Category Archives: Business Plan Contest

5 Good Posts for Friday May 6

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I’m in Austin TX today looking forward to two full days judging the University of Texas’ Venture Labs business plan competition, which is something like a grand finale, bringing together 36 teams that have won other competitions.

This is the original Moot Corp, started in 1984, the first MBA-level business plan contest that I ever heard of. I’m happy to be here for the fourth year in a row. I’ve read some really good business plans, and I’m looking forward to seeing the teams pitch and take questions.  And tomorrow we have a special Palo Alto Software challenge, and then the finals.  I expect to be posting about this event next week.

In the meantime, some good posts from earlier this week:

  1. Annie Mueller of Wise Bread posted 10 Signs You Shouldn’t Be a Small Business Owner on Amex OPEN forum.
  2. The Osama Raid Live Tweets: This one is off my normal track, but I found it fascinating, something like watching history as it actually happens, in a Twitter sort of way. Damon Clinkscales published a series of tweets from Sohaib Athar, in Pakistan, tweeting about the raid that killed Osama Bin Laden.
  3. A cool infographic called Startups Exposed. I’m like infographics a lot these days, this is a cool new trend. And there’s interesting data in this one, although – I’d take it all as food for thought, not as gospel truth.
  4. James Altucher’s 100 Rules for Being an Entrepreneur. A list of 100 is a nice touch, and most of them are very good.  I’m thinking about posting more on this one next week.
  5. I also liked Lena West’s How to Clean Out Your Inbox Without Guilt, also on Amex OPEN. Good advice.

10 Reflections On 2 Business Plan Competitions

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Last week I spent three days in Houston as a judge of the Rice Business Plan Competition. I haven’t been home since I left April 7 to judge the University of Oregon’s New Venture Championship.

Both of these competitions include four components: the business plan, the business pitch, the responses to questions, and the elevator speech. Every team has at least one MBA student, most of them are all MBA students. The winners get a lot of money.

Rice is the richest. Last Saturday night they distributed $1.3 million in investments, services, and cash awards. Some of that, however, involves investment for equity, or conditions like moving to Houston.

Judging these contests is fun. You read business plans, then listen to the entrepreneurs pitch the plan with slides and demos, followed by questions and answers. Later, you give them feedback. The hardest part, at least this year, is that you have to rank the teams and choose winners.

Here are my 10 reflections:

  1. A great ending: The Rice contest was a $1.1 million contest until the absolute last minute, the last presentation in the awards banquet, when the Texas GOOSE (grand order of successful entrepreneurs) doubled its investment in the winner, from $150K to $300K. The GOOSE society is a phenomenon in itself, worth another post here. I couldn’t find a good link to it to share here, but among the names I recognize are Rod Canion, co-founder of Compaq Computers, and Bob Brockman, who gave the award on Saturday. Right there, with the winners on the stage, they took a marker and, writing by hand, doubled the amount on the check.
  2. A good response to feedback: Clearbrook Imaging, a team from the University of Texas, has a product in its early stages that could, if it works and gets into the hands of doctors, make some kinds of heart surgery much safer. Unfortunately they’ve also got a thick, turbid business plan, and a slow-paced presentation. The underlying product/market fit looks so good my group of judges passes them onto the finals before lunch, then coaches them, in the afternoon, on how to turn their pitch around on empathy and stories and plot. The next day they win the Oregon contest.
  3. Mixed feelings: Innovators from The Indian Institute of Technology at Kharagpur has a way to rig some plastic together to filter water in villages without using electric power, for $6 a unit, to reduce the horrifying death toll of water-borne preventable diseases among India’s rural poor. They didn’t make the semifinals. It’s hard to compare plans offering frills in a consumer market to plans that offer real improvements in health and life for people living in poverty.
  4. Disappointing: The financial projections for a lot of the plans had horribly unrealistic profitability and little or no sense of cash flow. I’m surprised at how many strong teams had flawed financials. Good news: except for the flawed financials, the business plans are getting better than ever. These are exciting new companies with strong markets and excellent teams behind them. And flawed financials are not fatal flaws.
  5. Growth and change: business plan competitions started in 1984 with the University of Texas’ Moot Corp, now called Venture Labs. They were originally a lot like that name, moot, hypothetical, academic exercises in mock businesses. These days the vast majority of these plans are real, with real prospects, real value, and real likelihood of launching. Brad Burke, managing director of the Rice Alliance that puts on the competition, says since they started in 2001 they’ve had 116 teams launch businesses, which raised $337 million in venture capital.
  6. Four for four: For my flight at the Oregon contest I reviewed four plans. All four were believable, launchable businesses.
  7. Six for six: For my flight at Rice I reviewed six plans. Two were a bit early, but promising. Four were real.
  8. Disproportionately male: It’s getting better these days, but it’s still true that judges and competitors are maybe 80 percent male. There’s no good reason for that. I hope it changes fast. And for more good news on this front, the winning team, TNG Pharmaceuticals,  was led by CEO Jenny Corbin, and two others of the six finalist teams included strong women. Priyanka Bakaya of MIT and PK Clean, another finalist, won the $10,000 nCourage Courageous Women Entrepreneur Prize. And Priscilla Silva had the main speaking part for Cyclewood Plastics, of the University of Arkansas, another of the six finalists.
  9. Meanwhile, back in the real world: QRCodeCity, one of the plans I reviewed for Rice, had started in January with an iPhone app called “Scan.” When the Rice contest started in had been downloaded more than 250,000 times. Three days later, at the awards banquet, it had been downloaded more than 300,000 times. They didn’t make the finals.
  10. Toughest finals ever: The Rice event included 42 teams chosen from more than 150 applications. They filtered them down to six teams for the finals. It was incredibly hard to choose between those six. Any one of them could have won. One of my favorites fell behind only because they hadn’t signed the technology license agreement. The team that won, TNG Pharmaceuticals from the University of Louisville, which has vaccine to relieve cattle of fly infestations, was fabulous. But so were the five other finalists.

I’m not done with this subject. In two weeks I do it again for the University of Texas’ Venture Labs, formerly Moot Corp, the oldest and maybe still the best known of these contests. Venture Labs gets the winners of several dozen other contests.

5 Ways to Make Your Projected Profits Realistic

Business Financing, Business Plan Contest, Business Plan Marathon, Business Planning, Venture Contests, , , , ,

I’m well into my business plan marathon again this year, in Houston today looking forward to judging the Rice Business Plan Competition, one of my favorites.

Regarding business plans, instead of just complaining (again) about unrealistically high profitability projections, today I have some specific suggestions. And this has nothing whatsoever to do with the six excellent plans I’ve read for my part of the judging today.

But, as my mother used to say: “if the shoe fits, wear it.”

The underlying problem is that projecting high profits doesn’t usually mean you have a great business plan. It almost always means that you’ve underestimated expenses or direct costs. It’s usually a bad thing, rarely a good thing.

So here are those concrete suggestions:

  1. Compare your projected profitability (net profits or pretax profits as percent of sales) to standard industry profiles. The most well-known source in the Annual Statement Studies published by Risk Management Associates (RMA). These will give you standard profitability rates for more than 700 common types of business. I searched the site for information business, narrowed it down to software publishing, and I was offered a download for $120. Oxxford Information Systems competes with RMA with more profiles for more different types of business. And Business Plan Pro bundles the Oxxford Information profiles with a searchable database linked to the ratios table [disclosure: I’m the conceptual author of Business Plan Pro and my company publishes it.] And there are other competitors in that market. Standard profitability isn’t that hard to find.That doesn’t mean that I recommend your projected profits always match some standard industry profile. Not at all. What it does mean, though, is that you should know what profits are reasonable for similar industries, and don’t project huge profitability that’s 5 or 10 times higher, in percent of sales terms, than the standards. That kills credibility.
  2. Compare your projected profitability to results of publicly traded companies in your industry. You don’t need an exact match, but you should know how different your projections are, and you should satisfy yourself on why they’re different. The publicly traded companies tend to be larger and more established than new startups. Sometimes a startup is so new and innovative that it is much more profitable than industry leaders; but that’s rare. If you don’t know where to find financial reports of publicly traded companies, start with Yahoo Finance.
  3. Do a good web search to see if you can find comments on blogs or in interviews where entrepreneurs talk about actual profits in real businesses like yours. Maybe you’ll find somebody who might be a competitor. People give a lot of information away these days, in blogs, and on the web.
  4. Try to find somebody with actual experience in a similar company. Use social media, use your mentors, talk to the nearest business school or chamber of commerce. Get somebody to tell you, from real-world experience, what kind of profits are likely.
  5. If all else fails, remember that across the real world of business, normal profits run about 5, 10, maybe 15 percent of sales. If you’ve done your best and it still shows 30 percent or more, take a good look at your payroll, headcount, and marketing expenses. When it doubt, add marketing expenses to take your projected profits down to a credible level.

Is this you? Does your business plan project profits way above standard levels? That doesn’t make your plan look better. First, make it credible. Only then are the numbers really interesting.

(Image: Elnur/Shutterstock)

Business Plan Marathon Again … and Your Profits Are Still Way Too High

Business Plan Contest, Business Planning, Venture Contests,

This morning I start my annual business plan marathon. This is my day as a semi-finals judge at the University of Oregon’s New Venture Championship. From here I go to Houston next week for Rice University’s million-dollar business plan competition, and then in early may to Austin for the University of Texas’ Venture Labs competition. The illustration here is from last year’s competition at Rice.

I call it my business plan marathon because it includes reading several dozen business plans and watching several dozen business pitches. It also incudes reading some plans for the University of Notre Dame business plan competition, and plans submitted to the Willamette Angel Conference, where I’m a member investor. All of this happens between now and May 12.

I do enjoy reading business plans, and I enjoy even more meeting the entrepreneurs, watching them pitch, and asking questions. These events are good for everyone involved.

As I was reading plans in preparation, I found that one error I’ve complained about before — the totally unrealistic profits — is still quite common. Way too many of these business plans project profits at 40, 50, 60% and even higher, as if the way to show a good business is to project very high profitability.

The extremely high profits in the projections leaves me very unimpressed. Real businesses are happy to make 5 or 10% profit on sales when they do real well, maybe more when they are new, innovative, and spectacularly profitable. Nobody makes the high rates that show up too often in business plan contests.

Those sky-high projections don’t mean you have a great business plan or a great business; no, what they really mean, to me at least, is that you don’t really know the business you’re getting into. You don’t have a good grasp of normal costs and expenses.

Business Plan Contests Leave Out Bootstrappers

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I consider myself something of an expert on business plan competitions. I ran one myself for several years, I’ve judged several dozen including several of the most prestigious, my company sponsors more than a dozen a year, I’ve had students in my undergrad business classes competing in them, I’m an investor member of an angel investor group that holds an annual contest, and perhaps most important, I enjoy them.

So when the National Association for Community College Entrepreneurship (NACCE) asked me to do a webinar on business plan competitions, I said yes. That’s going to happen August 18 at 1 pm PDT (and you can click here to register). And it also got me thinking about what’s right and what’s wrong with most of the business plan competitions I see. Which led to this post, about a problem I can’t solve. While it might come up in that webinar, it’s not going to be the main topic. But I do want to write about it here.

The problem is that business plan contests almost all undervalue bootstrapping. While the vast majority of startups are bootstrapped, meaning they start without venture capital or angel investment, the vast majority of business plan competitions award the best investment, not the best company.

And I’ve seen many a good-looking plan, and good-looking business, that should have been winning something but wasn’t a great investment for outsiders. It hurts to not find a prize for the startups that look really good for the owners and operators, long term, without an obvious exit, which makes them a good business but a bad investment. Why don’t they get a prize?

However, this is a hard problem to fix. How do you decide what’s a good business? High risk, low risk, change the world, maybe? It depends a lot on who you are.

Back in the late 1990s I judged some intercollegiate MBA-level contests that left the criteria for winning up to the judges. Most of the judges were investors so they leaned naturally towards awarding the top awards to the startups that seemed to offer the best investment.

I still remember a conversation we had in the judges room in 1998. One of the best businesses we’d seen said outright that they could do it without outside investment. They were there for the cash prize. They had a strong team, a good product, and a believable plan for financing themselves using early sales. Several of us thought that the best possible businesses grow themselves that way, bootstrapped; and a good shot at a $5 million business owned by its founders was, to us, a better business than a 1-in-100 shot at a $25 million business owned by investors who put in $2 million. Several others thought that a business plan competition prize should go to the best investment opportunity.

How do you compare the relatively low risk cool bootstrapped startup to the high risk, high-profile startup that might change the world? Sure, we all say the risk and return ratio, and the MBA world offers technical analyses like internal rate of return, but, as they look into the future, it’s all very subjective. It involves guesses about the future cash flows and the discount rate. There’s a lot of unequal comparisons.

But the classic business plan for investment, and the investment process, and the investment filter, are also what’s generally taught at the MBA level, a lot more than bootstrapping.

A few years ago half a dozen or so of the leaders of MBA-level business plan contests got together and, trying to solve this problem, agreed on some general standards. At that time – or so I was told; I wasn’t there – they standardized on using “the best investment” as the main criterion for determining a winner. I do sympathize. Although even this one is a complex and difficult standard to follow, it gets way worse when you drop it in favor of something even more vague.

Most of the major competitions go along with that standard. Some of them have added special channels for social entrepreneurship, with different criteria. And for the angel investment competitions, like our Willamette Angel Conference, it’s not a problem at all because we’re actually investing, so of course we want the best investment.

But in the meantime, the bootstrappers are still left out; and that’s a shame. I think it’s a problem we can’t solve easily. And it might come up in my webinar, but I won’t have a solution.  What do you think?

Our Angel Group Chooses to Invest in Healthy Natural Organic Intimacy Products

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I fear you’d have to know the quirky nature of Eugene, Oregon, my home town, to understand how well the choice of our local angel investor group matches the area. Some people call Eugene “Berkeley North.” We have to have way more health foods stores, organic foods, and natural products per capita than any national average; and more Birkenstock, and more gray ponytails behind bald heads.

So it’s not a complete surprise that the winner of the Willamette Angel Conference angel investment was Good Clean Love, offering all-natural intimacy products in a market that is dominated by petrochemical-based products. This is what people in this town call “Eugenian,” a natural product produced by a company built on values.

This company reminds me of Coconut Bliss, another local success story, which went from founding to successful exit in less than five years, built around the values of natural and organic and healthy. I posted the Coconut Bliss story on my other blog just a few weeks ago.

Good Clean Love won over an impressive field of startups. As one of the investors, I can tell you that the deliberations were very tough because we did in fact have several very strong companies to consider. If you’re curious, take a look at the conference recap here.

The choice may surprise you if you look at those other companies. But for me, the lesson here is being different, building around a story, credibility, and staying local. This is a good story of local investors believing in local companies.  And developing the local area without sacrificing investment potential.

(And that brings up an interesting conflict of interest point, since I’m one of the angel investors, that means I now have an investor interest in Good Clean Love. Just so you know.)

Business Plan Contests Grow Up and Mean Business

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It’s time to note a major change. Just a few years ago business plan contests were an academic oddity, a dress-up exercise at a few business grad schools. Suddenly, or so it seems, they’re pretty much for real. Some very powerful new businesses are appearing at business plan contests, winning significant money, attracting investors, getting funded, and turning into real businesses.

For milestones, try this: last weekend Rice University hosted the first business plan contest to offer $1 million in total prize money. This is a serious event now. If you’re at all curious about how strong some of these businesses are, read Lora Kolodny’s ‘I Want This Drug on the Market by the Time I Need It!’ on her You’re the Boss Blog at the NYTimes.com.

How important are these contests? How real? Well Lora wasn’t the only journalist at Rice last weekend. Fortune and CNN are covering that contest in detail. Expect to see some of these major contests in the Wall Street Journal.

Brad Burke, head of the Rice Alliance for Technology and Entrepreneurship, chief host and organizer of the Rice contest, likes to point out how many of the teams entered have gone on to be successful:

More than 97 past competitors have gone on to successfully launch their business, including 33 of the 42 teams from the 2009 competition. In total, past competitors have raised more than $220 million in funding.

Moot Corp, meanwhile, the first of these competitions, started in 1984, has trouble keeping up with all of its Moot Corp success stories. Moot Corp will be taking place in Austin again this year, in early May, gathering together the winners of several dozen other competitions.

And at the University of Oregon’s annual New Venture Competition, of which I’ve been a judge 12 times, all four of the teams in my semi-finals track looked like real companies with good probability of making it in the real world. That’s impressive. I’ve seen a lot of good companies in that one before, but never before have I done a track in which all four of the four groups seemed likely to be real viable companies in the real world.

Big Mistake: Huge Unbelievable Sales Numbers

Angel investment, Business Plan Contest, Business Plan Marathon, Venture Capital, Venture Contests,

Jeffrey Moskovitz added an important comment to my big mistake post from last week:

I read an blog yesterday, written by someone I respect, who asserted that investors know and even EXPECT that projected sales and profits will be overstated. Aware of this expectation, the entrepreneur plays the game by inflating the numbers, fully aware that the investors will give the numbers a “haircut,” and everyone will be happy.

Jeffrey didn’t think so and I agree with Jeffrey. Emphatically agree. The idea that everybody winks at inflated numbers is a really bad idea.

My view on this hasn’t changed at all, even as years passed and I moved from entrepreneur seeking investment to angel investor reviewing business plans as part of an angel group. Here’s the way the process works, step by step:

1. Is the sales forecast believable?

Sales forecast credibility is a matter of several factors: understanding the market, size and structure of the market, selling process, channels, decision making, and so on. Granularity is really important, like the details of distribution, margins, buying points, actual names of potential buyers. Real sales already made, letters and testimonials from customers or distributors, are also important. Real Web forecasts, page views, conversion rates, and so on, are important.

If the sales forecast isn’t credible, then investors lose interest in the rest of the numbers in the plan. An unbelievable forecast voids profitability, cash flow, and supposed future valuation and investor return. The process stops.

It is true that a dumb forecast doesn’t necessarily kill potential investment. If there’s good product-market fit, scalability, defensibility, growth potential, management team, and so forth, then bad numbers are forgivable. But a bad forecast is a huge negative.

2. If so, then is profitability believable?

One of the most common errors in business plans, almost pervasive, is unbelievable profitability. As soon as projected profits go over industry averages, I disbelieve the rest of the numbers. In some rare cases (one that I posted about here Monday) entrepreneurs have real justification of those high numbers. But those are uncommon. Most of the time, it means the entrepreneurs don’t understand the business. They’ve underestimated expenses.

Even without researching the specific industry, no industry averages profits much higher than 10%. Most are closer to 5%.

If profitability isn’t believable, then I stop reading the numbers. I have no interest in cash flow or future valuation if profitability is off.

3. If so, then is cash flow believable?

Only if both sales and expenses are believable, do I look at cash flow. Does the cash flow plan recognize the impact of industry and accounts receivable? Does it show the need for investment?

And from there, to be honest, I’m back looking at larger factors, like product-market fit, management, defensibility, and scalability. I still don’t put much stock in what the business plan says the investors will get as return on investment. ROI and IRR projected out five years is an academic exercise, not a real decision factor.

No, You Can’t Just Pull Numbers Out of The Air

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Question: I’m in the process of writing an Internet startup business plan to present to prospective investors. The site isn’t live so I don’t even have a basis for speculation with respect to the financials. I would essentially be pulling numbers out of the air. Being that the Internet business as it pertains to advertising revenues is so mercurial, is it feasible to present the plan without having the financials included? If not, how can I make more realistic financial assumptions?

My answer: No, you won’t get anywhere presenting a business plan to investors without financials. I’m glad you asked me instead of just moving ahead with that idea.

Every new business, including a website business, has to be able to present a reasonable forecast if it’s going to hope to get an approval from outside investors. And it can never be “pulling numbers out of the air.” The assumption is that before you start a new business you have some idea how it’s going to work, based on some experience. If you have no idea, no investor wants to even share the same elevator with you.

In this case, the website business, you need somebody on your team who can project website traffic and sales based on real experience with search terms, search engine optimization, Google ad words and its competitors, conversion rates, and so on. Your traffic doesn’t get pulled out of the air, it’s a function of what you plan to do and what you plan to spend. Know your key search words and the traffic those words and phrases get for others, right now. Know reasonable conversion rates. Make estimates based on real assumptions about real variables.

For more information on this, you could try:

Big Mistake: Business Plans And Investor Returns

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Another problem that comes up a lot as I read on with my business plan marathon: too many business plans are taking too much time and effort telling supposed investors what their supposed return on investment will be. This is usually a waste of time, energy, and space. It’s certainly a mismatch between what the entrepreneurs are thinking and what the investors are thinking.

I was surprised a couple days ago, talking to entrepreneurs, at how much emphasis they put on wanting to know what return on investment was satisfactory to investors. It was as if they thought what the plan says the company will be worth five years from now makes a difference. And it doesn’t. The illustration here is a piece of fool’s gold, iron pyrite.

It felt like these entrepreneurs are thinking: investors want to see X in returns so I have to show that in my plan. I pop up the sales forecast, pop up the profitability, and that generates a great projected valuation. So I show that I can deliver a great return.

Investors, meanwhile, are actually thinking: I want to look at the product-market fit, scalability, management team, and factors like that to determine whether the company is going to make it. If they have all that right, then they have a shot; and if not, they don’t. Projected investor returns depend on a future valuation, which depends on the sales forecast or income forecast or both. Most investors look hard at the sales and profitability projections, because they want to see credibility; I use them to get a feel for how well the entrepreneurs know the business. There’s so much cascading uncertainty on future valuation that I don’t put much stock in it.

There’s a Catch-22 about sales and profitability forecasts: credibility of the numbers means more than the numbers themselves. A plan that has both big numbers and credibility is rare.

(Image: Vakhrushev Pavel/Shutterstock)