Chapter 9—Proof of Concept: A New Approach to Business Plans

TRUE/FALSE

1. Somewhere in the micro strategy process, the business is actually launched in a small, controlled way.

ANS: T PTS: 1 REF: p. 204

2. POC tests involve field work with the customer.

ANS: T PTS: 1 REF: p. 203

3. Submitting a professionally crafted business plan is less important than making it clear what the
entrepreneur has accomplished in the way of starting the business.

ANS: T PTS: 1 REF: p. 202

4. The strongest product POC is a working prototype.

ANS: F PTS: 1 REF: p. 206

5. A feasibility study and a business plan are essentially the same.

ANS: F PTS: 1 REF: p. 214

6. Building a POC prototype reduces the risk of failure and clarifies customer needs.

ANS: T PTS: 1 REF: p. 206

7. Investors tend to look for technology-driven companies rather than market-driven companies.

ANS: F PTS: 1 REF: p. 208

8. A highly focused executive summary and pitch presentation are best developed from a completed
business plan.

ANS: F PTS: 1 REF: p. 210

9. The executive summary of the business plan should be no more than two pages long.

ANS: F PTS: 1 REF: p. 213

10. As long as the market is growing, it is more important that the entrepreneur is solving a critical pain
with a value proposition the customer quickly understands.

ANS: T PTS: 1 REF: p. 211

MULTIPLE CHOICE

1. A ____ depends on a feasible business model that has been market-tested and is reliable.
a. feasibility study
b. marketing plan
 c. business plan
d. micro strategy
e. POC
ANS: C PTS: 1 REF: p. 202

2. The new environment for business planning makes the case for the importance of a feasibility study
and ____ to prove the concept and enable the founding team to launch the venture before completing
the formal business plan.
a. micro strategies
b. marketing plan
c. POC
d. executive summary
e. prototype
ANS: A PTS: 1 REF: pp. 202-203

3. A good way to test a new concept in the marketplace is through a ____.

a. feasibility study
b. marketing plan
c. business plan
d. market test
e. business test
ANS: A PTS: 1 REF: p. 202

4. A ____ is simply evidence that a technology, product, business model, or idea is feasible.
a. prototype
b. marketing plan
c. business plan
d. proof of concept
e. feasibility study
ANS: D PTS: 1 REF: p. 203

5. Entrepreneurs typically face two types of POC: the technology or product POC, and the ____ POC.
a. prototype
b. marketing
c. business plan
d. operations
e. business model
ANS: E PTS: 1 REF: p. 203

6. The ____ for POC consists of three primary elements: outcomes, assets, and actions.
a. prototype
b. micro strategy
c. business plan
d. feasibility test
e. executive summary
ANS: B PTS: 1 REF: p. 204

7. The micro strategy process repeats itself over and over again and with each successful outcome, the
new business is moved toward a complete ____.
a. prototype
 b. proof of concept
c. business plan
d. feasibility test
e. executive summary
ANS: B PTS: 1 REF: p. 205

8. To avoid ____, the team needs to change its angle of vision by looking at the situation in a new way
and then testing alternative hypotheses.
a. contingency planning
b. relying on intuition
c. pattern recognition bias
d. excessive optimism
e. None of these choices
ANS: C PTS: 1 REF: p. 206

9. A ____ will tell the entrepreneur whether people are interested in the product/service and prove that
it's worth the time and money to build out a more elaborate site.
a. virtual store
b. website
c. beta site
d. virtual prototype
e. None of these choices
ANS: C PTS: 1 REF: p. 207

10. Anyone investing in a new venture has four principal concerns: rate of growth, return on investment,
____ and ____.
a. degree of risk / protection
b. cash flow / degree of risk
c. founding team / protection
d. balance sheet / income statement
e. assets / equity
ANS: A PTS: 1 REF: p. 208

11. ____ are primarily interested in the company's margins and cash flow projections.
a. Bankers/lenders
b. Suppliers/creditors
c. Customers/stakeholders
d. Investors
e. Strategic partners
ANS: A PTS: 1 REF: p. 208

12. So that entrepreneurs do not have to incur the tremendous cost of purchasing equipment for a
manufacturing plant, they may ____.
a. acquire stakeholders
b. purchase suppliers
c. form a strategic alliance
d. downsize their operations
e. change their strategy
ANS: C PTS: 1 REF: p. 209
13. Which of the following is not a flaw that investors commonly find in business plans?
a. Overly optimistic projections
b. Lack of enthusiasm
c. Too much hype
d. Poor explanation of the business model
e. No demonstration of customer demand
ANS: B PTS: 1 REF: p. 208

14. Today most investors want to see a well-written ____ that tells a compelling story and grabs their
interest.
a. business plan
b. elevator speech
c. executive summary
d. proof of concept
e. marketing plan
ANS: C PTS: 1 REF: p. 210

15. An executive summary should demonstrate a clear link between the ____ and the ____.
a. customer / market
b. founder / team
c. return on investment / cash flow
d. pain / solution
e. None of these choices
ANS: D PTS: 1 REF: p. 211

16. ____ is created when the business is adequately capitalized and has highly regarded investors, an
experienced management team, customers, a unique technology, product, or service, the ability to
continually innovate, and a rapidly expanding market.
a. Value
b. Income
c. Cash flow
d. Equity
e. None of these choices
ANS: A PTS: 1 REF: p. 212

17. Entrepreneurs should keep in mind that the purpose for doing a/an ____ is to sell the business.
a. prototype
b. executive summary
c. feasibility analysis
d. business plan
e. None of these choices
ANS: B PTS: 1 REF: p. 214

18. Once the new venture has passed the startup stage, additional value is created by ____.
a. bankers/lenders
b. suppliers/creditors
c. significant customers
d. low return on equity
e. investors
ANS: C PTS: 1 REF: p. 212
19. Which section of the business plan details features and benefits as well as the plan for prototyping and
testing?
a. Industry/market analysis
b. Operations plan
c. Marketing plan
d. Product/service plan
e. None of these choices
ANS: D PTS: 1 REF: p. 216

20. The ____ plan focuses on issues related to processes the venture will own and outsource, as well as
where it will get its raw materials, and what type and quantity of labor will be required.
a. operations
b. marketing
c. financial
d. growth
e. industry
ANS: A PTS: 1 REF: p. 215

21. The ____ plan specifies the legal form of organization that the venture will take, whether that be sole
proprietorship, partnership, LLC, or corporation.
a. operations
b. marketing
c. financial
d. organization
e. industry
ANS: D PTS: 1 REF: p. 215

22. A financially healthy company will see its major source of ____ coming from operating sources, such
as sales.
a. cash inflows
b. cash outflows
c. profit
d. equity
e. assets
ANS: A PTS: 1 REF: p. 217

23. The ____ gives information about the projected profit or loss status of the business for a specified
period of time.
a. balance sheet
b. statement of cash flows
c. current ratio
d. profit margin
e. income statement
ANS: E PTS: 1 REF: p. 217

24. The ____ is different from the other financial statements in that it looks at the financial health of the
business at a single point in time.
a. balance sheet
b. statement of cash flows
 c. current ratio
d. profit margin
e. income statement
ANS: A PTS: 1 REF: p. 217

25. The higher the ____, the more liquid the company is and the more easily these assets can be converted
to cash to pay off short-term obligations.
a. return on investment
b. inventory turnover
c. current ratio
d. profit margin
e. income statement
ANS: C PTS: 1 REF: p. 218

26. Which ratio uses net income and net sales from the income statement to give the percentage of each
dollar of sales remaining after all costs of normal operations are accounted for?
a. Return on investment
b. Inventory turnover
c. Current ratio
d. Profit margin
e. Income statement
ANS: D PTS: 1 REF: p. 218

27. The ____ plan reflects recognition that sometimes the "best laid plans" do not work the way you
intended.
a. business
b. production
c. financial
d. contingency
e. media
ANS: D PTS: 1 REF: p. 219

28. The section of the business plan that presents the strategy that will be used to ensure that the business
is sustainable and continues to scale over its life is included in the ____.
a. financial plan
b. growth plan
c. marketing plan
d. contingency plan
e. production schedule
ANS: B PTS: 1 REF: p. 219

29. Which of the following is not a principal concern of investors?

a. Rate of growth
b. Return on investment
c. Degree of risk
d. Market analysis
e. Protection
ANS: D PTS: 1 REF: p. 208

30. Which of the following is not a concern for lenders when they consider an entrepreneur for a loan?
 a. The amount of money that is needed
b. The kind of positive impact the loan will have on the business
c. The number of strategic partners the venture has
d. The kinds of assets the business has for collateral
e. How the business will repay the loan
ANS: C PTS: 1 REF: pp. 208-209

SHORT ANSWER

1. What are the four principal concerns of investors?

ANS:
Rate of growth, return on investment, degree of risk, and protection.

PTS: 1 REF: p. 208

2. What are the primary concerns of bankers/lenders when considering a business plan?

ANS:
The amount of money the entrepreneur needs. The kind of positive impact the loan will have on the
business. The kinds of assets the business has for collateral. How the business will repay the loan.
How the bank will be protected if the business does not meet its projections. The entrepreneur's stake
in the business.

PTS: 1 REF: p. 208

3. Briefly describe a compelling executive summary and pitch.

ANS:
Convey the compelling story quickly and memorably; highlight the critical elements of the business
that provide a competitive advantage; present a coherent path to profitability and success that makes
sense; and demonstrate that the team can successfully execute the plan.

PTS: 1 REF: p. 210

4. What questions should be answered to create a compelling executive summary?

ANS:
What is the compelling story? What pain is being addressed? How is the venture solving the problem?
What is the competitive advantage? Can the venture make money? Can the founding team serve that
need? Why is now the right time to launch? What is the team seeking from investors?

PTS: 1 REF: pp. 210-213

5. What are the most common mistakes that entrepreneurs make in developing a business plan?

ANS:
Projecting rapid growth beyond the capabilities of the founding team. Envisioning a three-ring circus
but having only one ringleader. Projecting performance that exceeds industry averages in some or all
areas of the business. Underestimating the need for capital. Employing price as a market strategy for a
product or service. Not investing capital in their own business.
 PTS: 1 REF: pp. 220-221

6. What are the components of the business plan?

ANS:
Executive summary. The business concept. The founding or management team. Industry/market
analysis. Product/service development plan. Operations plan. Organization plan. Marketing plan.
Financial plan. Growth plan. Contingency plan and harvest strategy. Timeline to launch. Appendices.
Endnotes.

PTS: 1 REF: pp. 215-220

7. How does an entrepreneur benefit from a proof of concept with a prototype?

ANS:
The entrepreneur develops a clear understanding of customer needs; changes can be made early in the
process when they are less costly; and the prototype reduces the risk of failure.

PTS: 1 REF: p. 206

8. Briefly outline the entrepreneur's micro strategy for proof of concept.

ANS:
It consists of three primary elements: (1) outcomes, which are the near-term goals that the entrepreneur
is attempting to achieve; (2) assets, which are the human, social, physical, and financial assets needed
to achieve the outcomes desired; and (3) actions, which are the tasks the entrepreneur must undertake
to achieve the necessary outcomes.

PTS: 1 REF: pp. 204-206

9. Briefly discuss the elements of a successful business plan presentation.

ANS:
It should take less than half an hour. It should address the components of the business plan. It should
catch the audience's attention quickly. It should convey a compelling story of a problem of pain in the
market. It should convey how the new venture will solve the problem or alleviate the pain. The
presenter should not use a podium. The presenter should feel free to move around. The presenter
should talk directly to the audience and maintain eye contact. Professional visual aids should be used.

PTS: 1 REF: p. 222

10. Briefly discuss what the presentation team should be concerned about when responding to questions
from investors.

ANS:
They generally ask questions to which they already know the answers. This is a test to see whether the
founding team knows what it is talking about. They ask questions that either require an impossibly
precise answer or are so broad that it is hard to tell what they are looking for. The type of question that
poses the most problems for the founding team is the inordinately complex one that contains several
underlying assumptions. If the presenter does not know the answer, it is best to admit that he or she
does not have the answer but express willingness to find the answer after the presentation. The
presenter should not be defensive if criticized by the investor. The presenter should not turn the
criticism in any way on the audience.
PTS: 1 REF: pp. 222-223