Reality check

We live in the real world. We dream in the fantasy world. All too often entrepreneurs confuse the two.

Two start-up companies illustrate the difference between real world thinking and fantasy world thinking. The first has experienced executives with historic numbers on which to base their projections. They have sold product similar to what they propose to bring to market. After researching the market and determining what they felt they could accomplish, we prepared financial projections.

The numbers looked great. The gross margins were easy to verify and the net profitability was the result of honest assumptions and known costs. The numbers looked so good we were concerned no one would believe them, even though they could be defended.

The only variable of which we were not certain was the sales growth rate. Our sales just looked too good.

We did a reality check. We asked if we could achieve these results with the degree of confidence needed to present to capital. The president of the company said he “knew” he could hit the sales projection, but to satisfy our reality check, to give him two years instead of one to achieve the sales goal.

We made the change and the numbers came down but still looked great. It will be these, the reality checked numbers, that will be in the business plan.

A second company wanted me to model its financials based on nothing more than dreams. The entrepreneur had no experience in the industry, yet he wanted to raise tens of millions of dollars to enter the industry and roll up competition. And he wanted to raise funds using a nonstandard mechanism, which he’d heard one person used successfully.

After two meetings, he began to understand the reality and scaled his grandiose plan back. When he left, an assistant asked how I swung him to reality. I wasn’t certain I had.

At our subsequent meeting, he was back in fantasyland. The reality check could not stand up to his dreams of glory. I wished him success, but without my participation. Maybe he will succeed. I hope so, but doubt it.

While you are dreaming, remember a few real world necessities. Start with, “Are there real people with real money who will buy my real product or service?” Add managerial experience, market size, burn rate, sales cycle and availability of capital. Then ask if this is a real opportunity. “Can it be done, and can I do it?”

The reality of money lost is no fun, so check the realty of your dreams early and often. Erwin Bruder ([email protected]) is vice president of Enterprise Capital and Business Development. Reach him at (216) 292-2271 or (330) 374-7828.