Help investors see your company is a good bet: plan to succeed. (includes related articles)
by Tom Campbell
You have a great idea for a business. You've finally decided to make the leap. Your carefully chosen network of potential clients, employees, and future contacts is strong enough to support a new company. You're willing to give up vacations and weekends. You're ready to face a career where the 40-hour week is a misty daydream and a 60-hour week means you're slacking off. But there's a hitch; you need money. A lot of it.
Other People's Money
It's a nasty contradiction, but sometimes starting your own business--your dream of independence embodied--means depending on other people for money. If you need more money than you have to get started--or need to borrow a substantial amount of money after startup--you'll need a business plan.
In short, the purpose of a business plan is to convince people that they can make money by lending it to you or by purchasing part of your company. I found creating and presenting my business plan an eerie recap of the same things that sent me screaming from a traditional job: surrending control, dealing with people I didn't always want to deal with, asking for more money, writing resumes, and depending on other people for my livelihood. But the excitement of running my own business made it all worthwhile.
You need to look at you business plan as others will. Step into the shoes of the people you need to convince and see whether your plan makes the right sort of impression.
Who will see your business plan? Bankers, venture capitalists, or small investors willing to risk a few thousand dollars. In general, bankers loan amounts up to the hundreds of thousands. Venture capitalists start at about $100,000 (though many won't touch anything under a million). Who are the small investors? Generally people you know, people with a couple of thousand lying around collecting dust and insufficient interest in a savings account or CD. When it comes to handling out your business plan, don't forget Mom and Dad. Even if they don't require one, you should write one--the process of writing it will often cause you to make major changes in your game plan. Reading this article and writing a business plan will also help you avoid some common pitfalls, such as mistaking marketing for sales and learning the importance of a good presentation after the marketing plan has been written.
A word Is Worth $1,000
In high school, your English teacher probably tried to explain the importance of being able to write a coherent essay, and a business plan is structured like a good essay. You tell 'em what you're going to say, say it, and tell 'em what you said. It worked in high school, and it works in business plans, too. Depending on how busy your potential investors is, the table of contents and introduction may be all that ever get read. If you're a bad writer, you should get a professional writer to do it for you. A typical business plan has the following elements:
* Table of contents
* Description of your product or idea
* Description of what the investor gets in exchange for the investment
* Market research and sales projections
* Marketing plan
* Sales plan
* Distribution plan
* Plans for future enhancements, product lines
* Profit and loss projections
* Job history and experience for you and any other people involved
The description of your product or idea and market research are very important. The product description may only take up a page or two, but it had better excite the person reading it. Market research is problematic, but you'll find even the least sophisticated potential investors will ask for market research.
I managed to sell my idea with none, arguing that market research would be expensive and, more to the point, would tip off other software companies to the idea. Still, if I had to do it over again, I would have done the market research, even though more than 75 percent of the people to whom my partner and I gave our presentation bought stock.
I've since realized that any but the simplest of ideas is probably safe, just because the kind of people who tend to steal ideas don't tend to be very good in their execution. So take the time to find out about your customers. Your market research should contain as many hard numbers as possible, presented with charts and graphs, and it should emphasize the unique aspects of your venture.
When you write your description of the product or idea, bear in mind that the reader may know nothing about the industry you work in. Make no assumptions about his or her level of knowledge. Read the description over and over, pestering family, friends, and passersby at the bus stop until you've distilled it into a highly focused miniessay. Like a newspaper article, it should go from broad to narrow, doing everything it can to catch the reader's attention without larding the information with puffery and hype. You're forgiven the urge to wax eloquent in the sales projections, but make the description totally straight-forward. People who are about to sink their hard-earned cash into a speculative venture don't want to be entertained at this point in the plan.
Market research shows who will buy your product or service. A marketing plan maps the strategy you'll use to get it to them. For example, my product was a utility program for power users, MIS directors, and consultants. This determined my market. My marketing plan was to focus on getting free press by sending out creative press kits to narrowly focused computer magazines, appearing at user groups, and getting the product reviewed in major magazines. As the product made money, we would take out display ads in the appropriate publications; the marketing plan described what publications would be good to advertise in.
Since I had done similar work for other companies before, I was able to include samples of previous work as a demonstration of my value--not only could I program, the theory went, but I could write press releases, too. As it turned out, my partner did most of the marketing, but my ability to wear several hats impressed potential investors.
The sales plan details how the marketing will be executed. Marketing means determining who buys the product or service; sales means getting it to those people. For example, if your marketing plan details the kind of ads you'll run and their placement, the sales plan details how much the ads will cost to run, how you'll get the phone orders when they start rolling in, and so on. As you'll find out when you read the sidebar, "Selling It," you'd better be a good salesperson when you present your own plan. I found that my enthusiasm carried me where intimate knowledge of sales didn't.
The distribution plan shows the logistics of getting your product to dealers and keeping it there (if you're selling a service, this section probably won't apply). It tells how you'll create a dealer network, how you'll maintain it by offering them special discounts at certain quantities, how you'll train the dealers, what sort of special promotional materials you'll create for your dealers, and how you'll prune out the deadwood dealers. Many small companies, including software companies, can function well as their own distribution networks, although I dislike this end of the business. I'd rather have Egghead move 1000 copies of my product a month than sell those copies to individuals, even though the individuals buy at list price and Egghead gets a sharp discount. Economies of scale are just as important for a small business as a big one.
Your plan for future products and enhancements shows potential investors that you have a good grasp on the market. No one told me this before I wrote my business plan, but it turned out that this was one of the strongest points of my plan. In fact, I scaled this part down because I though it would make me look less pragmatic than I am, too much like a dreamer. Instead, many people were impressed with the clarity of vision--and at the thought of being able to make money on my product years after its introduction.
Your profit-and-loss projections (P & Ls) will be important to any investor with a sophisticated knowledge of money, even though planning it a year ahead of time is pure voodoo. I skirted the issue by creating three versions, from pessimistic to reasonably optimistic. This turned out to be a standard practice, even though I secretly thought it a copout. P & Ls shouldn't be too detailed. Look in a book or a big company's annual report for examples.
Finally, your hob history and experience must be included. A one-page summary is fine; you need include only what's relevant. Your job working at Wendy's in 1974 isn't relevant unless you're opening up a fast food joint. On the other hand, if you're opening a computer store, your experience working as a support tech at the city college ought to be included. Under no circumstances should you lie or waste the reader's time.
Here are some things to bear in mind before and during your creation of the business plan:
Write well. While most books on writing a business plan tell you to find writers in the local directory or writer's organizations, I suggest that you go to the source. Contact a writer you've seen in the local paper's business section, someone whose writing you like. If your kid brought home a term paper with snappy, cogent notes from the teacher, consider hiring the teacher. Or scan author blurbs in magazine articles you like for a writer living near you.
Leave a trail of evidence. Anytime you can illustrate a point in your business plan, do it. If you plan to distribute fliers, staple one to the back and refer to it in the marketing plan. If you wrote--or were written about--in any industry trade magazine, by all means include copies of those articles. Seeing your name in print gives the investors a feeling that they are dealing with a known quantity.
Throw away your computer. Take a moment to imagine your presentation without all the bells and whistles. Imagine what your presentation would be like if you didn't have a computer: a types business plan, no graphics, and no animated slide shows on your Super VGA monitor. If the presentation stands on its own, you've done a good job, and your other presentation tools will make it a slam dunk. If it doesn't stand on its own, pretend that you've had to throw away your computer. Start from scratch. Your potential investors almost invariably have a lot of common sense. They'll see through a hollow presentation as it it were printed on gauze.
Borrow a computer. Now that you have a good presentation, you'll want to make it better. A PC can be a powerful ally in giving a business presentation (see "Polishing Presentations with PCs"). If your PC isn't up to the task or if you need expensive hardware such as a laser printer, there are several ways to get access to highend computers and peripherals. In my area there are at least three junior colleges with excellent Macintosh and PC facilities. I was able to get access to them by purchasing a membership in the school library (entrolling in a course is another good way to do it). Several local print shops also have Mac networks, where the machines can be rented for $10 or so an hour. If you want to present a multimedia show to a group of investors and don't think huddling them around your PC in the master bedroom is a good idea, consider renting a training center on an off night. Radio Shacks in my area make their training facilities available when they aren't in use.
Watch yourself. Having been on the ground floor with both successful and unsuccessful companies, I've concluded that a few simple, fundamental, and somewhat out-of-fashion truths endure. Above all, never lie to yourself or to your investors. It's often more difficult to tell the truth in the short run, but it's almost always easier in the long run. For example, if a potential investor asks you about your marketing skills and you say they're great when they're not, you'll face some hard questions when sales don't meet projections. And you might find out too late that the same investor knew a really good, but hungry, startup agency that would've created some great ads on the cheap. If you don't know exactly why shipping costs much more than you think it should, ask around. Maybe one of your stockholders knows how to work a deal with the shipping company. If you find yourself answering questions with more authority than you have just because you're the boss, apologize immediately and learn to say "I don't know."
Avoid cram. Avoid cramming more than three of four phrases worth of text on word charts, avoid using clip art that doesn't help the presentation directly, and be very conservative in your use of color. Above all, never use pictures when they're not needed. It might lead an investor to think you have nothing to say.
The Royal Road
Writing your business plan can lead you to unexpected revelations. You might discover that you don't want to run a business after all. Or that if you do, you might want to choose a slower growth plan and use the business to finance itself.
You might even discover that you need a partner, rather than stockholders, because writing the plan has helped you identify some important gaps in your own abilities. Or you might discover the opposite: I realized while writing my business plan that my seemingly checkered past in the job market resulted in a wide arrat of skills--I was competent in enough areas that we were able to cut the personnel requirements substantially.
Writing a business plan isn't just a way to raise money. It's a way to sharpen your powers of observation and a way to learn about yourself. It can even be the touchstone of a whole new way of thinking about your business--and about life.