keys for an effective business plan business planning workshop september 27, 2006
TRANSCRIPT
Keys for an Effective Business Plan
Business Planning Workshop
September 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
0
200
400
600
800
1000
1200
2000
2003
2006
Nu
mb
er
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
Nu
mb
er
Why write a business Plan?
Overcome
subjectivity bias
Increase awareness
of key
challenges
Convince other
stakeholders
EmployeesCapital
ProvidersPartners
Angel DebtVC
Agenda
I. First … some terminology
II. Getting started: Begin with the end in mind
III. Plan outline
IV. Some considerations when writing the plan
V. Do’s and Don’t’s
VI. 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 Advantage
Source 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 Plans
Unacceptable 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) Accountant
b) Attorney
c) Consultant
d) Board of directors / advisors
Organization, Alliances and Relationships
Joint Marketing agreements Supplier Agreements Joint Development agreements
III. Market Analysis
A. Market Description
B. Target Market
C. Customer Buying Criteria
D. Distribution Strategy
E. 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 buy
ii. 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 Services
A. 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
sheetEndingbalancesheet
Cash flowstatement
Incomestatement
Assumptions
The Cover Page
VPThe Very Profitable Company
333 West St.West Lafayette, IN 47906
765-463-2012Fax (765) 494-9658
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!