The entrepreneur arrived at the meeting 20 minutes before, to present his plan of business to a large investor. Of course, the meeting room projector did not want to work however. He was fine with his laptop but it did not stop the sweat trickle down his back. How is he going to be able to do his business plan presentation well? Would you remember all details you wanted to highlight? It was a great opportunity to raise the capital that needed so much to show the world that he could be a unique, incredible and…millionaire!!
On the other hand, the investor had an agenda full of meetings that day. I knew that every entrepreneur who came to see him and explain why his project was the new revolution of the world, it could become very boring and irrelevant. But it could also be the new Facebook, Starbucks or Mercado Libre. I mean, you had to listen to them all to remove the doubt and not lose the needle in the haystack.
Throughout my life, I have seen many hundreds or perhaps thousands of business plans. I think in all possible categories. In the evaluation, I have been correct in some and I have been wrong in many others. But what I managed to identify are some patterns that help me to clearly identify and filter some points that make the strengths and weaknesses of each business plan:
How To Identify Each Business Plan
1 – A huge percentage of people predict that in year 5, they will be selling $50 million. It must be a magic number because it repeats continuously. Reality and my rule (here is the first one) is that the forecasted sales for year 1 are those that effectively they will be achieved in year 5 if all goes well. I mean, I do all the accounts considering that sales evolution for the next few years that they are generally much closer to reality.
2 – The valuation of businesses is always a big problem. When the Entrepreneur comes with an excessive valuation is a lose-lose. Lose the entrepreneur who fails to raise the capital to realize his great dream and loses the investor who misses out on investing in a project that perhaps had a good chance to be successful. Rule number 2 is that the business plan itself, when the project did not come off the paper, it is not worth more than $300 thousand, no matter what content have the same. If the entrepreneur has a long history and can achieve traction by its track record and drive, then the project valuation can go up to a maximum of $500 thousand. But above that only if the venture already managed to bill even one dollar in a genuine way, having completed all the sales cycle. In other words, it successfully passed the proof of concept.
3 – Every time an entrepreneur highlights that all his projections are based on in a “conservative scenario” that must be translated as “the most optimistic of all possible scenarios.” The truth is, I hate hearing those words. You should only speak only of “realistic scenarios.”
4 – All sales projections are always hyperoptimistic and growing. Nobody thinks that in a 5 or 10 year projection there will surely be some crisis in the economy and that this must be reflected in a realistic scenario within the Projections
5 – “… ..and to achieve all this we just have to conquer 1% of the Chinese market (or 5% of the Brazilian market) ”. As if that was something trivial or very easy and it did not cost anything. Ask big companies the investment needed to achieve each percentage point of market share!
6 – Generally, most business plans forecast growth of large percentage value from year 2 onwards. And where will the working capital come from when achieving those big growths where generally all marketing expenses and advertising you pay are paid in advanced?
7 – Will any of the key people in the venture work part-time? That I interpret as a lack of real commitment and passion, beyond the reason that led to the decision to work only part of the time. If it is the project of your life dedicate yourself to same with everything. And if it isn’t, then it may not be the right place to invest.
8 – Finally, if it is a company that has been in the market for a long time and comes from several years of no growth or very inexpressive growth, then that company probably already has the “no growth” virus in its DNA. Something I know installed in the culture of the company and that it is very difficult to change because everyone is in a “comfort zone”. So that a company of these can take a great leap, all or a good part of management will probably have to be changed, including the own owner who is the one who is generally promoting the capital raising.
All this seems hard, but we must never lose focus that the investor does not invest “to see what happens ”, but instead invest so that a project that has already demonstrated that it is viable, interesting and can be profitable to expand and grow. The investor seeks to scale and replicate! And he seeks that this is executed by an entrepreneur with great passion, commitment and that has the virtue of “being able to make it rain.”
You don’t need to be a professional to build a successful business or product. Amateur people started Google and Apple. And very professional people were the ones who built the Titanic.
Failure will never win if my determination to succeed is sufficiently powerful!