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Top 6 fatal mistakes to avoid when creating a business plan

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While debate persists over when to do it, how to do it and even why to do it, it remains a process that has made the difference between success and failure for many entrepreneurs with big ideas.

Through the Royal Academy of Engineering’s Enterprise Hub, the expertise of some of the UK’s most successful science and technology entrepreneurs provide money-can’t-buy support and mentoring to a number of incredibly bright individuals with superb ideas but limited business acumen.  

Here are some of the biggest mistakes the experts have witnessed in the development of business plans that could make all the difference between success and failure, and advice on how to avoid them.

1. Dive straight in without thinking what, who and why

Academy Fellow Chris Mairs, Metaswitch co-founder explains that “running out of cash is often cited as the most common cause of startup failure, but this is an effect, not a root cause. Too many new businesses create a business plan first as a matter of course, without thinking why. The result is that many business plans contain extraordinary detail and spurious accuracy built on an unvalidated assumption that there is a set of customers who will adopt the product. This is the classic mistake of building a house of stone on foundations of sand; it’s far better to validate the foundations, rather than worrying about the cost of the paint.”

And Ian Shott, serial entrepreneur and Chairman of the Academy’s Enterprise Committee suggests that businesses need to consider the business model before drawing up the plan. “Any business worth their salt needs to sit down first and foremost and decide what they’re offering, who the competition is, who’s buying and who’s paying. Before you take anything outside of the business, start with a storyboard and a PowerPoint presentation. Finally, leave the jargon out.”

2. Ignore the importance of structure

Academy fellow Richard Brook, a Founding Director of E-Synergy stresses that the reader “should be able to find the topics of critical importance in easily identifiable sections.” When using the business plan as a tool to attract an investor or financier, for example, key topics they will be looking at are: 

  • Market and customer need;
  • Product or service description;
  • Revenues and business model;
  • Competition;
  • Unique selling point (USP);
  • Intellectual property;
  • Team;
  • Financials;
  • Funds required (and use of funds);
  • Risks; and
  • Exit for investors and repayment for lenders.

“The team must be able to explain their business proposals clearly, coherently and accurately, without too much repetition or unnecessary and distracting detail,” he continued.”

3. Assume investors will read it from back to front… or won’t read it at all

Academy Fellow Robert Sansom, Founder of Cambridge Angels, says:Although it is invariably true that investors may not read your business plan, they require you to write one to ensure that you have thoroughly considered your business proposition; a well constructed and thoroughly researched business plan is an essential component of successful businesses regardless of whether they are seeking investment. 

“To confirm there is a good market opportunity, for example, don’t just assume that you can sell to one per cent of the customers of a billion dollar market. Demonstrate which customers you have approached, what their requirements are, and how you’re going to win them.”

4. Underestimate the incumbent leader’s grip on the market

“Startups often assume that, because their product is cheaper, faster or better than the incumbent solution, users will switch their allegiance easily,” says Mairs. “In determining how much their product needs to be better, they usually underestimate the advantage of credibility and consumer inertia held by the incumbent. 

Even where there is no network effect (i.e. if there is no loss of interactivity with other users resulting from a switch) inertia, credibility and established relationships play a massive role. As a rule of thumb, think about order of magnitude improvements if you want to disrupt an incumbent rather than, say, doubling speed or halving costs.

5. Muddle your motivations 

“Some business plans are aimed at providing low cost, very affordable products or services to those who are resource-poor in developing countries,” Brook goes on to say. “Whilst such aims are extremely laudable and in many cases deserve support, the opportunity to make a good return, particularly when speaking to investors, is really compromised by the desirability of supplying products or services at the lowest possible cost to those countries. 

“The same kind of dual motivations sometimes apply to proposals for ‘green’ products where the economic viability may be unproven. It can be unclear as to whether the primary motivation is helping to save the planet, or making a good financial return for themselves and for investors. 

“This may not be such a problem when seeking funds from individual business angels, but as soon as institutional funds become involved, where the financial return becomes the dominant factor, such applications will almost always fail to attract finance.”

6. Consider it to be the finished article

Arnoud Jullens, head of enterprise at the Royal Academy of Engineering’s Enterprise Hub, concludes that”too many entrepreneurs write their business plan, put it down and assume it’s finished. A good business plan should act as a point of reference that’s regularly updated to reflect the circumstances surrounding the business. 

“Make sure you consult and update it every three months, consulting with experienced entrepreneurs, industry specialists and other experts. Using customer feedback, you can constantly adapt your business plan to remain current.”

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