Founders and entrepreneurs need to be many things. They need to be enthusiastic and energetic, intelligent and inventive, resourceful and resilient, tenacious and talented. But, sadly, too many of them are also fantasists.
I can say this from my 24 years’ experience as a business and finance consultant and as a mentor for both the UK’s largest entrepreneur accelerator and at Cass Business School. Don't get me wrong, I love working with startup and early-stage businesses and trying to ensure that they have the best possible chance of success — but sometimes this can be harder than it should be.
According to UK government statistics, some 660,000 new companies are set up each year, of which 20% fail within one year and between 50% and 60% fail within three years. According to the same UK government statistics, the top two reasons that businesses go south is that they have either failed to investigate the market properly, or they have failed to write a full business plan with realistic assumptions.
Six mistakes founders make
But let’s get to what makes me say that many founders are fantasists. There are six basic reasons:
- Many ‘invent’ a product or a service without doing detailed market research and believe that they have an idea that everyone will want and will be prepared to pay good money for.
- The failure to prepare a proper business plan, or the production of a bad one, leads to a lack of realistic and defendable assumptions, which in turn leads to unrealistic financial forecasts.
- ‘It’s My Baby’ syndrome often leads to founders being deaf to criticism and feeling that their business is much better than it actually is.
- Fundraising is much harder than most founders believe, as it takes much longer than expected and so they normally leave it too late.
- Unrealistic expectations for time and cost always lead to founders underestimating both — allow for everything taking twice as long and costing twice as much as might be hoped.
- Superman/Superwoman syndrome means that many believe they have all the skills to tackle every aspect of their new business and do not seek the assistance they need when they need it.
The first two points here are fundamental to the business and its chances of success, and it is also these two points that are most likely to turn founders into dreamers.
Many ‘invent’ a product or a service without doing detailed market research.
Do your darn market research
Market research is an absolute must for any business at every stage but many founders are so blinded by their own product that they often seem to skip this. They then fail to see that either their product is far from unique or it does not actually solve a problem and no one will want it.
Market research should start with desk-based research and then move through the whole spectrum of talking with potential buyers, conducting focus groups, really understanding all the present and potential competitors, looking at barriers to entry, understanding your product’s USP and price point, and so much more.
The point of market research is both to ensure that you are offering exactly what buyers will want and whether you are able to offer something better or cheaper than the competition. It is important to understand the demographics of your target customer and then conduct email surveys and small focus groups to find out what they dislike about existing products and what they would like to see improved. Ask how much more they would be prepared to pay for such an improved product.
I have seen presentations and business plans not detailing the market research, and ignoring any competition. This doesn’t do founders any favours: acknowledge which other businesses are out there — and explain how you’ll be better.
Prepare a stonking business plan
Writing a business plan is the only way to really understand every aspect of your business. Take into account all the information gathered from market research, add details about supply chains, sales and marketing, founders and senior management, as well as advisory board members, and put it into a logical and detailed document. Also include past accounts and forecasts.
Three sections are the most important:
- A one or two page executive summary at the start — if this does not grab the reader's attention then they will never read the whole document
- A description of the product or service and what makes this different
- A list of the founders and management, together with the advisory board
Most forecasts are over-enthusiastic and unachievable; they predict a rosy future where only good things happen and happen very quickly.
Your business plan not only shapes your views of your business but also those of anyone that you share it with. It is crucial and should be a living document being constantly updated. Get trusted partners to review it for that ‘sanity check’ to ensure that it makes sense and you have not let your fantasies cloud the truth gained from your market research.
Most forecasts are over-enthusiastic and unachievable; they predict a rosy future where only good things happen and happen very quickly. We all know that life is just not like that — especially as an entrepreneur, and especially in times of crisis.
I’ve seen business plans with such over-optimistic assumptions that they predict sales growth and market share at unbelievable levels, leading to massively over optimistic valuations. Nothing is more certain to undermine your credibility than that; fantasists cannot be trusted to run a company.
If you want investors to take you seriously, do thorough market research and produce a business plan that you can be proud of with solid assumptions and forecasts. Listen to advice, work with others and ask for help when you need to, and accept that there will be many tough times as well as good. But most of all, be a realist and not a fantasist!
Kevin Smith is the founder and chief executive of Boom & Partners.
