1. Overstating the market opportunity. “If we get just 1% of the market, we’ll have a $100MM business!” Sound familiar? I hope not. Make sure you identify the specific segments you’ll be going after, not some arbitrary fraction of a broader market. Break the market down into meaningful buckets based on things like demographics (e.g. age, gender), geography, psychographics (e.g. personality, values, attitudes, interests, lifestyle, etc.). and buying habits. Also consider the growth rate of the market, and explain relevant market trends.
2. Fuzzy or unrealistic business models. You should be able to explain your business model to someone in less than a minute, with no visuals. “We connect buyers and sellers, and take a 20% commission” is a straightforward business model. “We get people to visit our website, and make money by selling ads, sponsorships and leads on our site and in email newsletter, by trading users up to paid subscriptions, and through ecommerce” is probably a stretch. How many startups have really done all those things successfully?
3. Questionable financials. If you build a complex financial model in Excel, it’s easy to lose track of reality. One thing I always know for sure is that the 5 year projections in an entrepreneur’s business plan will never be accurate. So keep it simple. Be sure to start with a bottom-up approach (e.g. “Each sales person can close 1 deal per month, with an average price of $20,000, and a margin of 30%…”). Use comparables to get reality checks. Make your assumptions explicit. And look at basic, back-of-the envelope numbers, like break-even volume and unit economics.
4. Overthinking competition. If you are pitching to a venture capital firm, they may prefer opportunities without well-funded, successful competitors. That way, when the mother ship comes sailing in looking to make an acquisition, you won’t be 3rd in line. However, many startups (wisely) succeed by focusing on niche markets, or by providing better service than bigger players. If that’s the case, don’t get put off by competition. At least you’ll know that there’s really a market for what you’re selling,
5. Not enough emphasis on your team. Investors are betting on the right horse, more than anything. Despite all your research and planning, after all, things probably won’t play out the way you expect. So the key to success will be your team’s ability to roll with the punches. In your business plan, explain who will be on the founding team, and why they are well-suited to tackle the opportunity. Show their roles, expertise and experience. Also, show how you expect your team to evolve over time. Don’t be afraid to say you’ll need to find someone to fill a key role. Explain what that person will do, and show that you’ve thought through a job spec.