What is your company name?
Who are the founders?
What do you do?
Why is that important? Why do customers love it? How is what you do valuable?
In preparing for battle, I have always found that plans are useless, but planning is indispensable.
—Dwight D. Eisenhower
If one plan won’t do, then another must.
—John Augustus Roebling2
Any business plan is about communication. Externally, the business plan serves as a company’s statement to potential strategic investors, major customers, and significant vendors or suppliers. Everyone asks to see your plan. This alone is reason enough to develop the best possible plan early and keep developing it as you gain more information and grow your company. However, although people want to see your plan, they probably won’t read it. This is particularly true for potential investors, perhaps the most important intended audience for the plan. At most they’ll flip through it.
In his 2009 doctoral thesis at the University of Maryland, Azi Gera concluded that venture investors do not rely on the contents of a start-up’s business plan to make their investment decisions. Instead, he found, investors seldom do more than read the summary and perhaps skim the plan.3 Brent Bowers of the New York Times added:
Jeff Fagnan, general partner of Atlas Venture in Waltham, Mass., which provides seed money for young businesses, said he agreed with the [Gera’s] study’s main premise. “I’ve never given funding to an entrepreneur who had a business plan with him when he walked into my office,” Mr. Fagnan said. “Never. Most of the information you find there, five-year financial forecasts and so on, is not relevant.”
He says he looks for “market validation,” hard evidence that the entrepreneur has actually sold his product or at least lined up enthusiastic potential customers. Mr. Fagnan says that, rather than reading a report, he wants to hear the evidence in PowerPoint slides, whiteboard presentations or “somebody just talking.”4
To an investor, far more important than a detailed plan are things such as the impression the team makes, who referred the opportunity to the investor, the market and its validation, the presentation, and even the basic business proposition. However, although investors may not scrutinize your plan, they will skim it for the key points, and they may give some sections—those addressing key areas—a close read if they’re interested. Plans are a qualifier, something that many people expect to see even if they don’t do anything with them. There are other reasons building a good business plan is an important step in starting up, but generally one of them is not to close a financing. Other people besides investors—such as potential employees, future customers and suppliers, and strategic partners—will pay more attention to your plan and may read it in detail. These people are trying to get a sense of your company’s substance before they deal with you.
In the end, you are the most important audience for your plan—you and your team. Internally, drafting and redrafting a business plan, especially for a start-up, creates clarity of vision, forces you to think things through comprehensively, and stimulates you to imagine a variety of risks and outcomes. It structures ongoing communication within your team, directs your focus to the most important goals, and builds consensus around a course of action. The exercise of creating a plan helps you identify gaps in your preparation and differences of opinion that have to be reconciled before the venture can move forward. You almost always learn something about yourself and your company when you write or modify the business plan. Most important, putting a plan down on paper early creates an accountability structure for you and your team, setting operational benchmarks and timelines for execution. Down the road, showing how you have met those benchmarks on time will be a valuable tool for impressing investors and other outside parties.
In this chapter we’ll help you think through the elements of a business plan. We won’t give you a recipe or a fill-in-the-blanks worksheet but a framework of things you should think about as you start. No pilot takes off from a runway without carefully going through the preflight checklist. You shouldn’t either. There is no single template for planning, not even our framework. There are, though, key questions investors and others look to answer when they think about your business, and so we will look at planning as an exercise in answering questions. But remember, this is only a framework. In this chapter we don’t cover everything you should consider. You’ll need to read the rest of the book for that. This chapter just gives you some structure and guidance for putting it all together. Keep in mind that thinking through these things and building a good plan is not a one-time exercise. As you launch and build, you learn new things each day that will change the way you think about the future, and eventually those changes should make their way into your plan. Sometimes those changes will be small; other times they’ll be fundamental course corrections that make the difference between failure and success.5
Business plans and all their component parts are communication tools. Your ability to get things done is only as good as your ability to communicate your business to others: what you are doing and why it matters. Communication starts with a short pitch summarizing the most important points of the business. The pitch is not about telling a whole story and making a sale. The pitch has only one crucial objective: to get the listener interested enough to say, “Tell me more.”
There are two kinds of pitches: the elevator pitch and the pitch sheet. The elevator pitch is a short verbal presentation that should leave the listener excited and wanting to know more. The pitch sheet is short, a one- or two-page summary—almost a brochure—that hits the high points, is heavy on layout and graphics, and tells your story in a compelling way. When people say, “Tell me about your idea,” they’re looking for the elevator pitch. When they say, “Send me your summary,” they’re looking for your pitch sheet, not a plain-text abstract or the executive summary from your business plan. With the pitch, you’re always selling, not providing information. In Chapter 17 we discuss the communication practices that go into creating a successful first pitch and a compelling summary.
Sooner or later, you’ll have to present your business opportunity and plan of action to someone—most likely a potential investor—and so you want to create a plan in a conventional form. But if you go out and look for templates or guidance to help you write the first plan, you’ll probably drown in all the resources.6 Fortunately, there is a consensus on what people expect to see. Investors and others interested enough to hear about your business have two things on their minds: greed and fear. They want to get excited about the potential to make money, and they want you to quiet their fear of risk. From the moment you start talking or they start reading, they’ll have dozens of questions. A good plan and presentation answer the obvious questions before they’re asked. Our template business plan is just a collection of these questions grouped by the subject areas that matter most to investors and others. If you write a plan and presentation answering these questions, you’ll cover what people care about.
Plans typically come in two forms: a written plan and a PowerPoint presentation. Increasingly, people just read through the PowerPoint version. In plans and presentations, brevity is a virtue. Details never sell a deal. The articulation of your plan should be simple, significant, and short. A good plan and presentation focus on the key points and substantiate them. For the presentation, Guy Kawasaki in The Art of the Start provides a great guideline he calls the 10–20–30 Rule: 10 slides, 20 minutes, 30-point font.7 That’s it. The written piece should be 10 to 20 pages max. Include all the other background and detail in appendixes, which can be as long as you like. People seldom read appendixes, but they can be valuable for reference or to show how thoroughly you have done your homework. One of our DEN companies was in a highly competitive space with a solidly differentiated product. In their 12-page plan they had less than a page on the competition, but in the appendix they included a thorough 16-page survey of the competition with a significant amount of both public and proprietary detail. As competitive as the space was, when investors saw the appendix, no one doubted that the company had done its homework and had a competitive advantage. Still, that level of detail has no place in the plan itself. Keep the plan simple, short, and significant. You should include a concise one- to two-page summary—an abstract of the plan—at the beginning of the written plan.
For the actual form of the business plan and presentation—the formatting, writing style, and so forth—we normally just have students look through our collection of good plans and presentations, choose one or two they like, and then imitate them.8 Here we’ll focus on the content. This is our template—basically a 10-slide presentation covering all the basic questions. Your plan sections can mirror this template as well.
What is your company name?
Who are the founders?
What do you do?
Why is that important? Why do customers love it? How is what you do valuable?
Slide number zero? Yes, we’re cheating on 10. The point is that every page and slide is valuable real estate. Information overload kills understanding and buy-in. Don’t overfill your space with dense text and too many words but use every square inch and every minute of presentation time wisely and for maximum impact. We are serious about the 10–20–30 Rule. Use all your space to convey meaningful information. Even the section headings or, for the written plan, the descriptive table of contents should convey information. You want to use the opening slide to introduce yourself, your company, and your team. You also need to be able to explain what you do and why it is important and valuable in two sentences or less. The title page is also the place to display your contact information prominently. Normally the CEO or founder is the contact. Believe it or not, people often forget to display their contact information. What could be worse than finding out people were really interested in your deal but gave up because they couldn’t figure out how to contact you?
A quick note about confidentiality. This is a tricky issue. The information in your plan will probably end up in the hands of people you didn’t intend to have it. Still, you have to disclose enough to give your listeners a fair understanding of your company. Also, Regulation D—Rules Governing the Limited Offer and Sale of Securities without Registration under the Securities Act of 1933—requires that if you want to raise money from private investors, you must, among other things, be diligent about controlling the distribution of plans and presentations. To cover both points, you should mark your plan copyright with your name and the year,9 which puts recipients on notice of copy restrictions. We also encourage people to add a note at the bottom such as the following:
Proprietary and confidential. Do not copy or distribute to others without prior permission of [Company Name].
There is nothing binding or enforceable about this notice, but it sends the signal that you are expecting the readers to respect the confidentiality of what you are telling them and trusting them to honor your request. Number the plans you share and keep a register of names and dates.
What need are you filling or problem are you solving?
How is this need relevant to your listeners and readers?
The best idea is a need that finds a solution, not a solution in search of a need. If your readers and listeners recognize the validity of your need, you have a solid shot at capturing interest and buy-in. Your need should be specific with a clear and relevant solution. Investors want plans for aspirin to cure a headache, not candy that tastes good. Further, to be relevant you need to present the need so that your listeners identify with the mindset of the customer. You want to convince your listener that your solution is a cost-effective means of filling that need. It’s much easier to win an audience if they internalize the need and picture themselves buying your product. Some of the best words you can hear are “Yes, I would buy that.”
Who is your customer?
How well do you know that customer?
What is the size of the market?
What are the key facts about the industry? Trends and growth rates?
How have you validated your market and customer demand?
What makes you confident the dogs will eat the dog food?
Ideally, this slide and section demonstrate the market’s size and growth rate. You should be able to describe your customer profile accurately, including its key characteristics and demographics. You’ll also want to present the high points of your validation work clearly10—everything that convinces you that customers are really going to buy.
What is the solution to the need?
How will you make money?
What will people pay for this product or service?
What your product does is important; how it does it may or may not be. You need to strike a balance between technical detail and relevance. Technical is not important, but credible is. Some listeners will want more detail to substantiate your product claims, especially if the product involves new or innovative technology. You can always add more technical detail. If they’re interested, they’ll ask for it. The key is to show you have something solid that works. Most important, you need to answer the question “How will you make money on the product?” Of course, profit is more than just pricing, but substantiating market demand at your price is incredibly powerful information. Remember the product elements from Chapter 4:
Product. What needs does it meet? What benefits does it provide?
Service. How will it be supported?
Price. It’s not cost-plus. Optimal pricing balances willingness to pay with volume of demand. Pricing is an art.
Access. How do customers get it?
Experience. How does it feel to use it?
What are your goals and how will you achieve them?
Proof of principle?
Development and validation?
Production?
Marketing/promotion/distribution?
How will you sell—not market—the product?
Some entrepreneurs like to think they are really clever if they use a new business model to deliver a new product, as if a new and original business model could help them outwit the competition. Of course, any competitive angle must be defensible to be worthwhile, and this often is overlooked in the thrill of creativity. But there’s a bigger problem here. You’re taking two major risks at once: a new product and a new operating model. Risk is expensive. If you are taking a new product into the market, you have plenty of risk in terms of product development and market acceptance. Why would you want to increase your chances of failure by trying an unproven business model? The experienced entrepreneur tries wherever possible to take either a product-market risk or a business model risk, not both at once.
The operating plan is simply what you are going to do to get all the necessary work done, in what order, and on what timeline. Somewhere you will want to spec out carefully everything needed for each of these steps—resources, people, funding—but this kind of detail doesn’t belong in the plan. You can put it in an appendix if you like, but the important thing is to have done it and be prepared to show it if asked.
Do you know the difference between marketing and sales? It’s sad how few business plans seem to. They almost always have an extensive marketing section with all the elements—product, pricing, promotion, place—but few ever mention the sales plan. Selling happens when someone persuades a customer to buy the product and then closes the sale. Promotion can help generate interest, but salespeople make sales. Only sales create revenue. Your operating plan should explain how you will build out a sales effort and eventually a sales team. Also, your sales projections should always be grounded in realistic assumptions about your sales effort: costs, time, staffing, and projected yield per unit effort.11
Who is the competition, present and future?
What are your barriers to competition? (Intellectual Property?)
How will you defend profits and market share?
How are you different?
Competition is one of the burning questions that always come up quickly when you talk to investors and others about your plan. You want to answer this question before they ask it. Never say: “No one is doing this.” Even if you think it’s true, never say it. There is no faster way to be dismissed as inexperienced and naive. We have yet to see an opportunity that has no competition. Even the status quo and inertia are competitors. More often than not someone else is already doing what you are planning or has independently thought about the same idea and is right behind you. Even if you don’t have those competitors, you will have people who will deliberately follow and imitate you—so-called fast followers. Bottom line: You’ll always have competition, even if it’s just the customer’s thrift. We further discuss your competition in Chapter 11 and provide you with a features table example, which we suggest you use in the competition section.
Competition is not just a problem. It’s also a great source of information and ideas. Study your competition relentlessly from the very start and never quit.
Who will put this plan into action?
Why are these people qualified?
What is their track record?
As you will see in Chapter 8, the team is the single most important factor to investors. Be honest. No team has everything it needs. Show the holes in your team and explain how you plan to address them. Investors are not impressed with the terrific experienced person you will hire once you get funding. They want to see your team now. Beyond your execution team, your boards of advisors and directors can provide credibility, experience, and contacts. Next, think about your service providers: attorneys, accountants, and so on. Do they add credibility? Prominent, respected investors, if you have them, make great reference team members. The people story is so important that we’ll spend the next three chapters discussing it.
What are your assumptions?
What are your projections for sales and costs?
What happens to the cash?
How are you set up to deal with your cash needs?
Think of financial projections as a narrative: You’re telling your potential investors a story. You are imagining what will happen in the future as you carry out your plan based on as much detail and support as you have in hand. Let’s hope you’ve done your homework and your numbers are more than just guesses out of thin air.
Your assumptions in the financial projections are far more important than your bottom line. Everyone expects the financial forecasts that make up your pro forma to work. Pro formas always work. Think about it: Who would project that a company will lose money and go broke? The more important questions are: What are the assumptions in the pro forma? Are these assumptions factually supported? How do they turn into good forecasts? Bottom-up forecasts are best. Build a sales forecast that’s not just some percentage of the market and a growth rate. Build one that is based on the number of potential prospects, the number of sales calls and their hit rate, and the sales close rate per unit time. Remember Slide 4: It’s not about how you market but about how you sell. You should show how thoroughly you’ve thought about that here.
Avoid putting too much detail into your financial projections. You don’t need to show every cost line and every quarter in the summary financials. Make it simple to follow in a font large enough to read. You can put the detail in appendixes. Most people are more interested in the assumptions and their basis anyway.
It’s always tempting to say: “These are really conservative numbers.” You can say it, and it may indeed be true, but it will rarely make any difference to investors. Most people say it. The fact is, no matter what you use for numbers, investors invariably will halve the revenue, double the costs, and double the timeline projections. Just forecast your best guess with solid support for your assumptions and let nature take its course. An effective approach to the conservatism-optimism issue is to bracket your base case with two sensitivity cases: a downside case that shows the worst that can happen without failure and an upside case that captures how it might look if things go better than expected. This anchors the range of outcomes for your audience and highlights which factors in the plan really affect performance and risks.
Some people feel they should somehow estimate the company’s value. Until you have a stable operating and growth history, attempting valuation is not a good use of time or electrons. Sometimes investors will ask a start-up to calculate for them the value of the enterprise. If asked, don’t do it. It doesn’t mean anything. One successful repeat entrepreneur we know actually packed up and left a meeting with a prospective investor when the investor persistently asked him to value his company on the basis of his prerevenue pro forma. He said: “Anyone who wants a valuation based on these kinds of guesses is not the right partner for us. Clearly you don’t understand start-ups.”
In your pro forma, show an income and expense (I&E) projection that sums to a cash flow projection and cash balance at the bottom. Financial earnings are not a focus in early-stage companies. It’s all about cash. The general format for a pro forma I&E looks something like this:
Sales volume
Pricing
Sales revenue
– Any discounts, other offsets to revenue
+ Net sales
+ Other revenue
= Total revenue
– Cost of goods sold
= Operating margin or “gross profit”
Sales and marketing
+ Research and development
+ General and administrative expenses
= Total operating expenses
Interest income (interest expense)
Cash balance, beginning of period
Operating cash flow, in period
Financing
Cash balance, at end of period
Remember, start-ups fail only when one thing happens: They run out of cash. Show how you expect the cash to behave. Having solid and evidence-based assumptions rather than precise numbers is the primary goal of the pro forma. Most of the important numbers are just guesses anyway. Some people will ask for balance sheets too. Usually what people want to know is what your current finances look like—cash, receivables, payables, debt—and sometimes the ownership structure. Unless you already have revenue, balance sheets are basically meaningless. Ownership structure is better communicated in a cap table, but this can contain sensitive information and should be left for the serious stages of a discussion.
What makes your deal more valuable in the future?
How might it end?
What are the upsides and/or exits?
You are seeking investment; private equity investors are looking for a return on their investment. They don’t just want to get their money back. They don’t even want their money back with dividends. They want a multiple of the capital they’ve invested.12 If your investors are limited partnerships, as most venture capital investors are, they have to deliver a return on their partners’ investment within a defined timeline. This means that if you take angel or venture capital investment, your investors will expect your company to turn into cash over a realistic time horizon. A realistic timeline is in the eye of the beholder, but in venture capital, this is generally no more than four to eight years.13 However, though investors do want that quick return, many say they won’t invest in a founder who isn’t building for the long term. They don’t want someone who is in it for a quick sale, but they also don’t want to fight with a founder over liquidity. Nobody said life isn’t complicated. Normally, the most salable companies are the ones that grow dynamically under solid management, and so to some extent both views are right. You need to show that you understand both the short-term and long-term views.
When you’re writing your plan and presenting your start-up, be aware of your audience’s future expectations. You can speak to both short- and long-term interests by talking about what your company might be worth if successful. This is not a valuation so much as a description of how ownership interests might turn into cash. Think about who might be interested in your company. Most liquidity events occur by acquisition or merger, not by going public in an initial public offering. You also should think about your company’s logical strategic acquirers. Not everyone sells to Google, Microsoft, or the current acquirers of the month in your space. In talking about potential future value and liquidity, recent sales of comparable companies are powerful, something like: “If we perform as projected, in——years, we will look like Company——, which sold last year to Company——for——million dollars.” A list of several comparable sales is even better. It shows an active market.
What do you need?
How will you use the money?
What are your milestones?
What will you have to show for it when you’re done?
You need to define how much money you are looking to raise, assuming that you need to raise money. This shouldn’t be just the total number but should include a well-thought-out breakdown describing how you will use the funding. For prototyping and proof of concept? For regulatory hurdles? To hire salespeople?
Early-stage money is incredibly expensive. You don’t want to raise more than you need, but you also don’t want to raise so little that you can’t get to cash self-sufficiency or raise more money on later, better terms. Big salaries for the team are a nonstarter. Your goal here is to create a work program that, when completed, materially increases your company’s valuation and fits within the amount of money raised. No one wants to fund a bridge to nowhere. Think about the money you might need in later rounds, if any, and explain how you will be positioned to raise it.
What have you done to date? What momentum have you created?
What risks have you eliminated?
What are the next steps?
What is the timeline? What will you get done and when?
Unlike an operating plan, which looks at the global, long-term future and includes lots of generalities, next steps are concrete and are tied to a clear timeline. The goal is to communicate that you have an impulse to action, are prioritizing important action, and know the steps that can lead to an increase in your company’s value.
You’ll probably want to close your presentations with a summary slide of key takeaway points. For the written plan, you should include the summary at the beginning rather than at the end.
Tom Brady, Plastic Technologies
Dr. Tom Brady is founder, president, and CEO of Plastic Technologies, Inc. (PTI), and oversees the operations of six other PTI companies engaged in specialty manufacturing, advanced product development, and technology licensing. Founded in 1985, PTI and its companies employ 200 people worldwide, and PTI is recognized internationally for its expertise in plastic packaging technology. Every day you use products invented and developed by PTI. Dr. Brady sits on the Ohio Governor’s Third Frontier Advisory Board and was founding chair of the Northwest Ohio Regional Technology Alliance (RTA), an alliance of northwestern Ohio businesses, public-private partnerships, and educational institutions with the mission of “diversifying our economy into the technology sector.” Tom is now interim dean for the Judith Herb College of Education at the University of Toledo. Tom says he learned many lessons the hard way, including the following:
Life does not always go as you plan it. Be flexible and opportunistic.
Make financial management a priority.
Leadership is about making others successful. Hire people smarter than you and be loyal to them.
Knowing your business is more important than running your business.
Never apologize for doing the right thing. Don’t compromise on integrity—ever. Good reputations are hard to build and easy to lose.
Listening is more important than being really smart.
Owners make really good employees.
It takes a champion to make something new happen.
It is okay to fail.
It is better to do the right thing than to do things the right way.
Be the best in the world.
“Build it and they will come” does not apply to starting a business. It’s what the customers think that counts.
Laugh a lot and have fun!
Your plan and presentation are never done. Your first plan is mostly hope, and hope is not a plan. As you learn more, get more feedback, and gain knowledge of the market, your plan should evolve and grow. But you should check your outcomes periodically against the earlier guesses in your plan. You can learn a lot by looking back over the various projections and assumptions you made and seeing what really happened. Often what you missed turns out to be more instructive than what you got right. Of course, in the end it’s about execution, but good planning drives good execution.
Do you think you need a business plan for your idea? (Hint: The answer isn’t automatically yes.) Why? If yes, does it need to be now?
Who are the main audiences for which you are writing the plan?
Can you make an inventory of what you know and what you don’t? And for what you don’t know, can you make a list of which items you can fill in with additional work? Can you define what that work is?
How will you ensure that everyone on the team proactively participates and buys in?
1. Nixon, Richard, Six Crises, “Khrushchev” (Garden City, NY: Doubleday, 1962): 235.
2. John Augustus Roebling, 1806–1869; German-born architect famous for his wire rope suspension bridge designs, including the design of the Brooklyn Bridge.
3. Gera, Azi, “Do Investor Capabilities Influence the Interpretation of Entrepreneur Signals? Theory and Testing in the Private Equity Setting,” Kirsch, David A., and Brent Goldfarb, advisors. Digital Repository at the University of Maryland, University of Maryland, (College Park, http://www.lib.umd.edu/drum/handle/1903/9617).
4. Bowers, Brent, “Investors Pay Business Plans Little Heed, Study Finds,” New York Times, May 13, 2009.
5. See Chapter 20, “Correcting Your Course.”
6. The day we wrote this text, we searched the term business plan and Google returned 775 million hits.
7. Kawaski, Guy, The Art of the Start (New York: Portfolio, 2004): 49.
8. If you want access to our library, go to www.greggfairbrothers.com.
9. See Chapter 5, “Intellectual Property, and Licensing.”
10. See Chapter 4 for details on market validation.
11. For more on sales, see Chapter 16, “On Sales and Selling.”
12. For more on financing, see Chapter 12, “Financing.”
13. For more on liquidity events and investors, see Chapter 22, “Liquidity Events.”