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Business Plans
Finance for Entrepreneurs
Overview
Business Plans vs. “Business Plans” Contents, or what is in them Mistakes
2
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
3
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
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
5
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
6
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
7
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
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?
9
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
10
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
11
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
12
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
13
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
14
Reasons for Monopoly
New technology with IP protection Control over input factors
15
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?
16
Value of a New Idea
Threats posed by the following groups Potential industry entrants Suppliers Buyers Substitutes
The following moderators can reduce these threats
17
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
18
Moderators
Buyers Large number Small percentage of buyers overall cost Buyers are very profitable
19
20
Contents of the Business Plan
The people The opportunity The context Risk and reward Exit strategies
21
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
22
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
23
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
24
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
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
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
27
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
28
The Issue of Confidentiality
Protecting intellectual property Preempting rivals and first-mover advantage Using non-disclosure agreements Relying on reputation
29
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
30
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
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
32
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
33
Source: 10 Tips for Successful Bootstrapping,
Guy Kawasaki