Most often, ideas that require 100% funding are born from people who do not have their own management experience. They are not accustomed to working with projects. They have no idea about most aspects of financial and economic activity. They are disgusted by the strict rules of reporting, control and planning on the part of the financier.
Many initiators significantly overestimate their experience and knowledge. And as a result, they spend time on stillborn projects. Even if they are lucky, and they still find a good “business angel”, their projects often do not live up to the break-even point.
In practice, developers of IT projects (software, monetarization of Internet resources, etc.), innovators-inventors and people of science are mostly guilty of this.
These “project geniuses” often have a kind of feeling of poor relatives, whom everyone around them is simply obliged to help. And most importantly, for free.
They are fully confident that their “idea” is promising. Understanding the future investor in all the details with conducting their own research, studying technologies, comprehensive market research, determining risks, developing a business plan, etc. – only their personal problems. As well as those that will follow the launch of the project.
“- I’m a genius, I came up with a mega promising project, and only for this you are already obliged to me in life.”
There is often a clear bias towards personal exclusivity. As many young people, and those who have spent their entire lives in the Department, white-haired inventors, often do not understand that the status is determined by the assessment of others. Those who have a longer queue for their resources will put forward their working conditions.
If investors do not line up for your idea in the queue, you should not blame the world around you, but draw appropriate conclusions and start working according to the established rules.
Many startups should overcome their cognitive dissonance and understand a simple thing: any unfounded idea is not worth anything. Not because the raw idea itself is bad or unviable, but because it has not yet been confirmed.
No matter how brilliant the idea is, it must be correctly calculated and justified on paper. And in order to do this, it is necessary not to hover in the clouds, but to turn on thinking and try to see it in the implementation stage. Figuratively speaking, by implementing your idea, you are laying the Foundation for a new business.
If the Foundation is calculated incorrectly, future loads on it can lead to the destruction of the entire building. And no matter what some friends imagine, it is the task of a startup, not an investor, to calculate this very Foundation.
The owner of the project is obliged to work it out qualitatively. And to go to the investor not with a bare idea, sucked out of a finger, but with an absolutely complete understanding of all the details and aspects of the operational business without exception.
Of course, highly specialized specialists do not always have organizational skills and experience. It’s simple here:
You know how to generate ideas-generate;
You know how to program-program;
You know how to manage a team-manage a team;
You know how to analyze the market-analyze;
You know how to keep management, accounting, tax records-keep records;
If you know how to do financial analysis and planning, do it.
But when you will be able to do all this simultaneously and efficiently-then look for funding.
A startup must first work out its idea to the point where it is possible to put together a preliminary business model. And it makes no difference whether it is creating a software product, creating a social network for fans of burning wood, building a plant for the production of burbulizers with a side figaster, or creating a new system Bank. For any business, the financial and organizational models are completely identical.
As for whether the owners of start-up projects have a business plan, in 95% of cases, more or less serious research is not carried out. There are no marketing or technological developments as such. The financial plan is presented in the form of a four-line table.
Very often we have to meet business plans, in which two or three months pass from the moment of making a decision on the allocation of a land plot to the launch of a large plant in operation.
Transport and storage costs are ignored because they are not even suspected. No one wants to think about the seasonality of sales and planned production stops at the planning stage. Raw materials are purchased as needed, and payments for goods sold come in an endless stream as the conveyor works.
Such an entrepreneur wants everything in his project to be like a fairy tale. Waved his sleeve – and there is a huge plant. He pulled a hair out of his beard and his goods flew through the air to stores that were happily making prepayments.
Most of the business plans that credit clerks, investors, and other financial people have to deal with resemble children’s drawings. Naspetti, easy and fantastic animals.
Many people categorically refuse to learn or adopt someone’s ready-made experience.
Sometimes you read a creation with a claim to be serious and the price of the issue is tens of millions of euros, and you think-well, how can this be? Did OK you, darling, in Google banned? Well, there is no money for consultants or for our own staff of specialists. So sit down and read what the hell people write on the Internet! Download examples of business plans and see how they are done. There are plenty of business planning textbooks in online libraries. Already only the laziest departments have not copied each other’s various guidelines for preparing feasibility studies. Everything is chewed-chewed. Take it and use it!
Yes, visually, there are a lot of incomprehensible signs and numbers that make your eyes ripple. But all this is difficult only at first glance. It is only difficult to collect all the data so that they are as correct as possible.
In General, in the business environment, there is often an opinion that at the stage of a bare idea, there is no need to be puzzled by some pieces of paper, research, business plans, or financial models. There will be, they say, an investor, and then we will think about how to live further.
I want to repeat myself again.
It is necessary to know the estimate of all stages before commissioning (costs of the preparatory period). We need to study the market, its capacity, competitors, and development potential. A preliminary technological project (on production topics) must be completed. It is necessary to take into account all factors (raw materials, resources) that affect the direct cost of final products. It is necessary to have sufficient experience to assess the forecast management costs (FOT, utilities, transport, administrative, etc.). Have an understanding of the legal component of the business.
But only then, all the information received can be combined into a single document called a business plan. It should be understood that the business plan itself is just a useless stack of papers, only if it is not preceded by thorough pre-project research.
At the same time, there is nothing worse than coming to a potential investor without any information about the project set out on paper. Any excuses that, following Kozma Prutkov, it is impossible to grasp the immensity, are groundless.
I often meet the opinion that they say that if jobs and Zuckerberg at the start of their business meticulously delved into the details, then nothing would have happened. Well, since the great Zuckerberg is so herringbone, then, they say, we do not have time to go into details. The curve will probably somehow take itself out. Start-up entrepreneurs do this all the time.
The problem is global, and its origins lie in several things.
First, the General habit that the banking credit system has a formal approach to the justification of financing. First of all, you need a liquid collateral and credit history, and the business plan is attached only for form.
Secondly, banks rarely have professional investment analysts who are able to see the marketing, management and technological aspects of the business through the forecast financial indicators. Accordingly, no one can tell a potential borrower about their mistakes.
Third, the General limitations and lack of education of many startups. Hence the fact that the Internet is not crowded with “ready-made business plans”, in which both the financial model and the summarizing indicators are based on some hypothetical, it is not known where taken, initial data.
It’s the twenty-first century, if anyone hasn’t noticed.
When I graduated from Kiev Polytechnic University in the early 90’s, the common phrase was that a specialist can improve their skills or get information by confidently using the scientific library and alphabetical indexes.
Now there is the Internet and search engines.
What prevents a startup from getting into the details of its project before looking for investments?
In order to at least convince the investor that you can effectively manage the project, you need to know all the nuances of its implementation without exception.
It is not necessary to know all the subtleties and details of resolving these nuances.
We need to know about their existence. It is necessary to be able to select specialized specialists, set them tasks and monitor their performance. But the Manager must also know the conceptual solution of such tasks.
If a startup does not want to get out of the creative state in principle ,the end of such a project can only be the sale or transfer of ideas and technologies to management. Well, everyone knows how intellectual property protection works in our country.
Even now, reading this book, surely someone will think that, here, there was another “business guru” with hidden advertising of their services. Nothing like that. Believe it-just got enough!
In General, I recommend that all these business plans, feasibility studies, and investment memoranda be perceived not as a stack of papers with a lot of letters, numbers, and beautiful diagrams, but as a business (coordination of actions) and a plan (to convert assumptions into clear agreements).
Have you ever taken a job? Did you make a beautiful resume? A business plan is the same as a resume. Determining your adequacy, literacy, and understanding of your own project.
Everyone is well aware that in fact, any project, even an extremely well-calculated one, will still not go exactly as originally planned.
We live too much in a chaotic time to predict anything for the long term. For sure, the capital expenditure estimates will be underestimated, the schedules will not be maintained, and all marketing justifications will be untenable.
Let’s remember 2007 and 2008. Buying up land plots and capital construction was not done only by the very lazy. The rampant growth of asset capitalization obscured everyone’s eyes. How did it all end? Huge zilch, bankruptcies, banking crisis, loss of capital.
No sooner had they somehow survived the financial crisis, than the Donetsk bandit clan came to power in Ukraine. A system program of legalized raider attacks on both large and medium-sized businesses was launched. The country has become one big zone with criminal orders. In each district, in addition to the head of administration, a separate “supervisor”was appointed. Not only the assets of individual enterprises were seized, but entire sectors of the economy were systematically taken over by the Donetsk authorities. What kind of investment climate could we be talking about?
In 2014, at the cost of a lot of blood, they demolished the gang, but received Russian aggression, war and rising inflation.
What awaits Russia in the medium term, no analyst can say either. I write these words in February 2015. And who knows what will happen next?
At the same time, despite all possible force majeure with cataclysms, money for that and money that should work.
In conditions of uncertainty, such a factor as the qualification of the project management comes to the fore. This is the notorious human factor that allows you to diversify risks, react quickly to market threats and turn the ship in the right direction. How will the investor understand that you do not need professionalism? You don’t get a job with him. Then they will check all the background, and now your business plan will not be in the trash just because it is written professionally.
In order not to run far, take me for example. Enough diagonal to run through the eyes of any business plan to understand the extent to which the entrepreneur is subject to all difficulties of the capital cost, how much careful attention he paid staffing, sales and procurement, logistics, policy sales and procurement of raw materials, production costs, future marketing costs, etc. and hence, the primary conclusion about whether to talk further.
Drawing up the business plan itself is 0.01% of the total amount of work to study all aspects of your future business without exception. Well, if we are not talking about finding an investor right away, then in order not to get confused, it would be more correct to call this stage not a business plan, but a business strategy.
The owner at the start must understand all the details of the project without exception. And in the form of advice. For example, I have this rule. If it seems that everything is already known about the project being developed, then something is probably missing. And this rule most often works.
Personally, I know many dozens, if not hundreds of entrepreneurs who lost borrowed money without even starting production. For one simple reason, they were genuinely confident that there were no such stages. And to build a factory, you need to buy a piece of collective farm field, the next day drive the equipment there, draw a parallelepiped on a piece of paper with a pencil, say that this is a drawing of the object, give it all to the team of shabashnikov and decide that everything is ready.
Results, from those that immediately came to mind:
abandoned almost completed dairy plant near Kiev (self-seizure of land, which did not take into account that the government sometimes changes);
the Foundation, earthworks and utilities of the brick factory, under which shards from the Paleolithic period were found. In Ukraine, wherever you dig, you’ll find something. But the Department of archaeology has maps. Do not put a seal on the approval-get it!;
aerated concrete plant, which forgot about the transport ring (without which, at those volumes, it is simply not possible to provide logistics). And as they started to coordinate with the railway, it turned out that it was necessary to break and expand the bridge on the strategic highway;
a logistics center with a 172 KV high-voltage line running across the site;
the project of a cottage town, which foolishly decided that the nearby 10 KV line will give the necessary 3.5 MW*h . Cottage towns are, in General, a song. I don’t know of any completely successful projects;
I myself, who almost started to take away a section that was not specified in the administration of the easement (some kind of government communication cable).
And so on. And all this is lost and buried in the ground money. Very big money. Were.
And here are more examples from life:
A familiar investor was once offered to buy a Soviet unfinished sports complex for demolition and subsequent construction of a shopping and entertainment complex.
Exactly in the Babi Yar Park in Kiev. Right there. On the bones. I knew what the mayor’s office would miss, but at the same time I knew what would follow. Yes, and I was categorically against it (I was asked to evaluate the entire project as a whole). What would a specialist do when evaluating a payback written on a piece of paper? I would have missed it. And flew in 10 million euros.
A program for the development of the Izmail region was being developed. The main focus, of course, is on the development of shipping and the organization of cargo flows with the construction of the necessary infrastructure. The mayor’s office offered a plot of land for a warehouse center near the port.
Smooth, beautiful, all communications at hand, the water is low on hydrology. Ring road. Well, just beauty! Take and build.
If only the local residents had not told us that even walking on those ten hectares was dangerous (in 41, they bombed an ammunition depot and a metal detector lights up on every square meter). A mixture of earth, rusty iron, caps, and artillery macaroni. Just wait another hundred years until the brass caps, along with rattling mercury and all sorts of antimony, will not rot themselves.
Examples can be continued indefinitely.
Uncle, give me a million!
Frequent communication with applicants for funding for their investment projects, familiarization with their business plans, memoranda and proposals for investors, sometimes gives rich food for thought in the “hand-face”pose.
In most cases, the level of validity, elaboration and adequacy of the project is directly dependent on what and how much risk the initiator of the project risks.
If the project involves the expansion of an existing business, standard Bank lending with collateral or participation in the project with its own capital-everything is usually well worked out.
People with assets, mortgages, and most importantly, experience, often know in detail what they want, and what they can really count on. And it’s a completely different story with start-up projects, when an entrepreneur has nothing but a bare idea behind his heart.
It is often striking that many startups, realizing that there is nothing to remove from them other than shackles, do not value the investor’s money at all.
Guided by the opinion that there is not a lot of other people’s money, like the notorious Panikovsky with his “million give, give a million”, investors are bombarded with offers that feature rounded numbers.
Million. 10 million. $ 200,000,000… Why not 199,989,765. 5? Or not 200 015 932,15?
Few startups pay serious attention to the careful calculation of the budget.
Although for the investor, in fact, a detailed estimate is one of the indicators of the adequacy of the project (well, and the adequacy of the applicant, respectively).
What is the project cost? This is without exception the costs up to the moment when the future income will not cover the monthly expenses. That is, to the break-even point.
Thus, these are all the costs of the preparatory period, capital investments, possible expenses that accompany these capital investments (including bribes) and working capital sufficient to cover all operating costs until the moment when external financing is no longer necessary.
Having all the necessary data on hand, creating a simple monthly table in Excel, in which a separate line, substituting a subtraction formula, displays the deficit of funds (that is, the need for external financing) is easier than ever.
By the way, this table is called the Cash-Flow table, and is the basis of any financial model. There is no point in rounding the numbers. As well as withdraw the amount taken from the ceiling for working expenses.
Also, it makes no sense to try to hide some additional amount in capital costs. For the reason that in the case of a startup, the business plan is of a conceptual nature. In the process of its practical implementation, every cent will be justified, controlled by the investor and documented.
Do not underestimate the actual amount of the project. At least from subjective premises. For example, if today is concerned the investor is not necessary one and a half million, but there are 700 000, there is absolutely no guarantee that tomorrow or the day after you put the fact that next payment will not be due any problems.
There is an infinite number of failed investment projects due only to the fact that the investor was in no way responsible for suspending previously agreed payments.
It is necessary to treat such situations as a natural disaster. Legal regulation of the responsibility of a private investor for disrupting the schedule for start-up projects in our countries does not work. At least, the author of these lines does not know anything about such precedents.
Investment and project company BFM Group Ukraine