The Business Plan

The business plan document is often the first exposure a venture capital firm has to a company seeking financing, often even before talking to the entrepreneur on the phone or having a meeting. Because it makes the critical "first impression" for the company, a poorly prepared plan can be a reason for the venture capitalist declining on the investment, and not taking the time to ask for more information.

Don't Make These Critical Mistakes in Your Business Plans

We asked nearly 250 venture capital companies across the United States how they evaluated the business plans presented to them.

The survey participants were asked: What is the worst mistake an entrepreneur can make when completing their company's business plan?

Eight Critical Mistakes

1. Most frequently occuring (17%) was that entrepreneurs were not clear in explaining the opportunity. Why the business made sense, why the business model would be successful. Some VCs said this was because the plan was incomplete, others said it was because the plan was not concise or focused. This lack of clarity kept the investor from being excited enough about the company to proceed to the next stage. The business plan failed to achieve the objective of telling the company's story in a clear fashion.

2. In second place is an error that is very difficult for entrepreneurs to avoid: unrealistic projections (13% of respondents).

3. Or simplistic assumptions (8%) One respondent complained about the tendency for entrepreneurs to claim their projections are conservative, when this is simply not true. Another respondent expressed this mistake as "entrepreneurs believing whatever they write is factual."

4. The analysis of competition in business plans is an area that the venture capitalists believe is weak on (10%).

5. Failure to describe a sustainable competitive advantage was also noted by 8%. Many entrepreneurs do not make the effort, or find it too difficult, to research their competitors. Two critical mistakes result, according to the respondents: entrepreneurs say there is no competition, or underestimate the strength of competitors; and the plan does not describe a competitive advantage the company may have, or how to achieve a competitive advantage.

6. Mistakes and errors appear frequently in the plans they see, according to more than 10% of the respondents, who also said that entrepreneurs sometimes try to mislead them with the information in the plan, or do not trust the venture capitalists sufficiently to give them key pieces of sensitive information in the plan.

7. Management strengths were overstated in the plan (8%) with one respondent even saying that entrepreneurs "lie" about their credentials, and this is a critical mistake because the venture capitalist always thoroughly checks out the background of people involved in a company they are contemplating investing in.

8. Incompleteness, including leaving sections out of the plan or not including sufficient financial data, were cited by 8%.

One interesting response was that the entrepreneur failed to provide the name of anyone in the company to contact after finishing reading the plan. He or she must have been in quite a hurry to get the plan in the mail!