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Business Plans Finance for Entrepreneurs
 

Business Plans Finance for Entrepreneurs

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  • 41% had no business plan at all. 26% had just a rudimentary, back-of-the-envelope type of plan. 5% worked up financial projections for investors. 28% wrote up a full-blown plan. HBR March / April 1994. Many entrepreneurs, the interviews suggested, don't bother with well-formulated plans for good reasons. They thrive in rapidly changing industries and niches that tend to deter established companies. And under these fluid conditions, an ability to roll with the punches is much more important than careful planning. The reasons are to raise finance, attract personnel, and for internal planning purposes. Of course, the contents of each will be slightly different. Do business spend to much time on bps? Great business can thrive without them, poor businesses are not going to be salvaged by them. I find that they are a useful tool for highlighting aspects that were not previously considered. This can change the way we do business and also prepare as in case certain previously unexpected events happen. Entrepreneurship is a four step process: recognizing an opportunity, developing a strategy for pursuing the opportunity, implementing the strategy, and harvesting the investment. The BP is the bridge between strategy and implementation.
  • Hundreds or even thousands of proposals for every one that receives funding Results suggest that the inclusion of a business planning document in a request for funding is weakly predictive of funding decisions, the actual content of the document does not inform venture capitalists. Critical information is learned through alternative channels. Results are most supportive of the premise that planning documents play, at best, a minor ceremonial role and do not inform venture capitalists. Therefore, the research concludes that planning documents do not play an important role in VC opportunity screening. When a VC looks at business plan within a few minutes he decides whether or not to follow up on the company. Therefore the Executive Summary needs to be exceptional.
  • An existing business will likely have a history on which to base its assumptions (although not always). As a general point the preparation of a business plan should be a bottom up process, many existing businesses should use this approach more often rather than relying on history. Remember, planning is a project like any other and must justify its investment. Although there are particular problems with “valuing” this investment it is likely that less resources should be used for the planning process of an existing business compared to a startup. Existing business are more likely to prepare accurate forecasts and so these can be used as a basis for compensating management this is often not the case for a new startup. Even in existing businesses, internal plans are often used as a basis for receiving funding from “head office”, but this is purely an internal matter. Business plans for new ventures consider more than just a narrow sales/product focus, all aspects of the business have to be considered. Even large businesses will have business plans. Less precise: Because the track record is not going to be there – no history of the business. It doesn’t mean you cannot draw on history – look at other start-ups, and draw on experience if you have started businesses before (still less precise though). Planning investment: More resources because there is more to plan (though there is so much that you don’t know – cannot plan too, too much though because there is so much that is not precise). Can plan to death and not have it go that way. Deviations from plans and wrong assumptions: If there is a deviation, it’s probably because there are not many facts about how the business will look that are known when you start. You miss because you were wrong about where the target was. Evaluate manager performance: cannot compensate managers based on sticking to a plan – this can lead to poor motivation. There are too many assumptions, too much out of control of the managers. Managerial compensation should not be adherence to the plan. More likely to be relied on externally: Management, VC, strategic partner, Perspective employees – share the business plan with them. Not so in established company usually. Capital: In order to gain capital, must show the investors (share with the shareholders). Breadth of coverage: Planning process – have to cover far more things (what computers, what programs, etc.) Unconstrained by previous decisions: have a lot more flexibility because things are not all set (fixed assets, etc).
  • Profits do not equal cash flow (often caused by TIMING!!! TELL BRIAN). If startups grow too quickly they often bust because they run out of capital. (cash flow – accounts receivable (you must extend credit to customers) and accounts payable (you must pay your suppliers because you are a start up) and you have to invest fixed assets (fixed asset has depreciation – this will reduce your profits – though it will not go into cash flow because depreciation is a non-cash item).
  • What problem are you solving and how are you going to do it? Why are people going to buy your product? When do you plan to make sales and what will happen then?(distribution, planning, etc).
  • Mistake: General information (things that can be done by internet research) is not particularly valuable and is not interesting. Someone else is probably already doing it, and what you are doing is probably not going to have value as a business. When you do real research, you know what value is created by doing something – go out and interview people or conduct scientific research. (e.g. Dental fixtures because population is aging – instead could go out and interview people and find out they need something else). Have it be specific and not be easily copied, and then you probably have a good business plan. Avoid the general and focus on specifics that make your opportunity valuable.
  • There are other things in the paper, but FIT and VALUE are most important.
  • Monopoly: Being the only person who can do something. Entrepreneurs tend to be very optimistic, and they also tend to believe that they will be a monopoly (have a product that no one else’s product can do – even if others can). Be very careful in believing that you’ve got the only product that does something. If you actually do, try to analyze why there is monopoly. Some reasons can be good and other reasons can be bad (market may be small, poor, etc). If people could compete but they just don’t bother, then there might be a reason. The opportunity might not be as good as it looks. The market may be there and be valuable, but you might have to change the way people do things, a process that may take a while. Have to explain to them why this is good. It will take time – the actions are sticky. The change may be so difficult or long that a person would run out of capital before the market realizes that the product is good.
  • IP: Intellectual property – with protection – this is a good opportunity (assuming market is big enough, and doesn’t take too much education). Having this as a reason for a monopoly is a good thing. Control of input factors: Being the only person who owns the input (can be knowledge or material) – so tangible and intangible.
  • First to market: first person there has the most market share idea – others have to pick up the scraps of what is left. Leads to competitive advantage because you gain market share. (Ebay – first to do on-line auction, and by the time people wanted to mimic it, it was very difficult to compete because it was already in place) contrast with (Osborne – portable computer failed – the product was not familiar originally – difficult to get people to accept it because people had no concept of it. Also hard to sell a product if you don’t have competitors – hard to get a customer to understand what the product does if there is not competition – good to have competitor to contrast yourself. Sometimes first to market fails and people look at it and improve on the product and now the product does well. Some products need an infrastructure so that the product can function – like the hydrogen car (need hydrogen fuel cells to be able to refuel). Sometimes the second person to market comes when the infrastructure has been put into place.)
  • New Entrants: Has to do with monopoly and competing with each other. Moderators: Factors that lessen the bad impact of each of these groups. You do have to think about others in the market. The decisions that your business make will impact others in the market place. They could react in ways that hurt your opportunities. Threats that impact the success of the opportunity: potential entrants, suppliers, buyers (customers), substitutes (not the same, but performs the same function). Fifth: The Government (regulation – If I do something, how will it be regulated – both now and possibly in the future).
  • Supplier can be in a position of power due to control of resource. Many suppliers reduces this power. Substitutes will also lessen the impact. Vertical integration is dangerous because if they want to buy you, then you have some problems.
  • Buyers will care a lot more if it is B2B and it your product is only for a small percentage of the cost of the good. A lot of buyers increases demand and increases the price.
  • This template can be used to give a qualitative / quantitative assessment of new venture. For each question give a response of either high, average or low. If high, place a 3 in the high column for that question. For average, assign a value of 2, for low, a value of 1. Sometimes used as a screening guide for venture capitalists (if not this, it’s something similar). Fast growing large markets are more valuable to VC because you can make mistakes and still make money. What is the pricing – slim margins? When will the venture capitalist be able to exit? Is there IPO potential? Expertise of the management team – do they have the expertise and functionality for all the areas that need to be covered. Is there a plan to hire when they don’t have someone for each role? Flexibility – can they adapt to new opportunities. Entrepreneurial Focus – only one job, have they mortgaged their house?
  • The People. The men and women starting and running the venture, as well as the outside parties providing key services or important resources for it, such as its lawyers, accountants, and suppliers. The Opportunity. A profile of the business itself -- what it will sell and to whom, whether the business can grow and how fast, what its economics are, who and what stand in the way of success. When it comes to the opportunity itself, a good business plan begins by focusing on two questions: Is the total market for the venture's product or service large, rapidly growing, or both? Is the industry now, or can it become, structurally attractive? Entrepreneurs and investors look for large or rapidly growing markets mainly because it is often easier to obtain a share of a growing market than to fight with entrenched competitors for a share of a mature or stagnant market . As for attractiveness, investors are obviously looking for markets that actually allow businesses to make some money. The Context. The big picture – the regulatory environment, interest rates, demographic trends, inflation, and the like – basically, factors that inevitably change but cannot be controlled by the entrepreneur. Risk and Reward. An assessment of everything that can go wrong and right, and a discussion of how the entrepreneurial team can respond.
  • Include the problem areas. It is better to be open initially rather than be discovered during the due diligence process. If discovered, what was the reason for not bringing out in the original plan. (1) Hiding, or (2) to incompetent to know about. Target the bp. Is it to raise capital, is it to use to find a strategic partner? The market growing at 15% and we expect to capture 5% of the market is not an assumption. How will the market share be gained, what is our basis for supposing that is the case, etc… Short, sweet, and focused is better. Do not overload a person and do not leave open questions. You must address the questions that you are most scared of – because this is what the VC will ask you. Look for the holes and the gaps and be able to answer them. You must give the reasons behind the assumption.
  • Critical elements should be the main focus. Milestones solidify the business plan. Also discuss if the milestones have any give, if they give what will happen to the business? Financials are important to ensure the whole thing hangs together; does it make sense in its entirety. It can and does form a basis for valuation and compensation to some degree. Filling a position, the passing of a law, etc. will have impact on success/failure of the business. Milestones do not have to be financial only. Financial projections allow you to test the plan and show if you have forgotten anything.
  • This should be facilitated by detailed research and hopefully from the people / experts involved with the business. People are key. Do they have the skills needed as well as the experience. DO not be scared to highlight gaps. Describe the position, the person needed and the people targeted, or at the very least, how these people will be found. No part timers, especially college professors who will do the job part time.
  • There are two points here. You can protect your business in two main ways, property rights, or be the first in and take the market. As to the confidentiality of the plan, use non-disclosure and only deal with the reputable.
  • 10 years ago this was the focus of a business plan… not anymore. Future is difficult to forecast, but you must have some sort of plan in place. Should the financial aspects be included in the plan or in the appendix – it should be in both. Keys in the plan, then the appendix should have: (break even point, number of sales, when cash will run out and need to raise more capital). Financial plan is only as good as the financial assumptions. When you set out to raise capital, the financial projections will be used by outside investors to calculate the size of ownership, the value of the company, etc.
  • Most waste too much ink on numbers and devote too little to the information that really matters. Financial projections for a new company – especially detailed, month-by-month projections that stretch out for more than a year – are an act of imagination. Typically, they are wildly optimistic, padding their projections. Investors know about the padding effect and therefore discount the figures in business plans (Venture capitalists believe that it is too optimistic so just knock down the estimates some). These maneuvers create a vicious circle of inaccuracy that benefits no one. It is really very difficult to forecast accurately. The financial data should focus on answering two questions. First, what are the critical drivers of the business; what items are critical to success; second, how much business does the company need to achieve to break even. Other important questions: How much cash are we burning through and what is our cash burn rate, when do we run out of cash? People emphasize the financial section far too much. 1 st Mistake: Idea, write business plan before planning. (who team is, what the market is, how fast growing, problem it solves = most important). 2 nd Mistake: Financial forecast gets too much emphasis. (need to know what your cash flow is going to be, and whether or not you will be able to cover what is going out with what is coming in). Business plans and financial modeling (forecasting) will be on the exam.
  • More than a fourth of the VCs said that lack of marketing strategies, or not defining the market, was the most frequently occurring mistake. Entrepreneurs had trouble determining who would be their customers and how they would communicate to customers that their product/service was available. The advice: Don’t fall into the trap that the product or service will sell itself. Find companies with similar products and research their marketing strategies through websites, promotional materials, and company brochures. Hire a marketing expert to either work with the company on its strategies in the business plan or at least review those strategies and provide additional suggestions. Include a publicity program as well as advertising. Creating a tie for second place in the list, 21% of the VCs said that entrepreneurs were not clear in explaining the opportunity—why the business model made sense, why their company would succeed. This lack of clarity kept investors from being excited enough about the company to proceed to the next stage. Entrepreneurs can avoid this mistake simply by asking several people who aren’t familiar with their firm to read its business plan. If those readers don’t “get it,” it’s unlikely an investor will. Also tied for second place is a difficult error for entrepreneurs to avoid: unrealistic financial projections and assumptions. It is true that the company must produce enough revenue to be able to generate the 30 to 40% yearly returns VCs expect, but those projections have to be reasonable and achievable. The advice: Apply common sense. Justify assumptions with as much research as possible. Get an idea of whether your projections are in the ballpark by looking at the annual reports of public companies in the same industry. Lack of specificity and/or detail was mentioned by 15% of the survey respondents. Entrepreneurs too often didn’t do their homework in justifying their assumptions. Company outsiders should review the business plan and come up with a list of issues they feel are not adequately covered. The company’s accountant and attorney can be helpful in this regard as well. And of course, entrepreneurs should never lie. Although they should convey enthusiasm for the company and its product, they must not exaggerate. Many entrepreneurs make the mistake of being too optimistic in their profitability timetables, according to 8% of the VCs. Many overestimate their revenues and underestimate their costs. Entrepreneurs are by nature optimistic; they have to be to face the challenges of starting and growing a business. Nevertheless, they must keep in mind that it always takes more time and money than originally estimated, so they must make sure the company has a reasonable and achievable schedule. Analyzing competition in business plans is an area that 7% of the VCs believe is weak. The advice: Never say the company has no competition. Even if it has a leading edge technology, there will still be competition for customers’ dollars from well-established firms. Many entrepreneurs do not make the effort, or find it too difficult, to research their competitors. State the company’s competitive advantage in one paragraph. If that’s not possible, or if it takes more than a paragraph, the competitive advantage hasn’t been established.

Business Plans Finance for Entrepreneurs Business Plans Finance for Entrepreneurs Presentation Transcript