Who Needs a Business Plan?

• … And Why?
• Some Good Ideas
• …And Some Bad Ones!
 To Successfully Launch a New
Business...
• ...Requires Identifying and Bringing Together
Necessary Resources
– Human - Technological
– Physical - Financial
• We Do This Through a Business Plan
 What Is a Business Plan?
• It’s a Process, Not a Product
• It’s Written to Develop a Successful Business
– Not Just to Raise $
– Should Be Used & Updated as a Mgmt Tool
• Most Business Failures Can Be Prevented …
– If You Have a Good Business Plan
 Why Do Startups Fail?

• How Often Can We Predict?

What Does the “Product” Look Like?
• Executive Summary (1-2 pages)
– It’s All They’ll Read
– Must Communicate and Capture Attention
• Market Opportunity & Strategy
• Product / Operations
• Management Team
• Financials
• Critical Risks
• Timetable / Milestones
• Exhibits
What Are They Looking For?
• What’s the Problem?
– How Big Is It?
• How Will You Solve It?
– You and Who Else?
• Do I Believe You Can Do It?
– The TEAM!
• Will I Make $ By Helping You?
– Financials
– Exit Strategy
 What NOT to Do in a BP
• What is a “BAD” Business Plan?
• What Are Some of the Common Mistakes
We See?
What is a “BAD” Business Plan?
• One That Doesn’t Meet Its Objectives
• Fails to Help Launch a Successful Business
• Fails to Identify Key Obstacles / Problems
• Fails to Attract Interest:
– Of Investors
– Of a Team
– Of Partners
– Of Other Resource Providers
 It’s Possible to Launch a Good
Business Without One!
• …And Vice-Versa
• …But a Good BP Improves Your Odds
First Clue That You’re
Reading a “Bad Plan”…

You Don’t Want to Keep Reading!

• It Doesn’t Capture Your Attention
• It’s Hard to Get Through
• You Just Don’t Get It!
 Most Common Errors in a Plan
• Lack of Understanding of Value Proposition
– …Or Significantly Overstates It
• Lack of Understanding of Customer
– And How to Reach Them
• Lack of Focus
• Underestimating Inertia
• Underestimating Effort & Resources Required
 Most Common Errors in a Plan
(Cont’d)
• Failure to Identify Competition
• Lack of a Competitive Advantage
• Unproven Team
• Inconsistent Facts
• Inconsistent Logic
• Over-Optimistic Financial Projections
 Signs of a Poor Market Planning
• Failure to Identify Key Segments & Target
• Lack of a Clear Strategy
• Failure to Anticipate Competitive Reaction
• Failure to Consider “Reach” in Market
Share Estimates
• Underestimation of Cost of Identified Plan
Poor Product / Operations Section
• Does Not Consider How the Product Will be:
– Developed & Built
– Delivered
– Serviced
• Is Unclear About Stage of Development
• Is Unclear About IP
• Underestimates Cost & Difficulty of
Managing Operation
 Poor Management Section
• Does Not Identify Key Players
• Does Not Provide Sufficient Background
Info
• Has Insufficient Management Resources
• Lacks Strong Advisory Group
 Poor Financial Plan
• Does Not Consider Perspective of Investor / Donor
– ROI
– Exit Strategy
• Does Not Indicate Clearly Amount to be Raised
– And Timetable
• Fails to Provide Full Set of Financial Projections
– Error Free!
 Management Section
• The Most Important Part of Your Plan
• What Is the Ideal Team?
• Key Positions
• Advisory Board / BOD
• What to Disclose
Why Is Management So Important?

• By Nature, High Risk Businesses

• Opportunities / Strategy Likely to Change
• Success Will Depend on Management’s
Ability
– To See Opportunities & React
– To Execute
– To Make Alliances
– To Build an Organization
 What Is An Ideal Team?
• One Who Has Done It Before
• One Who Can Work Together
• One VC’s Have Made $$ From Before
• One That Doesn’t Require “Adult Supervision”
• Is There Such a Thing In the Real World?
 Key Positions
• Depends on Opportunity / Strategy
• Like to See:
– Technology
– Marketing
– Finance
– A Leader (CEO)
 Advisory Board / BOD
• Great Way to Add Experience
• … And Credibility
– They Must Think It’s a Good Idea
– If You Can’t Sell Them...
• Funding Sources Will Want to Participate
• Careful About Balance
– Inside / Outside
– Funding Providers / People You Really Want
 What to Disclose
• Paragraph About the Background of Each
Key Member
• Comments About Adequacy of
Management
– If You Plan to Hire Upon Funding, Say So
– If You Augment Team w/Outside Resources…
• Describe Culture / Philosophy, if Important
• Org Chart, if Useful
 Key Tasks of the Leader in an
Early Stage Company
• Need to Be an Individual Contributor
– Need to Understand Value You Bring
– Need to Understand How It Changes
– (What I Like to Do vs. What I Need to Do)
• Need to Shape the Culture
– Create an Environment for Success
– Shared Set of Values & Beliefs
– Need to Communicate and Show the Way
• Need to Provide the Vision
– See the Opportunity Before Anyone Else
– How Collaboratively?
– When to Use the “10 Votes”
– When/ When Not to be Opportunistic
 Entrepreneurial Finance
(Readers’ Digest Version)

• The “Big 3” Questions (from Managing By the

Numbers)
• Why?
 3 BIG Questions:
• What Is My Cash Flow?
• What Is My Profitability?
• What is My ROI?
 Cash Flow (Survival)
• Can I Pay My Bills?
• … So I Can Live to See Tomorrow!
• “Money Is Time!”
 Cash & Cash Flow
• Cash is King!
• It’s Not Enough to Succeed…
• …But You Won’t Succeed Without It!
 Time is Money
• But to an Entrepreneur…
• Money is Time!
• Huh?
 Flow of Cash Through a Business
Owner’s Borrowed Sale of Fixed
Investment Funds Assets

Collection of
Cash Sales
Accounts
Receivable
Cash
Purchase of
Fixed Payment of
Assets Expenses

Payment for
Payment of
Inventory
Dividends

Small Business Management, 11th edition

Longenecker, Moore, and Petty
© 2000 22-5
South-Western College Publishing
 Working-Capital Time Line

Order Inventory Sale Cash collection of

placed received receivables
Days in inventory
Days in accounts
receivable

a b c d e
Cash conversion
Days in accounts period
payable

Cash payment
for inventory

Small Business Management, 11th

edition
Longenecker, Moore, and Petty
© 2000
South-Western College Publishing
 So, How Do I Buy Time?
• Collect Early - Pay Late!
– Special Terms w/Suppliers & Customers
• Manage Inventory Well
• Only Own What You Need To
• Set Up Additional Sources of Capital
 Profitability (Sustainability)
• Regardless of How Much Cash…
• I Need to Earn a Profit, OR…
• … I’m On Borrowed Time!
• Do I Have a Viable Business Model?
 ROI (Growth)
• Can We Offer an Attractive Return to
Investors?
• If Not, We Cannot Attract Capital!
 Financial Statements
• Presenting Them
• Understanding Them
 Principal Financial Statements
• Income Statement
– Flow of Activity Over a Time Period
– “For the ______ Ended…”
• Balance Sheet
– Snapshot at a Particular Time
– “As of __/__/__”
• Cash Flow Statement
– Simply a Restatement of the Balance Sheet
• To Reflect Changes (Flows) Over Time
• “For the ______ Ended…”
 Income Statement
• Reflects Revenue Sources & Expenses
• Expenses Are Typically Grouped by
Function
– Manufacturing
– Sales & Marketing
– G&A
• EBIT Reflects Operating Results
 Balance Sheet
• Reflects Financial Health of Company
• Assets Reflect Cash and Future Claims to Cash
– In Descending Order of When We Expect Cash
– If <1 Year - Current Asset
• Liabilities Reflect Future Claims on Cash
– In Descending Order of When We Expect to Pay
– If < 1 Year - Current Liability
• Equity is Assets - Liabilities
– Could be Called “Fund Balance in Not-Profit World
 Cash Flow Statement
• May Be Most Important
• Definitely Least Understood
• Addresses the Fact That BS is Static
• Since Ret Earnings Reflects Income / Loss:
– Every Line Item in Cash Flow Statement is Derived From BS
• Cash Flows Are grouped by Source:
– Operations
– Working Capital
– Investing / Financing
 What Format Is Right For You?
• There is a Standard for Your Business
• Stick With It!
• Try to Find Similar Public Companies
 Legal Issues in Start Up
• Entrepreneurs’ Top 10 Mistakes
• Forms of Business
• Securities Laws
 Top 10 Mistakes (Constance Bagley)
1) Thinking Legal Problems Can Be Solved Later
2) Making Unreasonable Promises in BP
3) Starting Business While Still Employed or Hiring
People w/o Checking Employment Agreements
4) Discussing Inventions w/o NDA or Before Filing
for Patent
5) Waiting to Consider Intellectual Property Issues
 Top 10 Mistakes (Cont’d)

6) Negotiating VC Financing Based Only on

Valuation
7) Fail to Make IRC 83(b) Elections
8) Hire Lawyer Not Experienced at This Stuff
9) Issue Founders Shares w/o Vesting
10) Failing to Incorporate Early Enough
 Why Is It Critical to Have
Legal Representation?
• Some Decisions Are Difficult to Undo
– Much Easier to Do Things Right the First Time
• A Good Counsel Will Point Out Issues You Didn’t
Know Existed
– Intellectual Property
– Forms of Business / Ownership
– Compensation
• When Raising $$, a Good Legal Counsel Will:
– Provide Introductions
– Know What’s Negotiable
– Know What’s Typical / Reasonable
 Forms of Business
• C Corp.
– The One VC’s Expect
• Sub S Corp.
– Watch Limitations
• LLC
– Very Flexible
• Partnership
• Sole-Proprietorship
 Market Entry Strategies
• Do It Yourself
• License
• Acquisition
• Strategic Alliance
 Key Factors
• Potential to Create Value
• Likelihood Potential Will Be Realized
– Goal Congruency
– Compatible Values & Culture
 Pros and Cons of Being Acquired
By an Existing Business
• Pro
– Parent Brings $$ / Expertise
– Overcome Market Inertia
– Acquiring Infrastructure / Technology / Know-How
– Synergy (1+1=3)
– TIME!!!
• Cons
– Loss of Control
– Most Companies Have Poor Record of Managing
Acquisitions
 Strategic Partnerships
Potential Long Term Concerns
• How Does Balance of Power Shift?
– Once I Show You What I Know…
– Or Once You Are Known in the Market…
• Is There Ongoing Benefit to Both Sides?
• Is This Really a Sale?