(Note: this is the third of a 10-part series listing my revised top 10 business planning mistakes. The list goes from 10, the least important, to 1, the most important.)
It’s just too damn bad that so many entrepreneurs assume to start a business you do a plan, get financed, and then you start. As if the goal of the plan is getting financed; and as if the getting financed is the win, regardless of financed how and by whom and on what terms.
And that’s a big mistake. You should choose investors as carefully as you choose a spouse.
Contrary to the myth, winning the investment isn’t always a win. Getting investment from the wrong people isn’t a win. It’s a recipe for disaster. Marrying your company with incompatible investors can turn a dream into a nightmare. And yet so often when you talk to entrepreneurs they seem to think that just getting that investment is the same as winning the race. Find somebody to say yes and you’ve succeeded.
Not all good businesses make good investments for outsiders. Investors need exits in 3-5 years, while lots of good businesses aim for forever, not just 3-5 years. And entrepreneurs often want independence, while investors usually feel like bosses. They are owners. Some of the best businesses are bootstrapped, meaning they don’t get outside investment. They use their own funds, or early sales, and they grow more slowly but without requiring other people’s money. And some successful businesses are financed by loans, which increases the risk, but doesn’t dilute ownership.
I say let the nature of the business, and the goals of the entrepreneur, determine the financial strategy regarding investment. Some businesses simply can’t sprout without healthy amounts of outside investment. Others have no good reason to even think of investment. And most are in between, with investment a matter of what the owners ultimately want. And there is what I’ve called the Startup Sweet Spot, the natural right level of financing for the startup, based on what it actually needs to develop right, which may or may not require outside funding. As in the diagram here to the right, the plan estimates the ideal startup costs level, and if funding for that isn’t available, then you revise the plan.
The correct goal of the planning process is to help the entrepreneurs determine what their startup really requires, and to help them look at options for growth, so that they can decide whether or not they even have something that will interest investors. And, if they do, then also of course whether or not they want investment. Then, if the entrepreneurs decide they want or need investors, then the planning helps communicate the business to the investors, and that becomes a starting point to deciding whether or not the founders and the investors are compatible.
Just as bad – or even worse – is having the wrong people on your board of directors. Not all investors become board directors but often there are legacy issues: Someone (maybe a neighbor or a relative) agrees to be on a startup’s board with nothing of value (besides their money) to help build and propel the growth of the company; and may even block decisions that would benefit the company’s long term health. This strategy misalignment between the company management and its board is deadly. Seen it too many times … sadly.