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How Not to Write a Business Plan

How Not to Write a Business Plan


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Published by CTA102
An informal (possibly irreverent) guide to things to avoid when writing a business plan, from the point of view of a venture capitalist and investment banker.
An informal (possibly irreverent) guide to things to avoid when writing a business plan, from the point of view of a venture capitalist and investment banker.

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Categories:Types, Business/Law
Published by: CTA102 on Jan 26, 2009
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How Not to Write a Business Plan

Writing a business plan combines art, research and expertise to create a comprehensive presentation of the inner workings of an existing or future enterprise. A business plan is a description and plan for operating a company on paper. One of its primary aims is to validate an idea and challenge every aspect of the business. A business plan is a written presentation that carefully explains the business, its management team, its products or services and its goals, together with strategies for achieving those goals. Disclaimer: This section is not about how to write a business plan as much as it is a compilation of thoughts and observations from those of us in the venture capital, private equity, financial advisory and investment banking industries on how NOT to write a business plan. We don’t claim to be able to teach someone how to write a business plan, an activity more closely resembling an art than a science. Also there are many books, guides and software programs that claim to be able to teach this art and it’s conceivable that one or more may actually be worth reading. In terms of software programs, for example, we usually recommend Business Plan Pro (http://www.paloalto.com/ps/bp/s/). What follows is the result of years of reading, writing, analyzing, editing and rewriting thousands of business plans ranging in quality from startlingly-original works of art to appalling confirmations of the writer’s abject idiocy and aberrant personality. Most business plans (like most film or TV scripts) are simply thrown out, not because the ideas behind them are unsound or derivative but because the writer was unable to communicate his business concept in a manner that reasonably-intelligent people could understand and evaluate. These observations come from the perspective of people who read business plans for a living and who are always willing to give the writer the benefit of the doubt to a certain extent but who expect a few small things in return. Please remember that business plans are written primarily to raise money and writers should have enough respect for the readers to spare them from the most avoidable errors: 1) We live in the age of automated spell-checkers. There simply isn’t any excuse for misspelled words in a business plan. Grammar is another issue and some business plan writers in this melting pot of ours might not start with English as their first language. Let’s not even discuss the issue of those who have spoken only English their entire lives and can’t write an intelligible sentence. Hire an English Literature major (or graduate student) to proofread, review and correct the plan. This shouldn’t cost more than $1,500. Since English Lit majors have no practically-usable skills, they’re always short of money. If you don’t think your business plan is worth investing $1,500, we probably won’t either. 2) Likewise the numbers need to make sense. The plan needs to make rational projections based on some detailed assumptions. Some of the more cynical institutional investors have suggested that anyone who can’t learn how to make simple projections with a spreadsheet program is not intelligent enough to start and run a business. Sidestep the issue by hiring a business major (or graduate

student) to create, review and/or correct the numbers. This will cost more than the English Lit major’s effort since business majors actually learn real stuff. This will also be good negotiating practice. Make sure the assumptions are rational and spelled out. Assumptions are critical. 3) Business plan writers should not underestimate the intelligence of their readers, most of whom think they are smarter than they really are anyway. A business plan is primarily a sales document for the writer’s idea or business. Talking down to one’s potential customers is a risky way to attempt a sale. On the other hand a business plan should be about the actual business, not about the abstruse or arcane components that go into it. 4) Focus on what is important to understand how the business makes (or could make) money. Eliminate the extraneous and the anecdotal. Remember the old canard about the forest and the trees. The most important thing in any plan (after the insanely-brilliant business concept itself) is the section with management’s biographies. Forget the college track medals and the Dean’s list. Describe in detail what significant business learning experiences qualify you to excel at this new business beyond anyone’s reasonable expectation. Tell us of the astounding collection of Nobel-Prize-winning geniuses you have assembled to help you. Alan Greenspan or Jack Welch isn’t on your board yet? How soon can you arrange it? 5) You never get a second chance to make that first impression. Sorry, it’s an old line but a true one. Spend a few dollars and put together a first-class presentation, with graphs and charts, pictures or drawings where possible but resist the impulse to do the graphic stuff yourself unless you know how. Flying a 747 looks easy when leaning over the Captain’s shoulder but landing it could be a terminal experience without the right expertise. Alternatively a business plan shouldn’t look so slick that it seems artificial, such that the impression left is that more effort went into the graphic design than the research and development of the business or the concept. 6) The three most important things in a business plan (Sorry, Harry…) are research, research and research. If you don’t do the research (and the subsequent “due diligence,” the most overworked phrase in the investment lexicon), we will have to and we will probably be disinclined to do so, unless the business concept is so startlingly original and clever that it conclusively refutes the old adage about what’s new under the sun (see also “geniuses,” below). 7) Don’t make the plan too long, unless your name is Dostoevsky and you’re writing something of a more literary nature. Institutions won’t read a hundredpage business plan because they figure if you can’t make a persuasive case in ten pages, you just can’t make it, in more ways than one. 8) There are, in fact, business geniuses and we all know who some of them are. Very few venture capitalists, investment bankers and institutional investors get

to meet them or see any of their new projects because they simply don’t need us. If we get to see a business plan for a new venture from Bill Gates, Paul Allen, Larry Ellison or Jim Clark, you can be sure there’s something seriously wrong with it. So we assume you’re not a genius and don’t expect you to be one, but we will, for the moment, assume that your idea is original and interesting. PLEASE don’t disappoint us. This is a corollary of doing the research. Nothing makes professional investors twitchier than reading a business plan that proposes to do something that someone else has already done or already proposed to do. Actually there are two things that are worse – receiving the same business plan from two different investment bankers simultaneously and receiving the same business plan a year later. 9) We’re thrilled that you’ve been a great success in the _________ business. We’re as certain as you are that the skills you have so painstakingly acquired make you more than qualified to start and run a company in an industry completely unrelated to your previous business. But we are even more interested in the reasons you believe the new business will be so much better than the old one that you left to jump into this exciting but definitely uncertain future. 10) We’re not stupid (see 3, above) but we are not necessarily familiar with all the jargon and buzzwords of your particular industry, particularly if it isn’t developing (i.e. you read about it in Wired), fully-developed (i.e. you read about it in Forbes), maturing (i.e. you read about it in The Wall Street Journal), fully-matured (i.e. you read about it in Fortune) or history (i.e. you read about it in Time Magazine), so ease up on the neologisms. Remember, you want us to understand your business as much as we do. We can’t find it as intriguing as you do if we can’t figure out what a frammis or a dongle is. 11) There’s no need to talk about “risk factors” and other quasi-legal mumbojumbo (an investment banking term of art) in your business plan. We understand risk a lot better than you do because we evaluate it every day. Our attorneys will handle the language issues so we can concentrate on figuring out whether or not we will reach the point of calling them. 12) Please don’t make speculative and complex financial exit plans (“We’re anticipating an IPO in the third quarter of next year at a valuation of seventy trillion dollars…”) a part of your business plan. It’s hard to understand what’s going on in the market unless you’re in it and if we don’t understand it as well as we would like to, it’s really hard for us to believe that you do. Besides, that’s what you’re going to pay us a lot of money to worry about. If you promise to stay out of our business, we’ll promise to stay out of yours, unless of course it’s extremely successful and profitable, doubling in size every year, in which case you will probably need a very sophisticated and experienced investment banker to be your CFO or EVP of Corporate Development. Forget those guys from Arthur Andersen – they are clueless (Editor’s note: This was written before Enron even escaped the business plan stage and shortly after Arthur Andersen’s Seoul office had ruined the $500M recapitalization of a

promising South Korean electronics company through sheer, unadulterated ineptitude.) "The entrepreneurs who are seeking venture-capital dollars must have a very, very serious business plan which shows how they are going to become profitable, when they are going to become profitable, what kind of revenue streams they have, how their technology is going to be applied . . . the ones who can show that they can do that are going to be funded.” Mark Heesen, President – National Venture Capital Association

Ten Commandments of Fundraising
Despite the fact that both angels and venture capitalists are still doling out money (Investments through 2002 totaled $19.4 billion, far below 2000’s record $93.8 billion and significantly less than 2001’s $34.6 billion, but that’s still $19.4 billion, which is greater than the GNP of most of the countries in the world.), rigor and attention to detail has never been more important in the fundraising process. Whether you are raising $100,000 from friends of the family or $5 million from institutions, the same basic principles and discipline apply. The following are 10 basic commandments that, although seemingly obvious and avoidable, are the most commonly violated by those seeking to raise capital. I. Thou shalt focus, focus, focus thy plan. Make sure that your strategy is a rifle shot, not a shotgun blast and always keep in mind the problem you are trying to solve. The days of throwing great technology against the wall and seeing what sticks are over. Proprietary and sustainable technology is a necessary, but not sufficient condition for success. Carve up target markets finely and restrict yourself to two or three well-defined segments. II. Thou shalt weave a story. Remember, investors are looking for a reason to believe. Create excitement around your plan and show energy, enthusiasm and commitment in how you present it. Detail both the mystic and the mundane - cover your long-term vision and then spell out short-term practicalities of its implementation. III. Thou shalt understand thy audience. Research and understand your target audience for both your plan and your pitch. Understand your prospective investor's job history, areas of expertise, prior areas of investment, etc. Don't forget, you are in selling mode and need to understand your prospect's hot buttons. IV. Thou shalt arrive via referral. Nothing turns off a prospective investor more than coming in over the transom, regardless of the medium. Whether it's garage.com, an industry contact expert or simply a friend of the investor, a reference will instantly give you credibility, visibility and the investor's attention.

V. Thou shalt be crisp in thy plan. Keep your plan succinct and remember a picture is often worth a thousand words. Although graphics can be overdone, they convey information efficiently and add impact. Your plan should be no more than 25 pages and the executive summary no more than two pages. VI. And thy presentation. Your presentation is not a fireside chat plan your pitch and pitch your plan - preferably in no more than thirty minutes. Have backup slides for common questions and prepare a reference list in advance that you can drop off if so requested. Efficiency in both plan and presentation will create a good impression that often is taken as a proxy for how you will run your business. You'll get one shot in front of your prospective investor - there are no dress rehearsals. VII. Thou shalt thoroughly research and evaluate the current and prospective competition. All startups have competition of one sort or another whether it's internal development in prospects, other startups or established companies. Thoroughly map out the competition and honestly assess your relative status. Openly disclose management team background strengths and weaknesses. Today, marketing and sales execution is more important than ever. VIII. Thou shalt get real about financial projections. Investors understand that financials for new businesses in undefined markets are very hard to estimate, much less verify, but be realistic. Even if you believe that you can build a $500 million business in five years, understand that this kind of growth would make you one of the fastest growing companies in American history. To the extent possible, build projections from the ground up, not the top down. There is no substitute for showing investors direct prospect/customer contacts who are willing to vouch for the product and company. IX. Thou shalt not obsess on valuation. Valuation is clearly very important, but don't be penny-wise and pound-foolish. The entrepreneur must give credit to the value-added benefit of the angel or professional investor. By understanding this, ideally everyone gets a piece of a much larger pie than would otherwise be the case. X. Thou shalt understand potential exit strategies. Although the investor's first thought is the excitement of getting into an investment, his next priority is how he is going to get out of it. An IPO is one obvious path, but today strategic buyers are acquiring more and more companies. Be explicit about potential buyers and the rationale for their interest in your company.


Since you’ve skipped the previous section on How Not to Write a Business Plan because you are too smart and experienced to have made any of those kindergarten-level errors, we’ll assume you don’t really need to read the following. On the other hand, just in case there is the slightest chance we might have accidentally inserted something in our list of things that should be included in a business plan that fell off the end of your desk, it probably wouldn’t hurt to skim the following just to be safe. As the New York Lottery is fond of saying, you never know. The entrepreneur and his team members who participate in writing a good plan will find it almost as much fun as extensive dental surgery. But keep in mind that this is the first and most important selling tool for the entire outside world, not just the financial one, and it requires careful consideration of all the multiple facets of a start-up or expansion. The business plan cannot be written as an afterthought and needs to be the primary guiding document, the bible of this particular business. There are two primary purposes to a business plan. The first has an outside objective--to obtain funding. There is no business without capital. The second serves an inside purpose--to provide a plan for early corporate development: to guide an organization toward meeting its objectives, to keep the entrepreneurial business itself and all its decision makers headed in a predetermined direction and to explain in an engaging way with interesting information how the company will be run for the next 3 to 5 years. The entrepreneur must put all the "hows" and "needs" together in one neat package. The human and physical resources must effectively interrelate with the marketing, operational, and financial strategies of the company. Unless an entrepreneur has magical powers of persuasion, this is not the time to try to fake it. The business plan is considered a vital sales tool for approaching and capturing financial sources, be they investors or lenders. They want to know that the entrepreneurial team has carefully thought out the plan. They want to be convinced that the team has the skills and expertise needed to actively manage the company and that it is prepared to seize opportunities and solve the problems that arise. That's why the business plan must be well prepared, professional in tone, and persuasive in conveying the company's potential. It cannot be stressed too strongly that a good business plan is the cornerstone of a successful financing. If you want investors' money, you've got to give them good reasons to buy in. The business plan is where you lay out the reasons. It does not have to be unduly lengthy or complicated, but it must be informative and relevant. It needs to maintain logic and order and show the company as effectively positioned as a good investment. More important, the business plan should be specifically directed to the funding source and satisfy its particular concerns. You would orient and write a plan somewhat


differently for presentation to a banker than you would for a venture capitalist, an underwriter or an institutional investor. The venture capitalist will want to know what risks are involved, whereas the banker wants more information about how marketable the assets are. These concerns must be individually addressed. There are no hard and fast rules for preparing a business plan and no universal format. The key word is ingenuity. Strive to be inventive, interesting and captivating. Here are some general guidelines covering the basic elements of a business plan. These should be helpful in writing any business plan, no matter to whom it is directed. 1. Make It Easy to Read There is so much competition for investment dollars today that if you want to get the jump on the next person, your plan will have to be well formatted and easily understood. Your introductory statement summarizing your operation is one of the most important sections; it must capture readers' attention and motivate them to read the balance of your plan. Caution: If they need a dictionary at their side in order to read, they'll stop. Construct a glossary if you have to use many technical words. 2. Be Sure Your Approach Is Market Driven Not product-driven. If you want to obtain money, you must understand that investors are primarily interested in how the product or service will react and be received in the market. Before they buy into your plan, they want to see your research demonstrating and substantiating how the customer will benefit and be motivated to purchase. 3. Qualify the Competition Start by qualifying your product according to cost or time saving and revenue generation. Also, show your projections for sales growth, how your product or service is superior to others and how you intend to exploit the competitive advantage. 4. Present Your Distribution Plan Be specific as to how the company will sell and distribute its product or service. Clearly describe the methods and what it will cost to get the product or service into the ultimate customer's hands. 5. Exploit Your Company's Uniqueness Explain what will give your company a competitive edge in the marketplace--special attributes like a patent, trade secrets, or copyrights. 6. Emphasize Management Strength Show proof that the company is comprised of highly qualified people who can cover all the bases. Indicate the incentives that will keep them together, and how they, the directors, and the advisers possess the necessary credibility.

7. Present Attractive Projections Paint a realistic picture--substantiated by assumptions--of where your company is going with funding. Be detailed and keep it credible. Good validated projections and forecasts are impressive. 8. Zero In on Specific Investors As mentioned earlier, it's different strokes for different folks. Design versions of the plan to fit the idiosyncrasies of each source you plan to approach. A banker's interest lies in stability, security, cash flow coverage and sound returns, whereas a venture capitalist is more interested in high leverage resulting in significant returns. Both want to know how the proceeds are going to be used. 9. Close with a Bang Drive home the point that your company is a terrific opportunity. Be definite about how well your company will do so that investors understand that will at east get their money back.

The Last Step: Obtain Critical Reviews
You are not finished yet. One of the big differences between ordinary plans and good entrepreneurial plans is that people who have seen many different kinds of plans have reviewed them. After you have drafted your business plan, solicit feedback on it. Ask a cross section of people in and out of your industry, whose judgment you respect, to review it. Don't fall in love with your wordsmithing. Make any revisions that are necessary then prepare a good oral presentation. You should have both a 2-minute and a 5-minute oral attention grabber. Follow up with a detailed fifteen to thirty-minute presentation. All should be modeled on your written business plan. When preparing your financial projections, avoid the shortcut of relying on packaged computerized templates - those preset formats in which you plug in figures and percentages. Individualize your financial projections. Think them out carefully. No two businesses are alike. Clearly indicate where and when you bring on additional personnel, keeping in mind that each new hire adds other costs beyond salary such as benefits, desks, supplies and possibly even another computer or additional travel expenses. These items need to be tracked for each expense period. Don't just show advertising costs as a percentage of sales. Most advertising expenditures are made some months before sales result. A lot of them have to be prepaid before they are run. It's just not justifiable to show "plugged" computer figures for most expense items.

Individualize them. Keep in mind that a start-up company will not fit the standard industry norms. Your projections should include the financial obligations of bringing your product or service to the marketplace, enlisting new management people as well as workers, taking on more physical space or manufacturing capacity, purchasing support materials and services and monitoring buildups in inventory and accounts receivable. This outline is just a preliminary planning guide. It's up to the reader to add lots of detail, meticulously gathered and presented in a succinct, entrepreneurial manner. For a complete guide to writing a business plan, the McGraw-Hill Guide to Writing a High-Impact Business Plan is probably as good as any other. The book includes an offer to receive a free disk with a complete business plan and financial spreadsheets.

One Suggested (not etched in stone) Format
1. Indicate full formal name of company ABC Company/ABC Corporation/ABC Inc. (If you have a logo, use it.) 3. List full street address 555 West Fifth, Suite 55, Anytown, State, ZIP USA 4. List mailing address if different Mail address P.O. Box 55, Anytown, State, ZIP USA 5. List phone, Fax/telecopier, e-mail and web site information 6. List principal contact name and title E. E. Entrepreneur,- President Home phone number (optional) 7. Date the plan Month and year 8. Table of Contents Categorize the contents. Use section names and page numbers. You have a choice of only main category headings (History, Management, Product, etc.) or detailed categories (History--date founded, founding members, place founded, etc.). Make note of any charts, tables, or graphs. 9. Executive Summary A very important part, the executive summary briefly sets forth the contents, taking key sentences from each section of the plan to overview the project for the reader. Limit the summary to two or three pages: more is too many. Consider using your mission statement or a brief visionary type of paragraph. It should be concise and to the point. This section is the first thing that investors read, and they may not read further if you haven't captured their interest.

10. History The first several paragraphs should briefly describe the product or service, to whom it is sold, the current status of your industry, and where your new company fits in. This is your second chance to give the reader an overview to establish a basis for detailed understanding. After this brief introduction, include a description of how, when, and by whom the company was started, its achievements and acceptance setbacks. Then bring these experiences to current-day status. 11. Product or Service To succeed with an entrepreneurial company, you must know your product or service; to succeed in obtaining capital, you have to be able to clearly describe your product or service. After giving a simple, straightforward description, outline the need for the product or service in today's marketplace, how it will make a difference, the benefits derived from using it (or what will make the customer buy it), and its advantages. Explain any special training needed to sell or use it. Include all relevant regulations that may affect its sale or use. Expound on any exclusivity or technological uniqueness. Unless your plan is going only to specialists in your industry area, assume you are writing for the layperson. Forget industry jargon and replace it with words that the nonspecialist can understand. If you tend to write overly technical descriptions, engage a professional writer. 12. Market Description and Analysis This section profiles three key areas: customers, industry, and competition. 13. Prepare a Customer Profile Describe what customers form your market, where they can be found, why they purchase your product or service rather than another, and whether it appeals to a single individual or to groups. Document quality, warranty, service, and price significance: pinpoint the buyer and user. Point out political influences, if any. Describe market coverage, whether local, regional, national, or international. 14. Prepare an Industry Profile Discuss pertinent trends, past, present, and future. Offer available statistical data on sales and units. Use charts, graphs, and tables if they can make the presentation clearer and more impressive. Refer to trade associations if helpful. 15. Prepare a Competitive Profile Stress advantages of price, quality, warranties, service, and distribution. Include the operational strengths and weaknesses. Project potential market share trends in sales and profitability. Don't guess in this section. Check all your facts and note all your sources. You can be sure that these will be checked with a fine-tooth comb during an investor's due diligence process. If you're citing voluminous reports or statistical information, note that you have them available for further review.

16. Marketing Strategy This is a critical section that should clearly specify the company's marketing goals, how they are to be achieved, and who will have the responsibility for achieving them. Qualify all distribution methods (representatives, dealers, and so forth) and describe any planned advertising or public relations activities. Include references to sales aids, foreign licensing, and training plans as appropriate. Simply, detail how you are going to sell the product or service. 17. Operations Plan This section is primarily oriented toward facilities, manufacturing capability, and equipment. Disclose all present capabilities as to equipment and facilities, as well as further projections for offices, branches, manufacturing, and distribution. It often helps if you include current floor plans as well as expected future space plans for production or manufacturing companies. For all fast-growth companies, task/time charts can be especially useful in this section. They help impress on the reader that the Entrepreneur has a real handle on the operational challenge. 18. Research and Development The length of this section depends on whether you're a service or product company and--if a you're a product company--on how technical your product is. The object is to explain all past research and development efforts and accomplishments as well as future expectations. Here is your opportunity to justify past time and dollar expenditures. Substantiate the patent ability of inventions, proprietary processes, or other advantages that your company will have over the competition and the resultant, anticipated market impact. 19. Schedule Describe the timing and sequential steps that will be taken to bring the company up to full speed. Graphs or charts help indicate the timing and interrelationships of the major events in the company. Take it month by month for the first year. Thereafter, indicate the progress expected quarterly. Areas that may be important include completion of prototypes, starts of beta tests, early significant sales, when key people are to be hired, physical expansions or moves, opening of branches, trade show or convention dates, major equipment purchases, and the like. 20. Management In the eyes of the investors, the quality of the management team often determines the potential success of the company. Consequently, this section should cover career highlights, accomplishments, and positions held, with an emphasis on good performance records. Describe how the team has worked together in the past. List all directors, consultants, advisers, and other key professionals who will be involved in company operations and point out how they add value. Detailed resumes of key management should be appended with bios of others as appropriate.


21. Risks and Problems Risks could be a red flag. There are diverse opinions about the inclusion of this category. Some investors object to the obvious and prefer to discover their own negatives. Others prefer that the company openly acknowledge risks and potential problems. It's a toss-up; however, high-profile, success-threatening risks should be brought out. 22. Use of Proceeds Judiciously present a timetable indicating how much money will be needed, when it will be needed, and how it will be used. Most companies require multiple stages of financing, including both debt and equity. Show the proposed capital structure, including who is going to own what part or percentage of the company at what stage. Start-up plans need to detail start-up use of proceeds and then generalize on the additional stages. 23. Finances Present the company's current equity capital structure as well as future plans. Itemize the equity payments made with dates paid. List all outstanding stock options. Include both historical and current profit and loss statements and balance sheets. Present current and proposed salary structure for those who are already on board and those who will come on board at a later date. Show projections, including balance sheets, profit and loss statement, and cash flow studies. These should be month-by-month for the first year, quarterly for the second and third years, and yearly thereafter. It is mandatory that detailed assumptions accompany all projections. It is also very helpful if the very first part of this section summarizes the details. In fact, in many cases, details can be appended or supplied separately. 24. Appendix Include a glossary (if pertinent) and all essential pieces of evidence, such as resumes, product brochures, customer listings, testimonials, and news articles. Expect to spend a minimum of 2 or 3 weeks and 20 to 30 hours writing your plan. It's not unheard of for an entrepreneur to spend up to six months putting together a detailed plan. Additionally, you will need to spend some time preparing and rehearsing your oral pitch. Remember, your words and story not only have to paint a pretty picture; they must be persuasive as well. It's of little use to approach the writing of a business plan as a necessary evil. Rather, look at it as a helpful tool that can be used to exploit the advantages of your product or service.

Another Suggested (not etched in stone) Format (courtesy of David Ludlum)
Note: Not all plans require all topics. I.The Opportunity A.The Business — an overview with details on the business model and sources of profitability (such as margins, scalability, cash flow) B.Customers and Their Needs C.Market Size and Growth — identify segments

D.Products and Services E.Competitors and Positioning — establish categories and how the company is positioned against them, then how it is positioned against individual companies in a category into which it fits; bases include: 1.markets and segments 2.product/service line and/or features 3.pricing 4.distribution F.Sustainable Competitive Advantage G.Opportunities for Expansion and Diversification II.The Organization H.Management 5.responsibilities, compensation, incentives 6.experience, knowledge of the market, industry contacts, experience together 7.future needs and plans 8.directors and advisors I.Development - technology and product or service: launch requirements, costs, partners, timetable J.Operations — facilities, processes, and personnel, including costs (compensation, recruitment, and training; key materials, suppliers, and equipment; inventory needs, quality control, capacity; future needs and plans) K.Marketing and Sales — how the company reaches the right decision makers (promotion, lead generation, in-house sales vs. representatives, incentives, future expansion)
III.Financial Projections

(three to five years pro forma) L.Income Statements M.Balance Sheets N.Cash Flow Statements — highlight breakeven, cumulative negative and positive cash flow O.Assumptions — by product or service, possibly including market share and where it comes from as well as growth, repeat sales, cyclicality, seasonality, concessions, sales capacity and costs

IV.The Investment P.Financing sought and uses — previous financing; ownership and rights; future needs Q.Exit options

Sources of Profitability in an Industry
V.Strength With Respect to Buyers (distributors or customers)

of buyers - each buyer accounts for a small proportion of sales S.Purchasing power of buyers - buyers are profitable or wealthy

T.Small cost to buyers - the purchase is a relatively small one for the buyers U.Value added to buyers - the product or service is valuable to the buyers V.Differentiation of product or service - its different from competing ones W.Switching costs - buyers can be locked in from a learning curve,

technological compatibility, frequent buyer premiums, etc. X.Make/Buy or Substitution - it's difficult for buyers to make it or use a substitute Y.Information - buyers have limited information about the market VI.Strength With Respect to Suppliers
Z.Availability high - the input is not in short supply AA.Fragmented suppliers - the input is bought or available

from a number of sources BB.Dependence of suppliers - suppliers depend on you as an important customer CC.Value added small - the input is not particularly valuable to you DD.Substitutes available - you have alternatives to the input EE.Differentiation small - there is little differentiation among competing suppliers FF.Switching costs low - see I.F above GG.Make/Buy - it is feasible to make the input rather than buy it VII.Competition (factors that lessen competitive intensity)

rate - the industry is growing rapidly II.Existing and potential competitors 9.number and strength - competitors are few and/or unequal in strength 10.strategic or emotional stakes - competitors don't have strategic or emotional commitment to the industry JJ.Entry barriers (note: startups will need to circumvent them) 11.cost/experience advantages - established competitors benefit from economies of scale or cumulative output 12.input/distribution advantages - established competitors have a lock on supplies or distribution channels 13.customer loyalty/switching costs - established competitors have a lock on customers (see I.F above) 14.capital requirements - large investments are needed to get started 15.government policies - regulation deters new entrants KK.Exit barriers 16.specialized assets - equipment or other assets can be used in other industries 17.expenses - one-time costs of getting out (i.e., severance pay) aren't significant 18.government restrictions - governments don't subsidize


Sources of Sustainable Competitive Advantage
VIII.Size LL.Scale MM.Experience NN.Scope IX.Access (to one of the following) OO.Know how (i.e., technological process; must be difficult to duplicate) PP.Inputs 19.backward integration 20.contracts 21.reputation/relationships QQ.Markets 22.switching costs 23.complementary products 24.reputation/brand 25.relationships X.Constraints on competitors RR.Public Policy (i.e., copyrights, patents, other intellectual property protection) SS.Defensiveness (i.e., from fear of cannibalization; not very reliable) TT.Response lags (inflexibility, difficulty of matching initiatives; not very reliable)

Include a glossary (if pertinent) and all essential pieces of evidence, such as resumes, product brochures, customer listings, testimonials, and news articles.

Survival Tips for Business Plan Writers in the New Venture Capital Era
I. Try even harder to focus Even during fatter times, many entrepreneurs fall victim to a lack of focus. They often have a difficult time putting aside some of their intended markets, products, services, or features and focusing on the ones that will really differentiate their ventures. But those are the kinds of decisions that growing companies with limited resources must make, and today business plans need to be more mindful than ever of limitations on resources.


It's true that with really new markets or products it's not always possible to identify the winning elements. Nevertheless, at a minimum, a business plan should reflect an ability to make those kinds of decisions, whether the choices prove to be optimal or not. Besides, when it comes to actually reading a business plan, less is more for VCs. II. Be more granular about the near term The VC mantra this season is "path to profitability." In business plans for earlystage ventures, the path is defined by milestones that focus on revenue growth and cost control. Early on, VCs want to see milestones for things like the completion of product development or beta tests, or the acquisition of pilot customers or distribution partners. Indeed, most VCs limited their investments to companies that have already accomplished some of these things, particularly when members of the management team don't have a track record of success with previous ventures. The most encouraging signs for a VC are accomplishments that indicate that a company is building up a momentum that will carry it forward. III. Pay more attention to marketing and sales With Internet business plans, there's never been much of a consensus about how important it is to provide a detailed discussion of marketing and sales. The answer is -- it depends. It's OK to leave the discussion somewhat speculative if the market, products, or services are truly new, and clearly satisfy a critical need. It's not OK to leave the discussion speculative just because no one on the management team really understands how to market and sell the products or services to the target customers. It's particularly not OK if the business plan involves selling things online and there's no understanding of the cost of attracting customers. This is because one of the leading causes of the ongoing VC winter is the implosion of e-commerce ventures due to the high cost of customer acquisition. It may seem simplistic, but the costs of acquiring a customer should be measured against the lifetime value of the customers. IV. Put yourself in the VC's shoes At times, it's helpful not to overestimate the sophistication of the analysis that a VC brings to an investment. At it's most elementary level, the analysis runs like this: "How much money will I have to put in, how much can I get back, and when can I get it?" Entrepreneurs traditionally have tended not to pay as much attention as VCs to the first and third questions. Many VCs have always been more interested in how much they'll have to put into a venture than in how much they might get out of it. In line with the season's theme of constrained resources, the former issue has taken on primary importance as VCs send more money than expected into


their current portfolio companies and extend the investment horizons for new deals. In addition to being more precise in qualitative terms, it's now more important than ever to accurately forecast expenses through the next anticipated round of financing. It's also necessary to be able to defend the expenses as both frugal and realistic, and to make a reasonable projection as to how much follow-on funding will be required. For businesses that rely on a lot of people or equipment, it is particularly important to demonstrate you can scale up to a significant size while achieving a targeted level of profitability. V. Put yourself in the VC's shoes -- Part II The second critical concern of VCs that entrepreneurs don't always fully appreciate is how they are going to realize their payday. The ideal scenario is an IPO. It typically requires a period years for an early-stage venture to pull an IPO off. VCs, however, don't seem to look beyond the current state of the IPO market, and currently that market is dead, so VCs need to have greater confidence that the ventures that they invest in will make attractive acquisition candidates. For Internet businesses, this generally has been another issue of secondary importance. Attempting to make accurate predictions about a liquidity event that is months or years away has been a challenge at best. In today's environment, providing expertly informed, compelling speculation about potential acquisitions provides the members of a management team with another opportunity to demonstrate their knowledge of their industry -- which stands to reassure a rattled VC. VI. Management, Management, Management. Well, this is nothing new. VCs have always bet on people first and ideas second, knowing that ideas change but people do not. If you want to raise money for your company, the best thing you can do right now is find a serial entrepreneur who has sold or taken a company public and make him or her your CEO. Don’t be tied to the title of CEO, because if you have not raised VC money before, it is highly unlikely you will do so for the first time in today’s market. Instead, leverage someone else’s track record, and enjoy the title of chairman or president. VII. Project Real Revenues Based on Boring Business Models. One of the most soughtafter segments of the media space today is business information systems (BIS), or subscriptions to databases (think: LexisNexis, Hoover's, et al.), not flashy magazines like Fast Company or cable channels like Oxygen. Why? Sexy doesn't pay the bills, but subscriptions do. Advertising goes away in a recession, but subscriptions stay stable. What other old economy revenue model can you make more efficient and ride to a revenue ramp of $30 million to $50 million over the next three to five years? VIII. Show a Slow Burn and Anticipate the Unexpected. The days of wild growth, freeflowing capital markets, and "We'll cross that bridge..." are over. Your model should

anticipate (and I'm not joking here) things like war, terrorism, and recession. VCs have learned over the past year that things can, in fact, always get worse, and they will appreciate your honesty if you say, "If things get really bad, we plan on weathering the storm by trimming our staff by x-percent and hiring freelancers," and concepts like that. IX. Swim With the Current, if at all Possible. You need to be pragmatic at a time like this. You can raise capital for life sciences, software, security, and nanotech, but you will not raise VC funds for pure content, e-commerce, or B2B plays. If you are stuck on one of those business models, consider alternate funding options, like strategic money, or friends and family members. VCs are by nature pack hunters, and you're not going to convince them otherwise.

Why Produce a Comprehensive Business Plan?
Some entrepreneurs may question the necessity of a business plan, citing theoretical, successful firms that never had one. Times have changed. When the goal is to raise money, it's not only the entrepreneur's money that is at stake. Advisers, team members, directors, investors and bankers need to be thoroughly convinced. They want to know that they will not be wasting their time and money. They want to know that the entrepreneurial management team has a clear sense of direction and is prepared to move toward its established goals. A good business plan is the answer. What's more, much of the same information would have to be gathered anyway, to be made available to potential investors before they could invest in the company. The operating plan helps keep both management and staff focused on the tasks at hand. The parts that are pertinent to various departments can be pulled from the master plan and passed on to the appropriate staff individuals responsible. Continuous updates should be given top priority in all entrepreneurial companies. The basic plan should be reviewed quarterly--at minimum, semiannually. Remember, for investors, the business plan is what they sign up for and it is their benchmark for accountability. They intend to hold management responsible for achieving the goals and objectives that are set out in the plan.


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