Opensourcing my entrepreneurship course notes, the second lecture of my course focus on introducing to the student: (a) the executive summary, (b) the business plan and (c) the elements that construct both documents: technology/service/product description, management team, marketing plan, market segmentation, business strategy (business model), operations plan, financials and exit strategy. This is a series based on a course “MPS 812: Entrepreneurship” I have been teaching in School of Physical & Mathematical Sciences, Nanyang Technological University.
My Course Slides:
Talking Points
Why do you write a business plan?
“Writing a business plan forces you into disciplined thinking if you do an intellectually honest job. An idea may sound great in your own mind, but when you put down the details and numbers, it may fall apart.”
– Eugene Kleiner, venture capitalist
There are two universal truths to a good business plan. The first universal truth is: whatever content you write and claim within the document, the first version you start out with will be totally different from the n-th version which you end up with. It simply means that you have to be dynamic and be ready to adapt to changes and to how your investors, clients and collaborators view your business plan. That comes to my second universal truth, the business plan must hold true to the original ideals and principles of the founders, but what changes are the details of how it is implemented. Dogma is the root of all evil for business ideas. The changes may frustrate you but they are meant for your own good. If you respond respectfully and with some thinking about the critical and helpful comments from the people in the industry, you can refine your plan to a form preferred by an investor. Sometimes, experts can make mistakes, and you have to remember that they are usually right about 90% of the time. The real difference for you as an entrepreneur, is to see that remaining 10% which they cannot fathom. Even when your business eventually starts with version X of your business plan, you will still continue to make changes to it as your company engages the market.
Elements of a business plan
- Executive Summary: The overview and summary of the business plan. Please refer to [1] for more details. It must be short and never exceed more than 2 pages.
- Problem and Opportunity The first thing that you need to frame is the problem that your business is trying to solve. Once you have done that, you also demonstrate why your problem has a business case in exploring the dollars and cents behind that industry. For example, a bottle of mineral water is a solution for the problem of thirst in human beings, and that is a human need, and you can explain the market opportunity based on the consumption of water and how many bottles of water are required to deal with the problem of thirst in the world. Do not try to find the problem with a solution that you have in hand. That requires usually a change in behaviour and not many companies succeed in creating a brand or product for a solution that is yet to find a problem.
- Technology/Product/Business Idea: What is the problem that your technology, product or business solution is trying to address? There must be some background to how there exist a market opportunity. For example, you can cite that governments may be planning to put a significant of their GDP to boost the prospects of that industry. It is important to pinpoint down to either one feature of your product/service/technology against the current ones in the market. Note that it is not a research report on a product. The product or prototype has to be working such that you can explain how the features solved the business case of the problem.
- Management Team and Advisory Board: Who is on the team? Who are the advisors or grey hair behind the team? A good team is made up of individuals who have different skills that complement each other. They also set the roles and responsibilities which they want to play. In the business plan, the CVs of the team (usually 3/4 of a page) are placed in the appendices. It is often thought that this is the easiest to write but in my opinion, it is toughest to do so not because you don’t have the information but rather how you framed your team’s skill sets to convince them that they are the right people for the job.
- Markets: This is the part which you explain how your company meet the needs of the customers. It also provides the market segmentation analysis of that industry which you are planning to target. You must convince the investor on how you plan to approach which segment of the market, for example, you may want to target women between 18 to 30 for a particular type of utility clubbing wear you have in mind. The key of understanding markets is to get a grasp on the actual numbers of how much that industry has grown and the CAGR rate is (refer to the lecture notes).
- Business Strategy and Route to Market: The most important part of the business plan is in this section. Here is where you need to work out the business model for your company, the strategy to enter the market, the pricing model for your product and service and how you set to engineer the different channels into a successful corporation. You will also clarify your sales and branding, logistics operations and distribution channels. What investors are geniunely looking out for is the word, scale and the best way to think of this is to ask the question, “How do you drive down the cost of customer acquisition to near zero?”.
- Operations Plan aka Timelines and Milestones: You need to create a realistic timeline usually about three years, from how you take the initial investment and finally cross the valley of death into a positive revenue company. In the real world, if you are fundraising for different stages, your next round of financing is tied to the milestones you achieved. Suppose you are a mobile-web company raising US$5M for the next round and you have built up 5 million users, then you need to tell your investors that you will be raising US$20M after this round, but with this US$5M, you will achieve the goal of reaching say, 20M users and revenues from x% of the users you have grown from your website or mobile application.
- Risks, Barriers to Entry and Competition: You cannot convince your investor unless you let them know who you are pitting your startup against. You will need to suggest solutions that will help to minimize these risks and mitigate against the barriers of entry. This is the part of the business plan which you need to be really truthful to yourself: do you have a plan to prepare against all the problems which will crop up in your business?
- Financials: In this section, through the use of a financial forecast, you calculate both the pre and post-money valuation of your company that will support your business venture. You do not need these numbers until you reached the last two rounds of the negotiation with the investors. Usually, what you forecast greatly differs from reality.
- Exit Strategy: What is the status of the company within a three year horizon? Do you need additional fundraising to take you into the next stage or simply, you just get acquired by another company? In some cases, if your growth trajectory is really awesome, you might be able to take the company to public through an initial public offering (IPO).
Do you really need a business plan in real life fundraising?
The answer varies. In fact, in real life, what entrepreneurs tend to do, is build a presentation deck with the elements required within the business plan. Usually, the entire presentation will contain about 50-100 slides. Then the entrepreneur need to trim it down to about 20 slides for an introduction deck (without mentions of financials and valuation), 30-50 slides for an investor ready deck (with some mention of financials). It varies from investors to investors. You will probably hear some entrepreneurs claiming that they did not need to write a business plan or a presentation deck to get investors. That is probably true, because if you are profitable and are on a super growth trajectory, you will do less work to get the fundraising. I probably have this conjecture for mobile-web start-ups that the amount of money you raised is inversely proportional to the amount of content for a business plan. The reason is that in the modern day mobile-web tech start-ups, investors don’t look at your overbloated powerpoint presentations or documents, but rather a prototype and some analytics about the number of users, user behaviour and what takeaways you learn so that you can turn it into a profitable business.
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