Developing your business plan To convince investors, you must achieve a state of intellectual prepar- blind spots. I recommend that you also edness. Be prepared to fine-tune your have a lawyer review the plan to make describe your dream plan in business plan as you add people to sure your optimism won’t be construed words and spreadsheets, moving your team and as you get investor as a warranty for success. from vision to practical details. feedback. Writing your plan is like working The investor’s point of view through a flight-simulator exercise that As in all “selling” situations, you begin trains you to run your business. It’s the M with an understanding of your next best thing to having actually done customers—you write the plan from omentum is building. You’re con- it. You’ll envision and play out differ- their perspective. Remember, you want fident your idea is going to work and ent scenarios. You’ll describe those to present reasons for them to invest, you want to move forward to start scenarios in words and also in and they want to find reasons not to. your company. Now’s the time to spreadsheets that show the financial Investing is a defensive game! One Sili- gather your thoughts and put them results of your actions. As problems in con Valley venture capital firm I know down on paper. In this article, we’ll cash flow become apparent, you mod- receives six hundred business plans a look at the basics of writing a business ify your decisions and actions or even year; another receives more than a plan—what it is, who needs it, and how to think about it. Having been both an entrepreneur and an investor, I can take you across the table and be- hind the scenes to help you develop and sell your idea. You want your business plan to con- vince investors to part with their mon- ey and to convince professionals to join your team. But before it can be useful and convincing to them, it must be useful and convincing to you. Most of all, the business plan is a valuable planning tool to help you systematical- modify your strategy. For example, thousand. Potential investors can’t dev- ly think through the business. you may decide to slow down your ote much time to you. So you need to sales growth if it’s placing too high a convince them quickly. The entrepreneurs point of view demand on cash. That’s counter intui- The first thing an investor reads is the Up until this point your business is only tive, but it shows up clearly as you Executive Summary (see “Writing the Ex- an idea or a dream in your head. Peo- play with your spreadsheet. The work ecutive Summary” on p.10), so it’s the ple toss around ideas all the time. you do now can help you avoid costly most important part of your business Writing the business plan is the first mistakes. plan. The investor really wants answers step to confirm to yourself and others If you can’t write a good business to these questions: that you’re serious about your idea. plan, you’re probably not ready to You start with a vision of what you start your own business. But it’s un- • Is this going to be a good business? want to accomplish. In preparing a thinkable to have an outside profes- • Can this company succeed? business plan, you deal with the de- sional write your business plan; it de- • What is the payout, and when does it tails, the practical aspects of how feats the whole purpose. You will need happen? you’re going to realize and implement guidance from experts on different as- • Can I trust and have confidence in your vision. You have to decide how pects of the business, and you can these people? Do I like them? Can I to develop, make, and distribute pro- learn a lot from books and from exist- work with them? ducts (or provide services), persuade ing companies. You can get an annual • How much investment would be customers to buy them, find and keep report from a public company in a needed to get the business launched? good people, respond to your com- similar business or simply look into the Can I get other investors interested petitors, and even decide how to pay company you work for now. It’s im- to share my risks? yourself. portant that other people critique your • Will I be proud as an investor in this Writing the business plan helps you plan along the way to help you find company? For most venture capitalists, the in- vestment criteria are market size, Writing the Executive Summary technology, and people, in that order. Using the low-risk startup model I pre- All is lost if you can't pique the in- member, it usually takes more than sented in the first article in this series vestor's interest in the Executive technology to make a business suc- (see Laser Focus World, March 1995, p. Summary. You'll have to invest quite cessful. 61), the considerations are reversed: a bit of time to write a complete people are the key. story in two pages. Remember, you Where you are today Body language. Potential investors want the investor to identify with Describe the status of the product can’t possibly understand all the busi- your enthusiasm. You want to help and the time when business transac- ness plans coming their way. They get people form a vivid mental picture tions will begin. Give a sense of what the job done by looking for inconsis- and "see" your business just as clear- key milestones you must reach before tencies in your presentation and by re- ly as if they were in the middle of it business can sustain itself or be ready sorting to intuition and reading body as it's happening. Keep this section for the next round of financing. language. In essence, consciously or positive. Put the caveats In the main not, they are comparing you to busi- text. Operating plans ness people in their own experience The Executive Summary should deal Make a strategic statement about who have been successful. with these issues: each function of the company. Pay Successful people are goal oriented, particular attention to product devel- thorough, and decisive; they can cut Mission opment, manufacturing, and marketing to the heart of the matter quickly. What's the business, and where do and sales. Knowing the status Of your They have enough self-confidence to you plan to take it? You want to company and the way you plan to op- be objective, and they don’t generally give the reader a feel for the pro- erate helps the investor to visualize the resort to snow jobs to convince peo- duct and its potential. This is a good amount of investment you'll need. ple. As for myself, I also look for ho- place to state why you and your nesty, enthusiasm, and commitment. team want to start this business. Organization People won’t be successful unless Key people and their track records re they’re passionate and love their work. Opportunity a major decision factor. State their ex- That’s the body language you have to What unique set of circumstances perience factually, and limit the discus- convey in your business plan, and, for led to this opportunity? The circum- sion to what is germane to this busi- that matter, in all your interactions. stances can include some technolo- ness- Key people can include directors, gy changes, a unique group of peo- advisors, and existing investors who Putting it together ple getting together, or your unusual are well known. You may also want to To begin with, you want to define experience that made it possible for make a statement about your organi- clearly the kind of investor that’s likely you to see this opportunity. zational strategy. to fund you. Professional investors are unlikely to invest in someone who Why you can succeed Financial needs hasn’t started a company before. And Explain the unique competitive ad- Clearly state how much money you in general, the investment community vantage your company possesses would need for starting your business doesn’t look with great favor on the that would be hard to duplicate el- and how you would use the money. In laser and optics industries. For these sewhere and how you would sustain most cases, people don't describe the reasons, chances are that your target that advantage over time. This ad- "deal" or the ownership breakdown investor will be an “angel,” a private vantage is often referred to as the here in the business plan. individual investing personal funds. core competence of a company. Re- It’s inexcusable to submit a business plan that’s inconsistent, incorrect, poorly written, or in any way unprofes- fused and can’t see what’s most im- as if you were reaching for an unrealisti- sional. I tend to shy away from a busi- portant, or, worse, that you’re incon- cally high target. That may very well ness plan if I don’t understand the siderate — you’re taking up people’s mean spending at a higher than opti- main message right away. If the plan is time unnecessarily. mum rate, which heightens your risk of sloppy, I get nervous about the plan- Be honest. People often ask me running out of money before the busi- ner’s ability to get the job done right. whether they should inflate the ness develops. Keep it short. Keep the business plan numbers “because the investors will di- Think also about the people that crisp and concise, no longer than thirty vide them by two anyway.” I tell them would join your company based on pages as a rule of thumb. The Execu- no. It’s essential that you be honest. your presentation. You may be disrupt- tive Summary should be just a page or Don’t exaggerate any numbers, and ing their entire career! Dishonesty could two. The optimal length for the main make sure you can back up your very well be a time bomb for investors, body text is 10 to 15 pages. If your claims about the size of the market. employees, and everyone involved. plan is too long, investors may think Professional investors will run their own Your lawyer may protect you with the you’re trying to cover up a lack of numbers if they’re seriously interested. right caveat wording, but I prefer to substance with bulk, you’re indecisive And if you get away with inflating the think of the business plan as an implied or lacking in confidence, you’re con- numbers, you’ll be forced to operate contract. Other parts of the puzzle Putting together your business plan Why is that some business plans get funded while others don’t? That may be The Executive Summary comes first, and a R&D the wrong question to ask, because I financial statement with a five-year financial How do you sustain a technical competitive doubt that any investor ever decides to projection follows. Put miscellaneous sup- advantage? What kind of facility or signifi- porting documents, including resumés of the cant capital investments do you need? Is invest on the basis of the business plan key executives, in appendices. Keep these there any technology bottleneck that may alone. The business plan is only a small questions in mind as you write out your busi- become a problem? Do you anticipate any ness plan. part of the complex puzzle involved in breakthroughs if everything works right? What are your competitors doing in R&D? making an investment decision. Mission and vision What do the government funding agencies At the introductory stage when you What’s the driving force behind your compa- believe? Do you have any prospects for get- submit your plan, the key is to keep ny? Why does it exist? How big do you envi- ting government support? sion it becoming? What image will it have in the process going rather than to close the marketplace? How will employees feel Manufacturing and operations the sale. This perspective puts an inter- about working there? How do you propose to manufacture pro- esting spin on how you approach writing ducts? Are you vertically integrated, or will Products (and/or services) you depend on resources from suppliers? Do the business plan. You’ll want to keep it What are your products? Why do people need you depend on the unique skills of a few key short and simple, easy to read and un- them? (Include photographs of a mockup or suppliers? Do you require a significant derstand, and you’ll want to give the an artist’s rendition.) What are the unique ad- amount of manufacturing equipment? Do vantages your product provides? What’s the your materials requirements have any unu- reader a reason to come back for more status of the product? What will it take to get sual aspects such as long lead times, cost information. Relax and be yourself. All the product ready? What are the follow-on fluctuations, or special controls? What kind products? What kind of protection is available of information system do you need? How will you need is one investor that responds (patents, materials available only to you, you document your manufacturing process? well to you. If you aim right, you’ll get etc.)? Does the product depend on someone How will the operation evolve? What will it funded soon enough. else for materials or key capabilities? Are look like one, three, and five years out? any government regulations relevant, or gov- ernment approvals required? What is the like- Marketing ly product life cycle? How do you propose to reach customers? Are there special trade shows or magazines? Target customers Who are the decision makers of the industry? Who are the customers? What industries do Who are the opinion leaders? How does infor- they work in? How do they make buying deci- mation flow? What kind of image do you want sions? Who has the final say? Who pays the to convey to your customers? What are the bill? What are the driving factors (Relative new products to develop first? How will you importance of price, performance, etc.)? position your products (lowest price, highest What are the customers’ economic forces? quality, or mid-range)? What is your pricing What are the relevant characteristics of the strategy? What is your target market seg- customers (for example, are they slow to ment? What kind of sales literature will you make changes, sensitive to price, etc.)? What provide? What are your advertising plans? potential customers have you talked to? What distribution channels are currently used What are their reactions? Do you have any in the industry? Will you use sales represen- customers lined up? Do you have any testi- tatives, dealers, or employ your own direct monials from customers? Have you received sales force? Are there any new ways to any feedback about prototypes? reach new customers? How do you reach in- ternational customers? The market What kind of people or organizations need Sales this product? Are you serving a scientific, in- How do you take care of customers when dustrial, OEM, or consumer market? How they need information and services? What many potential customers are there? What kind of sales force do you have? How do you are the alternative solutions to their prob- manage them? What’s conventional in the in- lem? What trends will impact this market? dustry, and how will you do things different- What’s the industry like? How big are the oth- ly? er companies serving this market? What do you know about these companies? Have you Risks heard any recent success stories about this What are the critical success factors? What industry? are the likely failure modes? Competitive analysis Financing What is your sustainable competitive advan- How much funding are you looking for? What tage? What is your core competence? Why will you do with the funding? What is your can you succeed better than others? Who can current financial situation? What future fund- provide similar products? What are their ing requirements do you anticipate before strengths and weaknesses, compared to reaching positive cash flow? How will you yours? How big are they? What are their likely raise the balance of the money required to reactions, based on the past actions? What launch the business? What are your profit are your options if the going gets tough? margins? What is the exit strategy for all in- volved? What happens if the business de- viates from your projections?