Business Plans

Finance for Entrepreneurs

Overview
Business

Plans vs. Business Plans Contents, or what is in them Mistakes

Useful Articles
How to Write a Great Business Plan (HBR article, see library) Enterprise Do Start-Ups Really Need Formal Business Plans Due Diligence 10 Tips for Successful Bootstrapping Form or Substance: The Role of Business Plans in Venture Capital Decision Making New study shows six critical business plan mistakes

What is a Business Plan?

A

written document Summarizes the purpose and overriding strategy of the venture Provides details on operation, financing, marketing, and management Analysis of strategic alternatives does not belong in the business plan Consider aspects of strategy simultaneously, not sequentially 4

To Business Plan or Business Plan

Interviews

with the founders of 100 companies on the 1989 Inc. "500" list of the fastest growing companies in the United States revealed that entrepreneurs spent little effort on their initial business plan

The Role of Business Plans in Venture Capital Decision Making

So what is important in BPs if used for this purpose? Limited external benefits accrue from the production of formal business planning documents

David Kirsch, Brent Goldfarb, Azi Gera

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What Makes the Business Plans of New Ventures Different?

Forecasts

and projections usually are less precise A greater investment in planning Deviations from plans and wrong assumptions Evaluating manager performance More likely to be relied on externally Used to attract investment capital Greater breadth of coverage Unconstrained by previous decisions
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Components of a Sound Business Model

Generate

Revenues (You must have customers & sell them something) Make Profits (You must eventually have revenues that exceed the expenses of generating those revenues) Produce Free Cash Flows (You must generate cash inflows that exceed net working capital & capital expenditures) But, another way of viewing.
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Components of a Sound Business Model

What

is the concept? How are you going to market it? How much do you think it will cost to produce and deliver what you're selling? What do you expect will happen when you actually go out and start making sales?

Valuable Opportunities
Business

plans based on general information

Can be copied Often lead to normal rents Unlikely to be worth the entrepreneurial risk
Business

plans based on specific information

Not easily copied Higher potential for wealth creation

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Potential for Value Creation

1. 2.

Fit Value
This slide and the following slides are based on Evaluating the Wealth-Creating Potential of Business Plans, Fiet and Patel

See next slides

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Entrepreneurial Fit
Prior

experience and specific knowledge necessary to exploit and new opportunity

Prior Experience
Occupation Specialized education Social Relations Hobbies

Specific Knowledge
Self explanatory
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Value
A

function of competitive rivalry in an industry

In this context, industry refers to group of firms who offer products that are close substitutes
Many

entrepreneurs deny the existence of competitors

Belief that there product leads to a monopoly

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Reasons for Monopoly

The

new product is not valuable to customers

Yes monopoly exists, because no competitors sees value in the market Unlikely to lead to wealth creation
The

product is valuable, but customers are slow to adopt because education is required
It can be difficult to educate a market to the value of a new product, but not impossible
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Reasons for Monopoly

New

technology with IP protection Control over input factors

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First-to-Market
It

happens in some circumstances that being first-to-market leads to sustained competitive advantage
ebay

Other

times, later-to-market is the wining strategy

Osborne - portable computer

Why?
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Value of a New Idea

Threats

posed by the following groups

Potential industry entrants Suppliers Buyers Substitutes

The

following moderators can reduce these threats

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Moderators
Potential

entrants

Economies of scale Cost advantage independent of scale

IP, factor control, know-how,

Government regulation
Suppliers

Many suppliers Threatened by substitutes No desire for vertical integration

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Moderators
Buyers

Large number Small percentage of buyers overall cost Buyers are very profitable

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Contents of the Business Plan

The

people The opportunity The context Risk and reward Exit strategies

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Contents of the Business Plan

Focus

on the purpose(s) and uses of the plan.

Include whatever information is relevant and material

Make

certain the audience is neither overloaded nor left to speculate

Include only what is appropriate and necessary, given the use

Identify

the key assumptions as assumptions.

Include the support for key assumptions

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Contents of the Business Plan

Highlight

the critical elements for success or

failure Delineate milestones

So users can evaluate success, modify assumptions, expectations, or strategy
Include

financial projections

To test the plan, commit the entrepreneur, facilitate negotiation

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A Typical Business Plan Outline

I. II. Executive Summary Business Description A. Description of the product/service B. Industry background C. Venture or firm background D. Goals and milestone objectives

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Business Plan Outline

III. Marketing Plan and Strategy
A. Target market and customers B. Competition and market share C. Pricing strategy D. Promotion and distribution IV. Operations and Support A. Quality targets B. Technology requirements C. Service support
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Business Plan Outline

V. Management Team
A. Experience and expertise B. Organizational structure C. Intellectual property rights VI. Financial Plans and Projections A. Income statements & balance sheets B. Statements of cash flows C. Break-even analysis D. Funding needs and sources
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Business Plan Outline

VII. Risks and Opportunities A. Possible problems and risks B. Real option opportunities VIII. Appendix A. Detailed support for financial forecasts B. Timeline and milestones

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Making the Business Plan Credible

Demonstrate understanding of the technology, market, risks, needs, and potential rewards Provide evidence of the quality and capabilities of people involved, and that they can function effectively as a team Provide evidence that key personnel are committed

Bonding Reputation Certification

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The Issue of Confidentiality

Protecting intellectual property Preempting rivals and first-mover advantage Using non-disclosure agreements Relying on reputation

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Financial Aspects of the Business Plan

Differing views on what to include Is the future too uncertain to warrant careful forecasting? Include in the plan, or as an appendix? The importance of supporting assumptions Relationship of projections to contract negotiation The value of quantifying risk Value as a diagnostic tool - to facilitate adaptation

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What's Wrong with most Business Plans?

Problem

lies with the financial data

To concentrated on financial information Act of imagination To optimistic

The

financial data should focus on answering two questions

What are the critical drivers of the business?

How much business does the company need to achieve to break even?

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Study Shows Six Critical Business Plan Mistakes

Lack

of marketing strategies Lack of clarity Unrealistic financial projections/assumptions Lack of detail Overly optimistic Weak analysis of competition

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Business Plans
Focus on cash flow, not profitability Forecast from the bottom up Ship, then test Source: 10 Tips for Forget the proven team Successful Bootstrapping, Guy Kawasaki Start as a service business Focus on function, not form Understaff Go direct Position against the leader 33 Find out how deep the rabbit hole really is