Do the financial projections in your business plan have your company grossing gobs of income in the first year?
Get real! Investors are far more responsive to business plans that skip the hockeystick projections and provide more realistic pro forma numbers.
A good small business owner is optimistic about his company. So it's no surprise that investors look for enthusiastic entrepreneurs who are capable of sharing their passion with the people around them. But sometimes enthusiasm crosses the line into sheer fantasy – and when that happens, investors aren't impressed. The moment your enthusiasm starts to influence your business plan's hard number projections, your ability to attract investors decreases dramatically.
Over the years, investors have learned that entrepreneurs tend to inflate numbers in several key areas. Realistic projections in these areas won't guarantee funding. But they will give your business plan legitimacy and inspire investor confidence in your leadership skills.
Investors get bombarded with unrealistic claims and projections about market share. As crazy as it sounds, some business plans promise a huge market for their product, then claim they have no real competitors – in other words, a 100% market share in an exploding market! Yet investors may be just as skeptical about business plans that promise a 10% market share in Year 1 or claim to only need 1% of the market to break even. Those numbers mean nothing – unless the business plan lays out a rational basis for its projections.
Along the same line, sales projections need to be based on the facts, not best case scenarios. Promising to sell the pants off an unproven product in a crowded marketplace won't make the cut. Instead, your sales projections should take into account industry trends, existing sales histories, and your company's sales infrastructure. You shouldn't have to tell investors that your sales projections are "conservative" – the numbers should tell them that on their own.
Cost projections should be the easiest projections in the business plan because they can be based on actual costs. Yet you would be surprised by the number of business owners who base their cost projections on what they think it should it cost to run a business rather than on hard research. One more thing to consider: Multiyear budget estimates should allow for inflation and other cost increases.
Want to make an investor laugh? Tell him your startup will be profitable in six months. Profitability takes time and you're not doing yourself any favors by playing fast and loose with timetables and milestones. For example, if your business requires a multiyear investor commitment with an estimated return of 8%, don't tell them they can walk away in a year with a 30% return on their investment. Just be honest and use the information you've gathered to incorporate achievable and realistic milestones in your business plan.