Entrepreneurship, Second Edition

8.1. Common Mistakes

In preparing this chapter, we sent an e-mail to several acquaintances who are professional equity investors (either angels or venture capitalists). We asked them, "What are the most common mistakes you see when you review an entrepreneur's business proposal?" We wanted to know what "red flags" made them hesitant to believe that the business could survive and succeed. Here are the six mistakes they consistently cited.

Figure 8.1. Hockey stick sales growth

1. Not understanding the revenue drivers. Entrepreneurs need to know what the leverage points are that drive revenues. They need to understand how many customers are likely to see the product, how many of those who see it will buy it, and how much, on average, they will buy each time. Although every entrepreneur claims his estimates are "conservative," 99% of the time entrepreneurs are overly optimistic in their projections. So avoid the "conservative" adjective; it strikes most sophisticated investors as naïve.

2. Underestimating costs. If you were to graph the revenue and cost projections of entrepreneurs over time, you would often see revenues growing in a "hockey stick" fashion, while costs slowly progress upward (see Figure 8.1). We often see revenue projections of $15 million after five years on costs of only $5 million. That is unbelievable. When we dig into those numbers, we often see that the firm has only ...