Keys for an Effective Business Plan

Business Planning WorkshopSeptember 27, 2006

Dr. Timothy B. Folta

Associate Professor of Strategy and Entrepreneurship Director – BIOMEDSHIP (Biomedical Entrepreneurship) Program

– http://www.purdue.edu/biomedship/ Instructor, Undergraduate, MBA, & Ph.D. Courses in

Entrepreneurship Entrepreneurship research published in leading journals

– Entrepreneurial survival– Entrepreneurial risk– Entrepreneurial entry– Acquisitions of entrepreneurial firms

Why write a business plan? According to Dun & Bradstreet study of businesses between 1989-1992:

– 66% of businesses remain open at least 2 years.– 49.6% remain open at least 4 years.– 39.5% remain open at least 6 years.

Study of Canadian firms found roughly the same:

Why write a business plan? (cont.) Cooper, Dunkelberg, and Woo (1988) found that 95% of

entrepreneurs believe that their ventures will most probably succeed even though over half of all new ventures fail.– Over-optimism of own ability?– Don’t perceive risks?

Shane and Delmar (2003) found that entrepreneurs who have completed business plans or undertaken more business planning should be:– more likely to survive– further along in product development– further along in organizing the venture

Cooper, A.C., Dunkelberg, W.C., & Woo, C.Y. (1988). ‘Entrepreneurs’ perceived chances of success.’ Journal of Business Venturing, 3: 97-108. Delmar, F. & Shane, S. (2003). ‘Does business planning facilitate the development of new ventures, Strategic Management Journal, 24(12), pp 1165-1185.

Number of Deals

0

1000

2000

3000

4000

5000

6000

1998 1999 2000 2001 2002 2003 2004 YTD

Tale of Two Markets

Source: Venture One

2001-todayGet profitable fastWhere’s the business model? Path to profitabilityExperienced veteransVC controls valuation

1995-2000Get big fastConcept fundedTime to IPOYoung EntrepreneursEntrepreneurs controlled valuation

Number of Financing Rounds by Industry - United States

0200400600800

10001200

2000

2003

2006

Num

ber

Business/Consumer/Retail Total

Healthcare Total

InformationTechnology Total

Number of VC Financing Rounds - United States

0

500

1000

1500

2000

2000

2001

2002

2003

2004

2005

2006

Num

ber

Why write a business Plan?

Overcome subjectivity bias

Increase awareness of key

challenges

Convince other stakeholders

Employees Capital Providers Partners

Angel DebtVC

Agenda

I. First … some terminologyII. Getting started: Begin with the end in mindIII. Plan outlineIV. Some considerations when writing the planV. Do’s and Don’t’sVI. Q & A

First …. some terminology

Unique Selling Proposition Competitive Advantage Business Model

Unique selling proposition or Value Proposition

How the product or service benefits the customer in a unique way

Answers the critical question for each customer:

“What’s in it for me?”

Examples of Value Propositions

– “We provide a friendly, comfortable, well-located place offering a wide range of fresh, customized quality coffees, teas, and other beverages for the person who enjoys a good experience and a good beverage.”

– “An easily accessible Internet site that is convenient all of the time to provide a wide selection of books, CDs, and videos at a fair price to the busy, computer-literate customer.”

competitive advantage

a firm’s distinctive factors that give it a superior of favorable position in relation to its competitors. A sustainable competitive advantage is a competitive advantage is maintained persistently.

Cost

WTP

Cost

WTP

Firm Profit

A firm establishes a competitive advantage by driving a wedge between the costs it incurs and the willingness to

pay (WTP)

Cost

WTP

Firm Profitor

Price

Value

Cost

The Firm’s EconomicContribution

3 Broad Types of Choices that Define a Company’s Business

Strategy

The advantage the firm aims to deliver

The activities throughout the value

chain that deliver the intendedadvantage

The scope over whichthe advantage is

targeted

PositioningStrategy

ParticipationStrategy

Organizational Strategy

The advantage the firm aims to deliver

Cost

WTP

Firm Profit

Alter WTP

Cost

WTP

Firm Profit

Alter Marginal Cost

Cost

WTP

Firm Profit

Alter WTP

Cost

WTP

Firm Profit

Alter Marginal Cost

Superior Competitive Position

Examples of Sources of Competitive AdvantageSource Example

Efficiency, low costs Alcoa

Product innovation Intel

Quality, reliability Mercedes

Customer responsiveness Dell

Manufacturing innovation Toyota

The scope over which the advantage

is targeted

GeographyDemographyProduct

The activities throughout the value

chain that deliver the intendedadvantage

Design

Production

Logistics

Sales Marketing

Human ResourcesService

business model

A business model is the description of the business and how it will work in economic terms – that is, how it will make money.– to be persuasive, it must specify how / why each

stakeholder gains from the venture

Getting Started

Begin with the end in mind

“Would you tell me please which way I ought to walk from here?”

“I don’t much care where –” said Alice.

“Then it doesn’t matter which way to walk,” said the Cat.

From Alice’s ADVENTURES IN WONDERLAND

“That depends a good deal on where you want to get to,” said the Cat.

The End Could refer to the purpose of the plan

– Recruiting talent– Gaining confidence in business opportunity– Securing financing

Could refer to the exit– IPO– Sale or Merger

6 things you must have to get VC funding

Compelling business models Good business plan Unique technology with clear benefits Strong Intellectual Property position BIG markets Experienced management team Realistic financial plan

Not necessarily in this order of importance!!

General Venture Capital Fund

L.P.

L.P.L.P.

L.P.

General Partner

Key Features* 10 Year Life* Annual Management Fee - 2.5%* Profit Share: 80% Limited Partners, 20% General Partners

-2 to 0 yearsRaise Funds

0 to 4 yearsLocate Deals

Invest

4 to 8 yearsGrow

Investments

9-10 yearsLiquidate

InvestmentsInvestment Fund Cycle

Capital99% Limited Partners1% General Partners

Expertise1% Limited Partners99% General Partners

Example

VC

I1 I3I2

P1 P5P4P3P2

Total Amount Invested = $100MM

Total Amount Harvested = $400MM

•Investors get $100 MM back•$300 MM Profit Split

•VC gets 20%•Investors get 80%

$50MM $0 $200MM $150MM $0

I = Investors, P = Target ventures

Key Components of the Business Plan Cover Page Table of ContentsI. Executive SummaryII. The Company II. Market AnalysisIII. Competitive AnalysisIV. Products and ServicesV. Marketing and SalesVI. FinanceVII. Appendix

1.0 The Executive Summary Probably the most important part of the plan. It is a business plan in miniature – should be

able to stand on its own. Organize in order of importance No more than 2 pages

Did you know that most business plans are never read by a VC partner?

II. The Company

A. Company HistoryB. MissionC. Legal Business DescriptionD. StrategyE. TechnologyF. Value PropositionG. ManagementH. Organization, Alliances, and RelationshipsI. Intellectual Property StrategyJ. Facilities

Example of Mission Statement: eBayMission Statement

“We help people trade practically anything on earth. eBay was founded with the belief that people are basically good. We believe that each of our customers, whether a buyer or a seller, is an individual who deserves to be treated with respect. We will continue to enhance the online trading experience of all – collectors, hobbyists, dealers, small business, unique item seekers, bargain hunters, opportunistic sellers, and browsers. The growth of the eBay community comes from meeting and exceeding the expectations of these special people.”

Strategy

Major opportunities Estimated cost of entry, time frame, and risk Competitive advantage

– Type of advantage– Scope of advantage– Key activities driving advantage

Product / Service A Product / Service B

Technology Proprietary Technology Technology relationships

Human CapitalOther assets: technology, market power, reputation, customer relationships, scale economies, scope economies, etc.

The Average Start-up Firm The Established Firm

Why Venture Capitalists Reject Business PlansUnacceptable management team 52%Company not market driven 38%

Time frame too long 33%Inadequate financing plan 25%No proprietary position 15%No experience in industry (VC) 12%Other pitfalls: too long, opportunity too small, poor

organization, lack of focus

The relationship between prior experience and performance

In a Purdue study of 2994 entrepreneurs by Gimeno, Folta, Cooper, and Woo (1997)– Similarity of prior business to current one is one of the

strongest predictors of performance.– Other predictors of performance

Formal education Management experience Entrepreneurial experience

Management

I. Leadership team and brief resumes

II. Ownership, voting, stock options, and other incentives

III. Outside supporta) Accountantb) Attorneyc) Consultantd) Board of directors / advisors

Organization, Alliances and Relationships

Joint Marketing agreements Supplier Agreements Joint Development agreements

III. Market Analysis

A. Market DescriptionB. Target MarketC. Customer Buying CriteriaD. Distribution StrategyE. Market Penetration and Sales Volume

Market Description We expect to compete in the [define niche] of the [define industry].

This market was approximately [$x] at [wholesale or retail] last [period available], according to [cite resource]. We believe a major future trend in the industry will be toward [environmentally oriented, miniaturized, high quality, value oriented] product offerings. Market research [cite source] suggests that this market will [grow/shrink] to [$x] by the year [200?]. We expect the niche in which we compete to [grow/shrink/remain stagnant] during this time. The major forces affecting this change will be [falling cost of computers, explosion of home based businesses, tendency for baby boomers to have less kids-and pamper their pets, whatever]. The are of greatest growth within the industry will be [x].

[Company] is uniquely positioned to attend to this segment because …

Target Market

i. We define our target market as [x], [y], and [z]. Currently the market is shared by [a] competitors.

ii. Market segments and characteristics of those segments

Customer Buying criteria

i. Motivation to buyii. Primary market research to suggest target

customers want product or service.

Market Penetration and Sales Volume For each channel, identify the target volumes

and assumptions over a five year period

Revenue Model: how the firm will generate revenue Product sales model Subscription fee model Advertising revenue model Transaction fee revenue model

Sources of revenue growth

Increasing brand recognition Intellectual property licensing International expansion Acquisition of other firms Price increases New product offerings

IV. Competitive Analysis Key competitors

– Product, price, market share, location, promotion, management, financial strength.

Industry analysis– Barriers to entry, intensity of rivalry, buyer power,

supplier power, availability of substitutes. Distinguishing qualities of company

V. Product and ServicesA. Description of how it works. What needs are met.

Photos or drawings.B. Product line plansC. R&DD. Production and delivery

1) Location2) Build versus buy versus license decisions,3) Facilities and logistics.

E. PackagingF. FulfillmentG. Service and Support

VI. Marketing and Sales Marketing Plan Sales Strategy Distribution Channels and Partners Sales Cycle Pricing Strategy Marketing Communications

Sales Strategy– Selling Methods– Product Positioning

Distribution Channels and Partners– Distributors– Direct Sales– Retailers– Corporate Sales

Sales Cycle Pricing Strategy

– Product A– Product B

Marketing Communications– Trade shows– Advertising– Press Releases– Conferences / Seminars– Internet Promotions– Direct Mail

VII. Financial Plan

Highlights of financial statements Revenue Sources Funding requirements How you intend to use Funds Required Analysis:

– Profit and loss forecast– Cash flow forecast– Balance sheet

Supplemental analysis– Ratio analysis– Break-even analysis

Harvest plan

Some Overall Thoughts on the Financial Section of the Plan Financial projections are relatively unimportant

(Sahlman)– Everyone knows they’re inaccurate:

– However, they take on more importance if the fundamentals of the business model are well established.

VIII. Risks and Milestones

Critical risks: technological, market, execution Potential mitigation of the risks Performance milestones

IX. Appendices Pro-forma financial reports

– Assumptions, trends, comparatives– Cash flow statements– Income statements– Balance sheets– Sources and uses of funds– Supplementary financial analysis

Resumes / Management Team Biographies Testimonials Patent applications Description of primary data analysis Contracts Promotion literature Competitive Profiles Press Clippings References

For what do you need financial assumptions? Sales - when to begin, growth Start-up costs fixed and variables expenses terms on accounts receivable, payable inventory turnover terms of financing initial cash position timing of key events

How to generate pro-forma financials?

Salesforecast

Beginningbalance

sheetEndingbalance

sheet

Cash flowstatement

Incomestatement

Assumptions

The Cover Page

VPThe Very Profitable Company

333 West St.West Lafayette, IN 47906

765-463-2012Fax (765) 494-9658

Jones@msn.com

Contact: Wayne Jones - CEO

The company was established in 2003

This (2nd) version of the plan was completed September 2004

Plan #2.4

Like Coach Wooden – Pay attention to detail

Some Considerations When Writing the Business Plan How long should it be? Where to start? Who should write the plan? What should the plan look like? Should you have more than one version of the plan? Should you seek the perspective of outsiders?

The impression continuum

Messy (poor organizational skills)

Too short (glib)

No pictures (lacking creativity)

Too conservative (too bearish)

B&W faded photocopy (lacking marketing skills)

Over-organized (hiding lack of content)

Too long (unable to get to the point)

Too many pictures (lacking discipline)

Too optimistic (unrealistic, naïve)

Full color ad-like production (no self control, too flashy or focused on appearances)

the answer: tell the story & keep it succinct!!!

Do’s and Don’t’s of Business Plans

Do … tell the story

Make sure the business model resonates throughout the plan

Make it a page turner … Each section should lead to the next Each business story must be told in a slightly different

way … do not follow a fixed formula Edit with a sharp knife

Don’t … make common mistakes

Beat the reader over the head with your point Too much repetition & irrelevant information Not enough information Ignore risks Ask for less money than is needed

Time’s Yours!