If you have ever been involved in funding a business venture of any kind, then you know that it is usually a difficult process.
Most projects start out with some sort of “Angel Investor” getting started tapping a friend or relative for this badly needed startup capital. Unfortunately this almost always gives a false sense of accomplishment which covers over the shortcomings of their offering.
Here are five of the mistakes that entrepreneurs make more often than not.
An Incomplete Business Plan
Creating a comprehensive business plan is tough. There are several components that must be there, and several more that most consider optional that should be considered must haves.
A basic business plan will have the following as a minimum:
- Executive Summary – Who are the key people involved in the project? What are their qualifications? This section of your business plan should also summarize what the venture proposes. This should be at the beginning of the Business Plan, but should also be available as a stand alone document.
- The Business Plan Itself – Whether it is long form, or a flip book with appropriate links to more detailed info, this is your main document. This should include your concept, proof of concept, and market research to back these up.
- A Minimum of Five Years of Financial Projections – Do NOT pull these numbers out of thin air. If you don’t know what a reasonable dollar amount is for office, warehouse, or storefront space in your market, then find out. Make your revenue projections realistic as well. Predicting huge market dominance is rarely (read that never for our purposes) realistic. Annual growth rates need to be conservative in nature as well. As a rule, overstate expenses and understate potential revenue.
- Assumptions – This is the part of your business plan that explains how you came up with your projections. They need to be explained, and they need to be understandable and inclusive. If you don’t have an explanation for something here, investors will assume you simply made it up.
Have your business plan looked at by a professional editor before you present it to anyone. This will save you more embarrassment than you can imagine. A professional funding consultant looking it over is another good idea for the same reason. They are particularly helpful filling in holes in your assumptions.
Make sure you have the right to use any images contained in your documents. Don’t be afraid to pay for images as they are usually less expensive than you think, and definitely less expensive than paying fines in the tens of thousands of dollars for using images that are not royalty free.
Yes, this was touched on above. It deserves a separate section because it is a big problem.
- Do you know the size of the market you are entering?
- Have you identified your potential competition and their relative market shares?
- Have you realistically identified how you will carve out a market niche, and the resulting market share you will attain?
- Are your capital needs identified thoroughly and accurately?
- Can you document any and all of the above? If not, then your projections may not be realistic, and even if they are potential investors may not find them so.
The fact that you are putting together a business project of sufficient scope to require funding means that you have significant dreams. Investors want to see you as having dreams, but they want them based in reality. Passion is good, delusion is not.
The “Shark Tank” Problem
If you’ve seen the popular television show Shark Tank more than once, you have likely seen this issue. Entrepreneurs consistently have a higher opinion of their projects value than investors. The investors are usually right. Business valuations are traditionally based on revenues. This doesn’t mean though that if you are a startup that your project has no value yet.
Your business may have one or more of the following, which would convey value to your project:
- Real Estate – If your project has either free and clear real estate, or equity in such then this adds value to the project.
- Intellectual Property – Patents, Copyrights, Licenses, etc. These can carry huge value.
- Contracts and Pre-orders – If your venture already has an agreement by another party to purchase your products or services in the future, this brings the value spelled out in the contract less the cost of fulfillment.
- Cyber Properties – Premium Domain Names, websites, etc. have more value than you may think. Get accurate appraisals.
This list is not exhaustive, but includes the bulk of what you can claim brings value to your venture. Be sure you are not overstating your value. Investors will frequently simply walk away as opposed to working to educate you as to the reasonable numbers involved. Your own perceived value will be questioned in their minds as well.
Equity Vs Debt Structuring
Are you seeking to borrow money, or offering an equity stake in your company? Not understanding your options is a huge mistake.
Most people have no desire to give up a huge chunk of their venture to obtain funding, but it is frequently desirable. An investor that is also a partner has a stake in your success that can’t be overstated.
Borrowing the funds without an equity offering will usually involve some form of collateralized assets. A hybrid debt/equity structure will frequently be the best solution.
Not sure what is and isn’t reasonable for your project? Seek professional opinions. This will involve disclosing information about your project to outside professionals. Do not be afraid to ask these individuals and/or organizations to sign a non-disclosure agreement. Professionals won’t be offended, or reluctant.
Once you’ve gotten a good idea of the type of financing available for your project and start developing preferences you can eliminate options. Once you’ve narrowed the field, don’t be afraid to stand firm on terms. Some will shake your tree just to test your mettle.
Develop a funding proposal to accompany your business plan, and has costs included in your projections.This alone will make you stand out in funding meetings.
Failing To Seek Professional Assistance
The act of putting together a business venture usually means that you have a certain amount of business expertise. It does NOT mean that you are automatically qualified to write your own business plan, executive summary, projections, or funding proposal. In short: Know your limitations!
The money you save will usually be moot when compared with what you gain in better terms such as interest rates, and equity given. The fact is that you don’t know what you don’t know. If you’ve been through funding rounds on previous projects, you may not need such assistance. You would be the exception.
Project funding of all sizes is a growing part of the Best Online Marketing Consultants practice. We have been involved in projects of all sizes and scopes up to the four hundred million dollar range and down to the ten thousand dollar level. Each has unique needs and obstacles.
Whether an SBA loan is appropriate, or working with a large venture capital firm you will need some professional advice. Working with someone that has been there before will save you more than just money. Time can be an even more important resource to manage.
Avoiding the costly mistakes involved in business funding is no small thing. This article is a great starting point. Talking with someone about the vision you have for your project should be the next step.
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