It is a known fact that 99% of all business plans written and presented to investors don’t get funded. Why? What’s responsible for the high rejection rate of business plans? Well, this article will highlight all the facts you need to know. angel investors, venture capitalists, and loan-issuing institutions receive tons of business plans every year from business owners seeking funds to kick-start their businesses. But only few of these plans get funded while most are turned down.
Startup owners understand that writing a business plan is the only way to present their business to potential funders. And they put in lots of time and energy to ensure that they come up with a compelling plan. However, due to some avoidable mistakes, many of them fail to convince funders. And they get nothing. Here are 10 of the common reasons why business plans don’t get funded and how you can avoid these mistakes in your own business plan.
10 Undisputed Reasons Why Business Plans Don’t Get Funded
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1. Not filling a need
People have varying needs and pain points. And these are what businesses are expected to help them with. Some are too busy to handle their laundry themselves. Some are battling with frequent network crashes on their PCs. Some are finding it hard to prepare their tax returns. Some travel long distances to get food for their pets. Some need people to help them look after their kids when they are off to work and the list goes on.
People are ready to pay good money to have their needs filled and to make their pains vanish. The greater the pain and the better your product is at alleviating it, the greater your market potential. If your business plan doesn’t explain what need your business wants to fill and how you will fill that need, you won’t get funded.
2. No competition
One of the best ways to have your business plan discarded quickly is to state that you have no competition. While many startup owners erroneously think this will fascinate funders, it indeed sends the wrong signals—that you have chose a market that is so marginal that others have stayed clear of it or you didn’t do your research well enough.
Funders read the competition section of your business plan hoping to see how you will fare against the competition, not a flat claim that you have no competition.
3. Trying to be a “master of many”
Many early stage companies believe that more is better. In their business plans, they describe a very wide range of products or services they intend to start with or brag about how their offers can be applied to multiple, diverse markets.
However, what investors want to see is a more focused strategy, especially for startups with little or no previous experience in any market. They prefer to see a single product or service that solves a troublesome problem in a single, large market that will be sold through a single, proven distribution strategy.
4. No clear-cut marketing strategy
Another reason why many business plans get tossed aside is that they fail to explain the sales, marketing, and distribution strategy. Whereas, funders need answers to three questions when browsing through your business plans:
- Who will buy your product/service?
- Why will they buy it?
- How will you get reach them?
5. Too technical
While it’s recommended that you use technical words moderately in your business plan to demonstrate your understanding of the business and the industry, overdoing this is one of the commonest reasons business plans don’t get funded.
However, you must bear in mind that investors are interested in your technology only in terms of how it solves a big problems that people will pay for, how it is better than competing solutions, and how it can be implemented on a reasonable budget. And you don’t need a highly technical business plan to explain all these.
6. No risk analysis
Funders want to balance risks and rewards. So, one of the things they look out for in your business plan is an explanation of the risks inherent in your business, and how you plan to mitigate these risks. These include market risks, operational risks, technology risks, management risks, legal risks, and so on. A business plan that doesn’t contain this is a sure candidate for the funder’s trash bin.
7. Unrealistic financial projections
Even though your financial projections are not expected to be accurate, they should not be overblown. Only very few companies achieve $100 million or more in sales only five years after their launch. Most businesses don’t. So, if your own projections for the first five years exceed this amount, you will raise the funder’s bullshit detector—and get your business plan trashed!
8. Poor organization
Your business plan should follow the typical format, which places the executive summary first, followed by your company overview, and so on. This is what most funders have been used to over the years. Trying to be innovative in this regard could be counterproductive.
9. Too long
Most funders are busy and don’t have the time to read long business plans. In fact, they usually have a heap of business plans to go through, so they can’t spend all their time on a single plan—except one that really interests them. So, keep your business plan as short as possible, without leaving out any of the important details that the typical funder will be interested in.
10. Poor spelling and grammar
Not taking enough time to cut out mistakes in a business plan is another recipe for not getting funded. If you cannot avoid silly mistakes in your business plan, how can you avoid those in your business? That question runs through the minds of potential funders as they toss your business plan aside.