In nearly 19 years of developing business plans, we’ve talked to a lot of entrepreneurs. They are creative, motivated, visionary, and optimistic.
But sometimes, their thinking on a topic is, well, flat-out wrong.
There’s a lot of misconceptions out there, so we thought we’d put together a list of wrongheaded statements we’ve heard, so you can change your mindset and avoid making the same mistakes.
Until you have the legal paperwork signed and a check in hand, you don’t have an investor. Yes, you may have an investor who is interested in your startup, but it’s never a sure thing. The average investor funds about 1 in every 20 companies that pitch them. Moreover, most investors want to mitigate risk by being part of a pool of investors; the average investors per round is somewhere between 3 and 4, depending on what statistic you find. So you should plan to talk to a lot of investors. Oh, and don’t expect the process to happen quickly. You will not walk into a pitch meeting and walk out with a check.
Sure, you may have a friend who, for example, builds websites. But if you’re going to ask them to perform the skill they use for a career at a reduced rate, expect to get what you pay for. Best-case scenario, your work will take a backseat to the paid work that puts food on their table. Worst-case, you’ll get a product that you’ll have to pay someone else to redo after wasting a bunch of time. Our advice: Treat personal relationships professionally and pay them market rate for their valuable skills.
The best part about being an entrepreneur is that you get to wear many hats. The bad part? You’re going to get pulled in a lot of directions and you’ll never have enough time to do it all. The best entrepreneurs know where their strengths lie and know where to delegate. Bad with numbers? Hire a bookkeeper. Don’t know anything about SEO? There are a lot of companies that can help. One thing to remember is that even if you have the ability, it may not be the best use of your time. Focus on the things that only you can do. For everything else, find people who can do it better and faster than you can.
If you have an idea for the next Facebook meets Uber, and know you have a market for it, well, that’s awesome, but investors don’t fund speculation. Investors are risk-averse, so you need to ease their fears by showing them some kind of traction. Creating a business plan and financial model, running a pilot, or testing the market with a Minimum Viable Product are all ways to increase the investor’s confidence in you and your idea.
Being an entrepreneur means knowing how to use your limited resources. We already talked about time; now let’s talk about money. As a new company, it is critical to allocate your budget appropriately. But that doesn’t mean you should be thrifty; rather, you need to spend money in the right places. As an example, let’s say you’re starting an owner-operator transportation company. There are tons of used tractor-trailers on the market, and certainly you can get one for a great price. But that piece of equipment is essential to your business. A used vehicle will come without a warranty, so if something goes wrong, it can end up costing a lot to repair it. And what happens while the truck is in the shop? That means you can’t run your business and your customers are going to look elsewhere. A new truck will come with a warranty and most dealers will offer a loaner if anything goes wrong.
Every entrepreneur believes their product and service is unique. And it should be. But just because it’s unique doesn’t mean you lack competition. Even if your company is completely disrupting an industry, there is still a way your future customers are spending their resources. If you’re trying to get customers, you always have competition for their dollars. But let’s just imagine a scenario in which there is literally no competition. An investor hears that and thinks that there must not be a market for this concept – which is obviously the last thing you want them to think. Competition is good: it means that people want to buy what you’re selling. So embrace it, be honest about it, and highlight your competitive edge.
The reality is that your business is worth precisely what someone is willing to offer for a share of it. Your present-day value will be based on a detailed and reasonable financial forecast, and the investor will set the terms of the offer, not the founder. For an early-stage company, you can expect an investor to want a 20-30% equity share. And they aren’t cutting you a blank check. You’ll need to tell them what you’re spending that investment on, and why that expenditure is necessary to ensure future earnings. If you’re pre-revenue, expect the investor to lessen their risk by offering a convertible note, such as a SAFE note, instead of a straight equity investment. This financing structure is beneficial to both sides; it allows the business to gain traction and begin generating revenue prior to assigning a value to it.
Really? Everyone? Obviously a generalized statement like this is easy to disprove. But what is important here is that every business needs to define its customer base. That doesn’t mean you can’t dream big, but it is not cost-effective to market to every single person in the world. You need to identify the most likely customers to buy and grow from that. One popular way of doing this is to develop buyer personas. By trying to create a representative example of your customer base, you can start to recognize key traits they have, and most importantly, realize the key motivators that drive them to buy your product.
If something sounds too good to be true, it probably is. At the very least, jargon like this will raise red flags with any investor or customer. This brings us to the “Four Ps of Marketing:” Product, Price, Promotion, and Place. Don’t plan to win at all four; pick the ones that make the most sense for your business and run with it. And come back to this later. Many companies start by offering their product for cheaper than the competition before realizing their customer needs a better product and are willing to pay more for it.
Entrepreneurs, we love that you think big. But scaling has to come at the right time and be done the right way. If, for instance, you’re opening your second restaurant within days of launching your first, how will you know what menu items are resonating or how to control your costs? Focus on what you need to do to get your first customers and hone your operations before you think about growing.