PORTABLE MBA IN FINANCE AND ACCOUNTING CHAPTER 9 potx

So do yourself a favor and spend the time and money up front.under-The business plan process can not only prevent entrepreneurs from suing a bad opportunity but also help them reshape th

questions—crit-Mr Walker said.1

Media stories abounded of the whiz kid college dropout who receivedventure capital, zoomed to IPO (initial public offering), and cashed out a mul-timillionaire in 18 months or less The mythology of the dot-com entrepreneurwas that he didn’t have a business plan, only a couple of PowerPoint slides.That was all it took to identify the opportunity, secure venture backing, and gopublic Why spend the 200 hours or so that a solid business plan often takes?The NASDAQ crash of March 2000 and the subsequent death of many dot-comhigh f lyers provides the clearest answer Many of these businesses didn’t havethe potential to make profits—not then, not now, and not anytime in the fu-ture The easy money and quick returns of the late nineties have disappeared,and what we are left with is the fact that good opportunities need good execu-tion in order to succeed and a rigorous business plan process can assist in thepursuit of entrepreneurial gold

There is a common misperception that a business plan is primarily usedfor raising capital Although a good business plan assists in raising capital, the

primary purpose of the process is to help the entrepreneur gain deep standing of the opportunity he or she is envisioning A business plan tests thefeasibility of an idea Is it truly an opportunity? Many a would-be entrepreneurhas doggedly pursued ideas that are not opportunities; the time invested in abusiness plan would save thousands of dollars and hours spent on such wildgoose chases For example, if a person makes $100,000 a year, spending 200hours on a business plan equates to a $10,000 investment in time spent ($50/hourtimes 200 hours) However, the costs of launching a f lawed business concept canquickly accelerate into the millions Most entrepreneurial ventures raise enoughmoney to survive two years even if the business ultimately fails Assuming thatthe only expense is the time value of the lead entrepreneur, a two-year invest-ment equates to $200,000, not to mention the lost opportunity cost and the like-lihood that other employees were hired and paid and that other expenses wereincurred So do yourself a favor and spend the time and money up front.

under-The business plan process can not only prevent entrepreneurs from suing a bad opportunity but also help them reshape their original visions intobetter opportunities As we will explore in the remainder of this chapter, thebusiness plan process involves raising a number of critical questions and thenseeking answers Part of that question-answering process involves talking totarget customers and gauging what is their “pain.” These conversations withcustomers as well as other trusted advisors can assist in better targeting thefeatures and needs that customers most want in a good or service Thisprestartup work saves untold effort and money otherwise spent trying to re-shape the product after the launch has occurred This is not to say that newventures don’t adjust their offering based upon customer feedback, but thebusiness plan process can anticipate some of these adjustments in advance ofthe initial launch

pur-Perhaps the greatest benefit of the business plan is that it allows the trepreneur to articulate the business opportunity to various stakeholders inthe most effective manner The plan provides the background to enable theentrepreneur to communicate the upside potential and attract equity invest-ment, and the validation needed to convince potential employees to leave theircurrent jobs for the uncertain future of a new venture It is also the instru-ment that can secure a strategic partner, key customer, or key supplier Inshort, the business plan provides the entrepreneur the deep understanding heneeds to answer the critical questions that various stakeholders will ask, even

en-if the stakeholders don’t actually read the written plan Completing a founded business plan gives the entrepreneur credibility in the eyes of variousstakeholders

well-TYPES OF PLANS

A business plan can take a number of forms depending on its purpose The mary difference between business plan types is length If outside capital is

pri-needed, a business plan geared towards equity investors or debt providers ically is 25 to 40 pages long Professional equity investors such as venture capi-talists and professional debt providers such as bankers will not read the entireplan from front to back Recognizing this fact, the entrepreneur needs to pro-duce the plan in a format that facilitates spot reading We will investigate themajor sections that comprise business plans throughout this chapter My gen-eral rule of thumb is that less is more For instance, I’ve seen a number of plansreceive venture funding that were closer to 25 pages than 40 pages.

typ-A second type of business plan, the operational plan, is primarily for theentrepreneur and his team to guide the development, launch, and initial growth

of the venture There really is no length specification for this type of plan;however, it is common for these plans to exceed 80 pages The basic organiza-tion format between the two types of plans is the same, however the level ofdetail tends to be much greater in an operational plan This effort is where theentrepreneur really gains the deep understanding important in discerning how

to build and run the business

The last type of plan is called a dehydrated business plan This type isconsiderably shorter than the previous two, typically no more than 10 pages.Its purpose is to provide an initial conception of the business As such, it can beused to test initial reaction to the entrepreneur’s idea and can be shared withhis confidants to obtain feedback before he invests significant time and effort

on a longer business plan

FROM GLIMMER TO ACTION: THE PROCESS

Perhaps the hardest part of writing any business plan is getting started piling the data, shaping it into an articulate story, and producing the finishedproduct can be a daunting task The best way to attack a business plan, there-fore, is in steps First, write a four-to-five-page summary of your current vi-sion This provides a roadmap for you and others to follow as you complete therest of the plan Second, start attacking major sections of the plan Although all

Com-of the sections interact and inf luence every other section, it is Com-often easiest forentrepreneurs to write the product /service description first This is usually themost concrete component of the entrepreneur’s vision Keep in mind, however,that writing a business plan isn’t purely a sequential process You will be filling

in different parts of the plan simultaneously or in whatever order makes themost sense in your mind Finally, after completing a first draft of all the majorsections, come back and rewrite a shorter, more concise executive summary(one to two pages) Not too surprisingly, the executive summary will be quitedifferent from the original summary because of all the learning and reshapingthat the business plan process facilitates

Common wisdom is that the business plan is a living document Althoughyour first draft will be polished, most business plans are obsolete the day theycome off the presses That means that entrepreneurs are continuously updating

and revising their business plan Again, the importance of the business planisn’t the final product but the learning that is gleaned from going through theprocess The business plan is the story line of your vision It articulates whatyou see in your mind and crystallizes that vision for you and your team It alsoprovides a history, a photo album, if you will, of the birth, growth, and matu-rity of your business Each major revision should be kept and filed and occa-sionally looked back upon for the lessons you have learned I find writing

a business plan, although daunting, exciting and creative, especially if I amworking on it with a founding team Whether it is over a glass of wine, beer, orcoffee, talking about your business concept with your founding team is invigo-rating, and the business plan is a critical outcome of these discussions So nowlet us dig in and examine how to write effective business plans

THE STORY MODEL

One of the major goals for business plans is to attract and convince variousstakeholders of the potential of your business You have to keep in mind, there-fore, how these stakeholders will interpret your plan The guiding principal isthat you are writing a story All good stories have a plot line, a unifying threadthat ties the characters and events together If you think about the most suc-cessful businesses in America, they all have well-publicized plot lines, moreappropriately called taglines When you hear these taglines, you immediatelyconnect them to the business For example, when you hear “absolutely, posi-tively has to be there overnight,” you probably connect that tagline to FederalExpress and package delivery Similarly, “Just do it” is intricately linked toNike and the image of athletic proficiency (see Exhibit 9.1) A tagline is a sen-tence or fragment of a sentence that summarizes the pure essence of your busi-ness It is the plot line that every sentence, paragraph, page, diagram, and otherpart of your business plan should correlate to One useful tip that I share withevery entrepreneur I work with is to put that tagline in a footer that runs on thebottom of every page Most word-processing packages, such as Microsoft Word,enable you to insert a footer that you can see as you type As you are writing, ifthe section doesn’t build on, explain, or otherwise directly relate to the tagline,

it most likely isn’t a necessary component to the business plan Rigorous ence to the tagline facilitates writing a concise business plan

Federal Express Absolutely, positively has to be there overnight.

McDonalds We love to see you smile.

Cisco Systems Discover all that's possible on the Internet.

Microsoft Where do you want to go today.

The key to beginning the story model is capturing the reader’s attention.The tagline is the foundation, but in writing the plan you want to create a num-ber of visual catch points Too many business plans are dense, text-laden mani-festos Only the most diligent reader will wade through all that text to find thenuggets of value Help the reader by highlighting different key points through-out the plan How do you create these catch points? Some effective techniquesinclude extensive use of headings and subheadings, strategically placed bullet-point lists, diagrams, charts, and the use of sidebars.2The point is to make thedocument not only content rich but visually attractive.

Now, let’s take a look at the major sections of the plan (see Exhibit 9.2).Keep in mind that although there are some different variations, most planshave these components It is important to keep your plan as close to this format

as possible because many stakeholders are used to the format and it facilitates

I Cover

II Title Page

III Executive Summary

Market Size and Structure,

and Margin Analysis

VI Marketing Plan

a Target Market Strategy

b Product /Service Strategy

a Development Strategy

b Development Timeline

IX Team

a Team Bios and Roles

b Advisory Boards, Board of Directors, Strategic Partners, External Members

c Compensation and Ownership

X Critical Risks

a Market Interest and Growth Potential

b Competitor Actions and Retaliation

c Time and Cost of Development

a Description of Financial Assumptions

b Income Statement

c Cash Flow Statement

d Balance Sheet XIII Appendices

spot reading So if you are seeking venture capital, for instance, you want to cilitate quick perusal because venture capitalists often spend, research shows,

fa-as little fa-as five minutes on a plan before rejecting it or putting it fa-aside for laterstudy If a venture capitalist becomes frustrated with an unfamiliar format, hewill more likely reject it than try to pull out the pertinent information

THE BUSINESS PLAN

We will progress through the sections in the order that they typically appear,but keep in mind that you can work on the sections in any order that you wish

The Cover

The plan’s cover should include the following information: company name,tagline, contact person and address, phone, fax, e-mail address, date, dis-claimer, and copy number Most of the information is self-explanatory, but Ishould point out a few things (see Exhibit 9.3) First, the contact person for anew venture should be the president or some other founding team member Ihave seen some business plans that failed to have the contact person’s nameand phone on the cover Imagine the frustration of an excited potential in-vestor who can’t find out how to contact the entrepreneur to gain more infor-mation; such plans usually end up in the rejected pile Second, business plansshould have a disclaimer along these lines:

This business plan has been submitted on a confidential basis solely to selected,highly qualified investors The recipient should not reproduce this plan nor dis-tribute it to others without permission Please return this copy if you do notwish to invest in the company

Controlling distribution is particularly important when seeking investmentcapital, especially to comply with Regulation A of the Securities and ExchangeCommission, which specifies that you must solicit qualified investors (highnet-worth and income individuals)

The cover should also have a line specifying the copy number You willoften see on the bottom right portion of the cover a line that says somethinglike “Copy 1 of 5 copies.” Entrepreneurs should keep a log of who has copies sothat they can control for unexpected distribution

Finally, the cover should be eye-catching If you have a product or type, a picture of it can draw the reader in Likewise, a catchy tagline draws at-tention and encourages the reader to look further

proto-Table of Contents

Continuing the theme of making the document easy to read, a detailed table ofcontents is critical It should list major sections, subsections, exhibits, and appen-dices The table provides the reader a roadmap to your plan (see Exhibit 9.4)

Note that the table of contents is customized to the specific business so that itdoesn’t perfectly correlate to the business plan outline presented in Exhibit 9.2.Nonetheless, a look at Exhibit 9.4 shows that the company’s business plan in-cludes most of the elements highlighted in the business outline and that theorder of information is basically the same as well.

Bringing Information to the Golfer’s Palm

Executive Summar y (1–3 pages)

This section is the most important part of the business plan If you don’t ture readers’ attention in the executive summary, it is unlikely that they willread any other parts of the plan Therefore, you want to hit them with the mostcompelling aspects of your business opportunity right up front

4.0 Company Description and Services 16

6.2 Business Development Activities 24

Hook the Reader

That means having the first sentence or paragraph highlight the potential ofthe opportunity I have read too many plans that start with “Company XYZ, in-corporated in the state of Delaware, will develop and sell widgets.” Ho-hum.That doesn’t excite me; but if, in contrast, the first sentence states, “The cur-rent market for widgets is $50 million and is growing at an annual rate of 20%.The emergence of the Internet is likely to accelerate this market’s growth.Company XYZ is positioned to capture this wave with its proprietary technol-ogy—the secret formula VOOM.” This creates the right tone It tells me thatthe potential opportunity is huge and that company XYZ has some competitiveadvantage that enables it to become a big player in this market I don’t reallycare at this point whether the business is incorporated or that it is a Delawarecorporation (aren’t they all?)

Common subsections within the executive summary include: description

of opportunity, business concept, industry overview, target market, tive advantage, business model and economics, team, and offering Rememberthat, since this is an executive summary, all these components are covered

competi-in the body of the plan We will explore them competi-in greater detail as we progressthrough the sections

Since the executive summary is the most important part of the finishedplan, it should be written after you have gained your deep learning by goingthrough all the other sections.3The summary should be 1 to 3 pages, although

I prefer executive summaries be no more than 2 pages

Industr y, Customer, and Competitor

Analysis (3 – 6 pages)

Industry

The goal of this section is to illustrate the opportunity and how you are going tocapture that opportunity A useful framework for visualizing the opportunity isTimmons’s model of opportunity recognition.4Using the “3Ms” helps quantify

an idea and assess how strong an opportunity the idea is First, examine Market

demand If the market is growing at 20% or better, the opportunity is more

ex-citing Second, we look at Market size and structure A market that is currently

$50 million with $1 billion potential is attractive This often is the case inemerging markets, those that appear poised for rapid growth and have the po-tential to change how we live and work For example, the PC, disk drive, andcomputer hardware markets of the eighties were very hot Many new com-panies were born and rode the wave of the emerging technology, includingApple, Microsoft, and Intel In the nineties, it was anything dealing with theInternet As we enter the twenty-first century, it appears that wireless commu-nications may be the next big market Another market structure that tends tohave promise is a fragmented market where many small, dispersed competitors

compete on a regional basis Many of the big names in retail revolutionizedfragmented markets For instance, category killers such as Wal-Mart, Staples,and Home Depot consolidated fragmented markets by providing quality prod-ucts at lower prices These firms replaced the dispersed regional and local

discount, office-supply, and hardware stores The final M is Margin analysis.

Do firms in the industry enjoy high gross margins (revenues minus cost ofgoods sold) of 40% or greater? Higher margins allow for higher returns, whichagain leads to greater potential business

The 3Ms help distinguish opportunities and as such should be

high-lighted as early as possible in your plan Describe your overall industry interms of revenues, growth, and pertinent future trends Avoid in this sectiondiscussing your concept, the proposed product or service you will offer In-stead, use dispassionate, arms-length analysis of the industry with the goal ofhighlighting a space or gap that is underserved Thus, how is the industry seg-mented currently, and how will it be segmented in the future? After identify-ing the relevant industry segments, identify the segment that your productwill target Again, what are the important trends that will shape the segment

in the future?

Customer

Once the plan has defined the market space it plans to enter, the target tomer needs to be examined in detail The entrepreneur needs to define whothe customer is by using demographic and psychographic information The bet-ter the entrepreneur can define his customer, the more apt he is to deliver aproduct that the customer truly wants A venture capitalist recently told methat the most impressive entrepreneur is the one who not only identifies whothe customer is in terms of demographics and psychographics but can alsoname who that customer is by address, phone number, and e-mail address.When you understand who your customer is, you can assess what compels them

cus-to buy, how your company can sell cus-to them (direct sales, retail, Internet, directmail, etc.), how much acquiring and retaining that customer will cost, and soforth A schedule inserted into the text describing customers on these basic pa-rameters communicates a lot of data quickly and can be very powerful

Competition

The competition analysis follows directly from the customer analysis You havejust identified your market segment, described what the customer looks like,and what the customer wants Now the key factor leading to competitive analy-sis is what the customer wants in a particular product These product attributesform a basis of comparison against your direct and indirect competitors Acompetitive profile matrix not only creates a powerful visual catch point, itconveys information regarding your competitive advantage and also the basisfor your company’s strategy (see Exhibit 9.5) The competitive profile matrix

should lead the section and be followed by text describing the analysis and itsimplications.

Finding information about your competition can be easy if the competingcompany is public, harder if it is private, and very difficult if it is operating in

“stealth” mode (i.e., it hasn’t yet announced itself to the world) Most librarieshave access to databases that contain a mother lode of information about pub-licly traded companies (see Exhibit 9.6 for some sample sources), but privatelyheld companies or stealth ventures represent a greater challenge The best wayfor savvy entrepreneurs to gather this information is through their network andvia trade shows Who should be in the entrepreneur’s network? First and fore-most are the customers the entrepreneur hopes to sell to in the near future.Just as you are (or should be) talking to your potential customers, your existingcompetition is interacting with the customers every day, and your customersare likely aware of the stealth competition on the horizon Although many en-trepreneurs are fearful (verging sometimes on the brink of paranoia) that valu-able information will fall in the wrong hands and lead to new competition thatinvalidates the current venture, the reality is that entrepreneurs who operate in

a vacuum (don’t talk to customers, attend tradeshows, etc.) fail far more oftenthan those who are talking to everyone they can Talking allows entrepreneurs

to get invaluable feedback that enables them to reshape their product offeringprior to launching a product that may or may not be accepted by the market-place So you should network not only to find out about your competition butalso to improve your own venture concept

VMC Napster Mp3.com MYRadio SonicNet XM Radio

Have to be online to listen to music No No No No Yes No Customized ads to individual users Yes N/A No N/A No No Can purchase physical media on

Can access personal music collection

Automatic play list generation Yes No No Yes Yes Yes Offers a service without ads Yes N/A No No No Yes Can choose to play specific songs on

Easy feedback for enhanced listening

Can distribute user collections to

Offers portable device player option Yes Yes Yes Yes No Yes

Offers service in telematics industry Yes No No No No Yes

Company and Product Description (1–2 pages)

Completing the dispassionate analysis described in the previous section laysthe foundation for describing your company and concept In one paragraphidentify the company name, where it is incorporated, and a brief overview ofthe company concept Also highlight in this section what the company hasachieved to date—what milestones have you accomplished that show progress.More space should be used to describe the product Again, graphic repre-sentations can be visually powerful (see Exhibit 9.7) Highlight how your prod-uct fits into the customer value proposition What is incorporated in yourproduct and what value do you add to the customer? This section should clearlyand forcefully identify your venture’s competitive advantage Based upon yourcompetitive analysis, why is your product better, cheaper, faster than whatcustomers currently have? Your advantage may be a function of proprietarytechnology, patents, distribution In fact, the most powerful competitive ad-vantages are derived from a bundle of factors because this makes them moredifficult to copy

Entrepreneurs also need to identify their entry and growth strategies.Since most new ventures are resource constrained, especially in terms of avail-able capital, it is crucial that the lead entrepreneur establish the most effectiveway to enter the market Based upon analysis in the market and customer sec-tions, entrepreneurs need to identify their primary target audience (PTA) Fo-cusing on a particular subset of the overall market niche allows new ventures

to utilize scarce resources to reach those customers and prove the viability oftheir concept

Infotrac Index /abstracts of journals, general business and finance magazines; market

overviews; and profiles of public and private firms.

Dow Jones Interactive Searchable index of articles from over 3,000 newspapers.

Lexis/Nexis Searchable index of articles.

Dun’s Principal International Business International business directory.

Dun’s One Million Dollar Premium Database of public and private firms with revenues

greater than $1 million or more than eight employees.

Hoover’s Online Profiles of private and public firms with links to Web sites, etc.

Corp Tech Profiles of high technology firms.

Bridge Information Services Detailed financial information on 1.4 million international

securities that can be manipulated in tables and graphs.

RDS Bizsuite Linked databases providing data and full-text searching on firms.

Bloomberg Detailed financial data and analyst reports.

EXHIBIT 9.7 Product/concept/description.

Video or audio content customized ads

B2B intranet

Customer profile management (Web site)

Content information database (ratings, availability, etc.)

Consumer usage and advertising database

Consumer profile database

Customized advertising data Catalog

VMC compliant device component

Home entertainment system T.V.

Portable audio device

World WideCKS Group Inc.Omnicom Dentsu Interpublic

The business plan should also sell the entrepreneur’s vision for growth cause that vision indicates the business’s true potential Thus, a paragraph ortwo should be devoted to the firm’s growth strategy If the venture achievessuccess in its entry strategy, it will either generate internal cash f low that can

be-be used to fuel the growth strategy or attract further equity financing at proved valuations The growth strategy should talk about the secondary targetaudience and tertiary target audiences that the firm will pursue For example,

im-if I were starting a restaurant, my entry strategy might be to establish a ence in Wellesley, Massachusetts, geared toward college students and youngprofessionals Assuming that I achieved some success (e.g., generating sales andhigh table turns), my growth strategy might be to open up five more restau-rants around the greater Boston area If these restaurants also proved success-ful, I might franchise the concept nationwide to achieve rapid growth with lesscapital infusion than if I opened all company-owned restaurants This in fact,appears to be the strategy that Joey Crugnale, the founder of Steve’s IceCream, Bertucci’s Brick Oven Pizza, and more recently the Naked Fish, is fol-lowing Crugnale opened the first Naked Fish in May 1999 After testing and refining the concept, he has opened another nine outlets (as of Decem-ber 2000) The establishment of nine Naked Fish restaurants shows growth andsuccess and enables Mr Crugnale to attract further financing to grow the con-cept around Boston and beyond

pres-Marketing Plan (4 – 6 pages)

To this point, we have laid the stage for your company’s potential to enter amarket successfully and grow Now we need to devise the strategy that willallow the company to reach its potential The primary components of this sec-tion include a description of the target market strategy, product /service strat-egy, pricing strategy, distribution strategy, advertising and promotion, salesstrategy, and sales and marketing forecasts Let’s take a look at each of thesesubsections in turn

Target Market Strategy

Every marketing plan needs some guiding principals Based on the knowledgegleaned from the target market analysis, entrepreneurs need to position theirproduct All product strategies fall somewhere on the continuum between “ra-tional purchase” and “emotional purchase.” As an example, when I buy a newcar, the rational purchase might be a low-cost reliable car such as the Ford As-pire However, there is an emotional element as well I want the car to be an ex-tension of my personality, so based on my economic means and self-perception,

I will buy a BMW or Audi because of the emotional benefits I derive fromowning a high-status car Within every product space, there is room for prod-ucts at different points along the continuum Entrepreneurs need to decide

where their product fits or where they would like to position it, because thisposition determines the other aspects of the marketing plan.

Product/Service Strategy

Building from the target market strategy, this section of the plan describeshow your product is differentiated from the competition Discuss why cus-tomers will switch to your product and how you will retain them so that theydon’t switch to your competition in the future Using the attributes defined inyour customer profile matrix, a powerful visual is a product attribute mapshowing how your firm compares to the competition It is best to focus on the

two most important attributes, one on the x-axis and the other on the y-axis.

The map should show that your product is clearly distinguishable from yourcompetition on desirable attributes (see Exhibit 9.8)

This section should also address how you will service the customer Whattype of technical support will you provide? Will you offer warranties? Whatkind of product upgrades will be available and when? It is important to detailall these efforts and account for each in the pricing of the product Entrepre-neurs frequently underestimate the costs of these services, which leads to adrain on cash f low and can ultimately lead to bankruptcy

Pricing Strategy

Determining how to price your product is always difficult The two primaryapproaches are the “cost-plus” approach and the “market demand” approach Iadvise entrepreneurs to avoid cost-plus pricing for a number of reasons First,

it is difficult to accurately determine your actual cost, especially if this is anew venture with a limited history New ventures consistently underestimatethe true cost of developing their products For example, how much did it really