To Investors, Startups Without Business Plans Are Expensive Hobbies

If you sold your last startup for $80 million, you probably already know how to build a business, and even conservative investors won’t worry about the quality of your next business plan. But for the rest of us, don’t believe the Silicon Valley myth that all you have to do is sketch your million-dollar idea on the back of a napkin and investors will line up to give you money.

Based on my experience as an investor and mentor to aspiring entrepreneurs in Miami, one of the quickest ways to kill your credibility and your startup is to offer a poorly written business plan, or none at all. There really is no excuse these days, with samples on the Internet, business-plan books in every bookstore and dozens of apps to automate the process.

A great business plan doesn’t have to be a book in length, with extensive financial statements. Most good ones I see are in the range of 25 pages, which is more than enough to describe concisely all the business what, when, where and how. The plan must simply answer every relevant business question that you could imagine from your team, partners and investors.

In fact, the process of organizing and documenting these elements is the best way to make sure you understand the answers yourself.

Would you be comfortable buying a house from a builder, or building one yourself, with no plan on timeframes, costs and features? I hope not. Most investors tend to think of startups without a plan as expensive hobbies.

There is no magic formula for a formal business plan format or sequence, but I would recommend the following 10 sections, in this sequence, with relevant content:

Executive summary
Problem and solution
Company description
Market opportunity
Business model
Competition analysis
Marketing and sales strategy
Management team
Financial projections
Exit strategy

A business plan that skips one or more of these topics is not complete, so don’t jeopardize your one chance to make a great first impression by offering a partial plan. It only takes a little extra work to make it a professional document, with a cover page, table of contents, headings and page numbers. Don’t try to impress constituents with technical terms, jargon and acronyms.

If you don’t have the time to write things down, or your writing skills leave something to be desired, don’t be afraid to get some help. No executive I know writes all his own contracts, but every smart one owns every one that is written for him, and understands every element. An entrepreneur who can’t manage a plan probably won’t be able to manage the new business.

Of course, if you don’t yet understand all the elements, it’s time to learn. My advice here is to check your ego at the door, and find a mentor or a partner who has business experience and domain knowledge to help you plan a viable business. Your idea may be technically right, but without a business plan, it could be dead right, which is not the result anyone is looking for.

There are no guarantees, but various studies have found that entrepreneurs who create a good plan generally double their chances of securing funding and building a successful business. In any context, and especially in the high-risk world of startups where more than 50 percent fail, you need every advantage that you can get.

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Something about Passive Income

Earnings an individual derives from a rental property, limited partnership or other enterprise in which he or she is not actively involved. As with non-passive income, passive income is usually taxable; however it is often treated differently by the Internal Revenue Service (IRS).

INVESTOPEDIA EXPLAINS ‘PASSIVE INCOME’
There are three main categories of income: active income, passive income and portfolio income. Passive income does not include earnings from wages or active business participation, nor does it include income from dividends, interest or capital gains. For tax purposes, it is important to note that losses in passive income generally cannot offset active or portfolio income.

It is important to note that, by some, portfolio income is considered passive income; in which case dividends and interest would be considered passive. The important definition is the one the IRS uses, and to be sure your taxes are filed correctly, it would be prudent to check with the IRS or a tax professional on this matter if you have a blend of active, passive, and portfolio income.

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