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Latest blogs by Dr. Demetrius

The start-up bubble

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In my previous blog I bemoaned the fact that so many ventures with very promising offerings never get the investment they deserve due to the appallingly drafted business plans that accompany the invitation to invest. As I said last week, I can’t count the number of plans that I have thrown in the bin before I’ve even turned to page two!

But that raises another thought in my mind. Why am I getting so many plans anyway? Why has the number of start-ups increased so much? I may be wrong, but I am convinced that more and more people are moving their career aspirations towards an “I want to be my own boss and do my own thing” philosophy. If I am right, is this potentially a start-up bubble that could burst at any moment?

Some of the reasons for the move towards starting one’s own business are no doubt economic. If there isn’t enough opportunity within the standard career path as an employee of a larger organisation, it is no doubt attractive to decide to start something up yourself. An alternative is to get business cards printed with ‘Consultant’ as your job title, as that is definitely better than ‘Unemployed’. Of course, most people who might hire you will normally see through this subterfuge.

In addition, the majority of today’s youth, as they embark on life after they complete their studies, no longer ask themselves “What do I want to choose as a career for the rest of my life?” but instead ask “What would I like to do for the next year or so? Towards the end of that period, I’ll plan the following couple of years.” This attitude, although perhaps personally satisfying for the individual, is not attractive to employers, who are normally looking for long-term commitment.

So can anyone launch a start-up successfully? My answer to this is an emphatic “No”. What do they need in order to succeed? People say “Everyone else seems to be doing it. Why not me?”. You might assume that I’m going to say that it is because they don’t have superb products and/or services that they intend to offer and for which there is definitely a large potential market. Whilst that is certainly necessary, it is not, in my view, the key parameter for success.

Far more important is that the person or persons launching the start-up is/are totally committed to the venture almost to the exclusion of all other activities (whether they be family, sport, hobbies or whatever). I was asked a while ago by someone what I thought of a venture they were planning. When I asked how much time they expected to spend on it, the reply was “Four days a week. That is one of the reasons that I want to start my own business. I want more free time.” Needless to say, I recommended that he give up the idea immediately and go and get some ‘Consultant’ business cards printed instead.

I have been involved in quite a few start-ups in my life, varying from extremely successful to abject failures. All of these, regardless of their success or not, had one thing in common. I ended up working very long hours at least six days per week (at one stage averaging between 80 and 100 hours per week for nearly two years).

So to return to my question as to whether we are looking at a start-up bubble that is about to burst. I suspect not. The good ideas being driven by dedicated individuals prepared to make the sacrifices necessary to achieve success will always continue to reap the rewards that they deserve. What is likely, however, is that the percentage of failed start-ups will increase simply due to the number that should never have been launched in the first place, whether that be due to a poor initial concept, lack of drive by the founder(s) or inadequate planning.

But don’t let me put you off starting something. The world needs good entrepreneurs. Just be prepared for it to be hard work.

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Business plans

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Why do so many promising ventures never get the capital they need? In my experience, it is, In the vast majority of cases, due to the business plan not having made a good enough case for investment. I have over the years received many plans from firms seeking investment funds and well over 90% of them ended up in the bin before I got to the second page.

So what does a good business plan entail? Here is what I would be looking for.

It should start with an executive summary, preferably of a single page, but certainly not more than two. This summary needs to grab the potential investor’s attention in the first five lines. Don’t start with background waffle. Make it immediately clear what the products or services of the business are or are planned to be. Make the executive summary exactly that: a summary of the whole document including highlights of the market opportunity and the team and ending with a clear statement of what you are looking for and what you are offering in return. For example, “We are seeking an investment of 100.000 Euros in return for a 30% share of the company”.

After the executive summary, you can go into more detail on the venture. Excluding appendices, this should run to about 15 to 20 pages. You need to describe the products or services in some detail, but try not to get bogged down in technical jargon which at best will bore the investor and at worst will totally put him off. Of more importance is to show clearly what the market opportunity is and what competition exists or could appear in the near future.

You also need to give profiles of the team, their skills and their experience, and indicate what finances they are themselves investing in the venture. Be honest and point out what gaps there are in the team’s background and skills. Hopefully the investor will be able to help fill these gaps.

What investors will be very interested in is what they are likely to see as a return on their investment. For that you need to have detailed financial projections. However, there is no point in burying 30 pages of financial spreadsheets into the main body of the document. By all means have lots of detailed tables as an appendix, but in the main body simply have a page or two showing the key performance indicators (KPIs), such as graphs of projected cashflow, profitability and revenue growth. Then make it easy for the investors to find the detailed backup to this information, If they so wish, by guiding them to the relevant pages in the appendix.

It is also important that the summary pages on financials includes some “What if?” analysis (preferably displayed graphically). For example, it can be very reassuring to investors if they can see that, even if actual revenues achieved are only 80% of your projections, the company will nevertheless not run out of cash. This should not be achieved by simply asking for an overly high injection of funds, but rather by indicating savings in expenditure such as administration costs that would be made in the event of lower sales. Similarly show the optimistic growth figures for the venture if revenues significantly exceed your projections.

How far ahead should you forecast? In most cases, I would recommend three years with monthly figures, but in some industries a five-year forecast can be realistic. (In the oil industry, even 25 year plans are common). Basically you should only project revenue and costs as far forward as you can reasonably see. Don’t simply take ‘month 1’ and add x% per month to it for 36 months ahead. Any potential investor will realise that you have no real idea what is going to happen. Think it through carefully. For example, will there be months of the year when revenue will be lower due to holiday periods?

I am not saying that following my advice in this blog will definitely get you the investment you seek, but I am fairly confident that ignoring these pointers will not improve your chances!

 

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