The IMF has provided entrepreneurs with a wonderful example of how to get it wrong.

The number of times IMF economic forecasts have been trashed is very surprising. In fact, for a bit of fun – have a look at this google search – IMF Forecast Wrong .

You will see that the IMF failed to forecast the economic meltdown in 2008 and then equally, failed to estimate the cost of bailing out the banks getting it wrong by Trillions of £ or $ on each occasion.

Famously, their forecast for central and Eastern Europe in 2008 were so bad (and damaging) that the head of the IMF personnally apologised to the Austrian government (as Austria was criticised for heavy investment in central and eastern europe).

Okay – that’s enough fun – what does this tell us, the entrepreneurs?

Firstly, macro economic thinking is deeply flawed. This doesn’t stop it being a major business, of course and lots of big salaries and some profits somewhere?

Secondly, most forecasts – including entrepreneurs’ business forecasts – are wrong. Yes, just plain and simple, wrong!

All data driven forecasts (in the IMFs case – economic modelling and the Entrepreneur’s case – the spreadsheet) are wrong because they can only use the past to predict the future.

So, what should the entrepreneur do?

If you speak to a VC fund and ask them how they choose their investments, they will tell you that they back smart ideas, great people and a powerful emerging trends.

The notion of a smart idea and great people is well documented, but the idea of backing a powerful trend is interesting.

What the VCs are saying is that a business that will receive funding is going to be riding on the back of a long term demographic or consumer behvaviour trend.

Why?

Well, the VCs already know that the business forecasts they are presented with are rubbish. They already accept that many of their investments will fail (and their forecasts will turn out to be as valid as the IMFs).

Therefore, the VCs need to ensure that when one of their investments takes off – that it takes off big time. It needs to have the potential to become huge. And for that, the business needs to tap into a new trend in consumer or business behaviour.

So, the message that the IMF teaches us is this – don’t make your forecasts too complicated – they will almost certainly turn out to be wrong.

Instead, focus on establishing and proving an emerging trend – a growing desire to buy convenience food – the emergence of freelancing and entrepreneurial activity – the shift to mobile communication and impact on social media – the success of TV talent shows – the green energy shift – Government outsouring – consumer trends to value etc…

So, make the trend spotting your key focus and how your business taps that trend – and use the spreadsheet to manage your cash.

That is because the spreadsheet will keep you in business (stop you running out of money) but the trend forecasting is what will help you raise money – and potentially – have a huge success on your hands.

Successful investment proposals come in many shapes and sizes – they may be long documents – or they may be short documents. Sometimes, there is little or no document at all (although this is more rare).

The key thing that all proposals do is they find a sweet spot between the conflicting demands of putting together the best team, developing the best product and creating a profit with return to shareholders.

These three elements – team, product/ service and finance (ie cashflow, investment and profit) are like the base elements – fire, water, air and earth. Without them, nothing can be created – but equally, they are in conflict.

Team, product and finance in conflict?

Yes!

Think about it, a top team might include the CEO of a FTSE 100 company – but he or she might cost you £50k to £100k per year. Can you afford this? Or, perhaps, would you want to afford this?

Equally, you might be able to design or develop the perfect product is only you had £1m – but, would you be able to make a profit?

Lastly, if you cut costs so far that you have no money to spend on sales and marketing, how will you ever launch your product or service?

Hence, these three areas are in conflict – more spent on marketing means you need to raise more money and will offer lower returns in the short term (although, with the prospect of better returns in the future).

Equally, you want to build a non-exec and management team with the right experience, knowledge and contacts. But, are they all committed to your project? Will you be able to pay or reward them sufficiently? And, if you are giving shares and options away to your management team, have you left enough on the table to make the investment attractive to investors?

That’s why the search for funding is really about the push and pull between these three factors.

And, that’s why, when you take our questionnaire – Is My Business Ready for Investment - you’ll begin to see whether your proposal has adequately dealt with all three elements – team, money and product – and therefore, whether your business is truly investment ready.

Of course, many entrepreneurs don’t take finance – but, they still go through the process. Why? Simple – they are investing their time and money and so want to know that they are making a good investment.

That is why, even if you don’t want to take on external finance it is still a great idea to ask – Is My Business Investment Ready?

So, now is the time to take the survey and find out…is my business investment ready?

Giving up equity to partners is dangerous. It will cause you major problems in the future – if your busines is successful – if you don’t get the splits right from the outset.

Find out how I split the equity on my first business – and why it became a problem.

Then, don’t do as I did!

In this first video of the 7 point plan, Lewis deals with three key points

1. We are now learning to live with tough credit terms (as per pre-dot.com boom)
Lewis talks about the forecasts that net lending will remain negative until 2011 and that the new credit terms are here to stay.

2. Our markets appear slow but actually, most markets are shrinking fast, with a few growing quickly too
Lewis discusses how mature markets are getting squeezed either by lower prices which maintain demand, or higher prices coupled with much lower demand – both of which means shrinkage of market for most businesses.

Equally, there are a few key sectors which are growing rapidly, digital media, freelancing, green technologies etc… and that successful business needs to be connecting with if it is going to achieve growth.

3. And the Good News - slow or no competition (no one has any money, which makes it easier to start new ventures….)
Lewis agrues that the old notion of “early mover advantage” is gone. In this business climate it is more important to take your time and get your proposition right.

…click here to watch all the videos from the 7 Point Plan – How to Grow Your Business in 2010..

3Bs - Beg, Borrow and Barter

I’ve been asked to advise Liverpool John Moores University entrepreneur students on getting finance for their new businesses.

Controversially, my view on finance for young entrepreneurs would be, don’t.

Here’s what I would recommend:

a) avoid finance if at all possible and always for as long as possible – learn to beg, borrow and barter
b) focus on the ability to implement – not the idea
c) no one will invest in your idea unless you can sell – so what proof do you have of sales skills?

The only exception are silicon valley type VCs which invest heavily in ideas from untested entrepreneurs. If this is the kind of project and experience that you offer, then your best bet would be to catch a plane to San Francisco as this is extreme high risk investing and most investors are not willing to do this.

The essence here is that you have to be offering to create not only new customers (the standard definition of entrepreneurship) but also a new industry. But be careful, this is not as easy as it sounds – and many young entrepreneurs fall for this mistake. (See the business parable of the Rock that Wouldn’t Budge).

New industries don’t come along often, so, a VC is going to expect a high risk (or potentially very high risk) to the enterprise in return for a huge ‘google’ like return.

However, the more normal path to investment is essentially, don’t take investment in stage one, but look at investment in stage two and three – and what investors would look for at these stages.

You can define these stages as

1. Idea – pre-sales
2. Sales – pre-profit
3. Profit – pre-national or global expansion

If you approach investors at stage 1, then you need a track record because the likelihood of the idea failing is very high – and not least because you may or may not know what you are doing!.

The only way to reduce risk – once the idea is proven as new and potentially interesting – is to focus on the management team.

If you are still young and inexperienced and approach investors at stage one, then expect the investors to demand a majority stake for a small cash investment, which is a bad deal for you, and the investors know it.

So, any entrepreneur worth his salt is going to reject such a poor deal and work on the idea until sales are proven and preferably profitable.

At these later stages the young entrepreneur can already show a degree of resourcefulness and ability to implement. Now, you are no longer the greenhorn entrepreneur, but someone with a proven (albeit limited) ability to make stuff happen.

Hence, at stage one, you must begin by Begging, Borrowing from rich uncles and aunts and Bartering.

Learn the rule of the 3Bs – Begging, Borrowing and Bartering – first, and then you will find raising funds infinitely easier – not least, because you won’t need so much money.