Your plan will help you discover if your business can actually make money and what you really need to make it successful. And, time and time again, the results show that companies that plan are more successful , more likely to get funding, and more likely to achieve their goals. This still holds true even during a crisis.
Even amidst uncertainty, having a business plan provided guidance and stability, allowing businesses to make decisions, pivot their business, and succeed in a volatile environment. For starters, you can throw out the expectations of a long, formal written document. You can skip all the formatting, complete sentences, and paragraphs of text that few people will actually read. Instead, you should put together a Lean Plan that focuses only on what you really need to know to build a successful business.
A Lean Plan simplifies the entire process and makes your business plan actually useful. Instead of developing a long document, a Lean Plan focuses on distilling your business strategy into a simple, concise set of statements. It helps you set goals and then track your progress toward those goals. Lean Plans are also much easier to change when your plans change—and they will.
If you use the Lean Plan format, updating your plan will take minutes instead of hours. The goal is to keep each section as short as possible. Your goal is to communicate the value you are providing to your customers in a way that is as simple and direct as possible. Why would they go out shopping for a solution? Why does your business need to exist? Why would they choose you over other alternatives? Essentially, if someone asked you what you sell, what would your answer be? Describe your ideal customer.
Who are they? Be as specific as possible—age, gender, shopping habits, and so on. If you target different types of people, create market segments for each group. Every business has competition. What makes your business and products better than the alternatives that are out there? Nearly every business needs some money to get off the ground. These are the places where you will sell your products. What will you do to market your business? If you plan on buying advertising, list the types of advertising you plan on doing here.
Remember, different target markets might need different types of marketing activities to get your product in front of them. How much is it going to cost to run your business? What sales goals do you need to reach for your business to be a success? You can refine the details later. What are the major tasks you need to accomplish to get your business up and running? This will help you stay on track and meet your goals. Make sure to assign milestones to people on your team so you have real responsibility and accountability.
In monthly evening sessions the forum evaluates the business plans of companies accepted for presentation during to minute segments in which no holds are barred. The format allows each presenter 20 minutes to summarize a business plan orally. Each panelist reviews the written business plan in advance of the sessions. Then each of four panelists—who are venture capitalists, bankers, marketing specialists, successful entrepreneurs, MIT professors, or other experts—spends five to ten minutes assessing the strengths and weaknesses of the plan and the enterprise and suggesting improvements.
In some cases, the panelists suggest a completely new direction. In others, they advise more effective implementation of existing policies. Their comments range over the spectrum of business issues. Sessions are open to the public and usually draw about people, most of them financiers, business executives, accountants, lawyers, consultants, and others with special interest in emerging companies.
Presenters have the opportunity to respond to the evaluations and suggestions offered. They also receive written evaluations of the oral presentation from audience members. These monthly sessions are held primarily for companies that have advanced beyond the start-up stage. They tend to be from one to ten years old and in need of expansion capital.
Investors want to put their money into market-driven rather than technology-driven or service-driven companies. You can make a convincing case for the existence of a good market by demonstrating user benefit, identifying marketplace interest, and documenting market claims. He concluded with some financial projections looking five years down the road. The venture capitalist quickly reversed his original opinion. He said he would back a company in almost any industry if it could prove such an important user benefit—and emphasize it in its sales approach.
The venture capitalist knew that instruments, machinery, and services that pay for themselves in less than one year are mandatory purchases for many potential customers. If this payback period is less than two years, it is a probable purchase; beyond three years, they do not back the product. The MIT panel advised the entrepreneur to recast his business plan so that it emphasized the short payback period and played down the self-serving discussion about product innovation.
The executive took the advice and rewrote the plan in easily understandable terms. His company is doing very well and has made the transition from a technology-driven to a market-driven company. How can start-up businesses—some of which may have only a prototype product or an idea for a service—appropriately gauge market reaction? One executive of a smaller company had put together a prototype of a device that enables personal computers to handle telephone messages.
He needed to demonstrate that customers would buy the product, but the company had exhausted its cash resources and was thus unable to build and sell the item in quantity. The executives wondered how to get around the problem. The MIT panel offered two possible responses.
First, the founders might allow a few customers to use the prototype and obtain written evaluations of the product and the extent of their interest when it became available. Second, the founders might offer the product to a few potential customers at a substantial price discount if they paid part of the cost—say one-third—up front so that the company could build it.
The company could not only find out whether potential buyers existed but also demonstrate the product to potential investors in real-life installations. In the same way, an entrepreneur might offer a proposed new service at a discount to initial customers as a prototype if the customers agreed to serve as references in marketing the service to others.
You can obtain letters from users even if the product is only in prototype form. You can install it experimentally with a potential user to whom you will sell it at or below cost in return for information on its benefits and an agreement to talk to sales prospects or investors. In an appendix to the business plan or in a separate volume, you can include letters attesting to the value of the product from experimental customers.
Having established a market interest, you must use carefully analyzed data to support your assertions about the market and the growth rate of sales and profits. Even if the company makes such claims based on fact—as borne out, for example, by evidence of customer interest—they can quickly crumble if the company does not carefully gather and analyze supporting data.
An entrepreneur wanted to sell a service to small businesses. The panel pointed out that anywhere from 11 million to 14 million of such so-called small businesses were really sole proprietorships or part-time businesses.
Similarly, in a business plan relating to the sale of certain equipment to apple growers, you must have U. Department of Agriculture statistics to discover the number of growers who could use the equipment. If your equipment is useful only to growers with 50 acres or more, then you need to determine how many growers have farms of that size, that is, how many are minor producers with only an acre or two of apple trees.
A realistic business plan needs to specify the number of potential customers, the size of their businesses, and which size is most appropriate to the offered products or services. Sometimes bigger is not better. Such marketing research should also show the nature of the industry.
Few industries are more conservative than banking and public utilities. The number of potential customers is relatively small, and industry acceptance of new products or services is painfully slow, no matter how good the products and services have proven to be. Even so, most of the customers are well known and while they may act slowly, they have the buying power that makes the wait worthwhile. At the other end of the industrial spectrum are extremely fast-growing and fast-changing operations such as franchised weight-loss clinics and computer software companies.
Here the problem is reversed. While some companies have achieved multi-million-dollar sales in just a few years, they are vulnerable to declines of similar proportions from competitors. These companies must innovate constantly so that potential competitors will be discouraged from entering the marketplace.
You must convincingly project the rate of acceptance for the product or service—and the rate at which it is likely to be sold. From this marketing research data, you can begin assembling a credible sales plan and projecting your plant and staff needs.
The marketing issues are tied to the satisfaction of investors. Once executives make a convincing case for their market penetration, they can make the financial projections that help determine whether investors will be interested in evaluating the venture and how much they will commit and at what price. Most of us know that for new and growing private companies, investors may be professional venture capitalists and wealthy individuals.
For corporate ventures, they are the corporation itself. When a company offers shares to the public, individuals of all means become investors along with various institutions. But one part of the investor constituency is often overlooked in the planning process—the founders of new and growing enterprises. By deciding to start and manage a business, they are committed to years of hard work and personal sacrifice.
They must try to stand back and evaluate their own businesses in order to decide whether the opportunity for reward some years down the road truly justifies the risk early on. When an entrepreneur looks at an idea objectively rather than through rose-colored glasses, the decision whether to invest may change. One entrepreneur who believed in the promise of his scientific-instruments company faced difficult marketing problems because the product was highly specialized and had, at best, few customers.
The panelists concluded that the entrepreneur would earn only as much financial return as he would have had holding a job during the next three to seven years. On the downside, he might wind up with much less in exchange for larger headaches. When he viewed the project in such dispassionate terms, the entrepreneur finally agreed and gave it up.
Entrepreneurs frequently do not understand why investors have a short attention span. Many who see their ventures in terms of a lifetime commitment expect that anyone else who gets involved will feel the same. When investors evaluate a business plan, they consider not only whether to get in but also how and when to get out. Because small, fast-growing companies have little cash available for dividends, the main way investors can profit is from the sale of their holdings, either when the company goes public or is sold to another business.
Venture capital firms usually wish to liquidate their investments in small companies in three to seven years so as to pay gains while they generate funds for investment in new ventures. The professional investor wants to cash out with a large capital appreciation. Investors want to know that entrepreneurs have thought about how to comply with this desire. Do they expect to go public, sell the company, or buy the investors out in three to seven years?
Business plans often do not show when and how investors may liquidate their holdings. Five-year forecasts of profitability help lay the groundwork for negotiating the amount investors will receive in return for their money. Investors see such financial forecasts as yardsticks against which to judge future performance.
Too often, entrepreneurs go to extremes with their numbers. While a few industries such as computer software average such high profits, the scientific instruments business is so competitive, panelists noted, that expecting such margins is unrealistic. In fact, the managers had grossly—and carelessly—understated some important costs. The panelists advised them to take their financial estimates back to the drawing board and before approaching investors to consult financial professionals.
Some entrepreneurs think that the financials are the business plan. They may cover the plan with a smog of numbers. Investors are wary even when financial projections are solidly based on realistic marketing data because fledgling companies nearly always fail to achieve their rosy profit forecasts.
All investors wish to reduce their risk. In evaluating the risk of a new and growing venture, they assess the status of the product and the management team. The farther along an enterprise is in each area, the lower the risk. At one extreme is a single entrepreneur with an unproven idea.
Unless the founder has a magnificent track record, such a venture has little chance of obtaining investment funds. At the more desirable extreme is a venture that has an accepted product in a proven market and a competent and fully staffed management team. This business is most likely to win investment funds at the lowest costs. Entrepreneurs who become aware of their status with investors and think it inadequate can improve it. Take the case of a young MIT engineering graduate who appeared at an MIT Enterprise Forum session with written schematics for the improvement of semiconductor-equipment production.
He had documented interest by several producers and was looking for money to complete development and begin production. The panelists advised him to concentrate first on making a prototype and assembling a management team with marketing and financial know-how to complement his product-development expertise.
Once investors understand a company qualitatively, they can begin to do some quantitative analysis. Investors calculate the potential worth of a company after five years to determine what percentage they must own to realize their return. Investors would want to earn 4. If inflation is expected to average 7. But few businesses can make a convincing case for such a rich return if they do not already have a product in the hands of some representative customers.
The final percentage of the company acquired by the investors is, of course, subject to some negotiation, depending on projected earnings and expected inflation. The only way to tend to your needs is to satisfy those of the market and the investors—unless you are wealthy enough to furnish your own capital to finance the venture and test out the pet product or service.
Of course, you must confront other issues before you can convince investors that the enterprise will succeed.