Deciding your Business plan

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					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
                                                                                        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?

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Description: A guide on how to decide your business plan