What Entrepreneurs Need to Know About the Business Plan
“A business plan should always be market rather than product driven... that you and your management team are capable of making money.”
If you were an investor, would you be more likely to shell out millions of dollars to an entrepreneur who has "great ideas" but has never put them down on paper, or one who has outlined, in an extensive document, his company's intentions, business model, management team and everything else critical to making a profit?
If you answered yes to giving money to the guy with "great ideas," you have a lot to learn about business. But if you think the latter has better chances of securing capital, you're starting to understand the importance of having a solid business plan.
A business plan is a written document that provides you and potential investors or lenders a detailed description of every aspect of your company, and how it will grow and achieve profitability. It is an operations guide of sorts for you as the entrepreneur. And it's a source of credibility in the eyes of those who can provide you capital.
Here are some things to keep in mind about business plans.
Writing the Plan
Most venture capitalists would say that you should plan to spend a minimum of two to three months and 200 to 300 hours crafting your plan. Some spend longer. And remember that your final product could change as it passes from one investor to the next.
The basic components include:
- Cover sheet – The formal name of the company, ownership status, address, and contact information
- Executive summary – A one or two page summary of the whole business plan (best if written last).
- Table of contents – A well-organized and accurate reference to the rest of the document
- Company description – Brief history of the company including how it was founded, sales, profits and current status
- Product/Service – Description of the product you intend to introduce into the marketplace
- Market analysis – Size of your technology's market and the specific niche you intend to serve
- Marketing plan – How you and your management team plan to successfully sell a product in the marketplace
- Financial plan – Capital structure, financial projections, needs and how you plan to meet those needs
- Operations plan – Description of how the business operates from day to day, including a breakdown of equipment, employees and real estate
- Management team – Qualifications of your management team
- Exit strategy – Description of how investors are going to make money (e.g. merger, acquisition, initial public offering) and part ways with your company
- Appendices – Miscellaneous material such as promotional materials, resumes and product samples
Before attempting to write your plan, conduct thorough research of other successful business plans. There are numerous web sites and books on the subject that provide templates and tips for success. Once you've completed a draft, get critical feedback from both lay people and respected professionals in your industry.
What Investors are Looking For
A business plan should always be market rather than product driven. This means every section is intended to prove that beyond having a great product, you and your management team are capable of making money.
A well-crafted executive summary is the first thing an investor sees. Therefore it needs to hit home key points like the market potential, how your company stands out from competitors and the capital you need in order to achieve success, among other points. Think of it as a finely tuned advertisement that will inspire investors to read further. It should include very brief information from each basic component.
After reading the executive summary, many flip directly to the management team. Venture capitalists often say they invest in people. Tout your team's experience, technical expertise, and past business successes.
Accurate and specific market analysis and financial data are crucial. Many entrepreneurs fall into the trap of stating the overall market they intend to serve rather than a specific niche. Investors want to know the real market opportunity and that you have a firm grasp of the strength of competitors in the marketplace. And they want to know exactly how much money you are requesting.
Address weaknesses and risks. This may include shortfalls in your management team or potential barriers in developing technology. Being up-front about weaknesses builds your credibility. And make sure the business plan is well organized, clearly written and to the point. Jargon is only a distraction.
Bankers are likely to place increased emphasis on the balance sheet, profits or loss, cash flow and the management team. Collateral is a consideration to bankers more than investors.
Submitting a Business Plan
The first step is to research prospective investors to determine the ones who specialize in your industry. If you are applying for a loan, call ahead and set up an appointment.
Most investment firms have submission guidelines clearly outlined on their web sites. Many plans are submitted via e-mail, so you will need to have your plan in common computer formats such as Microsoft Word, PowerPoint, Excel or Adobe Acrobat.
If you are submitting a hard copy, package it nicely with high-quality paper, good layout and visual elements, but do not go overboard. Also keep in mind that most firms will not sign a non-disclosure agreement. So avoid, as much as possible, including trade secrets and other proprietary information in the documents you provide. The important description is what your product will do and not how it works.
Response times vary from one investment firm to the next. But if you have not heard back in 30 days, follow-up with an e-mail or telephone call.
Business plans are important at every stage of your company's growth. As a startup it can help you land a seed round of funding or a small business loan. A well-established company may even use a business plan as a sales tool. So update your plan periodically and document changes and accomplishments. Not only can this serve as a personal point of reference for you as an entrepreneur, it can open up the door to future investments and other business opportunities.
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