getting funded, six to eight months have slipped by and the information in the business plan has become stale with old articles and references. So in order to keep it fresh, you have to continuously update, update and update the damn business plan.

I wish I had known this myth when I was in my 20s. I raised money with some of the business plans I wrote, but that’s how thing were done back then. Sophisticated investors today rarely have the time to read business plans.

You are the business plan

Important: The real business plan is
you
, your management team, your prototype or product, your paying and non-paying customers or subscribers, and possibly your real revenues. I suggest you stay out of the business plan writing business.

Let me speak from both sides of my mouth. If you still feel you must write a business plan to feel complete, then go ahead and do it. Don’t mind me.

In this case, I recommend you write (1) a presentation that addresses all the aspects of the business, (2) an operating and logistics plan, if necessary, (3) budget and financials, for your own good, (4) an executive summary up to 3 pages, and (5) a 10-page mini-business plan, if you absolutely have to write one.

If you go the private placement memorandum (PPM) route, state laws require you prepare a legal version of the business plan for investors. Have you ever seen a PPM? At least a third of it is legal disclaimers. If you write the PPM yourself be sure to have your attorney look over it, or better yet, have your attorney write it for you. It’s worth the expense to be legally compliant. See Myth 22 for more on attorneys.

To write a business plan or not? That is the question. My answer is not. 

Brain Candy: questions to consider and ponder

(Q1)
How many business plans have you written in your life? How long does it take you to write a good business plan?

(Q2)
Have you ever raised capital without a business plan? What did you provide the investors for review?

(Q3)
If you have to write a business plan, how long should it be?

(Q4)
Do you think entrepreneurs need business plans, or are presentation better?

Entrepreneur
Myth 20
| Sales projections are critical

Can you predict what the financial markets will do today? How about tomorrow, next month or next year? Then why does anyone believe they can predict sales for any venture for three years? Sales projections are 75% bullshit.

Notice, they are called “projections” in most business plans. Startups rarely meet sales projections due to the unpredictable nature of the market. Even companies operating with historical sales data have difficulty predicting sales. As rule of thumb, I discount sales projections of startups by 50% to 75%.

Out of the 25+ companies I funded, more than 50% of them didn’t meet their own sales forecast projections, 20% of them exceeded them and the other 30% were close or on target. And the 20% that exceeded their numbers did it through pure luck as much as effort.

The problem with sales projections comes down to how entrepreneurs and investors approach, analyze, forecast, and make up their sales and financial numbers. Obviously, an entrepreneur will paint a rosy financial forecast. Investors will bring the numbers down so they can get a better company valuation. The true numbers are somewhere in the middle.

I spoke with an international entrepreneur in the high-tech sector who raised $4 million in capital and was seeking $1 million to close out the round. The valuation of the company was $99 million pre-money, and $100 million post-money. The company had spent five years developing their platform. They were pre-money, but because they were projecting financial numbers three years down the road to the tune of $500 million in profits they felt their company valuation was justified. I told him, “Cool technology but I couldn’t see it valued so high just because the platform is complete and the sales figures look so damn good three years down the road.” 

From an investor perspective, sales projections are a waste of time. Complexity science teaches you it’s difficult to predict the future, even in the short term. Sure, some people believe astrologists and palm readers have the power to predict the future — just like Wall Street.

Predicting is impossible

Who could have predicted everything would go to hell for Wall Street in the subprime market? I was in Silicon Valley during the Dotcom Bubble of the early 2000s. During the hype, very few people predicted the collapse of the internet market.

How about the automobile business? General Motors, the icon that stood for the power of American business for more than a hundred years, lost its leadership position and filed for bankruptcy in 2009. How many people would have predicted this outcome 10 years ago?

Apple, after struggling for years, came from behind to revolutionize, not only computing, but the music, telecommunications and publishing industries as well. Did any of the leading companies in those sectors predict the rise of Apple when Steve Jobs took the helm again? Did the leading publishing companies and retailers, like Barnes and Noble or Borders, predict Jeff Bezos, founder of Amazon, would eat their lunch for breakfast? Did Motorola, Research in Motion (RIM), or Nokia think Apple would flank them in the smartphone category? How about the social media sector? Did Myspace believe a college student working out of his dorm room would bring them to their knees, especially after Rupert Murdoch acquired them?