We know that your business plan will fail when…

Lately, I have been invited to listening business plan presentations by young undergraduates and postgraduates in the university. Of course, the typical hit rate for me for what I call a successful business plan and team worthy of investment is about one in ten.

The quality of presentations is definitely getting better, according to a distinguished professor from another business school sitting beside me. Generally, I was apprehensive about coming back to Singapore that the impressive business presentations that I witnessed in the UK will drop from five to zero out of ten. In retrospect, I should have more faith on the amount of effort brought about by the education community to educate students on entrepreneurship. That’s not a bad number, considering the common “fact” from my peers that one of ten startups usually succeed. To date, no one has told me where that statistic has come from. My fashioned guess is that five of ten startups usually failed, and within that remaining five, four of them are either acquired and merged, folded after three years or morphed into another company.

Somebody ask me, “How do I know when a business will succeed or fail?” I usually smile and say, “I don’t know.” Experience plays an important role for an entrepreneur. If you don’t have the experience, you need to understand why people fail. The only reason why most entrepreneurs seriously fail here, is because they gave up after losing once. One battle does not win a war, and if you are not ready to do the pitch a hundred times and getting snubbed ninety percent of the time, my advice to you is to forget about being one.

To me, I have a set of criteria that helps me to decide whether a business will definitely fail. I am confident to say that I can’t predict the success stories all the time. My gut feeling is that even the best entrepreneurs and venture capitalists are unable to do as well. We operate by finding the kind of mistakes that we know that you will definitely fail. Assuming that you are presenting a business plan to me, here are two basic strategies from my end for to help you think about.

Rule 1: Never make assumptions that you have no evidence to.

“Assumption is the mother of all screw-ups.”
- Anonymous

When I give my namecard or introduce myself, I have this feeling that the students are working on the grounds that they can impress me with the technology in their business plan. It stems from the fact that I am a research scientist and I dwell heavily on technology. In the “crossing the chasm” game, I am in the group of early adopters. Some of my students call me a geek because of my relentless pursuit to test state of the art technology and looking for fun applications from the technology. These students will pander their presentation around my interests in technology, except that they forgot that that I am also an entrepreneur and I value other things better than technology.

There are three things which you must never make assumptions on. They are namely:

• Market: Please make sure that there is a demand in the marketplace for your technology. I don’t buy presentations from people telling me that they have a brilliant solution but there is no market for that technology. Their favourite line will be that they can create the demand. Of course, I will only buy it if they explain to me how they can create the demand. Ninety nine percent of the time, my sword is sharpened and ready to slaughter the entire team for failing to tell me about the market.
• Technology: Please don’t me that there are no indirect competitors to your technology. Recently, a team pitched to me that their technology is the first mover in the women’s market and claimed that there is no such technology available in the market. With my computer and wireless network on, I did a quick google search and found that what they say is true. Of course, I don’t trust that claim and did a further google search for a technology that works similar to theirs for another purpose. I am aware of such a piece of diagnostic has an indirect application to what they were testing. Truly, not to my surprise, I got my answer in less than thirty seconds. So, I quizzed them on indirect competition from the alternative technology and they fell apart.
• Financials: Your financial projections will never reflect the reality. I like the confidence in business students in throwing their return of investment (ROI) rates to me, but they always forget to go back to their first principles. I usually don’t read the numbers. My first thought is to look at their financial assumptions, for example, “Assume that we sell twenty units per day, we gain an income of $X dollars and make a profit of $Y dollars…”. That’s how they are routed out by the investor.

In science, we usually question on someone’s claim during a scientific conference. I don’t buy the crap about the difference between a business plan presentation and a scientific seminar. I have been grilled by stringent and sometimes anal research people and at times, I have to fight back on putting my assumptions and inference on the line. Sometimes, I win and other times, I lose. I know that I have lost the argument when I fail to substantiate a claim that I make. The same can be applied to a business presentation. If you screw up a presentation, your credibility will drop in front of the investor. It is not something that you want to mess around with. A rule of thumb that you must remember is about an investor is that they always assess the business plan by logic first and when it is time to put down the money, they assess by their instincts.

Rule 2: Convince by Team and Business Model and not on Great Ideas

To me, this is the order which I decide on whether this business is worth investing: team, business model and idea. The business model includes the cashflow managment of the business. I am convinced of an idea if a team adopts different scenarios in raising capital or using bootstrapping to generate revenue. Most people always get a thrashing from me when they start and end with the idea without the team and business model. There are various ways to assessing a team and their business model within thirty minutes of the presentation.

There are a few strategies which I adopt to check out how good the team and how robust the business model is:

• Direct questions to other team members: Usually in most occasions, there is a point or two points of contact in a business plan presentation. Instead of quizzing the team leader, I usually direct a question on a certain aspect that the presenter miss to one of the team members. A recent example I saw was that the leader of the team told all of us that his chief operating officer can answer, and in the end, the question was referred back to the team leader. That might be a simple incident, but after the team walked out of the room, the investors all agreed that the team is weak.
• Consistency checks: I look at mistakes in the slides and the business plan and nitpick on errors on figures and assumptions. If the team is not ready to be pick out all kinds of mistakes, what makes you think that the investors will entrust you with the money?
• Who’s the grey hair on your advisory board?: Usually, I ask the team whether they have a grey hair to guide and mentor their team, particularly for biotechnology. If they do not have someone credible, I will take the opportunity and tear them apart.
• Throwing all kinds of barriers of entry: A lot of times, investors love to do that to challenge the robustness of the business model. Sometimes, the team has to work out a solution on the spot, and if they answer well, it shows that their team is geared for difficult times. Of course, the best strategy is to get them to work out market segmentation and challenge the notion that their business model will fall apart with that market analysis. Internet business are the easiest types of business plans to catch this kind of mistakes. A lot of times, an IT entrepreneur will pander to existing models like Google and try replicating it to something else. Only through continuous questioning, you will sieve out the problems in their ideas.

Conclusion
Of course, every team has their thumbscrews that you can take advantage and pound them. However, that is not the point. The issue is to help them to discover the weakness of their business plan. If they can come back with a better business plan after your poundiing, it means that they are serious about what they are doing. To the entrepreneurs, it really does not matter if an investor don’t listen to you. What matters in the end, is whether you can make it work.

Note: The picture is taken from Cartoons by Landers, UK.

Technorati Tags: Entrepreneurship, Singapore Entrepreneurs, Business Plan Presentations, Investors, Business Models, Team

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