Build a Better Business Plan

Many investors first turn to the section of a business plan that describes the startup's management team. All too often, what they find there is a red flag, says Goldhaber. One way startups screw up is by trying to give the impression that they already have all the talent onboard needed to grow the company past its first stage. Goldhaber finds that less believable and less helpful than an assessment that admits talent weaknesses. "The more they recognize their deficiencies, the happier I am," he says. "It helps me figure out how I may be useful to them."

An equally serious problem is describing a management team that hasn't invested significant money into the business, adds Greenberg. "It doesn't show a lot of confidence in the business if these guys aren't willing to put in their own bucks," he reasons.

When it comes to the company's operations, red-flag plans often make mistakes like Herrin's, displaying the founders' ignorance of the industry and lack of practical experience, Pinson says. Here's where you need to show you know your field and that you have the operational chops to execute your goals. If you don't, expect to be shown the door.

Get the Bucks and Get Out
In the financial data portions of their plans, startups often over-focus on profit and income statements at the expense of cash-flow projections. That's a major stop sign for savvy investors. Entrepreneurs have to forecast how much cash they'll need to reach major milestones and where that cash will come from, stresses Dukker. Otherwise, the people you're pitching may like your business, but dislike you. "That communicates to the investor that, even if it's a great idea, you're going to need help beyond what's available today, and you might not be the guy running the company," Dukker says.

Finally, startups need to describe an exit strategy. Investors want an opportunity to cash out, and now is the time to tell them about it. "Before you even write a plan, you need an exit strategy telling where you want to go, who you want to be and how you want to get there," Pinson says.

And don't toss off a half-baked idea for an IPO. "Naively written business plans say they're just planning to go public," Greenberg says. "But not many companies are going public today. If you're planning to be acquired, say who would acquire you and why they would acquire you."

The Biggest Red Flag of All
Some people see so many potential problems with business plans that they prefer to start without one. "I don't believe in business plans," says Shah. "They can lead you the wrong way." Rather than a written plan of many pages, Shah prefers to assemble a set of PowerPoint slides that sketch his idea at a general level and describe how his business differs from others in the market. Then he offers detailed statistics about customers gained from user surveys and other market research.

For the moment, however, the big-gest red flag with your business plan is not having one. "There's a lot of talk about whether business plans are even relevant anymore," says Greenberg. "But the business plan is still important because it helps you think strategically about your business.

Whatever you do, startup veterans like Herrin advise you to look at your plan with a critical eye, and be ready to revise it the moment a red flag pops up. She says, "A business plan is a living, organic thing, and it continues to change and evolve."

Going Back for More
You've removed your business plan's red flags. Now how can you get people who nixed you to take a second look? Odds are, you can't--unless you have a personal touch. Investors who have rejected a plan generally won't consider reviewing revisions without a recommendation from a friend or colleague. "Unless you have an introduction, you're not going to get a second chance," says San Francisco entrepreneur and startup advisor Stephen Dukker. "If your business plan goes from inbox to trash can, expect your phone calls not to be returned."

But don't quit. Talk to your lawyer, banker and other contacts to see if you can get an in. "Start calling people and have a tough skin," says Dukker. "You will eventually get through to people and have a chance to present your plan."

The Business Plan Test-Drive
To spot red flags before presenting a plan, give it a test run. Accountants, attorneys, bankers, and others can provide informal feedback without the risk of final rejection, suggests Costa Mesa California, attorney and strartup advisor Bart Greenberg. You can also find expert eyes at Small Business Development Centers, SCORE offices and local entrepreneur's groups.

If you package it right, you can even get preview feedback from your ultimate audience, says New Century Bewing Co. startup CEO Jessica Herrin. "We talked to lots of people, and the discussion wasn't about whether they would fund us," she says. "It was, 'What do you think of this ideas?' Never talk to venture capitalists about money. Just ask them what they think. Then maybe they'll get excited and offer you money."

Mark Henricks writes on business and technology for leading publications and is author of Not Just a Living.

This article was originally published in the February 2007 print edition of Entrepreneur's StartUps with the headline: On Target.