Tag Archives: venture competition

Your Profits Are Way Too High!

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The most common mistake in startup business plans is having the profits way too high. There’s no sense whatsoever to priding oneself in projected profits, as in profits you predict your business will have in the future. That’s like having replicas of future Olympic gold medals made and putting them into a trophy case. And in most business settings, it just lowers your credibility. I read 100 or so startup business plans every year, and I’ve getting tired of it. I’ve discovered a new 50-50 rule of profitability in business plans, as in, 50% of the plans I’m looking at project 50% or higher profits on sales.

Pick one: high growth or high startup profits

projected-profitsIn real business, there is inherent conflict between high growth and high profits. That is the collective result of lots of small decisions owners make as they choose to spend marketing money or not. Every dollar you keep in profits is a dollar you didn’t spend to generate growth.

It’s not just coincidence that the history of high-growth online business successes started with losses. Facebook founder Mark Zuckerberg resisted charging membership fees in the early years, when Facebook was losing money but staying free to users. Sure, later, through advertising, Facebook found a way to make money – but first it had to grow its user base to gain the critical mass that made advertising a practical source of revenue. And Facebook is still free to users. Twitter is still free, struggling to figure out how to make more money, but not even for a second considering charging a fee for participation. LinkedIn is still free, and was free and losing money for years. Revenues came later, after the user base was established.

And even with more traditional businesses on main street, startups are rarely profitable. There are always expenses before launch, and those cut into profits. And few businesses manage to generate revenue to cover costs from the very beginning. Most have a deficit phase as they gain traction and grow.

And as they do establish themselves, they still have to decide, dollar for dollar, whether they spend available money on marketing, or save it and keep it as profits.

Find realistic levels of startup profits

Real businesses make five or 10 percent profits on sales, at best. The NYU business school keeps an updated web page that lists profitability by industry, with an overall average of 6.4%

Occasionally a very successful startup will come up with something so new that it can, for a while, chalk up very high profit margins. That’s extremely rare. Out here in the real world, though, nobody really makes much more than 5-8-10% or so profits on sales. The real startups might make 15% or even 20%.

Projecting 40%, 50%, and even 60% profitability on sales doesn’t tell me you have a great business; it tells me you haven’t done all of your homework. You’re underestimating cost of sales, expenses, or both.

I find this particularly galling in business plans with some social implications, related to health care, or education. I’ve seen many startups planning to sell something offering huge medical benefits to people suffering from serious medical problems, projecting profits of 100 percent or more. Do you agree with me that this is wrong? Nobody chooses to buy these things. Can’t they charge a fair price, that allows a fair profit?

What would I like to see instead? First, find out average profitability for the industry you’re in. Put that number into your plan. Then explain why your company’s projected profitability is higher. Proprietary technology, specialty niche market, new processes? Okay, I can take that; just be aware of what the normal is, so you know what you’re up against. Please.

Standard financials are available from several vendors, for less than $100 per industry (and here I can’t resist adding that they’re bundled with LivePlan, my company’s software product. Sorry. I’m an entrepreneur. I can’t help it.) You can also get those from Oxxford Information Technology, or the Risk Management Association (RMA). And some summary profit by industry data is available for free, from sources such as the NYU page above.

 

Interesting Points, But Winning a Business Plan Competition is Still Better Than Losing One

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This morning I can’t resist writing about Vivek Wadhwa’s Winner’s Curse post on TechCrunch last weekend. Odd combination: it’s interesting, thoughtful, well-written, about a subject near and dear to my heart, and, at least in the title, wrong.

In the full title of his fascinating post, he says losing a business school business plan competition is better than winning. imageThat title assertion is my only real objection. He makes several great points explaining how business plan contests can be good for people, and how the winner isn’t necessarily the best business, and how these contests should not be confused with reality. No argument from me on any of those points. However, even if it’s not much difference, even if it means very little, winning is still better than losing.

Maybe it’s just a blog post title thing: surprise gets better traffic. Contrarian gets better traffic.

I’ve frequently been a judge at business school business plan contests (Moot Corp, Rice University, University of Oregon, University of Notre Dame, and others) and some non-school contests too (Forbes, for example). I think they’re great fun, great experience, a real educational opportunity, and pretty much right in line with his summary on that post:

This is not to say that the contests are bad. Instead, they educate students in entrepreneurship and motivate them to come up with interesting ideas. But for all of you out there who think a biz plan victory is a ticket to the big time, think again. And for all the engineering students who think any outcome but victory is a waste of time, you also need to think again.

He goes on to say that losing is better because winning generates praise too early in the business life cycle:

I submit that losing in a business plan contest is actually more beneficial than winning. There is a growing body of research that children who are praised too early and too easily end up under-performing peers who are not praised but are told, in constructive terms, they can do better.

I don’t buy that argument. I’ve been judging these contests for 12 years now, and I see a steady progression towards more and more real businesses, out there in the real world, rather than imaginary or hypothetical business. And in that case, as soon as the awards ceremony is over, the winners are right back out there in the real world, fighting the real battles on the front lines, with no time to bask in any glow. It’s reality for all, winners as well as runners-up and also-rans and losers.

So agreed, winning doesn’t mean much; but it’s not bad.

I’ve seen some really good winners in these contests. Look for example at Klymit, or Qcue, just to name a couple. These are companies which won business plan contests and continued growing. Wadhwa says “not a single home-run has emerged from this now-omnipresent practice.” But hey, that’s placing the bar pretty high. We’re talking about a few dozen such contests per year. Is there nothing between home run and failure?

By the way, this is the second really good post by Vivek Wadhwa about entrepreneurship on TechCrunch in barely a week or so. I posted here on the first one. Good stuff. His work is a nice addition to TechCrunch.

(Image credit: Aleksandr Kurganov/Shutterstock)

Your Profits Are Way Too High!

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

Business plans everywhere. I’m reading, annotating, filling in score sheets, and getting cranky. I explained that on this blog last Monday.

So what’s with the unrealistically high profitability projections? This year it seems like I’ve discovered a new 50-50 rule of profitability in business plans, as in, 50% of the plans I’m looking at project 50% or higher profits on sales.

That reminds me of a song my youngest daughter used to play: “That Don’t Impress Me Much.”

Occasionally a very successful startup will come up with something so new that it can, for a while, chalk up very high profit margins. That’s extremely rare. Out here in the real world, though, nobody really makes much more than 5-8-10% or so profits on sales. The real startups might make 15% or even 20%.

Projecting 40%, 50%, and even 60% profitability on sales doesn’t tell me you have a great business; it tells me you haven’t done all of your homework. You’re underestimating cost of sales, expenses, or both.

I find this particularly galling in business plans with some social implications, related to health care, or education.

What would I like to see instead? First, find out average profitability for the industry you’re in. Put that number into your plan. Then explain why your company’s projected profitability is higher. Proprietary technology, specialty niche market, new processes? Okay, I can take that; just be aware of what the normal is, so you know what you’re up against. Please.

Standard financials are available from several vendors, for less than $100 per industry (and here I can’t resist adding that they’re bundled with Business Plan Pro, my company’s software product. Sorry. I’m an entrepreneur. I can’t help it.) You can also get those from Oxxford Information Technology, or the Risk Management Association (RMA).

Anyhow, that’s my opinion.