Financing Your Small Business

What the Experts Say

The most frequent complaint among venture capitalists and other business plan reviewers is that the plan does not clearly explain both the opportu­nity and risks. This comment is equally applicable to the executive sum­mary, since that is the portion of the business plan that is read first and determines whether the reader will read further into the plan.

Close on the heels of lack of clarity is the use of unrealistic or hockey stick projections supported by weak assumptions. Unrealistic, in this instance, means unrealistically high. Weak assumptions are those not supported by the economic realities of the marketplace. Many times, the concern is that the assumptions are too simplistic.

There is a marked tendency on the part of entrepreneurs to treat their product or service as unique in the marketplace. Thus, one will read claims that no competition exists. Conduct thorough research to discover direct as
well as indirect competitors. Oddly, some entrepreneurs believe it is advan­tageous to provide filtered information to reviewers and omit a thorough competitive analysis or other information that might detract from their business model. For the sophisticated reviewer, omissions and mistakes do not generate a high degree of confidence in the plan or in management. Many investors want to be on the second wave of companies entering a field or market space; thus, the existence of competition, accurately described, can actually provide an element of risk reduction. They know that compe­tition exists in every market and that the later market entrants often have the best chance at success.

A business plan must establish the existence of a sustainable competitive advantage, yet many business plans are weak on market analysis. One rea­son for this weakness is that the cost of obtaining comprehensive market data can be very high. A low-cost, high-value alternative is to get your mar­ket research from the Internet. The advantages of the Internet cannot be overemphasized. Compare it to doing market research at the public library just a few years ago.

While the uniqueness of the product or service is helpful, the proven ability of the management team is even more important. It is common for business plans to overstate management's strengths or to provide an inadequate discussion of the management team. Sophisticated investors will not invest in the best product or service if there is a lack of confi­dence in management or an unwillingness to cede control to professional management if necessary.

There is also a tendency to overvalue companies. The days of sky-high valuations of the 1980s and 1990s are over. Valuation is an art, not a sci- ence—especially in early stage companies. Your best defense is to be able to identify valuable aspects of your business and attach a realistic valuation. Learn how investors in your industry or geographic area determine com­pany value. In a nonrevenue company, focus on intellectual property (IP), management, and benchmarks achieved to date.

Amazingly, a number of companies fail to include their contact informa­tion in the materials they send or present to investors. A good place to include that information is on the front cover of the business plan and in the executive summary.

Financing Your Small Business

Limited Liability Company Formation Documents

If, after consultation with your professional team, you decide to form a lim­ited liability company, you will need to file Articles of Organization with the state and draft an internal …

Corporation Formation Documents

After consulting with your professionals, you will most likely need to form an entity to raise capital. Most entrepreneurs will form either a corporation or a limited liability company. This …

Business Plan

As part of your business strategy, planning, and feasibility analysis, you will commit your plan to paper. The document produced is typically called a business plan. The purpose of a …

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