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050301LNZXL756LTDE-P1




How to Write a Business
         Plan
               Entrepreneurship Challenge


                              Imperial College
                               6 March 2001


  This report is solely for the use of client personnel. No part of it may be circulated, quoted, or
   reproduced for distribution outside the client organization without prior written approval from
     McKinsey & Company. This material was used by McKinsey & Company during an oral
                     presentation; it is not a complete record of the discussion.
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050301LNZXL756LTDE-P1



Contents




           • Business start-up process


           • Writing the Business Plan


           • Constructing the team




                                                            1
050301LNZXL756LTDE-P1



Contents




           • Business start-up process


           • Writing the Business Plan


           • Constructing the team




                                                            2
050301LNZXL756LTDE-P1



Stages of a Start-up


 Stage 1          Stage 2          Stage 3



                                                        Established
                                                         company


                                     Start-up and
                                        growth
                                                      Exit of
                                                      initial
                      Business                      investors
                        plan
                     preparation   Financing
                                    decision
      Business
        idea      Interest of
     generation    investors



                                                                               3
050301LNZXL756LTDE-P1



5 key factors for success of innovative start-ups

                  Ideas
                  • Degree of innovation
                  • Scope
                  • Patent



                  Network & exchange
                  • Coaching
People                                            Traditional service providers
                  • Networking
• Inventors                                       • Attorneys
                  • Matchmaking
• Entrepreneurs                                   • Patent lawyers
                  • Innovative service provider
• Team members                                    • Tax consultants/
                    – Venture capitalists
                                                    accountants
                    – Headhunters
                                                  • Market researchers
                    – Business angels
                    – Start-up consultants

                  Capital
                  • Availability/amount
                  • Needs/responsibilities
                  • Exists for investors


                                                                                    4
050301LNZXL756LTDE-P1



Elements of a promising business idea



                                                                    Successful ideas
                                                                    demonstrate how big
The key to success is         CLEAR              MARKET OF
                                                                    the market is, the target
satisfied customers, not    CUSTOMER             ADEQUATE
                                                                    customers and how the
a great product               VALUE                SIZE
                                                                    product differs from the
                                                                    competition


                                                                    Create a new product or
Ideas should be feasible     FEASIBILITY            SUFFICIENT      a new way of delivering
with realistic time and         AND                 DEGREE OF       an existing product – do
resource plans              PROFITABILITY          INNOVATION       both and create a new
                                                                    industry



                             “There is nothing in the world as
                           powerful than an idea whose time has
                                          come”
                                                      Victor Hugo

                                                                                                        5
050301LNZXL756LTDE-P1



Innovation classification scheme


                                    New product             New industry


                       Innovation
                                    • Microsoft             • Netscape
     Product/service




                                    Existing industry       New business system
                       Convention




                                    • Skilled trades        • Dell

                                    • Engineering offices


                                         Convention              Innovation
                                                  Business system

                                                                                                     6
050301LNZXL756LTDE-P1



Role of traditional service providers



                                                                      Long
                                                                       term
                                                                     success
                                           Market
                                           researchers
                                                          MARKET
                    Tax                                  RESEARCH
                    consultants
Patent                             TAX
lawyers

          PATENTS



                     Professional advisors can help to
                               clear hurdles


                                                                                       7
050301LNZXL756LTDE-P1



Role of a venture-capital company
                                                      • Seed capital (pre
                                                        start-up)
                                                      • Start-up capital (at
                             £££        Investments
                                                        or shortly before
                                                        start-up)
                                                      • Expansion capital
                   Capital
                  recovery


                                                      • Young, growing
                                                       companies



 • IPO (Initial Public
   Offering)                 5–8 years post
 • Sale of stake to             Start-up
   third parties



                                                                                  8
050301LNZXL756LTDE-P1



Collective team strength

                                  SUCCESS



                                  Entrepreneurs
                      Inventors                   Finance


             Team                                            Team
            members                                         members




                   Well constructed teams
                  provide a strong basis for
                           success


                                                                                         9
050301LNZXL756LTDE-P1



Network support


                  Academics         Entrepreneurs




     Venture
                                                     Peers
    capitalists


                              START-UP                             Use all
                                                                   connections
                                                      Service
     Friends
                                                     providers




                                           Other
                  Sponsors
                                         start-ups


                                                                                   10
050301LNZXL756LTDE-P1



Contents




           • Business start-up process


           • Writing the Business Plan


           • Constructing the team




                                                           11
050301LNZXL756LTDE-P1




“Writing a Business Plan forces you
into disciplined thinking, if you do an
intellectually honest job. An idea may
sound great, but when you put down
all the details and numbers, it may fall
apart”
      Eugene Kleiner, Venture Capitalist


                                                       12
050301LNZXL756LTDE-P1



Characteristics of a successful Business Plan


 Clear                                       Objective
 • Well structured                           • Accurate
 • Standalone                                • Positive and critical

                         Your calling card
                      The document the reader
                        will remember you by
 Consistent                                  Simple
 • Style                                     • Plain English
 • Analytical depth                          • Non-technical terms




                                                                                 13
050301LNZXL756LTDE-P1



Elements of a Business Plan                                                Focus of this phase
                                                                           Part of this phase

                                                                  Draft     ‘Final’
                                                     Business   business   business
                                                     concept      plan       plan
               1. Executive summary

               2. Product or service

               3. Management team
  Importance




               4. Market and competition

               5. Marketing and sales

               6. Business system and organisation

               7. Implementation schedule

               8. Opportunities and risks

               9. Financial planning and financing

                                                                                             14
050301LNZXL756LTDE-P1



Key questions – 1. Executive Summary

Business concept                  Draft business plan            ‘Final’ business plan

• What is your business           • What do you estimate         • What are the results of
    idea? In what way does it         your financing needs to        your detailed business
    fulfil the criterion of           be?                            planning?
    uniqueness?                   •   What are the sales, cost   •   What are your exact
•   Who are your target               and profit situations?         financing needs?
    customers?                    •   What are the most          •   How will you delegate
•   What is the value for those       important milestones           management tasks?
    customers?                        along the way to your      •   How much production
•   What market volume                goal?                          capacity is necessary?
    and growth rates do           •   What test customers have   •   How will the
    you forecast?                     you approached/could           implementation of your
•   What competitive                  you approach?                  business idea be
    environment do you face?      •   What distribution              organised?
•   What additional stages of         channels will you use?     •   What are your next
    development are needed?       •   What partnerships would        concrete steps?
•   How much investment is            you like to enter into?
    necessary (high level         •   What opportunities and
    estimation)?                      risks do you face?
•   What long term goals have     •   What is the picture on
    you set?                          patents?


                                                                                                    15
050301LNZXL756LTDE-P1



Key questions – 2. Product or service
     Executive        • What are the features or functions of the product/service?
     Summary
                      • Who are the target customers?
 Product or service   • What value propositions does the product/service provide to
                        the customers? (e.g., tabulate customers’ unfulfilled needs
                        and ways the product/service addresses those needs)
 Management team
                      • What is the revenue model? (i.e., description of revenue
                        sources – advertising revenue, transaction revenue,
     Market &           subscription revenue, flat-fee vs. percentage-based)
    competition
                      • What is the development status of the product? What remains
     Marketing          to be done to convert the business idea into a tangible product
      & sales           or service?
                      • Has this business model been proven elsewhere? What are
 Business system
                        some successful examples?
  & organisation
                      • What is the plan to maintain the loyalty of customers?
  Implementation
     schedule

  Opportunities &
      risks

 Financial planning

                                                                                                 16
050301LNZXL756LTDE-P1



Key questions – 3. Management team
     Executive
     Summary

 Product or service   • Who are the founders/founder groups and what are their
                        qualifications, experience and past achievements
                      • How critical is the idea originator to the future success of the
 Management team        venture?

     Market &
                      • How are the management responsibilities shared among the
                        team? (e.g., a table of team members with their position and
    competition
                        key activities/responsibilities)
     Marketing        • What is the plan to reinforce management team in the future?
      & sales           (e.g., schedule of future management hiring and skills
                        required)
 Business system
  & organisation

  Implementation
     schedule

  Opportunities &
      risks

 Financial planning

                                                                                                17
050301LNZXL756LTDE-P1



Key questions – 4. Market & competition
     Executive
     Summary

 Product or service


 Management team      • What is the potential market size for the product/service?
                        (e.g., calculation derived from number of target customers,
                        units sold, value of sales)
     Market &
    competition       • What is the expected market growth and which major factors
                        influence that growth?
     Marketing
      & sales
                      • Who are the likely competitors? What do they offer?
                      • What are the strengths and weaknesses of competitors? What
 Business system        is your competitive positioning vis-à-vis competitors? (i.e, a
  & organisation        table of competitors and their ratings across key criteria – e.g.,
                        time to launch, technological capability, access to proprietary
  Implementation        technology, privileged relationship with suppliers and
     schedule           customers)
  Opportunities &
      risks

 Financial planning

                                                                                                18
050301LNZXL756LTDE-P1



Key questions – 5. Marketing & sales
     Executive
     Summary

 Product or service


 Management team

     Market &         • What are the specific plans to promote the product/service?
    competition
                      • How will the product/service be distributed? Which partners
     Marketing          will be needed in the distribution channel?
      & sales         • What will be the pricing strategy? (e.g., how much will you
                        charge for different customer segments, quantities)
 Business system
  & organisation

  Implementation
     schedule

  Opportunities &
      risks

 Financial planning

                                                                                                19
050301LNZXL756LTDE-P1



Key questions – 6. Business systems &
   Executive
                   organisation
     Summary

 Product or service


 Management team      • What is the proposed organisational structure of the
                        company?
     Market &         • How will this organisational structure help achieve business
    competition         goals?

     Marketing
                      • What skills will be required and what is the hiring plan?
                        (e.g., a table that shows total number of positions and the
      & sales
                        functional description of positions, skills required for top 3
 Business system        positions in each department)
  & organisation      • What is the scope of the business? (i.e. what will be
                        performed internally and what will be outsourced?)
  Implementation
     schedule         • Have strategic partnerships been identified? If yes, how will
                        these partners be secured? If no, what is the plan to get
  Opportunities &       partners?
      risks
                      • Have key vendors been identified? If yes, how will these
                        vendors be secured? If no, what is the plan to get vendors?
 Financial planning

                                                                                                 20
050301LNZXL756LTDE-P1



Key questions – 7. Implementation schedule
     Executive
     Summary

 Product or service


 Management team

     Market &
    competition

     Marketing        • What is the detailed short term implementation plan? (e.g.,
      & sales           Gantt chart showing detailed activities by month)
                        – Who is responsible for each of the tasks?
 Business system        – What are major milestones?
  & organisation        – What are interdependencies between tasks?
  Implementation      • What is the 5-year implementation plan? (e.g., Gantt chart
     schedule           showing activities by quarter)
                        – Who is responsible for each of the tasks?
  Opportunities &       – What are major milestones?
      risks
                      • What are possible long term options for the business?
 Financial planning

                                                                                              21
050301LNZXL756LTDE-P1



Key questions – 8. Opportunities & risk
     Executive
     Summary

 Product or service


 Management team

     Market &
    competition

     Marketing
      & sales

 Business system      • What are the best case and worst case scenarios for the 5-year
  & organisation        financial projections? What are the key assumptions on the
                        key parameters? (e.g., market shares, profit margin) – refer to
  Implementation        Appendix for example
     schedule
                      • What does the sensitivity analysis show? (i.e., by varying key
  Opportunities &       assumptions in isolation)
      risks
                      • What mitigating steps are planned in order to minimise risks?
 Financial planning

                                                                                               22
050301LNZXL756LTDE-P1



Key questions – 9. Financial planning & financing
     Executive
     Summary

 Product or service


 Management team

     Market &
    competition       • For the next 5 years (and at least 1 year beyond breakeven
                        point), what are the projections for
     Marketing          – Income statement (includes detailed revenue source as
      & sales             described in the business model)
                        – Cash flow statement
 Business system        – Company valuation, utilising
  & organisation          · Discounted cash flow analysis
                          · Revenue multiples
  Implementation
                        – Balance sheet
     schedule
                      • What are the key assumption used in the financial proforma?
  Opportunities &       (e.g., cost of capital, market share, margin)
      risks
                      • What are the financial requirements for the business and what
                        sources of financing have been identified? (e.g., financial
 Financial planning     schedule with amount needed and possible financing sources)
                                                                                              23
050301LNZXL756LTDE-P1



Contents




           • Business start-up process


           • Writing the Business Plan


           • Constructing the team




                                                           24
050301LNZXL756LTDE-P1




“Invest in people, not ideas”
    Eugene Kleiner, Venture Capitalist




                                                     25
050301LNZXL756LTDE-P1



Characteristics of a powerful management team



      • Common vision – everybody wants to succeed

      • Complementary attitudes and strengths

      • At least 3, but usually no more than 6 people

      • Sticks together through thick and thin

      • Staying power, even when there are setbacks




                                                                          26
050301LNZXL756LTDE-P1



Criteria applied by investors

      • Has the team already worked together?

      • Do team members have relevant experience?

      • Do the founders know their weaknesses and are
       they willing to make up for them?

      • Have the founders agreed on their future roles
       and are ownership issues settled?

      • Has the management team agreed on a common
       goal, or are there underlying differences of
       opinion?

      • Do the team members fully back the project?

                                                                           27
050301LNZXL756LTDE-P1




GOOD
LUCK
                         28

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How To Write A Biz Plan

  • 1. 050301LNZXL756LTDE-P1 How to Write a Business Plan Entrepreneurship Challenge Imperial College 6 March 2001 This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.
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  • 3. 050301LNZXL756LTDE-P1 Contents • Business start-up process • Writing the Business Plan • Constructing the team 1
  • 4. 050301LNZXL756LTDE-P1 Contents • Business start-up process • Writing the Business Plan • Constructing the team 2
  • 5. 050301LNZXL756LTDE-P1 Stages of a Start-up Stage 1 Stage 2 Stage 3 Established company Start-up and growth Exit of initial Business investors plan preparation Financing decision Business idea Interest of generation investors 3
  • 6. 050301LNZXL756LTDE-P1 5 key factors for success of innovative start-ups Ideas • Degree of innovation • Scope • Patent Network & exchange • Coaching People Traditional service providers • Networking • Inventors • Attorneys • Matchmaking • Entrepreneurs • Patent lawyers • Innovative service provider • Team members • Tax consultants/ – Venture capitalists accountants – Headhunters • Market researchers – Business angels – Start-up consultants Capital • Availability/amount • Needs/responsibilities • Exists for investors 4
  • 7. 050301LNZXL756LTDE-P1 Elements of a promising business idea Successful ideas demonstrate how big The key to success is CLEAR MARKET OF the market is, the target satisfied customers, not CUSTOMER ADEQUATE customers and how the a great product VALUE SIZE product differs from the competition Create a new product or Ideas should be feasible FEASIBILITY SUFFICIENT a new way of delivering with realistic time and AND DEGREE OF an existing product – do resource plans PROFITABILITY INNOVATION both and create a new industry “There is nothing in the world as powerful than an idea whose time has come” Victor Hugo 5
  • 8. 050301LNZXL756LTDE-P1 Innovation classification scheme New product New industry Innovation • Microsoft • Netscape Product/service Existing industry New business system Convention • Skilled trades • Dell • Engineering offices Convention Innovation Business system 6
  • 9. 050301LNZXL756LTDE-P1 Role of traditional service providers Long term success Market researchers MARKET Tax RESEARCH consultants Patent TAX lawyers PATENTS Professional advisors can help to clear hurdles 7
  • 10. 050301LNZXL756LTDE-P1 Role of a venture-capital company • Seed capital (pre start-up) • Start-up capital (at £££ Investments or shortly before start-up) • Expansion capital Capital recovery • Young, growing companies • IPO (Initial Public Offering) 5–8 years post • Sale of stake to Start-up third parties 8
  • 11. 050301LNZXL756LTDE-P1 Collective team strength SUCCESS Entrepreneurs Inventors Finance Team Team members members Well constructed teams provide a strong basis for success 9
  • 12. 050301LNZXL756LTDE-P1 Network support Academics Entrepreneurs Venture Peers capitalists START-UP Use all connections Service Friends providers Other Sponsors start-ups 10
  • 13. 050301LNZXL756LTDE-P1 Contents • Business start-up process • Writing the Business Plan • Constructing the team 11
  • 14. 050301LNZXL756LTDE-P1 “Writing a Business Plan forces you into disciplined thinking, if you do an intellectually honest job. An idea may sound great, but when you put down all the details and numbers, it may fall apart” Eugene Kleiner, Venture Capitalist 12
  • 15. 050301LNZXL756LTDE-P1 Characteristics of a successful Business Plan Clear Objective • Well structured • Accurate • Standalone • Positive and critical Your calling card The document the reader will remember you by Consistent Simple • Style • Plain English • Analytical depth • Non-technical terms 13
  • 16. 050301LNZXL756LTDE-P1 Elements of a Business Plan Focus of this phase Part of this phase Draft ‘Final’ Business business business concept plan plan 1. Executive summary 2. Product or service 3. Management team Importance 4. Market and competition 5. Marketing and sales 6. Business system and organisation 7. Implementation schedule 8. Opportunities and risks 9. Financial planning and financing 14
  • 17. 050301LNZXL756LTDE-P1 Key questions – 1. Executive Summary Business concept Draft business plan ‘Final’ business plan • What is your business • What do you estimate • What are the results of idea? In what way does it your financing needs to your detailed business fulfil the criterion of be? planning? uniqueness? • What are the sales, cost • What are your exact • Who are your target and profit situations? financing needs? customers? • What are the most • How will you delegate • What is the value for those important milestones management tasks? customers? along the way to your • How much production • What market volume goal? capacity is necessary? and growth rates do • What test customers have • How will the you forecast? you approached/could implementation of your • What competitive you approach? business idea be environment do you face? • What distribution organised? • What additional stages of channels will you use? • What are your next development are needed? • What partnerships would concrete steps? • How much investment is you like to enter into? necessary (high level • What opportunities and estimation)? risks do you face? • What long term goals have • What is the picture on you set? patents? 15
  • 18. 050301LNZXL756LTDE-P1 Key questions – 2. Product or service Executive • What are the features or functions of the product/service? Summary • Who are the target customers? Product or service • What value propositions does the product/service provide to the customers? (e.g., tabulate customers’ unfulfilled needs and ways the product/service addresses those needs) Management team • What is the revenue model? (i.e., description of revenue sources – advertising revenue, transaction revenue, Market & subscription revenue, flat-fee vs. percentage-based) competition • What is the development status of the product? What remains Marketing to be done to convert the business idea into a tangible product & sales or service? • Has this business model been proven elsewhere? What are Business system some successful examples? & organisation • What is the plan to maintain the loyalty of customers? Implementation schedule Opportunities & risks Financial planning 16
  • 19. 050301LNZXL756LTDE-P1 Key questions – 3. Management team Executive Summary Product or service • Who are the founders/founder groups and what are their qualifications, experience and past achievements • How critical is the idea originator to the future success of the Management team venture? Market & • How are the management responsibilities shared among the team? (e.g., a table of team members with their position and competition key activities/responsibilities) Marketing • What is the plan to reinforce management team in the future? & sales (e.g., schedule of future management hiring and skills required) Business system & organisation Implementation schedule Opportunities & risks Financial planning 17
  • 20. 050301LNZXL756LTDE-P1 Key questions – 4. Market & competition Executive Summary Product or service Management team • What is the potential market size for the product/service? (e.g., calculation derived from number of target customers, units sold, value of sales) Market & competition • What is the expected market growth and which major factors influence that growth? Marketing & sales • Who are the likely competitors? What do they offer? • What are the strengths and weaknesses of competitors? What Business system is your competitive positioning vis-à-vis competitors? (i.e, a & organisation table of competitors and their ratings across key criteria – e.g., time to launch, technological capability, access to proprietary Implementation technology, privileged relationship with suppliers and schedule customers) Opportunities & risks Financial planning 18
  • 21. 050301LNZXL756LTDE-P1 Key questions – 5. Marketing & sales Executive Summary Product or service Management team Market & • What are the specific plans to promote the product/service? competition • How will the product/service be distributed? Which partners Marketing will be needed in the distribution channel? & sales • What will be the pricing strategy? (e.g., how much will you charge for different customer segments, quantities) Business system & organisation Implementation schedule Opportunities & risks Financial planning 19
  • 22. 050301LNZXL756LTDE-P1 Key questions – 6. Business systems & Executive organisation Summary Product or service Management team • What is the proposed organisational structure of the company? Market & • How will this organisational structure help achieve business competition goals? Marketing • What skills will be required and what is the hiring plan? (e.g., a table that shows total number of positions and the & sales functional description of positions, skills required for top 3 Business system positions in each department) & organisation • What is the scope of the business? (i.e. what will be performed internally and what will be outsourced?) Implementation schedule • Have strategic partnerships been identified? If yes, how will these partners be secured? If no, what is the plan to get Opportunities & partners? risks • Have key vendors been identified? If yes, how will these vendors be secured? If no, what is the plan to get vendors? Financial planning 20
  • 23. 050301LNZXL756LTDE-P1 Key questions – 7. Implementation schedule Executive Summary Product or service Management team Market & competition Marketing • What is the detailed short term implementation plan? (e.g., & sales Gantt chart showing detailed activities by month) – Who is responsible for each of the tasks? Business system – What are major milestones? & organisation – What are interdependencies between tasks? Implementation • What is the 5-year implementation plan? (e.g., Gantt chart schedule showing activities by quarter) – Who is responsible for each of the tasks? Opportunities & – What are major milestones? risks • What are possible long term options for the business? Financial planning 21
  • 24. 050301LNZXL756LTDE-P1 Key questions – 8. Opportunities & risk Executive Summary Product or service Management team Market & competition Marketing & sales Business system • What are the best case and worst case scenarios for the 5-year & organisation financial projections? What are the key assumptions on the key parameters? (e.g., market shares, profit margin) – refer to Implementation Appendix for example schedule • What does the sensitivity analysis show? (i.e., by varying key Opportunities & assumptions in isolation) risks • What mitigating steps are planned in order to minimise risks? Financial planning 22
  • 25. 050301LNZXL756LTDE-P1 Key questions – 9. Financial planning & financing Executive Summary Product or service Management team Market & competition • For the next 5 years (and at least 1 year beyond breakeven point), what are the projections for Marketing – Income statement (includes detailed revenue source as & sales described in the business model) – Cash flow statement Business system – Company valuation, utilising & organisation · Discounted cash flow analysis · Revenue multiples Implementation – Balance sheet schedule • What are the key assumption used in the financial proforma? Opportunities & (e.g., cost of capital, market share, margin) risks • What are the financial requirements for the business and what sources of financing have been identified? (e.g., financial Financial planning schedule with amount needed and possible financing sources) 23
  • 26. 050301LNZXL756LTDE-P1 Contents • Business start-up process • Writing the Business Plan • Constructing the team 24
  • 27. 050301LNZXL756LTDE-P1 “Invest in people, not ideas” Eugene Kleiner, Venture Capitalist 25
  • 28. 050301LNZXL756LTDE-P1 Characteristics of a powerful management team • Common vision – everybody wants to succeed • Complementary attitudes and strengths • At least 3, but usually no more than 6 people • Sticks together through thick and thin • Staying power, even when there are setbacks 26
  • 29. 050301LNZXL756LTDE-P1 Criteria applied by investors • Has the team already worked together? • Do team members have relevant experience? • Do the founders know their weaknesses and are they willing to make up for them? • Have the founders agreed on their future roles and are ownership issues settled? • Has the management team agreed on a common goal, or are there underlying differences of opinion? • Do the team members fully back the project? 27