AS YOU’VE PROBABLY GLEANED BY now, entrepreneurship requires far more than just a brilliant business idea. (If that were the case, this book would have been a lot shorter.) Now that you’ve worked out a concept, it’s time for the tricky part: figuring out how to turn your vision into reality.
It’s our opinion at Inc. that the next step of the entrepreneurial journey is the business plan—or at the very least, a rough version of what will become your formal business plan. Whether you’re a mom-and-pop bakery or an up-and-coming tech company, it’s wise to get your startup idea out of your head and onto paper (or an online document).
What’s a business plan, exactly? Simply put, it is a living, breathing document that describes your concept, outlines your goals, and maps out the strategies you’ll take (whether that’s marketing to customers or raising money from investors) to turn your idea into a successful company.
“Entrepreneurs are people who dream up new ideas, and then commercialize them into new businesses. Most people believe that the hard part is coming up with the idea, and the easy part is turning it into a business. Yet, in my experience as a mentor to entrepreneurs, the majority of failures I see are related to starting and growing the business, not developing the solution.”
MARTIN ZWILLING, veteran startup mentor and founder of Startup Professionals
Now, right away, we want to be clear. When the topic of business plans comes up, it tends to polarize people into two separate camps:
1.Those who think business plans are worth the effort to put together
2.Those who think writing business plans is a waste of time (except, perhaps, if you’re trying to raise money)
So, who’s right? We spoke to Ellen Rohr, founder of Bare Bones Biz, a venture capital and consulting company, who says the answer lies somewhere in between.
“The primary purpose of a business plan is to help you gain clarity and hold yourself accountable for moving in the direction of what you want,” she says. (For more on the benefits of that, please see “Five Reasons Why You Need a Business Plan,” page 49.) “The secondary purpose is to attract investors, or get a loan, or get buy-in from your spouse, partner, parent, kid, team members, or whomever,” she says. “Unless you have your intentions for your business written down, you might miss an opportunity to communicate it to someone else or even to clarify things for yourself.”
Are business plans ever a complete waste of time? Possibly, if writing a full-blown business plan takes weeks or months of your effort, or distracts you from getting going, which is a big reason why that second camp tends to discount them. (Please see “The Case Against Writing a Business Plan,” page 59.)
In recent years, much emphasis has been placed on the “lean startup” method, popularized by Eric Ries and Steve Blank, in which an entrepreneur essentially starts the process of developing a company in real time. (More on that later in the chapter.) We’re fans of the lean startup method, in which an entrepreneur typically puts a bare-bones version on the market, getting customer feedback and making constant iterations to the business model. The method de-emphasizes the old-school business plan, instead emphasizing “think big, start small, fail quickly, scale fast.”
Anecdotally, we find most successful entrepreneurs tend to land somewhere in the middle. They incorporate bits and pieces of both schools of thought, starting out with a simple business idea, testing it, tweaking it, and sometimes pivoting wildly if customer feedback demands it. (Please see case study of Slack on page 68.) Then they eventually encapsulate product descriptions, market strategies, and sales goals into a formal business plan as the company takes shape or as the need arises. And usually, that “need” is financing—most lenders will want to see a business plan, and most investors will want to see at minimum the executive summary of a business plan.
In the earliest stages, we recommend crafting at least an informal business plan (see page 58) in which you highlight key elements that define your vision while outlining initial activities or milestones that will drive you toward your goal.
“Build sports car. Use that money to build an affordable car. Use that money to build an even more affordable car. While doing above, also provide zero emission electric power generation options. Don’t tell anyone.”
ELON MUSK, summarizing his business plan in 2006 in a blog post on Tesla’s website
In the pages ahead, we’ll take a look at the formal business plan—which (at the least) should get you thinking about the nitty-gritty of your startup, including mission, business model, structure, existing strategic relationships, and your ultimate plan for profitability.
Will having a business plan make success inevitable? Absolutely not. But great planning often means the difference between success and failure.
Starting a business? You should write a business plan—even if you’re not raising money anytime soon, says Inc. columnist David Ronick, a serial entrepreneur. Here’s why Ronick thinks they are a must.
1.It will help you avoid big mistakes. The last thing you want to do is work on your startup for a year, only to realize you were doomed to fail from the start. Many founders learn the hard way that they underestimated capital needs or took on partners with the wrong skills or lacked a viable way to make money. Developing a business plan can help ensure that you’re sprinting down the right path.
2.It will help counterbalance emotions. During the startup phase, you’re prone to be “manic”—so passionate about your ideas that you lose sight of reality. At other times, you’ll be overwhelmed by doubt, fear, or exhaustion. When emotions peak, a business plan helps you step back and take an objective look at what you are doing and why.
3.It will make sure everyone’s on the same page. Chances are, you are not building a company by yourself. Ideally, you’ll have partners, so you can launch faster, smarter, and with less need to pay employees or suppliers. Even if you don’t have partners, you’ll have family, friends, and advisors involved. Sharing your business plan keeps everyone headed in the same direction.
4.It will help you develop a game plan. At a startup, execution is everything. That means you have to set priorities, establish goals, and measure performance. You also need to identify the key questions to answer, like “What features do customers really want?” “Will customers buy our product and how much will they pay?” and “How can we attract customers in a way that’s cost effective and scalable?” These are all things you’ll address during the business planning process.
5.It will help you raise capital. If you raise or borrow money—even from friends and family—you’ll need to communicate your vision in a clear, compelling way. A good business plan will help you do just that. A study by Babson College found that startups with a business plan raised twice as much capital as those without a business plan within the first twelve months.
A classic business plan is a blueprint for your business that can help you navigate and manage your company while also helping potential investors, partners, lenders, and others understand your business strategy and your chances at success.
A business plan, typically thirty pages or so in length, is never quite finished because you’re ideally always revising it, reviewing it, and building upon it. In fact, more critical to your business’s future than a plan is the process “that you undertake on a regular basis to hopefully keep your ship headed in the right direction without losing sight of your long-term destination,” says long-time business journalist Elizabeth Wasserman, who has written extensively on the issue.
If you’re just starting out, writing a business plan can help you describe your product or service, detail your marketing strategy, and lay out your sales and operational forecasts—including the ever-important cash-flow projection so as to keep your business on track for profits.
If you’re seeking investment or loans, whether from venture capitalists or bankers or others, a business plan (at the very least, the executive summary) is often essential. It’s one of the first documents that a loan officer will want to see. In addition, an angel or venture capital investor will want to see not only the executive summary before providing funding, but they’ll try to poke holes in your plan and quiz you about things you should have addressed. For the purpose of financing, you may add certain sections to your business plan, including background and historical information about the business and a description of the management team leading the organization.
If you’re developing a plan involving a business loan, then your lenders are going to want something slightly different. They will want to see a section detailing collateral, or assets to pledge against the loan. Collateral includes funds to support loan payments, interest expenses, and debt repayment. Banks won’t make speculative loans, so you need to include information in your plan to make the banker feel safe.
If you need help, consult the Small Business Administration’s online guide to business plans (www.sba.gov) or peruse over a hundred free sample business plans at Palo Alto Software’s Bplans.com.
“I actually wrote a 75-page business plan for Learnvest. Please do not do that. No one asked for it, no one read it. But what was important about it: It was for me. If any other person ever challenged me, I knew the answers. And what I mean by that: What’s the problem, what’s the market, who’s the customer. I knew who the competitors were. So, when I was jumping off the cliff, I wasn’t saying, “Oh, I’ll figure it out on the way down.” Once you get up and you’re running a business, your hair’s on fire. You’re putting out X, Y, Z problem. You’re not in a position to say, “What’s my strategy.” Now, I’m leading 115 people. If I didn’t have a clear strategy, I don’t know if everyone would get out of bed in the morning, excited to come work for me.”
ALEXA VON TOBEL, founder of Learnvest, a personal finance website
There are plenty of websites out there that offer to sell business plan templates for $20 or more, designed to let you enter your company name and specifics and generate a plan.
While that may be tempting, a generic business plan sample with your details just dumped in isn’t going to wow anyone, and it’s not going to inspire you on a regular basis, says Larry Kim, founder of WordStream, an online marketing company.
“I know from experience that the last thing you have when you’re starting your own business is an abundance of time to dream up creative ideas for your business plan,” Kim says. “Don’t worry—you don’t have to reinvent the wheel.”
He recommends using the following business plan templates, many of the “less is more” variety:
1.Business Plan Infographic PowerPoint, available on GraphicRiver.net. Present your market analysis, timeline, statistics, and more in an engaging and highly visual infographic.
2.Lean Canvas 1-Page Business Plan, Leanstack.com. You can create a one-page business model in a speedy twenty minutes.
3.Startup X—Perfect Pitch Deck PowerPoint Template, GraphicRiver.net. This one stands out in a sea of PowerPoint business plan templates, thanks to the creative modifications you can make.
4.Emaze Business Plan With Analytics, Emaze.com. More than just a template, this comprehensive presentation tool features collaboration and analytics.
5.Startup Pitch, GraphicRiver.net. This PowerPoint-format business plan sample has a creative tear-away design that’s eye catching and unique.
6.Palo Alto Software’s LivePlan, LivePlan.com. This is another easy-to-use tool where you input your information and it creates a one-page, infographic-style business plan for you.
Most formal business plans contain the following components, although the order in which you write and present these sections is subject to change:
Executive Summary. This is the abstract of your business plan, a summary of everything you will say in greater detail in the ensuing pages. It spells out the content and goals of your plan, hitting all the highlights. This section is key if you are seeking outside funding, as it introduces possible investors to your business. Be sure to include background about your company, the market opportunity, your capital requirements, a mission statement, an overview of management, competitors, your business’s competitive advantages, and a summary of your financial projections over the next three years. “Some people write the executive summary first, but I would never do that,” says Linda Pinson, author of Anatomy of a Business Plan. “I would go through and write my plan first and come back to the executive summary.” Keep this to no more than three or four pages.
Company Overview. The company overview is designed to provide more information about your business, why and when it was formed, its mission, business model, strategy, and any existing strategic relationships. Pinson recommends including administrative issues, such as intellectual property you may own, costs associated with your location, the legal structure of your company, management, personnel, and how you address accounting, legal, insurance, and security matters.
Business Offering. Here’s where you talk about why you’re in business and what you’re selling, whether it’s products and/or services. If you sell products, state whether you are the manufacturer, distributor, and/or retailer of a product and talk about your manufacturing process, availability of materials, how you handle inventory and fulfillment, etc. If you provide services, describe those services. Make sure to address any new product lines or service lines that you expect to enter into in the future.
Marketing Plan and Analysis. In this section, you spell out your marketing strategy (see more on that in Chapter 4), addressing details of your market analysis, sales, customer service, advertising, and public relations. Many businesses use this space to showcase their vision of why their business will be successful, backing that up with market research that identifies their target market and industry and customer trends. But most of the time, small and mid-sized businesses don’t have the deep pockets to hire outside firms to undertake exhaustive market research. “A sizeable majority of smaller entrepreneurial companies are going to bet the company on their own sense of the market without the validation of outside research,” says Tim Berry, chairman and founder of Palo Alto Software, maker of Business Plan Pro software. In lieu of research, Berry, who is also an investor, says companies can provide testimonials from existing customers.
Strategy and Implementation. Every business plan needs details. This section is where many should go. “This is where I’m going to be looking as an investor for dates and deadlines,” Berry says. “I’ll be looking for things we’ll be able to track,” whether that’s product release dates or unique visitors. This is also a section in which to include your sales forecasts, Berry says.
Management Team. If writing the business plan for investors or bankers, you want to explain the background of your company executives and managers and explain how that will help you meet business goals. “For investors, it’s an important element to include who these people are and what their experience is,” Berry says. “Investors need to evaluate risk, and the general assumption is that management team experience greatly affects risk. The more seasoned the management team, the less the risk.” If writing this solely for internal purposes, you may want to explain how managers expect to grow the staff of the business in the future to meet business objectives.
Financial Projections. In the financial section, you provide “the quantitative interpretation” of everything you stated in your organizational and marketing sections, Pinson says. She also advises not to write the financial section until those other sections are complete. This is where you include your projected profit and loss statements, your balance sheet, and your cash flow statements for the next three years. “Those are forward-looking projections,” Berry points out. “It’s not your accounting.” That’s often a source of confusion. The order of the numbers will be very much like they appear in accounting statements but they will be forecasts for the future. “Accounting is today backward into the past,” Berry says. “Planning is today forward into the future.’
You may want to include supporting documents to back up statements or decisions you’ve made. These should be included in a separate section. These supplemental materials might include resumes of your managers, credit reports, copies of leases or contracts, or letters of reference from people who can attest that you are a reputable and reliable businessperson.
The business plan, according to Berry, is far more than just a document. It’s actually “the content, the strategy, and the specifics of what is going to happen to your business,” he says.
If you’re not seeking investors, or want to jump into the market quickly to launch your product or service, then an informal business plan can help you clarify your startup’s goals, sales strategy, and target market. At the least, writing it all down will help you crystallize your thoughts, set your priorities, and keep you on track.
An informal business plan should contain, at the minimum:
A company description and mission statement. Describe your business in a few brief paragraphs, including your legal structure (for more on that, see pages 70–75) and the type of unique services or products you provide. Also include a brief description of the management team, detailing each person’s responsibilities.
An overview of your target market. Be specific about the customers you serve, including any demographics you might have, such as age, income, location, purchasing habits, buying cycles, and willingness to adopt new products and services. A goal in this section is to prove that you know your customer, which is important for marketing your company.
An overview of the competition. Identify the current (or potential) competitors in your area or online who sell a service or product similar to yours, and identify their strengths and weaknesses. Gather this information by checking out their websites and marketing materials, or visiting their locations.
Marketing and sales strategy. Describe how you will promote your business, whether that’s through advertising, social media campaigns, promotional literature, or public relations. Define how you will get your product or service to customers, including whether you need sales representatives (inside or external) to promote your products. Identify what differentiates you, particularly when it comes to price, product, or service.
An overview of your finances. Include your startup costs, your operating costs, and revenue estimates. Keep your expectations realistic and honest: The biggest mistake entrepreneurs can make is to be overly optimistic with sales estimates. Include a cash-flow statement, as lack of cash is one of the biggest reasons small businesses fail.
A formal business plan is a waste of your time—and that’s true even if you plan to raise money from investors, says Inc. columnist Geoffrey James.
The conventional wisdom, James explains, is that investors require a three- to five-year business plan, since they’ll look for their investment return in that time frame. But there’s scant evidence that’s the case, he says. Here’s why.
“First off, for a startup, three years is the distant future and five years might as well be in another geological epoch,” he says. “It’s ludicrous to pretend you have any idea what you or your firm will be doing in five years.’
Second, he says, nobody has time to read a formal document, especially one that follows the typical template that wastes pages on irrelevancies like corporate mission, personal background, and pie-in-the-sky projections.
“Finally, the fact that you wasted—what, maybe an entire week?—writing a formal document that nobody (including you) wants to read is a certain signal to savvy investors that you lack a sense of priority,” he says.
Rather than a formal business plan, some investors prefer a tenslide presentation (also known as a “pitch deck”) built around a demo or prototype, he says. Simplify your ideas so you can describe them on a single written page.
Remember, even the corporate world simultaneously uses and dismisses three- and five-year plans. “It’s been that way for decades,” James says. “So, no, you don’t need a formal business plan to get your startup off the ground. And you don’t need to spend precious hours polishing and updating it.”
That time is better spent doing something useful, he says . . . such as making your idea work in the real world.
In 2011, entrepreneur Eric Ries published a book called The Lean Startup, describing a startup methodology designed to eliminate waste that focuses on building a minimum viable product or MVP. It quickly became dogma in Silicon Valley.
Ries’s lean principles, which focus on rapid iteration rather than long development cycles, have since been embraced by old-school companies (think General Electric) and recommended for just about anyone starting a business. At its core, the lean startup method is a disciplined process, one that embraces experimentation, rapid prototyping, and constant learning from customer feedback.
“Now that I have my own startup, I’ve not only gotten the Lean Startup religion; I’ve become downright evangelical. We implement lean processes in just about everything we do, and we have from the start.”
THOMAS GOETZ, CEO and co-founder, Iodine
In a question-and-answer session with Inc., Ries explained his thinking behind the methodology and provided his best tips on how entrepreneurs can apply it.
Q |
You’ve started several companies that subsequently folded. What’s the biggest mistake that startups make? |
Startups make so many mistakes that the challenge to identify the root cause of a failure is tough. But believing in your own plan is probably the worst. In our case, we were convinced that if we did a really good job developing and implementing a good plan (writing a business plan, doing focus groups—all the traditional stuff), we would be rewarded with success. If I showed you the business plans, they were incredibly well-written. The only problem is that reality didn’t conform to our plan. We didn’t bother to double-check our plan—we just assumed we were correct and that’s where most of us go wrong. |
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Q |
So, from this idea, you formed the concept of the “Lean Startup.” How can entrepreneurs actually employ your strategy? |
A |
The fundamental idea is to treat everything a startup does as an experiment. Everything a startup does should be a test—a hypothesis. You really want to organize your company so that it’s built to learn. The Lean Startup idea is based on lean manufacturing—a management philosophy that we can easily adapt to the startup culture. A key part is creating a feedback loop: build, measure, and learn. We want to get through that loop as quickly as possible. But it’s not just failing fast, it’s failing well. |
Q |
A big part of your theory is to engage the customers early on and to test things. How do you find customers if you don’t have a final product or a well-known brand? |
Testing with only friends and family is a bad idea. Friends and family are more likely to give you positive feedback—and that’s not helpful. But this part should be easy for entrepreneurs. One of the assumptions you’ve probably built into your business plan is how you will get customers after the product is done. You can follow that plan right now to get started on finding those customers. Most entrepreneurs don’t need as many customers as they think. A lot of people think ten is too few for a sample. But if all ten refused a product, why is that not enough? If you want a hundred, a thousand, or a million customers, you first have to get ten. But the answer for every business is different. It will be a different size if you’re selling a B2B product versus a product for teenagers. |
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Q |
How do you test your concept without finalizing the product you plan to take to market? |
A |
What you want to do is create the “minimum viable product.” That’s essentially the smallest, simplest version of your product that allows you to begin that process of learning. What I mean by “minimal” is not just referring to features on a product, but also minimal in the number of people to show it to. The most common way to do it is to allow people to pre-order a product [doesn’t have to be online] before it’s ready. If your campaign fails, you never have to build the product. You can do this with almost any business. |
Can you give an example? |
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A |
Zappos. I often ask people how they would build Zappos. You need a good selection and customer service option, they’ll say. You’d need to build a big call center, a big distribution center, etc. But the MVP for them was as follows: They went to a local shoe store, took pictures of each of their products, and put them online. If anyone bought shoes from them [at this early stage], they planned to go to the store, buy the shoes and mail them to the customer. There was no big business behind it; there was a website and a hope that they’ll get so many orders that it will get annoying to do all the purchasing and shipping manually. It was all to test their big idea. |
Q |
Sometimes entrepreneurs learn that their product is all wrong, but you think that’s not a horrible thing. It can lead to what you call a “pivot” in your business plan. |
A |
You don’t need to fail before you pivot. A pivot is simply a change in strategy without a change in vision. Whenever entrepreneurs see a new way to achieve their vision—a way to be more successful—they have to remain nimble enough to take it. |
The administrative process of starting your own company is surprisingly simple. In fact, Inc.com columnist Jeff Haden estimates that aspiring entrepreneurs can clear all the hurdles in under three hours.
“Keep in mind, I’m only talking about setting yourself up to do business—I’m not talking about writing a business plan, sourcing financing, developing a marketing plan, etc.,” Haden says. “The goal is to get off square one and get on to the fun stuff.”
Here’s a checklist:
1.Pick a name so you can get the administrative ball rolling. While a business name is important, don’t needlessly agonize over the process—especially if it delays you from starting up. Remember, your business can operate under a different name than your company name. (A “doing business as” form takes minutes to complete.) And you can change your company name later, if you like.
2.Get your Employer Identification Number. An EIN is the federal tax number used to identify your business. Technically, you only need an EIN if you will have employees or plan to form a partnership, LLC, or corporation. But even if you don’t need an EIN, get one anyway: It’s free, takes minutes, and you can keep your Social Security number private, thereby reducing the chance of identity theft. (When you don’t have an EIN, you must use your SSN to identify your business for tax purposes.) Apply online for an EIN at www.irs.gov.
3.Obtain a business license. For this, head to your locality’s administrative office (or website). Most counties or cities require a business license, typically for tax purposes but sometimes—depending on your industry—to protect public health and safety. The form is easy and quick to fill out. Use your EIN instead of your Social Security number to identify your business. If asked for annual gross receipts, do your best to estimate accurately.
4.Ask your locality about other permits or paperwork. “In my area, for example, a home occupation permit is required to verify that a business based in a home meets zoning requirements,” Haden says. “Your locality may require other permits. Ask. They’ll tell you.” Some cities or towns may require that you register a trade name (in most cases, you’ll get approved on the spot) or complete a business personal-property tax form.
5.Get a certificate of resale (if necessary). A certificate of resale, also known as a seller’s permit, allows you to collect state sales tax on products sold. (In some states, there is also a sales tax on services like cleaning or repair.) You will need a seller’s permit if you plan to sell products. Your state department of taxation’s website can provide online forms, or most localities have forms you can complete while you’re at their administrative offices.
6.Get a business bank account. One of the easiest ways to screw up your business accounting and possibly run afoul of the IRS is to commingle personal and business funds (and transactions). Using a business account helps eliminate that possibility. Get a business account using your business name and EIN, and only use that account for all business-related deposits, withdrawals, and transactions. Pick a bank or local credit union that is convenient.
7.Set up a simple accounting spreadsheet. Worry about business accounting software like QuickBooks later. For now, just create a spreadsheet on which you can enter money you spend and money you receive. Bookkeeping is simple, at least at first. All you need are Revenue and Expenses columns; you can add line items as you go. As long as you record everything you do now, creating a more formal system later will be fairly easy.
“And now you’re an entrepreneur, with all the documents to prove it,” Haden says.