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A Market-driven Approach to Writing a Winning

Business Plan

DK (Dingkun) Ge, PhDAssistant Professor

Entrepreneurship & StrategySan Francisco State University

Prepared for

the Chinese Information Networking Association

November, 6th, 2004

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Dr. Ge’s Fundability Formula

Theoretical Hypothesis:

P(funding) = f (opportunity, founder/team, business plan…)+e

=>Empirical results: PF = 10000*opportunity+20000*founder/team

+ 0.05*business_plan

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Assumptions & Scope

Assuming a basic understanding of the structure and format of a business plan

The purpose of writing the biz-plan is to raise money from VCs

Neither comprehensive nor complete – it only provides a perspective

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Business Plan Basics

The purpose of a business plan is to convince investors to make substantial financial commitment to an unknown startup

We need to effectively address what concerns investors most: (1) whether they can get their money back (2) whether they can make some profit & (3) if yes, when and how much.

So the sole purpose of the biz-plan is to give the investors an affirmative answer

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1. Executive Summary

2. The Opportunity, the Company and its Services/Products

3. Market Research/Analysis

4. Economics of the Business

5. Marketing Plan

6. Design and Development Plan

7. Manufacturing and Operations Plan

8. Management Team

9. Schedule

10. Critical Risks, Problems and Assumptions

11. The Financial Plan

12. AppendicesNotice That “Technology” Is NOT A Section

Elements of a Biz-Plan

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Some Stylized Facts

Source: PWC Moneytree Survey, 2004

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Some Stylized Facts

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Some Stylized Facts

8.8% 5.4%7.4%

Source: PWC Moneytree Survey, 2004

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Less than 10% of business plans received by VCs passed their first round of screening (Russell, 1984; Nelson, Wainwright and Blaydon, 2003 )

Less than 1% of business plans received by VCs eventually get funded (Aggarwal and Esposito, 2001)

On average, VC spends less than 5 minutes reading a biz-plan for initial screening (Timmons, et al, 2004)

Some Stylized Facts

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Market-driven Business Plan

How to grab their attention at the first glance is of make-or-break importance

A market-driven approach may increase your chance of catching their eyes

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A winning business plan must be market-driven: The market opportunity itself must create and

appropriate sufficient value The heart of a business plan is the opportunity & your

ability to pursue it You must bear your readers in mind when writing

the business plan Understand what important to them & make it easy for

them to read

Market-driven Business Plan

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MarketProduct or Service

OPPORTUNITY RECOGNITION

PURSUIT OF OPPORTUNITY

People & Organization

Resources & Capital

© 2003 Mark P. Rice, Babson

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Qualifying the Opportunity

Macro-qualification Potential market – who &

where are they? Market potential – how

large is it? Market segments –

which groups to target? Your customers – who

will actually buy it?

PotentialMarket

Target SegmentsCustomer

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Qualifying the Opportunity

Micro-qualification: – What’s the value of your product/service – What’s your value-added?

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Micro-qualification – What’s the value of your product/service

Source: Dingkun Ge, 2002, Value Pricing in Presence of Network Effects, Journal of Product and Brand Management, Vol 11, No. 3

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Micro-qualification – What’s your value-added?

Source: Dingkun Ge, 2002, Value Pricing in Presence of Network Effects, Journal of Product and Brand Management, Vol 11, No. 3

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Qualifying the Opportunity

How Much Value Can You Appropriate

Customers

Suppliers

Competitors, Imitators, and Substitutions

YOUR FIRM

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Qualifying the Opportunity

An attractive opportunity: Market potential is large enough: > $50M High growth rate for at least 5 years: >20% Fit well: >40% gross margin High profit potential: > 15% after tax Attractive return to investors: 25% to 30% IRR All these can be realized in 5 to 7 years

$125M

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Qualifying the Opportunity

Market & margin related issues Needs/Wants/Problems Elegance of your solutions Payback to users Your gross margin

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Qualifying the Opportunity

Competitive Advantage Your ability to control cost and price Barriers to entry Access and bargaining power over supply and

distribution channels Lead time?

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Qualifying the Opportunity

Returns to Investors Cash-burn rate Time to breakeven, positive cash flow Profit after tax, ROI Exit channel

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Q: What is the most important part of any business plan?

A: “I always turn to the bios of the team first. For me, it’s team, team, team. Others might say, people, people, people -- but I’m interested in the team as a whole.”

John Doerr Partner of KPCB

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Q: What is the most important part of any business plan?

A: “Nearly every mistake I’ve made has been I picked the wrong people, not the wrong idea. If you can find good people, they can always change the product.”

Arthur Rock Founder and Partner ofArthur Rock & Company

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Q: What is the most important part of any business plan?Q: “What are the essential criteria that the absence

of or shortfall on any of these would result in rejection of the proposal regardless of any other characteristics?”

A: Five of the ten criteria rated as essential were associated with the entrepreneurs themselves:

1. capability for sustained effort,

2. demonstrated leadership,

3. track record relevant to the venture,

4. reaction to risk,

5. capability of articulating the venture well.

MacMillan, Siegel and SubbaNarasimha (1985)

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Q: What is the most important part of any business plan?

Relative Importance of Factors in Valuation of New Ventures: 

Factor                                                       PointsQuality of Management                                                4.5Size of the market                                                         3.8Product qualities                                                           3.7(uniqueness, brand strength, parent protection)  Rate of market growth                                                  3.5       Competition                                                                  3.5Barriers to entry                                                            3.4Company’s stage of development                               3.2Industry the company is in                                          3.0

- Hill, B., & Power, D. 2001, Inside secrets to venture capital

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Bear Your Readers in Mind

Make it easy to read: Follow the standard format Use plain English – limit the use of technical jargons Use visual aids: chart, diagram, sidebars, etc Understand your targeted investors and customize the biz-

plan for each investor if possible

Give them all the information they need Protect your butt – all critical assumptions, potential

uncertainties and risks fully addressed

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Dr. Ge’s Fundability Formula

Theoretical Hypothesis:

P(funding) = f (opportunity, founder/team, business plan…)+e

=>Empirical results: PF = 10000*opportunity+20000*founder/team

+ 0.05business_plan

Key Takeaways

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“It is critical to think big enough. If you want to start and build a company, you are going to end up exhausted. So you might as well think about creating a BIG company. At least you will end up exhausted rich, not just exhausted.”

– Pat ClohertyChairpersonThe U.S. Russia Investment Fund

Key Takeaways

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Contacts

Dingkun GeEmail: dge@sfsu.eduOffice Phone: 415-338-7475Home Phone: 415-337-0508