Business investors are sensitive to at least three major constraints when evaluating business plans. I call these constraints The Three R’s: reality, readiness, and resources.
Many creative entrepreneurs with ideas for scientific breakthroughs have ended up frustrated with business investors who just don’t seem to “get it.” The truth is, however, that it’s the entrepreneur who’s not getting it.
Unlike creativity or scientific breakthroughs, starting or expanding a business requires the entrepreneur be keenly aware of their customers, competition, and core competencies.
Creativity and scientific breakthroughs often disregard the customer, the competition, or a company’s core competencies, which is why they are usually risky and often require significant capital over several years before they are monetized. The opposite type of investment most business investors seek.
For example, suppose you had an idea for a new everlasting light bulb. After researching the market, you determine that customers do want such a bulb and are willing to pay a premium for it. Preliminary manufacturing studies show that you can produce the bulb and profit nicely from it. Would business investors be receptive to backing a business plan that puts you up against the likes of General Electric or Westinghouse? But, you say, your plan is to some day sell your idea to these competitors. Again, how receptive would a GE or Westinghouse be to a plan that obsoletes a major product line? What would HP do with a plan that killed its aftermarket in print cartridges? Do you see the flaws in such thinking? Business investors do.
That’s why business investors like to invest in business plans that are grounded in reality. Plans based on reasonable risks that can be monetized quickly and generate a return on their investment. Although the everlasting light bulb strikes a consumer hot button, it fails the reality test by not addressing the distribution network and shelf control of large competitors. More important, the strategy to sell the business to one of these competitors is a flawed exit strategy.
The second major consideration that a business investor wants addressed is readiness or timing. Unless the time is right for the proposed business plan, business investors are not likely to support it.
Take for example a business plan to introduce dishwashers in Japan in the early 1970’s. When dishwashers were rapidly becoming popular in other areas of the world, the average Japanese kitchen was too small to accommodate the new appliance. Moreover, the prevailing attitude among homemakers was that dishwashers were for the lazy or the idle rich. It took over a decade of attitude, social, and cultural changes before the timing was right to successfully introduce dishwashers to the Japanese market.
Business plans not only fail to gain support when they are premature, they also fail when they are late. Think how many American and European watch, automotive, or camera manufacturers lost their competitive advantage in their respective international markets because they resisted automation or robotics until it was too late. It is unlikely that investors would support a U.S. business plan based on automation or robotics in one of these markets today.
It’s amazing how many entrepreneurs ignore or neglect this constraint. Perhaps they believe that this is the entrepreneurial way…to know no obstacles. Although this attitude may impress self-help gurus, it won’t impress business investors.
The business plan graveyard is filled with plans that failed because their entrepreneurs were not sensitive to resource limitations. In most cases, these limitations range from the entrepreneur’s lack of sensitivity to their own internal resources and skills to not fully understanding what it takes to execute the plan itself.
This is especially true of businesses that are trying to expand through diversification. The world markets are filled with food companies that have failed trying to enter pharmaceuticals, chemical companies that have failed trying to enter foods, or electronic component manufacturers that failed trying to enter final assembly.
For start-up companies, entrepreneurs often fail to adequately estimate cash requirements or the time and resources required to build distribution channels, win customers, or to launch or sustain a business.
Business investors, experienced ones anyway, are all too familiar with the importance of resource constraints. So, when business investors zero in on this area and challenge your assumptions, don’t get too defensive. Instead, listen to their concerns with the knowledge that they can help you tighten up your plan and improve your chances of success.