You can’t bluff a start-up. It’s a no bluff zone. That’s the reality. You can’t achieve anything without substance.

This is actually a good thing because you don’t have to worry about anything else. You can be the worst presenter ever. You can look like a mess. You can smell bad. If you are competent at what you do and there is substance behind your start-up then people will be prepared to invest.

Conversely, you can be Mr/Ms slick and it will get you nowhere. Remember, the people you will be dealing with will  see through the crap. This applies to both investors and early adopters.

Substance over sales pitch all the way.

We have all seen it. The behemoth 80+ page business plan.  It’s a sight to behold. Very impressive indeed.  A lot of work went into it. In fact, it took four and a half weeks to write and proof read. It contains every conceivable detail and the writers believe that it leaves no stone unturned.

Okay, it sounds good doesn’t it? Well, in fact when you think about it, it’s not. Here are seven reasons why.

1. If you are looking for investment,  the people who you want to invest in your business don’t have the time to read it.
2. If you can’t condense what your business is about into a five minute read, either you are an extreme scatter-brain or your business has way too many moving parts for a start-up.
3. If you are going to use the plan in the day to day management of your business it’s not practical to have a plan that resembles a telephone directory.
4. It’s good to take care of the environment. Mammoth business plans = less rain forest = not good at all.
5. The more technical jargon there is, the more you are diluting the two core elements of the plan. How is this business going to make money? and how much can it make?
6. Law of averages are against you when you have an eighty plus page plan. Less people will read it. So if you are looking for investment, there is a smaller pool of people that you can draw from.
7. You have wasted time writing it when you should have been working on getting traction and making sales for your business. Sales matter much more than a business plan.

What do you think? Feel free to add more reasons in the comments. If you disagree please feel free to comment as well.

Here is a slidecast on how to build financial projections. It’s a good starting point that lays out some useful tips that can be applied to most business plans. It helps entrepreneurs from a non financial background to get a firm understanding of their financial structure. The purpose is to help entrepreneurs construct a basic financial model around their initial idea that they can use as an initial reference point during the start-up process.

Warren Buffett loves reading annual reports. He looks at a company’s business model in detail. He applies a simple and straight forward approach. In many ways, Buffett acts like a super business angel. His methods have been proven right in the long term. Entrepreneurs can learn a lot from Buffett’s investment strategy. The difference is, that instead of reading reports and doing research on the company, entrepreneurs are at the forge and are writing the annual reports by their actions.

There are many distractions that all too many times lead entrepreneurs down the path of failure. It’s important to have one eye on the money engine at all times. The trap of “high-tech escapism” is very easy to fall into.

Having a clear understanding of what fundamentally makes a good company is invaluable for entrepreneurs. It’s the framework on which you hang your core business strategy. It’s the compass point that will get you to your destination. Once you have this established in relation to your business everything must focus towards it.

Ultimately, three common sense questions sum this up.

1) How much will the business make?

2) How much will it cost to run the business?

3) Will your income stream and cost structure be sustainable into the future?

As an entrepreneur your goals and ambitions set the criteria for your business. How much do you want to make? How hard do you want to work?

Now what you are looking for is a convergence of what makes sense for you to start a business and what a potential investor is looking for.If your criteria meets their criteria then you have a real chance of making a deal. However, if you don’t focus on the money engine from day one it’s very unlikely that your start-up will be positioned for investment to scale.

A vast majority of investors are looking for historical data that indicates future potential. You must get this traction. The higher up the traction ladder you are the better chance you have of getting investment.

There is plenty of information on Warren Buffett’s investment strategy. Try and build a business that Warren would invest in and I’m sure you won’t have any problem finding others who will believe in you.

The Entrepreneur has just finished their presentation. They are feeling good. It came off without a flaw. They think the hard part is over – or is it?

Investor: Ok, nice presentation you didn’t bore me as much as I was expecting when I saw you walking in the door. You seem to have a natural flair for presenting things. That’s well and good, but now let’s get down to business. I have a few questions.

Entrepreneur: Fire away.

Investor: How do I know that your product is as awesome as you suggest? Are there users that I can call up to get their opinion?

Entrepreneur: Well we have an Alpha version. There’s a few bugs but if you use it and can see past the bugs I’m sure you will see how this product can be a success.

Investor: I’m not your target market. I would like to hear what your target market has to say about your product. If you had some reviews or testimonials I would have a much better idea about your product.

Entrepreneur: I understand. Unfortunately we are not at that stage just yet.

Investor: Moving on, are you sure that you looked at your competition hard enough? It seems hard to believe that only two other businesses are currently involved in what you believe is a lucrative niche. It makes me think that either you haven’t done enough research or your niche isn’t as lucrative as you believe.

Entrepreneur: We searched Google for the main keywords of the niche. Those two companies are all that showed up.

Investor: Hmmmm. I have another meeting in 25 minutes so I am going to move quickly on. Let’s take a look at your financial projections, they seem a bit far fetched to me. How did you come up with your sales figures?

Entrepreneur: We looked at the overall market and estimated that it was worth a total of $200 million per year. We estimate that we can get 1% of this market in year 2. We have used this as a base for out sales assumptions.

Investor: Do you know how many businesses I have seen that project a 1% market share by year two or three? Let’s move on.

Entrepreneur: Okay.

Investor: Looking at your expenses. It seems to me that you have completely missed the mark on how much you need to spend on marketing. Those sales figures are unobtainable based on your marketing spend. Look, I’ve been in this game a long time and you are trying to get water from a stone with these projections.

Entrepreneur: Thanks for the advice. We thought that our marketing expenses were okay. Our Accountant produced the figures and that’s what he believed would be sufficient to generate the sales in the plan.
Investor: I’ll tell you straight up. I don’t like your founding team. You guy’s don’t have the level of experience that can take your idea and turn it into a business that I would be prepared to invest in. Right now, I’m not going to invest. You need to work on your business more.

Entrepreneur: Wow, err, well thanks for your time

This scenario plays out countless times all over the world. First time entrepreneurs do not realize what they need to do in order to construct a viable investment proposal to Business Angels and Venture Capitalists. If entrepreneurs understood what was required to get investment from the very start, they would be able to structure their business model in such a way that would make it easier for them to get funding to scale.

It’s not complicated. In fact, it’s much simpler than many first time entrepreneurs believe. Get traction, become cash flow positive and make profits. Experienced investors will be able to judge the benefits of their investment to your business and get a more realistic appraisal of the potential returns.

Sadly, many entrepreneurs don’t put themselves in an investor’s shoes. However, if they investigate what makes a good investment for a Business Angel or Venture Capitalist they will be able to fit their business model into this criteria. It’s like looking down the sight instead of just firing wildly from the hip.

In order to avoid the above scenario, entrepreneurs need to focus on creating a sustainable business model that will generate returns for investors. There is no need for window dressing. Remember, investors don’t invest in an idea they invest in a business. So, build a business.

Check out this free Ebook called “Target Series A: From Idea to Investment” that shows first time entrepreneurs how to position their business for investment.

Lets face it, 2009 was a bad year for start-ups. This has been reflected in the capitulation of the number of IPOs in 2009. When exits are down it makes it harder for new businesses to attract VC investment. Look, when it comes to Venture Capital and Business Angel investment it’s all about the exit. That’s life, so entrepreneurs like us must deal with it.

NVCA president Mark Heesen is concerned about the lack of early stage investments. However, it is predicted that there will be a slight increase in overall VC investment. The NVCA predicts between $21 billion and $25 billion will be invested in 2010. Clean tech and e-commerce are predicted to receive the most money. Forty eight percent of the 325 venture capitalists surveyed by the NVCA believe that more foreign limited partners will invest in US firms. However, the semi-conductor and wireless sectors are flagged as possibly seeing the biggest decline in investment.

Although an increase on 2009. These figures show that the bootstrapping skill is still an extremely important ability for entrepreneurs. However, there is always opportunity. Get your fundamentals right and you will get the funding you need. When it comes to Venture Capital and start-ups the US leads the world by a long way. Those of us outside the US should pay attention because a recovery in US start-up funding will spread across the globe.

Too many entrepreneurs ignore common sense and abandon their reason when they are chasing angel investment. The right angel investor can skyrocket a start-up. Conversely, the wrong angel investor will lead to problems down the line and may jeopardize the start-up’s chances of success.

I have recently read this fantastic article on business angels by Dr. Earl R. Smith II. It’s essential reading for first time entrepreneurs. You must be smart when dealing with business angels. Define the type of angel that’s best for you before you start with meetings.

I have just published a new ebook that focuses on the first round of funding for start-ups. It’s called “Target Series A: From Idea To Investment”. Series A investment is a term for the first investment a start-up gets. It contains some very useful pointers on how to get to that that elusive first funding round. If you or one of your friends are starting or thinking about starting a business then you will find this ebook extremely useful.

It shatters some of the myths that many first time entrepreneurs believe and shows them the true route to obtaining Series A investment.

Target Series A: From Idea To Investment

I remember being in business school. One of the modules was business planning whereby we had to write a business plan for a fictitious company. Of course, we all produced a cliched 70 page behemoth of a document. We made sure that it ticked all the boxes so we could get the most marks. When I finished and entered the real world, I firmly believed that I should write a similar plan for my start up. How wrong I was.

This approach to teaching business planning is common place. There’s probably a teacher preaching this right now in a masters degree online course. Most people who leave a business school have a distorted view of the business planning reality.

Some people recommend that people write a detailed business plan just for their own management use. I agree with this. However, I believe that they should only use one A4 page and a pen. They should write their internal busness plan in the form of a scorecard and they should regularly check their progress.

With regard to a business plan for investors, since then, I have seen the light, and now advocate a more practical approach to writing one. Now, I view a business plan as a story. It’s a story about your business so far, and a best guess on what is going to happen in the future, based on your current conversion rates etc. It should be presented in the quickest to read format. Potential investors should understand your business model within five minutes of picking up the plan. In general, I agree with the new consensus that you should write your business plan on a 10-15 slide deck with notes.

The more you can back up your assumptions with hard evidence of actual conversion rates, cost per customer acquisition, positive product reviews by industry experts and glowing customer testimonials the better your business plan will be. In other words, if your plan is packed with real world evidence, you have a great chance of getting investment.

However, the same amount of background work goes into a plan in this format. The difference is that you don’t have to spend two weeks writing, formatting and proofing a massive document that will never be read in it’s entirety. See, as a start-up entrepreneur who requires investment to scale, your job is to make investing in your business a no brainer.

Think about it, the easier you make it for investors to understand your business the better the chance that they will invest. It has been proven that business plans are not as important as they are made out to be. Research from University of Maryland’s business school shows this. Your business plan is not an investment tool, it’s a communication tool and just one component of many a potential investors will consider.

In conclusion, if you tell an interesting story about your business that points to future success you are onto a winner. On the other hand, If you produce a 70+ page document, potential investors will have another cure for insomnia and your message will be lost. Remember, the work isn’t in the writing, it’s in the building of a business model that gets results.

Ok, I know what you are telling yourself. “This guy has sold out.” “He’s turned to the dark side.” “The VCs have secretly taken over the blog!!!”

I understand your initial reaction but take some deep breaths and relax. I have lost count of the number of times fellow entrepreneurs have moaned, bitched and complained about VCs. I never was so hard on them. My college degree was in Accounting and Finance so somewhere in my subconscious I held a little bit of sympathy for the VC community. I understand that they seem arrogant, self righteous, and egotistical to someone from a technical engineering/scientific background.  Sorry, can I rephrase that? – They seem arrogant to most human beings. However, it’s not their fault. It’s the position that they are in.

Look, their responsibility is to subscribers of the fund. The people who put money into the VC fund. They must maximize the return for these people. As a result, it’s only ethical that they are so hard on entrepreneurs. On top of this, let’s face it, entrepreneurs can be annoying. We can seem arrogant, self righteous, and egotistical to VCs.  Venture Capitalists are also scared because the World’s oxegen supply is being diminished right before their eyes by the thousands of 80+ page business plans that come in the mail ever year.

You see, they are not in the business of being nice. That doesn’t make them bad people. In fact, if you show a VC a little bit of love who knows they might even invest!