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  1. 1. Keys for an Effective Business Plan Business Planning Workshop September 27, 2006
  2. 2. Dr. Timothy B. Folta <ul><li>Associate Professor of Strategy and Entrepreneurship </li></ul><ul><li>Director – BIOMEDSHIP (Biomedical Entrepreneurship) Program </li></ul><ul><ul><li> </li></ul></ul><ul><li>Instructor, Undergraduate, MBA, & Ph.D. Courses in Entrepreneurship </li></ul><ul><li>Entrepreneurship research published in leading journals </li></ul><ul><ul><li>Entrepreneurial survival </li></ul></ul><ul><ul><li>Entrepreneurial risk </li></ul></ul><ul><ul><li>Entrepreneurial entry </li></ul></ul><ul><ul><li>Acquisitions of entrepreneurial firms </li></ul></ul>
  3. 3. Why write a business plan? <ul><li>According to Dun & Bradstreet study of businesses between 1989-1992: </li></ul><ul><ul><li>66% of businesses remain open at least 2 years. </li></ul></ul><ul><ul><li>49.6% remain open at least 4 years. </li></ul></ul><ul><ul><li>39.5% remain open at least 6 years. </li></ul></ul><ul><li>Study of Canadian firms found roughly the same: </li></ul>
  4. 4. Why write a business plan? (cont.) <ul><li>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. </li></ul><ul><ul><li>Over-optimism of own ability? </li></ul></ul><ul><ul><li>Don’t perceive risks? </li></ul></ul><ul><li>Shane and Delmar (2003) found that entrepreneurs who have completed business plans or undertaken more business planning should be: </li></ul><ul><ul><li>more likely to survive </li></ul></ul><ul><ul><li>further along in product development </li></ul></ul><ul><ul><li>further along in organizing the venture </li></ul></ul>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.
  5. 5. Tale of Two Markets Source: Venture One <ul><li>2001-today </li></ul><ul><li>Get profitable fast </li></ul><ul><li>Where’s the business model? </li></ul><ul><li>Path to profitability </li></ul><ul><li>Experienced veterans </li></ul><ul><li>VC controls valuation </li></ul><ul><li>1995-2000 </li></ul><ul><li>Get big fast </li></ul><ul><li>Concept funded </li></ul><ul><li>Time to IPO </li></ul><ul><li>Young Entrepreneurs </li></ul><ul><li>Entrepreneurs controlled valuation </li></ul>
  6. 7. Why write a business Plan? Overcome subjectivity bias Increase awareness of key challenges Convince other stakeholders Employees Capital Providers Partners Angel Debt VC
  7. 8. Agenda <ul><li>First … some terminology </li></ul><ul><li>Getting started: Begin with the end in mind </li></ul><ul><li>Plan outline </li></ul><ul><li>Some considerations when writing the plan </li></ul><ul><li>Do’s and Don’t’s </li></ul><ul><li>Q & A </li></ul>
  8. 9. First …. some terminology <ul><li>Unique Selling Proposition </li></ul><ul><li>Competitive Advantage </li></ul><ul><li>Business Model </li></ul>
  9. 10. Unique selling proposition or Value Proposition <ul><li>How the product or service benefits the customer in a unique way </li></ul><ul><li>Answers the critical question for each customer : </li></ul>“ What’s in it for me?”
  10. 11. Examples of Value Propositions <ul><ul><li>“ 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.” </li></ul></ul><ul><ul><li>“ 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.” </li></ul></ul>
  11. 12. competitive advantage <ul><li>a firm’s distinctive factors that give it a superior of favorable position in relation to its competitors. </li></ul><ul><li>A sustainable competitive advantage is a competitive advantage is maintained persistently. </li></ul>
  12. 13. 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
  13. 14. 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
  14. 15. 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
  15. 16. Examples of Sources of Competitive Advantage Toyota Manufacturing innovation Dell Customer responsiveness Mercedes Quality, reliability Intel Product innovation Alcoa Efficiency, low costs Example Source
  16. 17. The scope over which the advantage is targeted Geography Demography Product
  17. 18. The activities throughout the value chain that deliver the intended advantage Design Production Logistics Sales Marketing Human Resources Service
  18. 19. business model <ul><li>A business model is the description of the business and how it will work in economic terms – that is, how it will make money. </li></ul><ul><ul><li>to be persuasive, it must specify how / why each stakeholder gains from the venture </li></ul></ul>
  19. 20. Getting Started Begin with the end in mind
  20. 21. “ 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.
  21. 22. The End <ul><li>Could refer to the purpose of the plan </li></ul><ul><ul><li>Recruiting talent </li></ul></ul><ul><ul><li>Gaining confidence in business opportunity </li></ul></ul><ul><ul><li>Securing financing </li></ul></ul><ul><li>Could refer to the exit </li></ul><ul><ul><li>IPO </li></ul></ul><ul><ul><li>Sale or Merger </li></ul></ul>
  22. 23. 6 things you must have to get VC funding <ul><li>Compelling business models </li></ul><ul><li>Good business plan </li></ul><ul><li>Unique technology with clear benefits </li></ul><ul><li>Strong Intellectual Property position </li></ul><ul><li>BIG markets </li></ul><ul><li>Experienced management team </li></ul><ul><li>Realistic financial plan </li></ul><ul><li>Not necessarily in this order of importance!! </li></ul>
  23. 24. 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
  24. 25. 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 <ul><li>Investors get $100 MM back </li></ul><ul><li>$300 MM Profit Split </li></ul><ul><ul><li>VC gets 20% </li></ul></ul><ul><ul><li>Investors get 80% </li></ul></ul>$50MM $0 $200MM $150MM $0 I = Investors, P = Target ventures
  25. 26. Key Components of the Business Plan <ul><li>Cover Page </li></ul><ul><li>Table of Contents </li></ul><ul><li>Executive Summary </li></ul><ul><li>The Company </li></ul><ul><li>Market Analysis </li></ul><ul><li>Competitive Analysis </li></ul><ul><li>Products and Services </li></ul><ul><li>Marketing and Sales </li></ul><ul><li>Finance </li></ul><ul><li>Appendix </li></ul>
  26. 27. 1.0 The Executive Summary <ul><li>Probably the most important part of the plan. </li></ul><ul><li>It is a business plan in miniature – should be able to stand on its own . </li></ul><ul><li>Organize in order of importance </li></ul><ul><li>No more than 2 pages </li></ul>Did you know that most business plans are never read by a VC partner?
  27. 28. II. The Company <ul><li>Company History </li></ul><ul><li>Mission </li></ul><ul><li>Legal Business Description </li></ul><ul><li>Strategy </li></ul><ul><li>Technology </li></ul><ul><li>Value Proposition </li></ul><ul><li>Management </li></ul><ul><li>Organization, Alliances, and Relationships </li></ul><ul><li>Intellectual Property Strategy </li></ul><ul><li>Facilities </li></ul>
  28. 29. 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
  29. 30. Strategy <ul><li>Major opportunities </li></ul><ul><li>Estimated cost of entry, time frame, and risk </li></ul><ul><li>Competitive advantage </li></ul><ul><ul><li>Type of advantage </li></ul></ul><ul><ul><li>Scope of advantage </li></ul></ul><ul><ul><li>Key activities driving advantage </li></ul></ul><ul><li>Product / Service A </li></ul><ul><li>Product / Service B </li></ul>
  30. 31. Technology <ul><li>Proprietary Technology </li></ul><ul><li>Technology relationships </li></ul>
  31. 32. Human Capital Other assets: technology, market power, reputation, customer relationships, scale economies, scope economies, etc. The Average Start-up Firm The Established Firm
  32. 33. Why Venture Capitalists Reject Business Plans <ul><li>Unacceptable management team 52% </li></ul><ul><li>Company not market driven 38% </li></ul><ul><li>Time frame too long 33% </li></ul><ul><li>Inadequate financing plan 25% </li></ul><ul><li>No proprietary position 15% </li></ul><ul><li>No experience in industry (VC) 12% </li></ul><ul><li>Other pitfalls: too long, opportunity too small, poor organization, lack of focus </li></ul>
  33. 34. The relationship between prior experience and performance <ul><li>In a Purdue study of 2994 entrepreneurs by Gimeno, Folta, Cooper, and Woo (1997) </li></ul><ul><ul><li>Similarity of prior business to current one is one of the strongest predictors of performance. </li></ul></ul><ul><ul><li>Other predictors of performance </li></ul></ul><ul><ul><ul><li>Formal education </li></ul></ul></ul><ul><ul><ul><li>Management experience </li></ul></ul></ul><ul><ul><ul><li>Entrepreneurial experience </li></ul></ul></ul>
  34. 35. Management <ul><li>Leadership team and brief resumes </li></ul><ul><li>Ownership, voting, stock options, and other incentives </li></ul><ul><li>Outside support </li></ul><ul><ul><li>Accountant </li></ul></ul><ul><ul><li>Attorney </li></ul></ul><ul><ul><li>Consultant </li></ul></ul><ul><ul><li>Board of directors / advisors </li></ul></ul>
  35. 36. Organization, Alliances and Relationships <ul><li>Joint Marketing agreements </li></ul><ul><li>Supplier Agreements </li></ul><ul><li>Joint Development agreements </li></ul>
  36. 37. III. Market Analysis <ul><li>Market Description </li></ul><ul><li>Target Market </li></ul><ul><li>Customer Buying Criteria </li></ul><ul><li>Distribution Strategy </li></ul><ul><li>Market Penetration and Sales Volume </li></ul>
  37. 38. Market Description <ul><li>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]. </li></ul><ul><li>[Company] is uniquely positioned to attend to this segment because … </li></ul>
  38. 39. Target Market <ul><li>We define our target market as [x], [y], and [z]. Currently the market is shared by [a] competitors. </li></ul><ul><li>Market segments and characteristics of those segments </li></ul>
  39. 40. Customer Buying criteria <ul><li>Motivation to buy </li></ul><ul><li>Primary market research to suggest target customers want product or service. </li></ul>
  40. 41. Market Penetration and Sales Volume <ul><li>For each channel, identify the target volumes and assumptions over a five year period </li></ul>
  41. 42. Revenue Model : how the firm will generate revenue <ul><li>Product sales model </li></ul><ul><li>Subscription fee model </li></ul><ul><li>Advertising revenue model </li></ul><ul><li>Transaction fee revenue model </li></ul>
  42. 43. Sources of revenue growth <ul><li>Increasing brand recognition </li></ul><ul><li>Intellectual property licensing </li></ul><ul><li>International expansion </li></ul><ul><li>Acquisition of other firms </li></ul><ul><li>Price increases </li></ul><ul><li>New product offerings </li></ul>
  43. 44. IV. Competitive Analysis <ul><li>Key competitors </li></ul><ul><ul><li>Product, price, market share, location, promotion, management, financial strength. </li></ul></ul><ul><li>Industry analysis </li></ul><ul><ul><li>Barriers to entry, intensity of rivalry, buyer power, supplier power, availability of substitutes. </li></ul></ul><ul><li>Distinguishing qualities of company </li></ul>
  44. 45. V. Product and Services <ul><li>Description of how it works. What needs are met. Photos or drawings. </li></ul><ul><li>Product line plans </li></ul><ul><li>R&D </li></ul><ul><li>Production and delivery </li></ul><ul><ul><li>Location </li></ul></ul><ul><ul><li>Build versus buy versus license decisions, </li></ul></ul><ul><ul><li>Facilities and logistics. </li></ul></ul><ul><li>Packaging </li></ul><ul><li>Fulfillment </li></ul><ul><li>Service and Support </li></ul>
  45. 46. VI. Marketing and Sales <ul><li>Marketing Plan </li></ul><ul><li>Sales Strategy </li></ul><ul><li>Distribution Channels and Partners </li></ul><ul><li>Sales Cycle </li></ul><ul><li>Pricing Strategy </li></ul><ul><li>Marketing Communications </li></ul>
  46. 47. <ul><li>Sales Strategy </li></ul><ul><ul><li>Selling Methods </li></ul></ul><ul><ul><li>Product Positioning </li></ul></ul><ul><li>Distribution Channels and Partners </li></ul><ul><ul><li>Distributors </li></ul></ul><ul><ul><li>Direct Sales </li></ul></ul><ul><ul><li>Retailers </li></ul></ul><ul><ul><li>Corporate Sales </li></ul></ul><ul><li>Sales Cycle </li></ul><ul><li>Pricing Strategy </li></ul><ul><ul><li>Product A </li></ul></ul><ul><ul><li>Product B </li></ul></ul>
  47. 48. <ul><li>Marketing Communications </li></ul><ul><ul><li>Trade shows </li></ul></ul><ul><ul><li>Advertising </li></ul></ul><ul><ul><li>Press Releases </li></ul></ul><ul><ul><li>Conferences / Seminars </li></ul></ul><ul><ul><li>Internet Promotions </li></ul></ul><ul><ul><li>Direct Mail </li></ul></ul>
  48. 49. VII. Financial Plan <ul><li>Highlights of financial statements </li></ul><ul><li>Revenue Sources </li></ul><ul><li>Funding requirements </li></ul><ul><li>How you intend to use Funds </li></ul><ul><li>Required Analysis: </li></ul><ul><ul><li>Profit and loss forecast </li></ul></ul><ul><ul><li>Cash flow forecast </li></ul></ul><ul><ul><li>Balance sheet </li></ul></ul><ul><li>Supplemental analysis </li></ul><ul><ul><li>Ratio analysis </li></ul></ul><ul><ul><li>Break-even analysis </li></ul></ul><ul><li>Harvest plan </li></ul>
  49. 50. Some Overall Thoughts on the Financial Section of the Plan <ul><li>Financial projections are relatively unimportant (Sahlman) </li></ul><ul><ul><li>Everyone knows they’re inaccurate: </li></ul></ul><ul><ul><li>However, they take on more importance if the fundamentals of the business model are well established. </li></ul></ul>
  50. 51. VIII. Risks and Milestones <ul><li>Critical risks: technological, market, execution </li></ul><ul><li>Potential mitigation of the risks </li></ul><ul><li>Performance milestones </li></ul>
  51. 52. IX. Appendices <ul><li>Pro-forma financial reports </li></ul><ul><ul><li>Assumptions, trends, comparatives </li></ul></ul><ul><ul><li>Cash flow statements </li></ul></ul><ul><ul><li>Income statements </li></ul></ul><ul><ul><li>Balance sheets </li></ul></ul><ul><ul><li>Sources and uses of funds </li></ul></ul><ul><ul><li>Supplementary financial analysis </li></ul></ul><ul><li>Resumes / Management Team Biographies </li></ul><ul><li>Testimonials </li></ul><ul><li>Patent applications </li></ul><ul><li>Description of primary data analysis </li></ul><ul><li>Contracts </li></ul><ul><li>Promotion literature </li></ul><ul><li>Competitive Profiles </li></ul><ul><li>Press Clippings </li></ul><ul><li>References </li></ul>
  52. 53. For what do you need financial assumptions? <ul><li>Sales - when to begin, growth </li></ul><ul><li>Start-up costs </li></ul><ul><li>fixed and variables expenses </li></ul><ul><li>terms on accounts receivable, payable </li></ul><ul><li>inventory turnover </li></ul><ul><li>terms of financing </li></ul><ul><li>initial cash position </li></ul><ul><li>timing of key events </li></ul>
  53. 54. How to generate pro-forma financials? Sales forecast Beginning balance sheet Ending balance sheet Cash flow statement Income statement Assumptions
  54. 55. 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
  55. 56. Some Considerations When Writing the Business Plan <ul><li>How long should it be? </li></ul><ul><li>Where to start? </li></ul><ul><li>Who should write the plan? </li></ul><ul><li>What should the plan look like? </li></ul><ul><li>Should you have more than one version of the plan? </li></ul><ul><li>Should you seek the perspective of outsiders? </li></ul>
  56. 57. The impression continuum <ul><li>Messy (poor organizational skills) </li></ul><ul><li>Too short (glib) </li></ul><ul><li>No pictures (lacking creativity) </li></ul><ul><li>Too conservative (too bearish) </li></ul><ul><li>B&W faded photocopy (lacking marketing skills) </li></ul><ul><li>Over-organized (hiding lack of content) </li></ul><ul><li>Too long (unable to get to the point) </li></ul><ul><li>Too many pictures (lacking discipline) </li></ul><ul><li>Too optimistic (unrealistic, naïve) </li></ul><ul><li>Full color ad-like production (no self control, too flashy or focused on appearances) </li></ul>the answer : tell the story & keep it succinct!!!
  57. 58. Do’s and Don’t’s of Business Plans
  58. 59. Do … tell the story <ul><li>Make sure the business model resonates throughout the plan </li></ul><ul><li>Make it a page turner … </li></ul><ul><li>Each section should lead to the next </li></ul><ul><li>Each business story must be told in a slightly different way … do not follow a fixed formula </li></ul><ul><li>Edit with a sharp knife </li></ul>
  59. 60. Don’t … make common mistakes <ul><li>Beat the reader over the head with your point </li></ul><ul><li>Too much repetition & irrelevant information </li></ul><ul><li>Not enough information </li></ul><ul><li>Ignore risks </li></ul><ul><li>Ask for less money than is needed </li></ul>
  60. 61. Time’s Yours!