The past few days I have been helping as an evaluator for the Accelerate Michigan Innovation Competition. “Accelerate Michigan Innovation Competition is an international business plan competition which highlights Michigan as a robust and vibrant venue for innovation and business opportunity.”
Some ~570 business plans have been submitted. Being an evaluator is always rewarding as you are exposed to the leading edge of current thinking. You get to see what people want to do, and in some cases, already are doing. And, one thing young companies always need is: more money. So business competitions are rarely short of competitors.
Most of the plans get their message across effectively. As you would expect, a handful clearly stand out, and a few… Regardless of the business being presented there were consistent gotchas, or omissions, across almost all of them. I decided to highlight 5 to help out future business plan creators.
Here are 5 of the most common Gotchas consistently showing up in almost all the plans:
Exit Plans – Go/NoGo Decisions
Without exception, every business plan is operating on the blind assumption they will be successful. Very few even have an exit plan. Of the minority that do it feels like 1999 again: 5-year plans ending in an IPO or being acquired.
According to the US Small Business Administration, “Seven out of 10 new employer firms survive at least 2 years, half at least 5 years, a third at least 10 years, and a quarter stay in business 15 years or more.” This is much better than the ‘old rule’ suggesting 95% of businesses failed within 5 years.
With a 50% potential of failure, Exit Plans need to call out specific check-points for determining whether a company should continue further, or be dissolved. What are the conditions that define incremental and ongoing success? Milestones, Go/NoGo, Checkpoints, call them what you will, but they serve to protect everyone (e.g. investors, creditors, employees, etc.) from catastrophic collapse. A controlled shutdown is far preferable to an implosion.
Risk – Milestones
A recurring theme is the lack of risk mitigation planning. There is going to be some! (Risk, that is.) Market assessments typically address existing competitors and existing products, and how their value proposition will outperform all who have come before. However even the most complete assessments fail to address likely responses to their market entry, how quick competitors may react, or what may happen if the market simply ‘shifts’ in a new direction.
For instance, some plans rely significantly on simply getting their new offering into the market before incumbents can react to their arrival. What happens if the incumbents do react quickly? How must their plan respond? Can they? Is the Exit Plan ready? What happens if competitors are about to release their own product which will, unexpectedly, trump the new entrant? What then?
The near-complete lack of risk mitigation planning is concerning. Granted, the plans have constraints on length…but one would expect someone would at least comment on it.
Only ~25% directly address plans for growth. Today, they’re Micro Corp. Q2 next year, they’re going to launch production and become Much Bigger Corp. How will they move from making a handful of prototypes to hundreds, thousands of widgets? It’s not always clear and is often left for the reviewer to ‘assume’ they will be capable. This is also part of the Risk component. What if demand is under/overwhelming in relation to capacity?
About 20% of the business plans project what seems to be reasonable growth over time. The other 80% invariably have revenue projections resembling a Hockey-Stick (near-flat revenue growth today, rocketing upward next year). In some cases projections are for growth of 140x ‘next year’ and 5X the year after that.
One has to ask, especially if a business has been operating for a year, two, or three already, what will magically enable growth of 14,000% next year? Business plans need to provide more-than-adequate support for such expectations.
Investors looking to put money into a young company need to feel comfortable the company’s leadership can get the job done. Most of us have been asked to loan someone money, at some point in time. Perhaps to a family member, or perhaps to a business. Before doing so, you want to feel there’s a reasonably likelihood you’ll get it back? The best business plans clearly identify key participants and what makes them suited to their roles. Others, essentially say, “Trust us.” This is not a place to skimp. Besides, investments are sometimes simply made because, “we’re both Navy guys…”
Recently I read that, of failed businesses, 75% did not have a business plan. This competition will benefit all ~570 companies because, even for those with the simplest of plans, they had to build one in order to compete. Even a Piece of String Will Do…