Media Coverage

The Experts: Venture capital
Common pitfalls to securing capitals

Column by Lin Earley, Inside Business - Hampton Roads, October 22, 2007

Business plans are the calling card entrepreneurs use to get funding from banks, angel investors and venture capitalists. With a capital crunch rumbling throughout the economy, small business owners now more than ever need to generate smart business plans if they hope to secure much-needed capital for expansion, acquisitions, buyouts and working capital.

Following are some business plan pitfalls that should be avoided when approaching a financier:

Pitfall No. 1: Too much technical detail. Although it may show the entrepreneur is knowledgeable, an overly technical presentation will be lost on most financiers. Business plans need to speak to their audience. Bankers, angel investors and venture capitalists are generally number crunchers, and an intimate knowledge of technical aspects may be beyond them.

Pitfall No. 2: Unrealistic optimism. Because financiers are number crunchers, financial projections will be their key focus. A common blunder is unrealistic optimism in expected sales growth or future earnings, which in turn has a negative effect on an entrepreneur’s credibility. Unless optimistic projections can be backed up by well-founded reasons, it may be best to adjust them to more believable (and achievable) levels.

Pitfall No. 3: Incomplete financial data. A common mistake is not providing all the financial information – historic and projected. This includes income statements, balance sheets and cashflow statements. Historical financial statements let potential investors know what the business has done, and projections speak about what the business may do in the future. It is best to tell the whole story.

Pitfall No. 4: Hiding (or not addressing) past problems. As a normal part of life, businesses sometimes run into problems. Attempting to hide past troubles is more damaging than owning up to them and describing how they were solved – or how they will be managed in the future. This will actually work in favor of the management team as it may demonstrate entrepreneurial competency. All businesses have problems. The question is whether they are surmountable or tragic.

Pitfall No. 5: Failure to consider the competition. Many entrepreneurs feel their product or service is so unique and wonderful that they do not face any competition. This assumption is false and foolish. In some narrow cases there may not be a clearly defined competitor, but more times than not there are a set of competitors you must acknowledge.

Pitfall No. 6: More sales is rarely the answer. The false belief is that more sales will solve all problems. Small and profitable is a more survivable strategy than large and profitability-challenged. In fact, if a company already has sizable sales and is losing money, more sales will likely exacerbate whatever problem there is. A better goal is to get more profitable sales, where the cash is collected on a timely basis.

Pitfall No. 7: The mirage of a low price leader strategy. By definition, there is only one low price leader in each industry or market. If the business name is not “Wal-Mart,” chances are the differentiation strategy will have to be founded on quality, or service or something other than low prices. It is a bad sign when a small business’s competitive strategy is having lower and lower prices.

Pitfall No. 8: Outsourcing the writing. Many entrepreneurs visualize their business plans excellently, but they cannot translate those thoughts into a clearly written business plan. While outside professional assistance is useful for editing, it is paramount that entrepreneurs author the business plan. It is better to have a rough business plan authored by the entrepreneur than a beautifully written business plan that the entrepreneur has not embraced.

Lin Earley is the CEO of Waterside Capital Corp., a Norfolk-based SBIC with $28.3 million of loans and investments in 19 companies. He can be reached at www.watersidecapital.com.