This cautionary note is based on angel investing experience; deals done and a multitude of business plans vetted. Perhaps it is a stereotype or a gross generalization, but we pass along this observation anyway. Beware or certainly be mindful of entrepreneurs and start-ups that hugely underestimate the time and cost of sales and marketing. More often than not, start-ups are led by engineers (pick your flavor of the day—chemical, electrical, computer science) with little appreciation or knowledge of what it actually takes to get a product or service to market. When you look at the core management team-- this being an embellished characterization of three enthusiastic 20 or 30-something guys that may have developed a potently good product or service—you will generally find no one in the crew with any sales experience; zero. They have never sold anything, closed on a contract, or dealt with a real customer. This doesn’t make these start-up investment opportunities bad, it is just an alert for you as the investor.
When reviewing the business plan focus on the timetable and assumptions for bringing the product or service to market. Be wary of revenue optimism; not that it may not be a good business, but ensure the plan allows enough time to sell and close. Most entrepreneurs significantly underestimate the selling cycle time: find the customer, find the right person to pitch, schedule the sales pitch, provide sales support for the internal approval process, make additional sales presentations up the ladder, negotiate a sales contract, wait and wait for corporate approvals, and alas, close. Selling, particularly a new product or service, takes time and persistence. Most start-ups do not appreciate this; they in fact must believe clients wake-up every day thinking only of them.
Be on the alert for unrealistically low sales and marketing budget estimates. This under-estimation comes in three forms: allowance for sufficient time to make the market aware, expense of marketing, and margins required by distribution channel partners. The time for marketing issue is essentially the same as the previously discussed sales cycle issue; it takes time to raise awareness. As a follow-on, many engineering/science oriented entrepreneurs have little or no context for what it takes to market or the cost of developing a unified marketing program. As such, they often short-change the marketing budget. Lastly, many start-ups are clueless on gross margin requirements for marketing channel partners. This directly affects pricing and profit realization. Keep a weather eye open to this issue.
