Tuesday, March 8, 2011

Lesson #7: Key Components for Writing a Business Plan

Posted By: George Deeb - 3/08/2011


& Comment

When writing a business plan, it is critical to do research and set strategy across the following key topics:  (1) your industry/competition; (2) business/revenue model; (3)  sales/marketing plan; (4) management team; (5) cash requirements; and (6) forecasted financials/expected ROI.  When you are done, you will end up with the necessary research to back up the key assumptions of your plan.  We will tackle each of these points below.

Industry/Competition:  To me, this is the most critical research that needs to be done upfront.  How large is your industry?  Who are the key competitors?  How quickly is the industry growing?  Are you a first mover, or entering a crowded space?  What share of the market is reasonable to capture for your business?  Investors like to invest in large, growing markets as a first mover with limited competition where a business can scale up to 10-20% share.  So, pitching them the "next Google search engine" is a very large market opportunity, but would be very difficult to build with large, well capitalized competitors in the search space that would aggressively defend their turf.  On the flip side, pitching them the newest patentable innovation in door hinges may be perceived as less competitive and disruptive in the marketplace, but the market is really small to build material scale.  You need that right intersection of large market opportunity, disruptive/defensible business and limited competition.

Business/Revenue Model:    Now that you have found your ripe industry opportunity, what kind of business are you building?  A hardware solution?  An installed software solution?  Software as a service?  And, more importantly, how are you going to make money?  One time purchase? Recurring monthly revenues?  Heavy repeat usage?  Where are your prices vs. competitors?  What value are you bringing vs. current solutions in the market?  Investors obviously prefer large and recurring revenue streams for disruptive businesses that bring terrific value to their customers.

Sales/Marketing Plan:  The next step is figuring out your go-to-market strategy?  Does the product appeal to business clients (B2B) or consumers (B2C)?  Is it dependent on building a big team of salespeople?  Does it require a heavy investment in consumer marketing?  If marketing, is it going to be driven by the search engines online or direct mailers or trade shows?   Does it require any social media or viral elements for success?  Typically sales-driven B2B business are cheaper to launch than marketing-driven B2C businesses.  But, B2B businesses are sometimes harder to get investor interest, as they have a much longer sales cycle (e.g., read longer cash burn) and it is very difficult for a startup to break open new B2B relationships, especially one going after large corporations.  And, B2C businesses that can be virally grown online, are much preferred to ones requiring heavy investment in expensive TV, Radio or print (which frankly you should never use to launch a business until the concept is proven out, given their heavy expense and long-term branding aspects of such media).  And, in all cases, make sure the marketing or sales investment makes sense for the scale of revenues you are trying to build (e.g., is there a reasonable customer cost of acquisition metric compared to traditional industry norms).

Management Team:  To me, this is the most important element to any business.  I would rather have an A+ management team in a B- industry, than a B- management team in an A+ industry.  You want a team that has "been there and done that" before in a start-up environment, and will not be experimenting and learning with your limited startup capital.  Please re-read my previous post for more details on how to build a team for your startup in a way that will most appeal to investors.

Cash Requirements:   Sales and marketing investment will drive revenues.  Revenues will have cost of sales.  And the business will have overhead and other employee costs.  That will determine how much of an operating loss you will need to fund.  On top of that, will be any capital expenditures that need to be put into R&D for your product, capex for your office or whatever.  So, fully think through your cash requirements before approaching an investor.  And, two words of wisdom: (i) investors prefer lower burn rate, lower cash need businesses (so a $1MM need has a better chance than a $10MM need); and (ii) whatever the model says you need, double it for your cash raise (as things ultimately go wrong and you will want a cushion in place, to prevent going back to investors looking for more later--most likely at worse terms).

Financial Requirements/ROI:  The last check is a sanity check more than anything else.  Over the next 3-5 years, will the investor realize a 3x return or a 10x return on their investment?  And, there are two drivers of that: (i) the scale of the revenues/profits in that period; and (ii) the valuation at which the investor invested their money.   Obviously, investors are looking for 10x opportunities, so make sure your financial model gives them a reasonable chance to achieve such, either via scale or valuation. 

Once you have completed your business plan, you would materially pare back this information before presenting it to investors, depending on your need (e.g., a 1-2 page executive summary for preliminary introductions to investors via email; 14-15 slides for an in-person presentation).  Never lead with a 30-40 page document; nobody will read it past the first page given limited investor attention span and lots of competing investment opportunities.  So, make sure you get to the point, short and sweet.  And remember, graphic presentations always make a better impact than words, where possible.  So, provide screenshots of the product, instead of describing it in sentences.

My uncle is a successful executive and investor, and he once said to me: "if you can't communicate your vision in one sentence, you are making it too complicated for the listener to digest".  Good advice!!

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