Keys for an Effective Business Plan Business Planning Workshop September 27, 2006
Dr. Timothy B. Folta
Associate Professor of Strategy and Entrepreneurship
Director – BIOMEDSHIP (Biomedical Entrepreneurship) Program
Instructor, Undergraduate, MBA, & Ph.D. Courses in Entrepreneurship
Entrepreneurship research published in leading journals
Acquisitions of entrepreneurial firms
Why write a business plan?
According to Dun & Bradstreet study of businesses between 1989-1992:
66% of businesses remain open at least 2 years.
49.6% remain open at least 4 years.
39.5% remain open at least 6 years.
Study of Canadian firms found roughly the same:
Why write a business plan? (cont.)
Cooper, Dunkelberg, and Woo (1988) found that 95% of entrepreneurs believe that their ventures will most probably succeed even though over half of all new ventures fail.
Over-optimism of own ability?
Don’t perceive risks?
Shane and Delmar (2003) found that entrepreneurs who have completed business plans or undertaken more business planning should be:
more likely to survive
further along in product development
further along in organizing the venture
Cooper, A.C., Dunkelberg, W.C., & Woo, C.Y. (1988). ‘Entrepreneurs’ perceived chances of success.’ Journal of Business Venturing , 3: 97-108. Delmar, F. & Shane, S. (2003). ‘Does business planning facilitate the development of new ventures, Strategic Management Journal , 24(12), pp 1165-1185.
Tale of Two Markets Source: Venture One
Get profitable fast
Where’s the business model?
Path to profitability
VC controls valuation
Get big fast
Time to IPO
Entrepreneurs controlled valuation
Why write a business Plan? Overcome subjectivity bias Increase awareness of key challenges Convince other stakeholders Employees Capital Providers Partners Angel Debt VC
First … some terminology
Getting started: Begin with the end in mind
Some considerations when writing the plan
Do’s and Don’t’s
Q & A
First …. some terminology
Unique Selling Proposition
Unique selling proposition or Value Proposition
How the product or service benefits the customer in a unique way
Answers the critical question for each customer :
“ What’s in it for me?”
Examples of Value Propositions
“ We provide a friendly, comfortable, well-located place offering a wide range of fresh, customized quality coffees, teas, and other beverages for the person who enjoys a good experience and a good beverage.”
“ An easily accessible Internet site that is convenient all of the time to provide a wide selection of books, CDs, and videos at a fair price to the busy, computer-literate customer.”
a firm’s distinctive factors that give it a superior of favorable position in relation to its competitors.
A sustainable competitive advantage is a competitive advantage is maintained persistently.
Cost WTP Cost WTP Firm Profit A firm establishes a competitive advantage by driving a wedge between the costs it incurs and the willingness to pay (WTP) Cost WTP Firm Profit or Price Value Cost The Firm’s Economic Contribution
3 Broad Types of Choices that Define a Company’s Business Strategy The advantage the firm aims to deliver The activities throughout the value chain that deliver the intended advantage The scope over which the advantage is targeted Positioning Strategy Participation Strategy Organizational Strategy
The advantage the firm aims to deliver Cost WTP Firm Profit Alter WTP Cost WTP Firm Profit Alter Marginal Cost Cost WTP Firm Profit Alter WTP Cost WTP Firm Profit Alter Marginal Cost Superior Competitive Position
Examples of Sources of Competitive Advantage Toyota Manufacturing innovation Dell Customer responsiveness Mercedes Quality, reliability Intel Product innovation Alcoa Efficiency, low costs Example Source
The scope over which the advantage is targeted Geography Demography Product
The activities throughout the value chain that deliver the intended advantage Design Production Logistics Sales Marketing Human Resources Service
A business model is the description of the business and how it will work in economic terms – that is, how it will make money.
to be persuasive, it must specify how / why each stakeholder gains from the venture
Getting Started Begin with the end in mind
“ Would you tell me please which way I ought to walk from here?” “ I don’t much care where –” said Alice. “ Then it doesn’t matter which way to walk,” said the Cat. From Alice’s ADVENTURES IN WONDERLAND “ That depends a good deal on where you want to get to,” said the Cat.
Could refer to the purpose of the plan
Gaining confidence in business opportunity
Could refer to the exit
Sale or Merger
6 things you must have to get VC funding
Compelling business models
Good business plan
Unique technology with clear benefits
Strong Intellectual Property position
Experienced management team
Realistic financial plan
Not necessarily in this order of importance!!
General Venture Capital Fund L.P. L.P. L.P. L.P. General Partner Key Features * 10 Year Life * Annual Management Fee - 2.5% * Profit Share: 80% Limited Partners, 20% General Partners -2 to 0 years Raise Funds 0 to 4 years Locate Deals Invest 4 to 8 years Grow Investments 9-10 years Liquidate Investments Investment Fund Cycle Capital 99% Limited Partners 1% General Partners Expertise 1% Limited Partners 99% General Partners
Example VC I 1 I 3 I 2 P 1 P 5 P 4 P 3 P 2 Total Amount Invested = $100MM Total Amount Harvested = $400MM
Investors get $100 MM back
$300 MM Profit Split
VC gets 20%
Investors get 80%
$50MM $0 $200MM $150MM $0 I = Investors, P = Target ventures
Key Components of the Business Plan
Table of Contents
Products and Services
Marketing and Sales
1.0 The Executive Summary
Probably the most important part of the plan.
It is a business plan in miniature – should be able to stand on its own .
Organize in order of importance
No more than 2 pages
Did you know that most business plans are never read by a VC partner?
II. The Company
Legal Business Description
Organization, Alliances, and Relationships
Intellectual Property Strategy
Example of Mission Statement: eBay “ We help people trade practically anything on earth. eBay was founded with the belief that people are basically good. We believe that each of our customers, whether a buyer or a seller, is an individual who deserves to be treated with respect. We will continue to enhance the online trading experience of all – collectors, hobbyists, dealers, small business, unique item seekers, bargain hunters, opportunistic sellers, and browsers. The growth of the eBay community comes from meeting and exceeding the expectations of these special people.” Mission Statement
Estimated cost of entry, time frame, and risk
Type of advantage
Scope of advantage
Key activities driving advantage
Product / Service A
Product / Service B
Human Capital Other assets: technology, market power, reputation, customer relationships, scale economies, scope economies, etc. The Average Start-up Firm The Established Firm
Why Venture Capitalists Reject Business Plans
Unacceptable management team 52%
Company not market driven 38%
Time frame too long 33%
Inadequate financing plan 25%
No proprietary position 15%
No experience in industry (VC) 12%
Other pitfalls: too long, opportunity too small, poor organization, lack of focus
The relationship between prior experience and performance
In a Purdue study of 2994 entrepreneurs by Gimeno, Folta, Cooper, and Woo (1997)
Similarity of prior business to current one is one of the strongest predictors of performance.
Other predictors of performance
Leadership team and brief resumes
Ownership, voting, stock options, and other incentives
Board of directors / advisors
Organization, Alliances and Relationships
Joint Marketing agreements
Joint Development agreements
III. Market Analysis
Customer Buying Criteria
Market Penetration and Sales Volume
We expect to compete in the [define niche] of the [define industry]. This market was approximately [$x] at [wholesale or retail] last [period available], according to [cite resource]. We believe a major future trend in the industry will be toward [environmentally oriented, miniaturized, high quality, value oriented] product offerings. Market research [cite source] suggests that this market will [grow/shrink] to [$x] by the year [200?]. We expect the niche in which we compete to [grow/shrink/remain stagnant] during this time. The major forces affecting this change will be [falling cost of computers, explosion of home based businesses, tendency for baby boomers to have less kids-and pamper their pets, whatever]. The are of greatest growth within the industry will be [x].
[Company] is uniquely positioned to attend to this segment because …
We define our target market as [x], [y], and [z]. Currently the market is shared by [a] competitors.
Market segments and characteristics of those segments
Customer Buying criteria
Motivation to buy
Primary market research to suggest target customers want product or service.
Market Penetration and Sales Volume
For each channel, identify the target volumes and assumptions over a five year period
Revenue Model : how the firm will generate revenue
Barriers to entry, intensity of rivalry, buyer power, supplier power, availability of substitutes.
Distinguishing qualities of company
V. Product and Services
Description of how it works. What needs are met. Photos or drawings.
Product line plans
Production and delivery
Build versus buy versus license decisions,
Facilities and logistics.
Service and Support
VI. Marketing and Sales
Distribution Channels and Partners
Distribution Channels and Partners
Conferences / Seminars
VII. Financial Plan
Highlights of financial statements
How you intend to use Funds
Profit and loss forecast
Cash flow forecast
Some Overall Thoughts on the Financial Section of the Plan
Financial projections are relatively unimportant (Sahlman)
Everyone knows they’re inaccurate:
However, they take on more importance if the fundamentals of the business model are well established.
VIII. Risks and Milestones
Critical risks: technological, market, execution
Potential mitigation of the risks
Pro-forma financial reports
Assumptions, trends, comparatives
Cash flow statements
Sources and uses of funds
Supplementary financial analysis
Resumes / Management Team Biographies
Description of primary data analysis
For what do you need financial assumptions?
Sales - when to begin, growth
fixed and variables expenses
terms on accounts receivable, payable
terms of financing
initial cash position
timing of key events
How to generate pro-forma financials? Sales forecast Beginning balance sheet Ending balance sheet Cash flow statement Income statement Assumptions
The Cover Page VP The Very Profitable Company 333 West St. West Lafayette, IN 47906 765-463-2012 Fax (765) 494-9658 [email_address] Contact: Wayne Jones - CEO The company was established in 2003 This (2 nd ) version of the plan was completed September 2004 Plan #2.4 Like Coach Wooden – Pay attention to detail
Some Considerations When Writing the Business Plan
How long should it be?
Where to start?
Who should write the plan?
What should the plan look like?
Should you have more than one version of the plan?
Should you seek the perspective of outsiders?
The impression continuum
Messy (poor organizational skills)
Too short (glib)
No pictures (lacking creativity)
Too conservative (too bearish)
B&W faded photocopy (lacking marketing skills)
Over-organized (hiding lack of content)
Too long (unable to get to the point)
Too many pictures (lacking discipline)
Too optimistic (unrealistic, naïve)
Full color ad-like production (no self control, too flashy or focused on appearances)
the answer : tell the story & keep it succinct!!!
Do’s and Don’t’s of Business Plans
Do … tell the story
Make sure the business model resonates throughout the plan
Make it a page turner …
Each section should lead to the next
Each business story must be told in a slightly different way … do not follow a fixed formula