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Business Plans Finance for Entrepreneurs

Business Plans Finance for Entrepreneurs

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Page 1: Business Plans Finance for Entrepreneurs

Business Plans

Finance for Entrepreneurs

Page 2: Business Plans Finance for Entrepreneurs

Overview

Business Plans vs. “Business Plans” Contents, or what is in them Mistakes

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Page 3: Business Plans Finance for Entrepreneurs

Useful Articles

How to Write a Great Business Plan (HBR article, see library)

Enterprise Do Start-Ups Really Need Formal Business Plans

Due Diligence 10 Tips for Successful Bootstrapping Form or Substance: The Role of Business Plans in

Venture Capital Decision Making New study shows six critical business plan mistakes

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Page 4: Business Plans Finance for Entrepreneurs

What is a “Business Plan”?

A written document Summarizes the purpose and overriding strategy of

the venture Provides details on operation, financing, marketing,

and management Analysis of strategic alternatives does not belong in

the “business plan” Consider aspects of strategy simultaneously, not

sequentially4

Page 5: Business Plans Finance for Entrepreneurs

To Business Plan or “Business Plan”

Interviews with the founders of 100 companies on the 1989 Inc. "500" list of the fastest growing companies in the United States revealed that entrepreneurs spent little effort on their initial business plan

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Page 6: Business Plans Finance for Entrepreneurs

The Role of Business Plans in Venture Capital Decision Making

So what is important in “BPs” if used for this purpose?

Limited external benefits accrue from the production of formal business planning documents David Kirsch, Brent Goldfarb,

Azi Gera

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Page 7: Business Plans Finance for Entrepreneurs

What Makes the Business Plans of New Ventures Different?

Forecasts and projections usually are less precise A greater investment in planning Deviations from plans and wrong assumptions Evaluating manager performance More likely to be relied on externally Used to attract investment capital Greater breadth of coverage Unconstrained by previous decisions

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Page 8: Business Plans Finance for Entrepreneurs

Components of a Sound Business Model

Generate Revenues (You must have customers & sell them something)

Make Profits (You must eventually have revenues that exceed the expenses of generating those revenues)

Produce Free Cash Flows (You must generate cash inflows that exceed net working capital & capital expenditures)

But, another way of viewing….8

Page 9: Business Plans Finance for Entrepreneurs

Components of a Sound Business Model

What is the concept? How are you going to market it? How much do you think it will cost to produce

and deliver what you're selling? What do you expect will happen when you

actually go out and start making sales?

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Page 10: Business Plans Finance for Entrepreneurs

Valuable Opportunities

Business plans based on general information Can be copied Often lead to normal “rents” Unlikely to be worth the entrepreneurial risk

Business plans based on specific information Not easily copied Higher potential for wealth creation

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Page 11: Business Plans Finance for Entrepreneurs

Potential for Value Creation

1. Fit

2. Value

• This slide and the following slides are based on “Evaluating the Wealth-Creating Potential of Business Plans”, Fiet and Patel

See next slides

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Page 12: Business Plans Finance for Entrepreneurs

Entrepreneurial Fit

Prior experience and specific knowledge necessary to exploit and new opportunity Prior Experience

• Occupation

• Specialized education

• Social Relations

• Hobbies

Specific Knowledge• Self explanatory

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Page 13: Business Plans Finance for Entrepreneurs

Value

A function of competitive rivalry in an industry In this context, industry refers to group of firms who

offer products that are close substitutes Many entrepreneurs deny the existence of

competitors Belief that there product leads to a monopoly

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Page 14: Business Plans Finance for Entrepreneurs

Reasons for Monopoly

The new product is not valuable to customers Yes monopoly exists, because no competitors sees

value in the market Unlikely to lead to wealth creation

The product is valuable, but customers are slow to adopt because education is required It can be difficult to educate a market to the value of

a new product, but not impossible

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Page 15: Business Plans Finance for Entrepreneurs

Reasons for Monopoly

New technology with IP protection Control over input factors

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Page 16: Business Plans Finance for Entrepreneurs

First-to-Market

It happens in some circumstances that being first-to-market leads to sustained competitive advantage ebay

Other times, later-to-market is the wining strategy Osborne - portable computer

Why?

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Page 17: Business Plans Finance for Entrepreneurs

Value of a New Idea

Threats posed by the following groups Potential industry entrants Suppliers Buyers Substitutes

The following moderators can reduce these threats

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Page 18: Business Plans Finance for Entrepreneurs

Moderators

Potential entrants Economies of scale Cost advantage independent of scale

• IP, factor control, know-how,…

Government regulation Suppliers

Many suppliers Threatened by substitutes No desire for vertical integration

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Page 19: Business Plans Finance for Entrepreneurs

Moderators

Buyers Large number Small percentage of buyers overall cost Buyers are very profitable

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Page 20: Business Plans Finance for Entrepreneurs

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Page 21: Business Plans Finance for Entrepreneurs

Contents of the Business Plan

The people The opportunity The context Risk and reward Exit strategies

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Page 22: Business Plans Finance for Entrepreneurs

Contents of the Business Plan

Focus on the purpose(s) and uses of the plan. Include whatever information is relevant and

material Make certain the audience is neither overloaded

nor left to speculate Include only what is appropriate and necessary,

given the use Identify the key assumptions as assumptions.

Include the support for key assumptions

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Page 23: Business Plans Finance for Entrepreneurs

Contents of the Business Plan

Highlight the critical elements for success or failure

Delineate milestones So users can evaluate success, modify assumptions,

expectations, or strategy Include financial projections

To test the plan, commit the entrepreneur, facilitate negotiation

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Page 24: Business Plans Finance for Entrepreneurs

A Typical Business Plan Outline

I. Executive Summary

II. Business Description

A. Description of the product/service

B. Industry background

C. Venture or firm background

D. Goals and milestone objectives

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Page 25: Business Plans Finance for Entrepreneurs

Business Plan Outline

III. Marketing Plan and Strategy

A. Target market and customers

B. Competition and market share

C. Pricing strategy

D. Promotion and distribution

IV. Operations and Support

A. Quality targets

B. Technology requirements

C. Service support25

Page 26: Business Plans Finance for Entrepreneurs

Business Plan Outline

V. Management Team

A. Experience and expertise

B. Organizational structure

C. Intellectual property rights

VI. Financial Plans and Projections

A. Income statements & balance sheets

B. Statements of cash flows

C. Break-even analysis

D. Funding needs and sources26

Page 27: Business Plans Finance for Entrepreneurs

Business Plan Outline

VII. Risks and Opportunities

A. Possible problems and risks

B. Real option opportunities

VIII. Appendix

A. Detailed support for financial forecasts

B. Timeline and milestones

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Page 28: Business Plans Finance for Entrepreneurs

Making the Business Plan Credible

Demonstrate understanding of the technology, market, risks, needs, and potential rewards

Provide evidence of the quality and capabilities of people involved, and that they can function effectively as a team

Provide evidence that key personnel are committed Bonding Reputation Certification

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Page 29: Business Plans Finance for Entrepreneurs

The Issue of Confidentiality

Protecting intellectual property Preempting rivals and first-mover advantage Using non-disclosure agreements Relying on reputation

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Page 30: Business Plans Finance for Entrepreneurs

Financial Aspects of the Business Plan

Differing views on what to include Is the future too uncertain to warrant careful

forecasting? Include in the plan, or as an appendix? The importance of supporting assumptions Relationship of projections to contract negotiation The value of quantifying risk Value as a diagnostic tool - to facilitate adaptation

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Page 31: Business Plans Finance for Entrepreneurs

What's Wrong with most Business Plans?

Problem lies with the financial data To concentrated on financial information Act of imagination To optimistic

The financial data should focus on answering two questions What are the critical drivers of the business?

How much business does the company need to achieve

to break even?31

Page 32: Business Plans Finance for Entrepreneurs

Study Shows Six Critical Business Plan Mistakes

Lack of marketing strategies Lack of clarity Unrealistic financial projections/assumptions Lack of detail Overly optimistic Weak analysis of competition

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Page 33: Business Plans Finance for Entrepreneurs

Business Plans

Focus on cash flow, not profitability Forecast from the bottom up Ship, then test Forget the “proven” team Start as a service business Focus on function, not form Understaff Go direct Position against the leader Find out how deep the rabbit hole really is

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Source: 10 Tips for Successful Bootstrapping,

Guy Kawasaki