HOW TO WRITE A GREAT BUSINESS PLAN

Group: Mastermind Group

Written by Sylvia Vukmanovic on Sep 8, 2008 12:24 am

Read More: Discipline | Personal Development

We will still need to learn how to become capital compliant so that we can raise capital legally, but we will definitely need to know how to write a great business plan.

Framework for a GREAT Business Plan
* 1: The People – the men and women who will start, run and grow the venture. The outside parties who will provide key services (lawyers, accountants, suppliers).
* 2: The Opportunity – a profile of the business itself, what it will make or sell and to whom, can it grow, how fast, what are the pitfalls?
* 3: The Context – the big picture, regulations, interest rates, demographic trends, inflation – in other words things out of our control.
* 4: Risk and Reward – Assessment of everything that can go wrong and right, and how the team would respond.

* 1: The People
* The resumes are really important to investors, because having the right team is everything.
* Without this nothing else really matters.
* When the VC’s read the People Section they ask some very important questions;
* Where are the founders from, and where were they educated?
* Where have they worked, and for whom?
* What have they accomplished, both professionally and personally?
* What is their reputation in the business community?
* What direct experience have they had relevant to the opportunity?
* What skills, abilities and knowledge do they have?
* Who else needs to be on the team?
* Are they willing to recruit high-quality people?
* How well will they respond to adversity, have they done it in the past?
* How committed are they to the venture (skin in the game)?
* What are their motivations for the venture?
* There are critical issues about the team members that VC’s will want to know about;
* What do they know? (This is a matter of insight and experience).
* Whom do they know? (This is because VC’s value people who have been around the block a few times).
* How well are they known?
* Have they worked together before?
* Does the background and experience of the team members gel with the new venture’s requirements?
* A known team will help dispel being called a ‘start-up’.
* Even though the venture is new, the people are not!
* Top VC’s receive 2,000 BP’s a year, promising the world.
* Most of these lack the right people and are only ideas.
* Arthur Rock (Intel, Apple, Teledyne) said, “I invest in people, not ideas”.

* 2: The Opportunity:
* Is the total market for the venture’s product or service large and growing?
* Is the industry now, or can it become structurally attractive?
* VC’s and Entrepreneurs look for large or rapidly growing markets versus mature or stagnant ones.
* I will teach you how to create “Blue Oceans” of uncontested market space later this week.
* Try to identify high-growth-potential markets early on in their evolution (big payoff’s there).
* If you find a rapidly growing market, be aware that the ‘other sharks will smell the blood from miles away’.
* Too many competitors create what we call a commodity.
* Commodities usually become bottom feeders, and get outsourced.
* The opportunity needs to “find a need and fill it”.
* If the opportunity is ‘tech’ orientated, you face serious challenges to stay out in front.
* Let’s ask some important questions here!
1. Who are the new venture's customers.
2. How does the customer make decisions about buying this product or service.
3. To what degree is the product or service a compelling purchase for the customer.
4. How will the product or service be priced?
5. How will the venture reach all the identified customer segments?
6. How much does it cost (in time and resources) to acquire a customer?
7. How much does it cost to produce and deliver the product or service?
8. How much does it cost to support a customer?
9. How easy is it to retain a customer?
10. The first step is to make sure that the industry is large and growing or is a burgeoning opportunity.
11. The second step is to make sure the business plan rigorously describes why the opportunity exists.
12. The third step is to describe in detail how you will build and launch the product/service into the marketplace.
1. Doing this will reveal any hidden flaws in the business model (build it and they will come – “nonsense”)
2. Predicting consumer behavior is a risky business.
3. Creating “focus tests’ of the offering is a good way to help deflect Investor criticism (Plug in deodorizers?).
4. Remember Investors look for “value pricing” (cost vs. sale price ratio).
5. Operating Margin is KING (Gross Profit divided by Gross Revenue).
6. How will you test the validity of your pricing model if you do not market test it?
13. Most BP’s focus on the Income Statement side, they are usually weak the Balance sheet and Cash Flow.
14. You need to carefully address the following list of questions so that the Cash implications can be evaluated.
1. When does the business have to buy resources?
2. What credit terms are you likely to get from vendors?
3. How long does it take to acquire customers?
4. How long before the customers pay for the goods/service?
5. What are the capital requirements to support sales?
6. The Entrepreneurs Mantra:
1. Buy raw materials low
2. Sell the final product/service high
3. Collect revenues as early as possible
4. Pay for goods as late as possible
7. You will NOT easily get all of these, BUT describe which ones you can achieve and why!
8. Be very careful of using Arbitrage” as a viable competitive differential – is usually goes away.
9. Understand the Competition (and move away from it).
10. Who are the new venture's current competitors?
11. What resources do they control?
12. What are their strengths and weaknesses?
13. Draw a ‘strategy canvas’ of the competition.
14. How will they respond to the new venture’s decision to enter the business?
15. How can the new venture respond to its competitors’ response?
16. Who else might be able to observe and exploit the same opportunity?
17. Are there ways to co-opt potential or actual competitors by forming alliances?

* 3: The Context
* You need to adequately describe the macroeconomic environment (inflation, exchange rates, interest rates, etc.).
* Economic Conditions (in the 2002’s the ‘recession’ made capital availability low).
* Government regulations that might impact the venture need to be clarified.
* Tax and tariff policies, if any (import/export).
* Impact of technology (Moore’s Law).
* What is the availability of investment capital, and the state of Investment Capital in the marketplace in general.
* Consider the packaging industry before the Tylenol poison scare.
* The Business Plan should clearly spell out what Management will do under certain economic environmental changes.
* If the are ways you can impact context in a positive way, it should be delineated (Tylenol case).
* Predicting changes in the business landscape and how the venture will handle these changes.
* Your Business Plan should show that you have a good grasp of the context of your business.
* The goal is simple: “To sell John Smith what John Smith buys, you must see the world through John Smith’s eyes”.

* Risk and Reward
* A Business Plan is a quick snapshot of an event in he future.
* That is a scary position to be in – the art of PREDICTION.
* But it is not prediction as much as it is looking at a problem and seeing it as an opportunity in disguise.
* It is about plausible and coherent strategies that will harness the opportunity.
* Great business plans discuss People, Opportunity and Context as a moving target.
* One of the greatest myths is that entrepreneurs are risk seekers, ALL SANE PEOPLE AVOID RISK.
* The Business plan must unflinchingly confront the risks ahead in terms of people , opportunity and context.
* In order to make the VC feel comfortable you must assess and address the concept of risk.
* What would happen if one of the new venture's leaders were to leave?
* What happens if competitors respond with a price war?
* What would happen if raw materials were to go into short supply and price increased (gasoline).
* Provided you raise the concept of such occurrences you are raising the comfort level of the VC’s.
* Is the company a good candidate for an IPO?
* If not, what other “exit strategy” is there for the investors?
* How have they addressed valuation and dilution?
* If you believe that you are going to retain control of the equity, you are a true dreamer!
* It is critical for you to remember that it is more important whom you raise capital from than the terms.
* If you raise money from unsophisticated investors they will panic in tough time, VC’s do not.
* Professional investors know how and when to help when difficult times occur.
* When it is time for the exit strategy, Professional Investors know how to get the best deal.
* The best deals that can be struck have 6 characteristics.
* They are simple
* They are fair
* They emphasize trust rather than legal ties
* They do not blow apart if the actual differ from the plan
* They do not provide perverse incentives that will cause infighting
* They are written in a document no thicker than ¼”

Tricks of the Trade:
* Try treating the new venture as a series of small experiments.
* Before launching the entire show, launch a small piece.
* Create a focus group to test the product/service.
* Build a prototype and see how it performs.
* Do a regional trial and watch the results carefully.
* These trials will assist in proving the economic model.
* It will also help you assess the amount of capital you require, and in what stages.
* You should raise enough capital to fund these stages.
* Would you rather fund a small trial that needed changes, or risk failing in the whole venture?
* Beware of “Arrogance” and “Falling in love with the product”.
* The BP must be a “call to action” for the management team.
* Remember “RISK IS INEVITABLE, AVOIDING RISK IS IMPOSSIBLE”.

* Words of Wisdom
* Over the past 20 years Fortune 500 companies have dumped 5 million jobs.
* The overall economy has added almost 30 million, and most of these were created by Entrepreneurs like you.
* Cisco
* Genentech
* Microsoft
* FedEx
* Each of these companies began with a Business Plan.
* These BP’s addressed the 4 ingredients of success;
* PEOPLE
* OPPORTUNITY
* CONTEXT
* RISK/REWARD
* Effective business plans are not about the iron that produces the printed word.
* Rather, they're about the future needs and demands of the customer base.
* Industry trends and forecasts provide a fundamental foundation on which to grow the business model, but understanding the needs of your clients is the true key.
* Remember, “To sell John Smith what John Smith buys, you have to see the world through John Smith’s eyes”.