I constantly review the early version of business plans drawn up by potential Canadian entrepreneurs.
While the innovative ideas and opportunities are always fascinating, I am frustrated by most plans’ lack of ambition. As a result, I am left feeling why get excited, or even why bother. I am sure this is a reaction shared by many, and often results in limiting the opportunity’s potential.
As opportunities need to create a certain critical mass before they can generate enough revenue to pay the entrepreneur a salary – this limits the potential for creating the venture in the first place.
For example, entrepreneurs often identify a market opportunity in the local geographic region or in a specific application. Yet with a little imagination and a willingness to leverage external resources, they could expand the business to be much more substantial.
An example of this was a recent plan to develop a technology for the bar industry. In the plan, the entrepreneur proposed selling 50 devices a year in the Canadian market, each with a selling price of $5,000. The market opportunity and proposed technology seemed novel, but there was no reason why the entrepreneur should limit the size of the market to 50, I think this under stated the market-size by at least a factor about 4. Clearly, an opportunity to sell 200 units starts to look interesting. But what makes this opportunity into a business is using the Canadian market as a pilot for the US (potential 2,000 units a year). This much larger number will stimulate interest among suppliers, employees and even investors.
I was always skeptical when potential investors asked entrepreneurs the question –what would you do if you had more money than you are currently asking for? I thought that at best they were just testing the entrepreneur’s ability to think outside the box. At worst, I thought they were simply trying to get the entrepreneur to accept more money and in turn give up more equity in the venture. In reality, they were asking the question, does this investment create a big enough opportunity for potential acquirers to be worth taking over? This reinforces the importance of developing a strong exit strategy when making a pitch to investors.
While potential investors will probably continue to ask this question, I think it’s worthwhile that entrepreneurs find ways to challenge themselves to ask the same questions. One way to do this is to work with mentors and outside advisers whose experience help raise strategic questions. I noticed that one of the reasons US firms tend to be more aggressive is because of the influence of peer pressure or experienced investors on the ambitions of the next generation of entrepreneurs. In the US, it is always acceptable to develop an ambitious business plan. In Canada, less so.
In addition it is important to ask yourself, is it worth it? Creating a business plan for an opportunity that is only going to create $300 – $400,000 of revenue is not a worthwhile exercise. At this level of revenue, most entrepreneurs cannot afford to even draw a reasonable salary themselves, never mind provide an interesting return to a potential investor.
Don’t get me wrong, this does not mean that a business at this size is not worthwhile, it is simply means that developing a business plan is not worthwhile as there is limited ability to use the plan to bring in additional stakeholders or investors. In many cases, the effort required by the entrepreneur to create a $500,000 business may be that required to create a $5,000,000 business (although, there may be additional stakeholders).
I hope these short thoughts challenge you to think about scaling up and set lofty goals!
Andy is currently working at the Canadian Innovation Centre and pursuing a Ph.D. in the area of new venture creation at the University of Waterloo. In his spare time, he enjoys teaching technology entrepreneurship at UTM and the University of Waterloo.