Writing a Business Plan
Of course, every business plan is unique. A software company plan is clearly different from a manufacturing companies plan. But to obtain funding (and to increase the likelihood of the company's success), any plan must cover certain critical topics (see the outline in the Startup Roadmap or the outline of business plan on the Downloads page.)
Your plan must be compelling if it's going to convince someone to invest in it. Keep it under 20 pages, with a 2 to 3 page executive summary. Remember that as a startup, you've already got 2 challenges working against you:
Finally, remember that the business plan is not just a planning tool. It is a piece of sales collateral. You're selling the credibility of yourself, your team, and you plan. So make sure the plan is professional in appearance, and is well edited for typing, grammar, and formating problems.
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Stepping Through the Plan
This guide steps through each section of a typical business plan, with suggestions for the content of each section. We suggest you start at the top, and work through the outline!
Other Resources
In our Sample Documents, see the Business Plan Outline, the Business Plan Checklist, and the Financial Projections Spreadsheet
You'll want a cover page on your business plan that includes:
This is actually pretty important. You want a VC to be able to see at a glance, without opening the document, the name and location of the company and your contact info. So use a cover page!
You'll want to package your executive summary as a separable document, and it needs a cover page too (for those situations where it's the executive summary that you send to the VC.
You'll want a 2 to 6 page executive summary. This needs to get across the high-points of the plan, to motivate the VC to keep reading.
So think not only about content but also about format. Make it easy to read.
Remember that you'll want to be able to extract your executive summary, put a cover sheet on it, and use it as a stand-alone document. So it needs to cover all the high points. But don't try to cover everything that's in your business plan -- you can't in a short document.
Remember, the goal of the executive summary is to create enough interest that the reader wants to learn more. It must be compelling.
Do not try to cover everything that's in the plan. The goal is to be compelling; to leave the reader wanting to know more. Having said that, be sure the cover the high points:
- The compelling, unmet market need
- Your solution to that need
- Your competitive advantage and your intellectual property
- The growth potential of the market
- The go-to-market strategy (i.e., marketing & sales plan)
- Your team
- Accomplishments to date
- Financial projection (probably in the form of a simple graphic)
- Funding requirement, and what you'll accomplish with that funding
Overview
Describe what it is that is creating an opportunity for a startup in the market area that you are addressing.
Cause
What change is creating a new opportunity? That change could be either a change in technology that's allowing you to provide a much better answer to an already-existing problem, or it could be a change that's creating a new need in the market that didn't exist before.
But there's usually some kind of change (possibly a disruptive change) that's creating an opportunity. Otherwise, it's not likely to be a fast-growing opportunity.
A Compelling Need
For the need to be sufficiently compelling to attract venture capital, you'll typically need to be addressing some new need that will drive a rapidly growing opportunity, or you'll need to be providing some new technology or approach to a problem that presents a very compelling advantage over what is available today
Who has the Pain?
If you're solving a problem, it's a problem that is causing someone pain. Who, out in the market, has the pain that you will address? Is there a way to quantify that pain for a typical individual? Across the entire market?
Describe your product or service and show how it will solve the problem you described. This should not be a multiple-page, highly technical discussion. Remember, most investors are not all that technical. Keep it as straightforward and clear as you can.
A simple diagram or, if appropriate, photo can help. You want to give the reader a tangible concept of just what your solution is.
No acronyms.
No jargon.
Write it so an 8th grader can understand it.
Competition: Don't Say there Isn't Any
There is always competition. (You'll lose credibility if you say there isn't any.) Somehow, people get along today without your product or service. So at the very least, the "status quo" is the competition.
So what is the status quo?
Assume Others are Targeting this Opportunity Today
You could assume that you're the only person on the planet that's smart enough to address this opportunity, or that's smart enough to address this opportunity in the way that you are targeting it. That's usually not a safe assumption. Only the paranoid survive in high-tech.
Future Competition
Who do you expect will be competition, once this market niche you're addressing is shown to be a viable niche? In other words, what bigger, established companies will enter this market? (This is not all bad news. Those larger companies who are likely to enter your market once it's shown to be viable are also companies that might acquire you; VCs know that.)
Competitive Strategy
Describe the competition that you expect to have (near term and long term), and describe how you expect to win against them.
What is Your Advantage?
There are lots of creative people/teams in the world. You have to assume that someone else has the same idea as you do. So what advantage do you have that convinces you (and that might convince an investor) that you and your team will win?
Technical Advantage
VCs will be looking for your technology advantage (preferably a patentable advantage). If you have patentable technology, this is the place to talk about it, and to talk about how broadly you believe your patents will apply. If your technology is not patented (or patentable) then discuss the technical advantages you believe you do have.
Other Advantages
Technology isn't the only competitive advantage. For example, advantages can come from:
Barriers to Entry
Summarize your Differentiation
A helpful way to summarize how your solution compares to the competition is to use a simple table listing the competition on one axis, and critical differentiating attributes on the other axis. Those differentiating attributes are different for each business, but might incude things like cost (low vs. high), ease of use, etc. Only include factors that actually highlight your differentiation with the competition.
How will you make money? In many businesses, there are multiple points in the value chain where one might generate revenue. Which point (or points) in the value chain you have in mind (and exactly how you plan to "tax" the customer) might not be obvious, so you need to make it very, very clear.
You need to describe not only the structure of how you will charge, but what exactly is the pricing?
Market Size
If the market you're addressing doesn't have the potential for a $500M opportunity a few years down the line, then you'll have trouble getting a VC interested today. (It's a simple problem of return-on-investment.)
It doesn't have to be that big today. In fact, it's better if it's not, because a market that big will attract bigger players. You want to be targeting an emerging market that will grow rapidly.
As mentioned earlier, there are at least two most-common paths to an emerging, high- growth opportunity
So what is driving the high-growth in the opportunity that your company addresses? You need a compelling argument that you've got a high-growth opportunity.
Market Research
The problem with emerging markets is that there's no reliable market data for those markets.
My favorite emerging-market story: there was a car designer at Ford who came up with a design for a new kind of car that he thought would be very practical for baby-boomer families (which suggests the "change" that was driving the opportunity). But since this was a new type of automobile for which there were no market studies showing the market size, Ford decided to pass. So the designer took the idea to Chrystler, where the CEO liked it. And so the mini-van, a very successful product-line for Chrystler, was born.
So if your emerging market is so new that there are no market studies to point to, then you'll have to do what the designer from Ford did: argue the compelling nature of the change that will create the opportunity. (And take comfort in the fact that the best market opportunities for startups are those for which there is no market study from one of the leading market research companies.)
On the other hand, if you're addressing a market that market studies say is a billion-dollar- plus opportunity today, then you'd better be ready to argue how it is that you'll beat the big guys that should be addressing that market already.
Marketing and Sales
There are a number of points to address as to how you will let prospective customers know about your product or service, and how you will actually sell the product. You'll need to convince a prospective investor that you have carefully researched and thought through justhow the sales process will work.
Start with the First Year of Sales
Of course it's hard to say exactly how you'll make sales happen in year 5. That's a long way away. But you need to have a very clear notion of what exactly you'll do in terms of marketing and sales tactics, month by month, to make the first year of sales happen. You need to create a bottoms-up model of exactly what steps are required to get the sales you are projecting. That's the only way to convince an investor (and yourself) that the sales numbers actually could happen.
Product Positioning
How will you describe your product to customers? Are you sure you understand what problem it solves?
There are usually multiple ways to think about the "problem" and it's worth some thought. Examples:
Why would someone buy a cup of coffee?
Why would someone buy a BMW?
Understanding the "real" reason for buying can change the way you design and describe your product or service.
Marketing Strategy
How will you create awareness of your company and your product or service, and how will you generate sales leads? For your financial projections, you'll need an estimate of how much these marketing programs will cost. (And don't just assume you should use all of these. Do some market research to find out how customers in your target market find out about and buy new solutions. That will help you focus your marketing investments.)
Some possible approaches:
Who is the Customer?
Who is your customer? That's often a more complex question than it first appears to be. In a typical sale:
What is your Sales Channel?
Exactly how will you sell the product? Some possibilities:
The Sales Process
What will the sales process look like? Describe the basic steps that must happen from the customer first learning about your product or service through to the point where you receive a purchase order. Some questions to consider:
The last question is particularly important. Especially for your early sales, the sales cycle (the time it takes to complete the sale) is likely to be much longer than you expect. Early on, you have an unproven company and an unproven product. That lengthens the sales cycle. But also, in the early sales you are literally learning what is the best way to describe the benefits of and to sell your product or service. If your product or service is new and different, it can take a while to find just the right way to position and sell it. So that learning process will tend to further lengthen the early sales cycle.
Manufacturing Strategy
If you'll be building a physical product, then describe how it will be built. Instead of being very general (e.g., "we'll outsource manufacturing") it's much better to be specific ("we're evaluation firms A, B and C -- any of which are capable of manufacturing our product").
Some questions to consider:
If you're delivering a service instead of a product, there are still questions about how you will "manufacture" the service. How exactly will the service be developed and delivered?
After-Sale Service and Support
You probably don't have to go into detail in your VC-targetted business plan about your service and support strategy, but you certainly need to think it through and have a strategy and a plan. Service and support will certainly affect your budgeting.
If you have developed partnerships with other companies (or you'll need to develop some specific partnerships), and those partnerships are critical to your success, or provide some specific capability that is an advantage, you'll want to discuss that in the plan. If there are dependencies you have on partnerships -- relationships that will cause difficulties if for whatever reason the relationship doesn't work out -- that's worth discussing also.
Beyond the specific benefits related to partnerships there are two general potential benefits:
And there are non-equity possibilities for obtaining funding from strategic partners. If you need products or services from the partner, it's sometimes possible to negotiate favorable discounts and/or payment terms presuming that the partner eventually receives some other benefit from the partnership. Sometimes strategic partners are also customers, in which case selling them product (perhaps even selling them product before the product exists) is another funding possibility.
The Team
In this section, you want to describe your management team and any other key employees.
Most investors will agree that the quality of the management team is the best predictor of a startup's success. Do not compromise when it comes to the team. Determine what roles you need to fill and find a strong player for each role.
The more complete your team is, the more likely it is that you'll get funded (and a more complete, solid team will get a better valuation.) Likely roles for an early stage startup could include:
If your management team is incomplete, start looking for the right candidates to fill in the holes. If you have an advisor who has strength in an area where your missing a team member, be sure to mention that.
Evolving The Team
One of the items in our "Critical Success Factors" states that the founders need to be ready to replace themselves. The team that starts a company might not be (probably is not) the team to manage it through multiple stages of growth. Moving-out the old management team is a tough thing to do, but can be the right thing for the company.
There is a link to Robert Wiltbank's article on changing the management team in the "Build the Team" section of the Articles and Papers page.
You'll want a summary of you financial projections - perhaps a graph of a reasonably straightforward table. At a minimum it should show a 5 year revenue projection, point out when you become cash-flow positive.
In the Appendix, you'll want do included detailed projections of your income statement, balance sheet, and cash flow statement.
What funding you are requesting and what exactly you'll do with those funds is clearly a central issue. You'll need a clear statement of:
Although you will not want to include a detailed budget in your business plan, you'll certainly need to have done that work, so you have a clear idea of how much funding you'll need.
In determining the level of funding you'll request, it's good to remember that:
So when it comes to sizing the round, estimate how much you really think you'll need, then make some pessimistic assumptions and come up with a larger estimate. The latter is likely to be closer to the right number.
Exit Strategy
Exit strategy simply means: how do investors get their money out of the investment? In other words, if they invest in your company, how (and when) do they get a pay-off?
Exit Strategy Options
There are two (money-making) exit strategies for investors:
Looking at statistics, acquisition is by far the most likely exit for investors today.
The Not-so-Positive Exit
Of course, the other option is that investors could decide to shut your company down. That's a much less pleasant alternative, so the focus needs to be on creating value that will lead to an IPO or acquisition.
Potential Acquirers
You need to describe what companies are likely to acquire your company, and why. This should not be a vague, theoretical discussion. Name names, and describe why (once you've got market traction) these companies will want to buy your company.
And why would they want to buy you company at a price that would give the investors a good return?
Financial Statements
The business plan should include 5-year projections of:
Brian Goncher of Deloitte and Touche has created an excellent spreadsheet that allows you to "fill in the blanks" to create 5-year projected financial statements. It makes the job much easier! Plus, the spreadsheet reminds you of the various categories you need to include in a budget. Get Brian's spreadsheet in our Sample Documents collection.
Keep in mind that the smart VC will not believe your projections out five years, but they will want to be convinced that you thought it through. And they will want to understand the assumptions you made. So...
Assumptions
Include clear documentation of your assumptions that drive the financial projections. I'm tempted to include a laundry-list of categories to "not forget". But the reality is that you need a team member with the right background to do this (and to know what items need to go into it) which leads to the next section ...
Finance Team Member
You'll need a finance person on your team to do the financial projections (and to answer the VC questions that will come). That might be a part-time CFO, or an advisor, or a part-time Controller, or some finance outsourcing firm -- but unless you're a CPA, you probably don't want to do the financial projections yourself. (Even if you are a CPA, if you're also CEO, you have higher leverage things to do than create financial pro-formas... So find someone to do it.)
The Business Plan - Road Map to Success
Garage.com in the "Getting Started" area has a good article on business plans
7 Steps to a Compelling Business Plan & Financing Pitch
Structure and Key Elements of a Business Plan (OGI)
Outline for a Business Plan (OGI)
See the OEN site for links to their Business Plan Workshops and Reviews