Guide to Creating a Business PlanEntrepreneurs regularly ask Enterprise Partners what we're looking for in a business plan. While there is no set formula, there are certain elements that all businesses seeking venture funding should consider in their planning process.
It really isn't a cliché that every new company needs a vision. A vision of what it will do, how it will work, why it exists. That vision should incorporate the core values and purpose of the company, both now and as you see it in the coming years. Of course, a vision is not cast in stone. It may change over time. That is to be expected. But every company should start off with a firm conviction of what it's all about.
If the company's vision incorporates it core values and aspirations, its mission is a more concrete, goal oriented statement that addresses such questions as:
- What market are you addressing and how will you change it and dominate it?
- Who are your competitors and how will you win in the marketplace?
- What is your timeframe to achieve key milestones…sales…profitability…dominance?
Why, and how, will your company and its products win in your market? As a venture firm, Enterprise looks for big plays in big markets. Our business is based on delivering significant returns to our investors so we look for those companies that can perform at a world class level.
The strategy section of your plan is the place to address the following:
- Who precisely is your customer? Who is going to buy your product or service or technology? Be very precise and provide names of customers and examples of why they will buy.
- What precisely are the products/services that your company will sell to your customers?
- Why precisely will the customers buy the products/services from your company?
- When precisely will the customers buy? Will they have urgency to buy?
- What is the compelling, sustainable competitive advantage that your company and its products/services will have over current and future competition?
- Is there an incumbent technology that you are replacing? If so, what is it and how often is it replaced or upgraded? At what price to the customers?
- What is the typical sunk cost investment and level of satisfaction by existing customers in the incumbent technology?
- How will you overcome adoption barriers related to an incumbent technology?
How you define your market and the size of that market is very important since a business does not exist independent of the market it serves. It is critical to define your market in all its permutations and in clear, non jargon filled language. Factors to address include:
- the market opportunity (in terms of its size and concentration) for your company's products/services
- whether the market exists today or if you need to create or convert the market?
- the macro market dynamics that are shaping and transforming your target market. Is the market growing and if so, how long do you project that growth to continue?
- the composition of the customer base that comprises the majority of the market opportunity
- have money to spend?
- have a clear, simple-to-articulate and urgent need for your product or service?
- How are your end customers used to buying?
- How will you deliver the end product/service to them?
Your customer value proposition and how it compares to that of your competition is another critical element to address in your plan. You need to outline who your competitors are (by sector and name) along with competing products, services, and technologies.
We find it helpful to map each competitor's value position as perceived by your target customers.
- What embedded competitive alliances need to be overcome?
- Who dominates the market and how do you how do you win?
- How does your positioning on the value map uniquely allow you to address your customers' needs?
Product development is the lifeblood of your company. Describe the products in development and how they address the needs of the market you've identified. Equally important is to outline the costs to develop those products and the time it will take to get to market with a competitive offering.
It is important to establish the value of your offering before you set the price for it. Frequently, there is a distinct difference between customer-perceived value and what the supplier is delivering. Focus on the customer's perspective.
- How important is the problem your company solves to your customer?
- Where do your products/services fit in the chain? (Start with the ultimate end products and the ultimate end customer. Then work backward to all of the goods and services supplied by various suppliers).
- What do customers pay for the end products and services- as well as each of the sub-elements- delivered along the chain?
- Who is making all the money-and why?
- Do you know your customers business? What is your customer delivering to its clients and at what price/margin??
- Can you define and quantify the benefits of your products/services as your customer sees (or should see) them?
- Given your definition and quantification of the value proposition, what price range for your products/services should be compelling for your customer?
- Who in your company "owns" pricing?
- How are pricing decisions made? What is your company's pricing philosophy and approach? Is it aligned with customer value?
- What is your pricing menu for (i) a standard product/service and (ii) a range of additional products/features/services/support?
- How do you control the "holes in your pocket"? In other words, how do you address discounts and rebates, extended payment terms, returns, free services etc?
Sales are, well, essential. It is important in your plan to address your expected sales volume over the next two years as well as some description of where and how sales will be generated. A discussion of key early adopters, the top three customers who can launch your sales ramp and how they represent your channel segmentation strategies is helpful, along with the impact of competitive responses to the sales ramp.
The definition of contribution margin is: actual sales price collected minus the cost to make or provide your products and services, minus the cost to sell them. These costs are separate from, and do not include development costs or the general administrative costs to operate the company.
Contribution Margin = Net Sales Collected – Cost of Goods (COG) – Cost of Sales (COS)
As net sales grow evaluate what will happen to your COG and COS as a percentage of net sales. Explore, and then address the effect on your contribution margin of adopting different strategies:
- In production (e.g. in-house versus contract; integration and test versus subassembly)
- In sales strategies (e.g. direct versus distributor versus OEM).
- In licensing (e.g. versus supply of finished goods)
Break Even Analysis and Capital Management
Reaching break even is a key milestone for a new company. Any business plan must outline a projected annualized contribution margin as well as costs such as annualized R&D, G&A working capital and capital expenditures. Then, a time frame to reach breakeven must be included along with any considerations for contingencies (e.g. postponed receipt of expected sales contracts, etc.)
Estimating when and how the company will break even entails a thorough understanding of the company's capital needs. The business plan should address:
- The amount of equity-and debt needed and when
- Whether the company is eligible for SBIR or grant funds
- If there any licensing opportunities
- The appropriate inflection points that will show an up-tick in valuation or enable you to raise more money
- Any transactional risks (corporate governance, founder, or preference issues) that should be addressed up front
One critical measure of a company's value is the strength and breadth of its intellectual property. In most cases, intellectual property is the currency by which a company's value is measured. A strong and deep, yet reasonably priced, intellectual property strategy must be an important component of your business plan. Some patent issues to consider include
- Any patent searches you have conducted on third-party patents against your technology to determine if you have freedom to operate
- Those countries where you expect to have a significant market and the patent protection you will need to operate
- What trade secrets or copyrights you have for your technology
People frequently assume that venture capitalists only care about "what" a company does. At Enterprise, we look as hard at "who" the company is. Hence, one of the first elements we look at in a plan is the human resource component. First and foremost we care about the company's leadership-in all areas, from the CEO to the CFO to the CMO. We also expect to see that a business plan has outlined hiring priorities, timing and costs. Your plan should address:
- An estimated headcount growth and composition over the next three to five years, on a quarterly basis.
- An estimate of headcount and salaries by department and seniority
- Estimates of benefits, infrastructure, space, other overhead by headcount?
- Is outsourcing an option for production, service or support?
- Is there a plan to handle the "surprise costs" of severance contracts, option accelerations, guaranteed bonuses, individual side deals, and leasing too much space? How much compensation is variable, i.e. tied to the success of the company?
If you are seeking venture funding, you will need to create a three year financial model detailing the first two years by quarter and the third year in total. Give some thought to how sensitive your plan is to fluctuation and slips in revenue as well as the prime cost drivers and how can you manage if revenues are delayed. The model should include:
- A projected income statement that incorporates the product introduction timetable, the sales/revenue ramp, contribution margin and break even analysis along with working capital needs for inventory and receivables and estimated capital expenditures
- Estimated balance sheets, cash flows and estimated cash burn, by quarter, for each quarter of the first year
Entrepreneurs starting a company are understandably focused on getting their business off the ground, winning the competitive wars and making an impact in the market. But it is worth taking some time at the outset to envision how the value of all the hard work will be realized. If you are looking for venture funding, outlining the potential exits are key since venture returns are based on exit events. Some things to consider include:
- The market value of your company in three to five years
- How the value will be determined. Typically it will be influenced by comparable companies in your market, their growth rates, profitability and market capitalization
- The companies that might buy you…and why
- The market prices other companies comparable to yours have received Building a business and exiting that business involve different mind sets. That said, they are both part of the life cycle of a venture backed company and it is valuable for the entrepreneur to look down the road, even at the birth of the business.