by John Adler

Simply stated, the Entrepreneur’s Dilemma is how to strike a balance between an exciting plan and one that is practicable.  This idea applies to the plan in its entirety as well as the constituent parts.  Failure to negotiate the razors-edge of the dilemma leads to dull or unrealistic expectations between management and the potential investors.  Put simply, the solution is a statement of plan and probabilites.

“We have a conservative plan.”

Entrepreneurs use this phrase to reassure potential investors.  In most cases, it’s completely intellectually honest, but often says that the forthcoming plan is a snapshot with no analysis or discussion of what might, could or will happen.

The Three Key Elements

Marketing/sales plans can be so conservative that they don’t capture any market share or interest.  For example, “We’re addressing a billion dollar market,” yet the fourth year of the financial plan is a $7M business.   Worse is the implication that management didn’t bother to do any real work on the addressable market.  “If we get just 1% of our $1B market…”  1% would produce a company ($10M revenue) that will little chance at an IPO.  Overly aggressive consumer plays typically ignore the time and expense of building a brand or a channel.   Enterprise customers can take significant time and effort to close from first contact to first closing of a sale.  Finally, “We have no competition” means management simply does not understand the market.

Development plans have the same dynamic.  If the scope, schedule and resources presented in the plan are too aggressive, management will lose credibility.  Err on the too conservative side and the funding requirements or time-to-market will balloon, driving up capital requirements and resulting in an unfundable proposal.  An unclear process or set of development milestones is a sure sign of execution weakness.

The financial plan is often the result of the market/sales, and development plans.  It shows in plain arithmetic the proposed investment what will happen during the investment horizon.  It’s a scorecard of sorts that adds up all the thinking by management.  The underlying assumptions to the business model reveal themselves through the financial plan.  What investors want to know at this point is “if we invest x, the company y will look like z at this point in time when we can raise more money, sell or go public.”

So what to do?

The right answer is to show the plan that you believe and will be held accountable for.  From there you can show upside and downside possibilities that reflect how you will manage the business in reaction to the market.

Marketing plans reflect the size of the market today, it’s actual growth rate, and what might happen in the future.  In all cases, consider the ultimate market share or growth of the market in the context of the business.  If you think your market doesn’t exist today, but grow by taking wallet from other markets, illustrate that.  A 5-year projection from an analyst is not conclusive.  Review direct or indirect competitors where they are today, and tomorrow. What seems to work well is a segment of an existing market that can be clearly attacked, and then some hypothesis about how to make a big market the company’s strategy is correct and well-timed.

Development plans include some margin of error for changes in scope, difficulties in integration, slower hiring ramp-up and technology risk.  The key is to balance prudent risk and piling up every possible scenario which questions management’s ability to anticipate problems.  For example, software companies have a integration, test, verification, release development flow.  It would be unrealistic to assume a cleanup release would not be necessary.  Semiconductor startups must factor in a chip spin(s) into their development plan and expenses.

The financial plan reflects what you think is going to happen.  A sensitivity analysis considering the market, development or revenue happening at a slower rate should be in-hand.  Anticipate that if revenues happen at half the rate you are planning for, what would you do about it?  In creating the envelopes of potential outcomes, keep a close eye on the total capital requirements needed to get to cash-flow breakeven. A good test of a financial plan is comparables (if available) to contrast gross margin, timing and revenue growth.

Think. Change.

The whole point of the plan is to communicate what management believes will happen, and what management will do if things change.   In this way, investors understand the investment risk and can participate in effecting change to the plan and the business unfolds.