Small Business

A Winning Plan Is Just the Start


Emerging tops at a business-plan contest may help would-be entrepreneurs' chances in seeking financing, but plenty of challenges remain

Some of the most selective schools in the world -- from Oxford to Wharton and Yale -- are awaiting your application for admission. But they don't want you as a student, they want you to participate in their 2006 business-plan contests.

Each year, it seems, more colleges and universities sponsor business-plan contests. Just as students battle for admission to top-rung colleges and universities to launch successful careers, so would-be entrepreneurs battle for attention in business-plan contests, hoping to attract the support they need to launch successful ventures. Unfortunately, the similarities between college admissions and business-plan contests end there.

While MBA students and entrepreneurs have similar expectations, there's far greater uncertainty for the entrepreneur. For MBA students, the process of launching and building a career is pretty straightforward: Complete your degree requirements, interview for jobs, select one, and likely repeat the process several times during your lifetime.

In much the same way, would-be entrepreneurs often imagine they'll write a business plan, present it to professional investors in a business-plan contest, and wait for one of them to finance it. But it's not that straightforward. While the market for junior chemists, banking administrators, librarians, and other professionals is easily assessed, the market for startup Wi-Fi resellers, online retailers, and food franchises is not.

WHAT TO EXPECT.

Business-plan contest winners may think their problems are solved when they attract attention from would-be investors, but in fact they're only beginning. The real challenge is in obtaining the money -- and it's not just a challenge for winners of business-plan contests, it's a problem for every entrepreneur who seeks financing. Just because you've attracted the interest of a professional investor doesn't mean you're going to get the money. Invariably you will travel a long and winding road before any money comes through -- and if it does, it's rarely on the schedule or the terms you expect. Among the issues you can expect to crop up are:

1. The process moves in slow motion. You, the entrepreneur, are ready to rock. But your limited funds -- even if you win $10,000 or $20,000 in a business-plan contest -- won't carry you nearly as far, or as fast, as you have projected in your spreadsheets. Yet the prospective investor, who seemed so interested in your first couple of meetings, slows down the pace. There's talk about consulting the investment firm's board and doing due diligence. Days turn into weeks, and, in many cases, weeks turn into months.

2. The financing offer appears totally slanted toward the investors. Receiving a term sheet -- a proposed offer to invest -- is one of the most exciting events any entrepreneur can experience, until the terms are studied. More often than not, the investor is either offering much less money, demanding a much higher percentage of the company -- or both -- than the would-be entrepreneur expected.

3. The investor won't negotiate. The term sheet likely isn't a "first offer" that can be negotiated. It's probably the only offer -- and while no one ever says it this way, it really is a "take-it-or leave-it" situation. Sure, you may be able to negotiate some of the fine print, but the basic pricing of the deal is typically set in fast-drying concrete.

CULTIVATE OPTIONS.

The glitz and glamour of a business-plan contest does little to change the power dynamics underlying the subsequent entrepreneur-investor dance. These are the challenges entrepreneurs everywhere encounter in their dealings with professional investors.

The reasons behind the imbalance are simple: Professional investors, like investors everywhere from time immemorial, want to find the best opportunities at the lowest possible price. They don't want to rush into things -- in fact, they want to delay as long as possible to convince themselves that the opportunity is as good as they think it is.

There's only one real solution to these problems, and that is to have options. Competition can do wonders to speed things up, and it can even make investors more flexible in their financing offers. But entrepreneurs need to be able to do what investors do -- be standoffish, demand better terms, and be prepared to walk away from potential deals. So if you're competing for financing, don't fall too quickly for any one investor group. Entrepreneurs who have options will speed the process along and get the best financing terms.

READER COMMENTS

src="http://app.businessweek.com/UserComments/get_reviews?productId=1600" frameborder="0" marginheight="0" marginwidth="10">

David E. Gumpert covers business/health issues and also writes the biweekly What Entrepreneurs Need to Know column.

The Good Business Issue
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus