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Common Business Start-up Mistakes

Are you really an entrepreneur?

People with business ideas often believe that the idea is the hard part of starting a business. "If I'd only had that idea a couple of years ago, I could've made millions…".

Ideas are fun, but, frankly, overrated. Just ask any venture capitalist who has to wade through scores of business plans a week, seeing the same variations on a theme cropping up over and over again.

An entrepreneur is not someone with clever ideas but someone who has the ability to take an idea (often someone else's) and turn it into a real business, with products, staff, premises and profit.

This is why investors often back the same entrepreneurs over and over again (known as serial entrepreneurs). It's not because they keep coming up with fantastic ideas, its because they've demonstrated an ability to turn their ideas into profitable businesses (a much rarer skill).

In order to maximise your chances of success as an entrepreneur, don't waste all of your time trying to think of a killer idea and don't be despondent if you can't.

Instead, pick a simple idea and devote most of your planning time into working out how to turn that idea into a real business: where to get staff and how to manage them; how to promote the idea cost effectively; and how to grow the business without running into cashflow difficulties.

A business plan with one paragraph on your idea and ten pages on how you propose to execute it is far more likely to find favour with potential investors. That might be something they really haven't seen before.

20 pages of ideas, two pages of financials

If you’re raising finance for your new venture – whether from a bank or a private investor – you’ll almost certainly need a business plan. Either way, it’s an essential planning exercise, giving you the opportunity to really think through your business idea and how to execute it.

All too often, though, bank managers and investors see business plans that are long on written ideas, smart pictures and diagrams, but desperately short on financial forecasts. Bank managers are hardly noted for their flair and invention – that’s your job – so don’t assume yours will grasp immediately the sheer brilliance of your idea. He’ll want to know if the numbers add up, so the financial section of your plan must be thorough and credible.

Most people who provide investment for new businesses read business plans the same way. They look at the "executive summary" (a one or two-page outline of the business proposal) first, then they look at the management team, then they flick to the back to check out the financials. Only if these make sense will they bother to read the rest.

If finance isn’t your strength, seek help. Get a financially astute friend or associate to help, contact your local Enterprise Agency or Business Link or, if you actually want some decent advice, speak to us. (You didn’t think you were going to read all this stuff without the odd shameless plug did you?)

"...and these are the sales we expect to get!"

How long will it take you to achieve your target level of sales? Answer - probably double the length of time it says in your financial forecast.

It’s a very rare new business that achieves the target level of sales shown in the time predicted in the financial forecast. Why? Because most budding entrepreneurs believe that unless they show a very high level of sales in the financial plan, potential investors won't be interested.

To be fair, there is an element of truth in this. Investors are optimists too, otherwise they wouldn't be investing their money in your extraordinarily high risk venture would they? (We're talking about equity investors here and not banks, who don’t take risks, especially not extraordinarily high ones).

The problem is that if the gap between forecast and actual sales turns out to be too wide, your business’s cash-flow will be painfully stretched and, unless you can raise more money, you'll go bust. Furthermore, it's hard to raise more money when your sales have fallen so far short of that inflated target.

What should you do? Well, one thing you can do is to provide a low, medium and high forecast of sales. Respectively, these are the minimum acceptable level of sales to make the business viable, the expected level and the target level which you hope to achieve if everything goes particularly well.

You and your optimistic investor can gaze lovingly at the 'high' forecast and dream of riches to come. If sales only reach the 'low' target, you have at least reached your agreed minimum acceptable level and it should be easier to raise further finance (usually from the same investor) to keep the business going.

"It’s such a fantastic idea we’ll have no problems raising the money!"

People don’t invest in ideas, they invest in other people (now that we’ve got all that dot.com nonsense out of the way, this is painfully true again). You can have the world’s best business plan with a truly original idea that no one has done before and is guaranteed to make a fortune, and still no one will invest in it.

Investors and banks look more closely at the individuals behind the business than at the business itself. Ask any investor to choose between a mediocre idea with a brilliant management team and a great idea with an inexperienced management team and they'll choose the former.

It may not seem fair, but you're trying to start a business and you need business skills – a flair for marketing, an ability to manage and motivate people, operational nous and, particularly, financial acumen and discipline.

Do you have all of these? Really? No, didn’t think so. Investors are far more impressed if you have the sense to admit that you don't, but you know people who do. It adds credibility if you can say that you've approached them and they have expressed an interest in being involved (in fact it really needs to be a commitment, rather than an interest).

So identify your weak areas then think about who you could bring on board to beef up your management team. If Richard Branson’s your uncle, ask him. If not, then a friend, colleague or relative with the requisite skills is next best.

We’ll offer it at half price to begin with

Perhaps there really is such a thing as a free lunch, and it’s the half-price ones which should be treated with suspicion.

If you try to lure customers or clients by offering your new product at a reduced price, there’s a real danger that they’ll all vanish when you put the price up to its proper level.

Why? Because at the reduced price it feels like a 'bargain' and at the raised price it…doesn't. Remove the bargain and people will go hunting for it elsewhere.

It's probably better to give the product away rather then reduce the price. Customers don't view give-aways as bargains, and accept that they will have to pay the full price next time round.

Better still, don't mess around with the price of your products or services at launch.

Instead of offering things cheaper, consider other types of promotion such as giving away something extra for free. Ideally, this is something that doesn’t cost you very much, but is of value to the customer (such as a free six month service, if appropriate, or free delivery). This way, there’s no confusion over the price.

More pages

Page 1: Are you really an entrepreneur?
Page 2: Delaying the launch
Page 3: © Envestors 2008

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