3 Lessons Learned in Business Plan Contests

Every spring I judge intercollegiate MBA-level business plan contests at the University of Oregon, Rice, and the University of Texas, and participate in the Willamette Angel Conference as an investor. That means I read hundreds of business plans and listen to several dozen business pitches. And I form opinions, give feedback, and make choices.

;ve posted about this in the business plan marathon category on Planning Startups Stories, my main blog. And here on there on some other blogs too. If you looked there, yo-d find some of those posts are noting the astounding growth in maturity and importance of those business plan contests; and others are complaining about some common errors in the business planning.

For this post today on Industry Word, -d like to share some of the highlights, good and bad, of my journey through business plans this Spring:

1. Best (most viable) crop ever

The track I judged for the University of Orego's New Venture Competition included four companies, all of which looked viable, all of which I expect will become real companies. Tha's never happened to me before. Five and maybe six of the plans I read for Rice were real viable companies, and tha's never happened before. 'm looking forward to the plans 'll read for Moot Corp in Austin early next month.

In general, the product-market fits are better than ever, the management teams are better than ever, and defensibility is better than ever. That is true at least in terms of how far any generalization goes. What used to be an academic exercise composed mainly of fictional hypothetical companies (hence, the name Moot Corp, the first of these contests, held annually at the University of Texas since 1984) is now a parade of real companies with real possibilities. Or so it seems to me.

2. Fantastic financials

Sorry, by fantastic I mean fantasy, not real. More than in past years 've been exposed to otherwise good plans with bad financials.

I refer to stunningly high sales forecasts with no grounding in reality, which are more the rule than the exception. And almost as frequently, amazingly unrealistic profitability. I saw one plan that projected less than $1 million SG&A (sales, general, and administrative) expenses for sales of $50 million. That was't that unusual. I saw pretax profits of 40, 50, even 60 percent. Hint: profitability of 10 percent is really good in the real world; so projections of 40 percent or more are't indicative of a great business, but just, instead, poor research and superficial understanding of real costs.

And cash flow, also, very superficial. For example, a company whose sales go from $25 million to $50 million in a single year, selling business-to-business, is probably going to have $10 million or more in receivables clogging up the cash flow at the end of that year. Why? Because business customers pay in months, not days, and with growth that high there's probably at least $10 million in sales for the last 2-3 months, meaning that much in receivables. So a cash flow projection that skips that is way off.

And then there's a number of business plans whose financials indicate the companies are raising millions in investment money that's going to just sit in the bank, and not be spent. Good luck with that one.

I think what's happening is many of these business plan contest entries are pushing reality to try to invent higher projected investor returns. The contests are all set up to mimic the investment process, which effectively eliminates any thoughts of good self-financed and bootstrapped businesses. So they turn up the sales and profits in the spreadsheet, just as if they were turning a knob, because that's what they're told investors (and contest judges) like to see.

Unfortunately, speaking as a contest judge and angel investor, that doesn't work. When the financials are absurdly optimistic, I just ignore them. Occasionally I'll choose a startup that has everything else right, and bad financials, because the financials are relatively easy to fix. But don't think fantastic financials are a plus. They detract from the quality of the plan.

3. Forget websites; save the world

This is good news for all of us. The trend in new ventures entered in these contests has taken a remarkable turn. It's quite clear. Where we used to get a parade of would-be web businesses, social media sites, games, and such, we now get medical electronics, new surgical and diagnostic techniques, clean and renewable energy, and natural and organic products.

Not that I don't like software and web businesses. I do. But the level of urgency for green and clean and organic and natural is much higher.

If we keep that thought, and add to it the generally higher level of overall viability of the plans I'm seeing, this is all very encouraging.

Now if we could just get them to do more realistic financial projections...

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About the Author

Founder and Chairman of Palo Alto Software and bplans.com, on twitter as Timberry, doing social media business planning at smbplans.com, and blogging at timberry.bplans.com. Stanford MBA. Married 42 years, father of 5. Author of business plan software Business Plan Pro and www.liveplan.com and books including The Plan As You Go Business Plan, published by Entrepreneur Press, 2008.