The 4 most common business plan mistakes to address before raising capital

by Judd Hollas, CEO, EquityNet

Your business plan is one of the first things a potential investor will see.

yellow sign reading 'oops'As such, it’s important that it’s polished, succinct and accurate. A well written plan provides investors the information they need to make an investment decision and plays an essential role in many entrepreneurs’ fundraising efforts. A plan filled with mistakes, however, can be very costly and not only hinder capital raising but hinder the future growth and development of your business. With this in mind, here are four of the most common mistakes to avoid.

1. Not using a fair and realistic valuation for your company.

This can be a difficult task for some entrepreneurs because of the emotional and financial attachment they have to their companies. Still, an entrepreneur needs to determine how much his or her company is worth prior to receiving any investment. Savvy investors will ignore companies with unrealistic valuations or valuations that do not line up with revenues.

There are several approaches that can be used to estimate the value of a company, including discounting cash flows and multiplying existing revenues. Both these approaches can be used for companies, although the discounted cash flow approach is the more universal. It’s a method of valuation recognized and accepted by the Financial Accounting Standards Board.

2. Not seeking the right amount of money.

Entrepreneurs often seek the wrong amount of capital during fundraising, which can ultimately have a negative impact on their companies. You run the risk of running out of capital if you ask for too little, and since investors expect a return on investment, you also don’t want excess cash sitting in your bank account. They don’t invest so their money can sit in someone else’s bank account earning less than one percent return! In most cases, entrepreneurs should seek enough capital to adequately fund growth and operations for at least 12 to 18 months, if not to reach profitability entirely.

3. Not addressing an appropriate target market.

It’s very important to identify the target market. Often, entrepreneurs will claim their product or service applies to a much larger market than it actually does, which is a common red flag for investors. Investors want to invest in companies that have clearly identified their markets and have a realistic view of their market share. For example, if you own a coffee shop, your target market isn’t going to be everyone in your town that drinks coffee. It’s likely that not everyone in your town visits the area in which your coffee shop is located, and there may be several other coffee shops that have established a share of the market.

4. Providing too much information.

Entrepreneurs often feel they need to explain every single aspect of their company to prove to investors it’s a solid opportunity. In reality, investors already have a checklist of a few things they want to know before they make their final investment decision and don’t want to wade through extraneous information. Providing too much information simply dilutes your message and can cause you to go off topic. Keep your plan concise. Not only will that help investors find the information they need, but it can provide an opportunity for further discussion should an investor want to learn more.

By following these simple steps, you can avoid these mistakes and develop a winning plan that can help grow your business for years to come.

Judd Hollas is CEO of EquityNet, a business crowdfunding platform headquartered in Fayetteville, Ark. The service has been in business since 2005, and more than 60,000 entrepreneurs and investors, incubators, government entities and other members of the entrepreneurial community across North America have used it to raise more than $270 million in equity, debt and royalty-based capital.