research and writing of a business plan is probably the most important
step that an entrepreneur takes in preparing to launch a new business
and the quality of that research and plan are critical determinants
of the business's prospects for success. A business plan serves three
important purposes. First, it t ranslates and builds upon the ideas
in an entrepreneur's head for a business and converts them into a written
outline and a roadmap for how to launch and build it. If you can't get
the ideas out of your head and onto paper, no one will take them seriously.
The business plan should set out the fundamentals of the entrepreneur's
vision, goals and objectives and how he or she plans to achieve them.
Secondly, a written business plan serves as a means of communicating
the business to prospective investors, management team members, employees
and strategic partners. A business plan is typically the most important
document that anyone looking to raise debt and equity financing has
to prepare. And whether you're approaching an angel investor, a venture
capitalist or a banker, the first thing that person will likely request
is a business plan or at a minimum your executive summary. Consequently,
your plan has to be much better than good. It has to be compelling in
order to stand out among the hundreds of plans that the typical investor
reads during the course of the year.
the business plan serves as an effective management tool. It provides
a set of benchmarks against which management and investors can gage
the company's progress. Consequently, the business plan should be a
dynamic, living document and should be updated in writing annually.
Unfortunately, the reality of entrepreneurship and the multiple priorities
and tasks that the typical entrepreneur continuously juggles is that
they tend to have a current written business plan only at the launch
of their business or when they are desperately seeking financing of
something else that requires a current plan as the price of admission.
Transferring their business ideas and plans from their
head to paper in a manner that makes sense to readers is much more difficult
than most new entrepreneurs realize. The process will also likely require
several iterations before the plan is ready for prime time. In addition,
many companies that launch at the product development stage are simply
not far enough along to have a complete and accurate plan coming out
of the gate. However, the process of preparing the initial iteration
of their plan should make clear what they still need to learn about
their business opportunity and prospective markets before approaching
investors. This should help them to focus their business development
common mistake of entrepreneurs is to begin distributing their business
plans before it is ready resulting in a less than stellar first impression.
You get just one opportunity to make a strong first impression on prospective
investors so you want to make sure that you hit them with your best
shot. Raising debt and equity financing is all about perceptions of
risk and opportunity. You need to write your plan in a manner that maximizes
the perception of opportunity and effectively addresses and minimizes
the perceived risks. Make sure you have one or more experienced entrepreneurs
or business professionals critique your plan before you let it loose.
article recognizes the struggle that the average entrepreneur goes through
in completing their plan. It is intended to make the job of writing
a business plan a little easier by identifying the information that
investors typically expect to see in the plan. There is no single correct
format for a business plan. In reality, there are probably nearly as
many different formats as there are business professionals and the specific
format you choose is to some degree a matter of personal preference.
However, most of the good formats provide the same essential information.
The following format should be suitable for most purposes.
The most important part of this most important document is the executive
summary. This is essentially a snapshot, which highlights the most important
and compelling aspects of the plan and will typically follow a similar
When submitted to a potential investor on its own, the executive summary
will determine whether or not the entrepreneur is invited to submit
his or her complete plan for review. When accompanied by a complete
business plan, the executive summary is typically read first by investors
and used as a screening tool to determine how much time the investor
will spend reviewing the rest of the plan.
of the words frequently used in the venture financing industry is compelling.
Prospective investors expect executive summaries and business plans
to be compelling. Webster's defines compelling as forceful and demanding.
The executive summary should excite the reader and make them want to
know more about your business opportunity. If you haven't accomplished
this by then end of the executive summary, chances are that you have
The executive summary should be written in layman's language and should
generally not run more than 2-3 pages in length. Some investors like
a one-page summary. The executive summary should be written last, although
the temptation is to write it first and then attempt to inflate it like
a balloon into a complete plan. If you become one of those entrepreneurs
who are lured into following this approach, make sure that you go back
once you have completed the plan and revise your initial summary.
Begin the summary with a Company Overview. Investors
want to know after reading the first sentence of the summary what business
the company is in. A good way to open is with a mission statement that
in a few sentences identifies:
In the next few paragraphs it is critical that you address what is compelling
about your business. You must get the reader excited about the opportunity
and hungry to learn more. You will typically want to address the following
What unmet customer need does your product/service fill?
Why is this important?
How is it unique?
Why will customers care?
Why should investors care?
Why will you be successful?
This should be followed by a list of the company's milestone achievements
to date. You want to be able to convey that a momentum is building and
increase the reader’s excitement. Substantive milestones increase
the perception opportunity and can offset some of the apparent risks.
You will probably want to avoid showing your plan to investors until
you can demonstrate sufficient momentum to generate that enthusiasm.
Other sections of the summary, similar to your business plan typically
These sections will range between a few sentences and a few paragraphs
in length and will simply highlight the most compelling information
from their corresponding sections in the complete plan.
summary should also include a section entitled Funding Requirements.
Identify the amount of money that you seek to raise, whether it can
be raised in stages and your planned use of the funds. You should also
briefly identify one or two likely exit strategies. One of an investor's
most important concerns is how they will get their money back, and this
demonstrates your recognition of its importance.
with a brief summary of your Financial Performance.
Identify any revenue and your Earnings Before Interest and Taxes (EBIT)
for the past year, and provide projections for the present and next
This section should identify when the company was founded, who founded
it, why it was founded and the company business structure. In addition,
it can include any compelling information about the origins of the company.
where the business currently is situated in the business development
process. Pre-sales businesses should outline their path to market entry
and offer a time line that they know they will be able to achieve. Prospective
investors who prove interested in your business, but think that you
are too early to be invested in, will continue watch you and monitor
your progress against your market entry plan. Companies with sales should
outline the anticipated path from where they are today to their breakeven
point and continue to the fulfillment of their vision.
technologies are complex, and it can sometimes be difficult to understand
their significance. In these cases entrepreneurs may want to add one
or more paragraphs to this section to essentially build a foundation
of understanding so that the rest of the plan makes more sense, flows
better and is more compelling.
that writing a business plan is like building a cinder block foundation.
You are essentially building the reader's understanding of your business
opportunity block by block. Each building block of your business plan
must build upon and fit with the one laid before it. The business plan
must flow smoothly and must be user friendly to read. Make sure that
the plan is written in laymen's language and that you explain all acronyms
and technical terms the first time you use them. Unfortunately, many
business plans force the reader to have to work too hard to try to understand
the business opportunity. The typical investor will not work that hard
and will simply move on to the next plan.
are typically among the top concerns of prospective investors. Bigger
is obviously better, although investors typically don’t want to
see companies targeting huge markets from the outset. They would prefer
to see a company target one or up to a few lucrative niches within those
markets, establish themselves in those niches and then build from there.
and technology entrepreneurs tend to struggle with the market analysis
and marketing strategy sections of their business plans and tend to
treat them superficially. Investors for their part typically expect
entrepreneurs to be experts on their targeted markets and prospective
customers and to know them, as well as the competitive landscape, at
least as well as anyone else in their space.
your targeted markets including their size, growth and other trends,
as well as how they are likely to be impacted by general economic trends.
Identify your immediate and longer-term niches and your rationale for
targeting them. Investors expect to see a clearly identified unmet need
within a company's targeted niches that its product is going to fill.
any barriers to entry that are presently in place to keep new competitors
out of the market. Examples of these barriers are competitors intellectual
property or the large sums of money required for successful market entry.
Entrepreneurs should try to make certain up front that they will have
the resources and capability to successfully overcome these barriers.
They should also make sure that once they enter the market they close
the door behind them by putting barriers in place to prevent other potential
competitors from following them in. Entrepreneurs will also need to
demonstrate knowledge of the dynamics of how their markets work including
the buying and selling process.
Describe your product or technology in layman's terms. If it takes an
advanced degree to understand your business plan, you are limiting your
pool of potential investors. Make sure that you define all scientific
terms and acronyms the first time you use them and make sure that those
definitions make sense to laymen.
common weakness found in science and technology business plans is that
they place too much emphasis on the technology. In good plans and summaries,
the technology is presented as secondary and incidental to the business
opportunity that the technology offers. Readers want to understand the
value of the business opportunity and expect the presentation to be
business plan should be kept to no more than 25 pages in length. However,
entrepreneurs generally particularly enjoy writing the Products/ Services
section more than any other section of the plan. They are often concerned
that readers understand and appreciate their technology or product,
and consequently this section of the plan is often too lengthy and detracts
from the compelling nature of the business opportunity. One way of avoiding
being too technical or lengthy is to place the detailed description
in an appendix, so that it is available if a reader wants it.
any intellectual property and how you are presently protecting or will
protect it. In addition, discuss your ongoing R&D and product development
plans giving particular attention to any future products included in
your financial projections.
competitive analysis presentation in a business plan can build or kill
an entrepreneur's credibility with the reader. A common vulnerability
among entrepreneurs and the quickest way to irreparably lose all credibility
is to say that their product or service has no competition. Entrepreneurs
are typically quite sincere when they make this mistake because they
are looking at the word competition in a very narrow sense meaning competitors
offering products with the same capabilities and bundle of features
and attributes as their own. It may be true that there is nothing quite
like their product or service. However, they always have competition.
At a minimum, their competitor is no solution. Some problems are not
important or inconvenient enough to justify a solution at the price
at which one can be made available. There are investors who actually
prefer to see some competition because this validates the existence
of a market.
your key competitors. If there are numerous competitors you may wish
to group them according to their common denominators. You want to identify
the basis for the competition, whether it be technology, price, features,
quality, service, or some other factor. Discuss your strengths and weaknesses
and how they compare with those of your competitors. You will also want
to identify any developing technologies on the horizon that could potentially
disrupt the competitive field?
like portfolio companies to have a competitive or even unfair advantage.
This is something that differentiates companies from their competitors
in one or more ways that are compelling to their prospective customers
and/or difficult or impossible for competitors to overcome. Identify
and discuss your competitive advantage and how sustainable that advantage
is expected to be over time.
should also address how your competitors may respond to your entry to
the market? It is possible that your competitors could change the way
they conduct business upon your entry, in order to make themselves more
competitive and to fend off your competition. I get particularly nervous
when an entrepreneur tells me that they have a price advantage over
all their competitors. For example, just because a competitor is charging
35% more than your anticipated price, this does not mean that company
will continue to charge that price upon your entry. They may be able
to cut their price by 50%, drive you out of business and then raise
their price again. Or, even if their costs are substantially greater
than yours, if they have deeper pockets than you they may still be able
to cut their prices 50%. Although they may bleed red ink, their deeper
pockets will sustain them until they drive you out of business and then
raise their price again.
you do a thorough job in completing your competitive analysis, you will
generate a lot of information, which while critical to you in making
your case to investors can become a bit unwieldy for you and readers
to deal with and process. A competitive matrix allows for the presentation
of a lot of information in a useable format. Along one axis you will
list the critical evaluation criteria typically utilized by prospective
customers to compare the competing offerings. On the second axis you
list key competitors or groups of competitors. You then rate the competitors
against the criteria. You can make the matrix the focal point of your
competitive analysis and supplement it with appropriate narrative.
validation is also critically important. Investors want to see evidence
that an entrepreneur has been talking to prospective customers and industry
leaders who can testify to the unmet need for their product or at a
minimum that it offers a sufficiently large enough improvement over
competitive offerings to change customers purchase decisions. They want
evidence that prospects are interested in purchasing the entrepreneur's
product at a price at which he or she can afford to make it available,
while making investors lots of money. Market validation includes:
MANAGEMENT AND OPERATIONS
This is typically the most important section of the plan
to investors. One of the proverbs of the venture financing industry
is that investors would rather invest in a Class B product supported
by a Class A management team than they would invest in a Class A product
supported by a Class B team. This is because very few people possess
all the diverse skills required to build a successful business and even
in those cases, and hopefully sooner rather than later, there is simply
not going to be enough of that person to go around.
if not most, science and technology-based businesses are founded by
one or more scientists and technical professionals, with little formal
business experience. In almost all cases the management team will have
to include a sales and marketing professional with industry experience,
in order to be taken seriously by investors. They want to be sure that
there is someone on the team who can unlock the door of the company's
prospective customers. Investors will also want teams to include or
have plans to hire a chief financial officer. They want to know that
there is someone on the team watching out for and taking care of their
each team member's responsibilities, training, strengths and relevant
prior experience. Investors like teams that include successful entrepreneurs
and expect team members to have relevant industry experience. Discuss
plans for rounding out an incomplete team. Identify the owners of the
business, as well as advisory boards and key advisors. Discuss your
staffing plan including anticipated hiring over the period covered by
plan should also address where the business will be located and how
it will operate. Explain how the company’s product(s) will be
manufactured, packaged and delivered. Identify important capital equipment
that the company has or that will be required to be purchased. Discuss
quality control. Indicate anticipated increasing plant and equipment
requirements over the life of the plan. In the case of companies with
substantial manufacturing operations, the Management and Operations
section of the plan will be divided into separate sections.
a manufacturing capability is typically expensive and can delay a company's
market entry. In most cases it is possible to identify one or more manufacturers
in a region who can manufacture your product at a reasonable price enabling
you to maintain high margins. The outsourcing of manufacturing can be
an effective market entry strategy because it can greatly reduce the
amount of financing required to be raised and can accelerate your market
entry and penetration, thereby making your deal less risky and more
appealing to investors. If manufacturing is important to you, it can
be added down the road when you have more cash or are more bankable.
Other functions can be effectively outsourced as well.
In this section you will present how you will spread the word about
your product and get it into the hands of your prospective customers.
Begin with a discussion of your revenue model and identify your income
streams for current products and services, as well as anticipated products
included in your revenue projections. Discuss your pricing strategy
including your gross margins and how this compares with competing products.
how you will communicate your existence and product offerings to prospective
customers. Outline your public relations plans including the use of
press releases, technical papers, articles, etc. Identify your planned
use of advertising, marketing materials, and the Internet, as well as
your participation in conferences and trade shows.
and justify your distribution strategy including whether or not you
will have an in house sales force and your use of manufacturers reps,
distributors, telemarketing, online sales, mail order, and direct mail.
Indicate how this compares with the strategies used by your competitors.
your market penetration strategy, market share, and sales projections.
Investors want entrepreneurs to make bottom up rather than top down
sales projections. Entrepreneurs tend to make unsubstantiated market
share assumptions that they appear to pull out of the air and then apologize
for them being embarrassingly conservative. Investors want you to build
your projections sale by sale.
discounts, promotions, warranties and discuss customer service.
the significant potential risks inherent in your venture and in the
broader business environment and how you will overcome any problems
and pitfalls that materialize. Problems will inevitably arise. If there
is a single universal truth of entrepreneurship, it is that everything
takes more time than the entrepreneur's most conservative estimates.
If there is a second such truth it is that everything costs more money
than those same most conservative estimates. You can't anticipate every
possible problem. However, the more you consider, the better prepared
you will be to successfully overcome those you do encounter.
recognize the guess work involved in preparing revenue projections and
that they essentially are not worth the paper they are written on. What
they pay careful attention to, however, is the underlying assumptions
on which they are based and whether they are reasonable and founded
on a good understanding of the industry, targeted markets, and their
dynamics. Investors will also expect you to accurately account for every
anticipated cost. They will then assess whether the anticipated returns
justify the risks inherent in opportunity.
Identify your financing requirements and discuss how the funds will
be used. Explain whether the investment can be staged in incremental
payments tied to the achievement of performance milestones. Investors
often like this approach in order to reduce their risk. Discuss the
assumptions underlying your revenue and cost projections. Identify your
breakeven point and when it will be achieved. Identify your most probable
3-5 years of pro forma financial statements including balance sheets,
income statements, and cash-flow statements. The income and cash flow
projections should typically be monthly for the first year and quarterly
thereafter. Include historical financial statements if available. If
you make it past an initial meeting, you may be asked to develop multiple
sets of projections based upon various possible scenarios.
resumes of management team members, product literature, and other select
material that reinforce and validate the most compelling aspects of
Once you have had your draft plan critiqued by one or more experienced
entrepreneurs or business professionals, made the appropriate revisions
and think that you are ready to approach investors… DON'T. Try
to get your plan referred to a targeted investor by another entrepreneur
or business professional whom the investor knows and respects. Investors
try to find grounds to justify meeting with entrepreneurs whose plans
are referred to them. They look for grounds to weed out those plans
that come in without a referral.
article was originally written by Randy Harmon for publication in the
2003 financing supplement of NJBIZ, which is the leading weekly business
newspaper in New Jersey . As of July 2004 the complete guide was accessible