Winning Business Plan Competitions – Part I
12/02/2009 Leave a comment
Over the years, I have had the privilege of judging many business plan and idea competitions, and I was recently reflecting on the most common concerns that, if left unaddressed, are red flags for me.
Differentiation by price: Offering something similar to what already exists and expecting to compete on price is rarely a winning strategy, unless you address why your venture would have a lasting and defensible price advantage over your competition. Do you have access to unique intellectual property? Are you able to drive down the cost of manufacturing using a new process? How can you ensure that your competitors won’t replicate your cost-advantage? And, if your cost advantage comes from outsourcing, will it present problems with delivery times, customs, security of intellectual property, etc.?
Budget size and allocation: I know that taking an idea to market often requires extensive resources. However, there are some line items that are particular red flags:
- Large inventory costs – If the product is in its first run, spending a few million dollars on inventory may be premature.
- Expecting the costs to run into a few million dollars to get your prototype ready – Unless you are seeking Phase I FDA approval (at an approximate cost of $18.6M), you should examine whether you really need to raise more than $1M to get your prototype ready.
- High costs that could be outsourced – Rather than building something yourself, whether it’s machinery or channels to market, could you outsource any elements to cut costs and expedite your time to market?
Undefined target market: It’s easy to find large numbers to describe a general market. But reciting the numbers and having a strategy for accessing the market are two very different animals. In addition, you may need to narrow your target market according to specific characteristics so that it’s easier to reach with a clear value proposition that addresses a particular problem. I’m always weary when I read of multi-billion dollar markets and claims that a venture will secure a 2% stake for profits of a few hundred million dollars within five years. Accessing the market takes a lot of work. A more plausible case would be to describe the market characteristics that make your target interested in your product, understand how much your buyers would budget for what you offer (i.e. what value do they place on your product), and describe how you intend to reach specific target customers.
No existing competition: Is there a reason there is no existing competition? Perhaps the market is difficult to reach. Or maybe servicing / maintenance costs are too high. Is there a strong incumbent in the industry that can take over the market rapidly, thus preventing other smaller ventures from entering? Are there regulatory barriers to entry? Are there close substitutes for what you are providing? Remember that substitute products serve a similar purpose but may not actually be the same; for example, for the purposes of writing, a pen may be a substitute for a computer. And is there REALLY no competition? Sometimes, a simple Google search can reveal similar products in different markets that could be rapidly re-purposed to compete with your product, provided by ventures that already enjoy the benefits of having access to means of production, inventories, systems, etc.
Unrealistic time lines: Especially if you are a full-time student, building a prototype and bringing it to market may take longer than expected. Setting ambitious deadlines is great, but be aware that if your team is small and includes people who have additional commitments, you need to consider constraints on timing and what you can accomplish in a few months.
Addressing the above concerns would not necessarily convince me that an idea would make a great business, but it would make a stronger case as I read the plan. In many cases, the entrepreneurs have already thought about the issues – and may even have reasonable responses – but it’s impossible to tell this from reading the executive summary or business plan. So if you can justify any of the above red flags, please do so!