BUSINESS PLANS FOR EQUITY INVESTORS & BOOTSTRAPPING TO SURVIVE

1. BUSINESS PLANS FOR EQUITY INVESTORS &BOOTSTRAPPING TO SURVIVE Presented as part of “Climbing the Stairway to Heaven” on 2/15/05 for the Venture Association of New Jersey Randy Harmon, Foundations Business Development Group www.FoundationsBusiness.com consultant with NJ Small Business Development Centers of Rutgers Business School Business Plan Article-www.njbiz.com/guide

2. I DID IT! I’VE GOT IT!MAYBE I SHOULD GO INTO BUSINESS -Science and technology based businesses are typically founded by one or more technical professionals with little business experience -They are vulnerable to overemphasizing the technology… If we build it, they will come -First step in considering launching a technology-based business is to ask yourself: Who is going to care about this technology and why? -What CUSTOMER problem am I going to solve, what unmet need am I going to fill? Is it already being filled? -Whose pain am I going to ease? -Will they care enough to pay for my solution/product at a price at which I can afford to make it available?

3. RESEARCH, RESEARCH, ANDMORE RESEARCH -Preliminary market research including the industry you are in and the industries you are targeting, customers, competitors, and new technologies under development -Determine approximately how much money you will need to launch the business and carry it to the break-even point • Begin thinking about where this money is going to come from and the requirements for accessing this money -Conduct a preliminary patent search to make sure that you are not about to set out to reinvent someone else’s wheel -Consider the legal aspects and implications of setting up a business -YOUR OBJECTIVE IS TO CONDUCT SUFFICIENTLY DETAILED AND COMPREHENSIVE RESEARCH TO ENABLE YOU TO COMPLETE A WRITTEN BUSINESS PLAN

4. MISSION STATEMENT -What the company does, what business you are in -What industry you are in -Customers and markets -What the company aspires to become -Maximum of 2-4 sentences

5. “WHERE’S THE BEEF?”WHAT’S COMPELLING? -What unmet need does this fill? -Why is this important? -Why will customers care? -Why should investors care? -Why you will be successful

6. ELEVATOR PITCH -Networking is one of an entrepreneur’s most important activities -Typically a one minute description of the BUSINESS OPPORTUNITY in LAYMAN’S terms -No more than 15 seconds on the technology and product -Entrepreneurs should also have a 10-15 second networking pitch, which can be elaborated on if the listener is interested

7. ELEVATOR PITCH ADDRESS EACH POINT BELOW WITH 1 OR 2 SENTENCES AND THEN COMBINE AND SELECT YOUR BEST 10-14: -What the company does/what business you are in -Who you do it to- customers and markets -What the company aspires to become -What unmet need/customer problem do you solve? -Brief product/service description, 2 sentences max, non-technical terms -Why this is important/why customers will care/customer benefits -Why should investors care/what is compelling? -One or two exceptional milestones that demonstrate momentum is building. -What you are presently looking for (i.e. financing, guidance, team members) -Why you will be successful

8. BUSINESS PLAN -The FINAL EXAM test of the adequacy of your research -One of the most important steps in preparing to launch a new business -Describes what a business does, where it is going, how it is going to get there, and the resources it is going to require -It will only be as good as the depth and the quality of your research -Generally a prerequisite for formal debt and equity investors -

9. 3 PURPOSES -Extraction: Extracts, translates and expands upon an idea for a company from the entrepreneur’s head turning it into a written outline and roadmap for how to run a business -Most effective exercise you will go through -Communication: Communicates business to prospective advisors, management team members, investors, strategic partners and employees -Sales document -Management: Effective management tool -Serves as a benchmark -Dynamic, living document

10. BUSINESS PLAN OUTLINE -Executive Summary -Company Description -Market Analysis -Product/Technology/ Service -Competitive Analysis -Marketing and Sales Plan -Management and Operations -Long Term Development and Risk Analysis -Financial Plan

11. EXECUTIVE SUMMARY -Most important component of plan -Should convey the essence of your business IN LAYMAN’S LANGUAGE and summarize the most important information contained in each section of the plan -Starts with the mission statement, what business are you in? -Essentially an expansion of your elevator pitch -Identifies how much money you are looking to raise, your planned use of the funds, earnings projections and an exit strategy -Typically read first by investors and bankers, screening tool -Should arouse curiosity and be compelling -You want to demonstrate through a few significant milestones that a momentum is building -Should be completed last and run no more than 2 to 3 pages in length

12. A GOOD EXECUTIVE SUMMARY AND BUSINESS PLAN ARE LIKE THE FOUNDATION OF A BUILDING -Build reader’s understanding of business opportunity block by block -Each block must be clear and succinct -Must build upon and fit with one before it -Must flow smoothly and be easy to read -Readability, must be user friendly

13. OPPORTUNITY VERSUS RISK -Equity financing is based upon the perception of opportunity compared to the perception of risk -Each word should be written to enhance the reader’s perception of the business opportunity and minimize the perception of risk -Risk also increases because of what is lacking in a plan -Re-read draft of the plan with risk awareness glasses

14. COMPANY DESCRIPTION -Company founding (who, what, when, why?) -Structure -Compelling information about origins of company -Current status -Anticipated pathway to market entry and profitability -Introduction to complex technologies and their significance

15. MILESTONES -Significant achievements to date -You want to be able to demonstrate that a momentum is building -The number and significance of them determines their placement in the plan

16. MARKET ANALYSIS -Investors expect entrepreneurs to know their markets at least as well as anyone else and to demonstrate that understanding in the Market, Competitive Analysis and Marketing and Sales Plan sections of the plan -They like CEOs who know their prospective customers and who can sell -Tend to be worst written sections of plan

17. MARKET -Identify, describe and quantify your market opportunity -Bigger is better, but begin by targeting niches -Discuss targeted markets including size, growth and other trends, as well as how they are likely to be impacted by economic trends -Explain rationale for targeting niches and identify unmet needs -Demonstrate understanding of dynamics of how market works including the buying and selling process and who makes decisions -Identify and discuss barriers to entry -Profile your typical customer and best prospects

18. PRODUCT/TECHNOLOGY/SERVICE -Describe your product thoroughly in layman’s terms -Define acronyms and scientific terms -What benefits will it deliver to customers? -What are its unique features? -Focus on what makes this a compelling business opportunity, not on how the technology works -Include more robust technical discussion as warranted as an attachment -Discuss your intellectual property position -New product pipeline

19. COMPETITIVE ANALYSISCREDIBILITY BUILDER OR KILLER -Identify and discuss your competitors -EVERY PRODUCT HAS COMPETITION -At a minimum, your competition is NO SOLUTION -What is the basis for competition? (technology, price, features, quality, service, advertising) -Competitors strengths and weaknesses -What are your strengths and weaknesses compared to your competitors? -What is your competitive advantage and how sustainable is it? -How may your competitors respond to your entry to the market? -Are there any developing technologies which could disrupt the competitive field?

20. COMPETITIVE MATRIX -Matrixes allow the presentation of lots of information in a useable format -X Axis-Critical evaluation criteria -Y Axis-Key competitors or groups

21. COMPETITIVE MATRIX Criteria 1 Criteria 2 Criteria 3 Price Speed Useful life Competitor 1 $ 28,000 8 units/hr 7 years Competitor 2 $ 37,000 10 units/hr 10 years Competitor 3 $ 31,000 10 units/hr 8 years You Inc. $ 33,000 12 units/hr 10 years

22. MARKET VALIDATION -Sales -Beta testing -Business Partnerships -Testimonies from prospective customers and industry leaders

23. MARKETING AND SALES PLAN HOW YOU WILL POSITION YOUR PRODUCT, SPREAD THE WORD ABOUT IT, GET IT INTO THE HANDS OF YOUR CUSTOMERS AND CLOSE THE SALE -Pricing strategy including gross margins and how they compare with competitors -Marketing communications strategy and message -Presentation of technical papers -Public relations -Advertising -Exhibiting at trade shows -How you will distribute your product -Will you have your own sales force? -Discuss market entry strategy beginning with first sale -How you will maintain and increase market share -Warrantees and customer service

24. SOONER OR LATER, MOST ENTREPRENEURS WILL HAVE TO BUILD A MANAGEMENT TEAM -Few people have or can develop all the skills required for a successful technology-based business -There is not going to be enough of you to go around -Management, Management, Management -Experience, Experience, Experience -Equity investors invest in people, particularly teams of people, at least as much as they do the business concept -All venture capital backed businesses will have to build a management team -Entrepreneur’s dilemma -Business consultants and advisory boards -Creative teambuilding -www.NJTC.org: joint venture mentoring program

25. “INSIDE TRACK” MENTORING PROGRAM(PARTNERSHIP BETWEEN NJSBDC AND NJTC) • Purpose: to provide early stage and emerging NJTC member companies with the opportunity to discuss their plans, strategies and important issues they are presently facing with experienced venture development professionals • Goal: is to provide companies with guidance and input to help make sure that they are headed in the right direction, speed their development, and improve their prospects for success. • 30 companies and 50 mentors participated in 2004 pilot • Teams consisted of marketing professional, experienced entrepreneur, investor, accountant and attorney • 90 minute session, follow on sessions • -www.NJTC.org:

26. MANAGEMENT AND OPERATIONS -Describe each team member’s responsibilities, training, strengths and relevant prior experience -Appropriate composition of the team depends on the stage of development of the company and whether and how soon equity financing will be sought -Discuss plans for rounding out an incomplete team -Discuss advisors and significant outside resource organizations -Identify the owners of the business -Staffing plan -How will the product be produced, packaged and delivered -Facilities -Equipment -Discuss scale-up plans

27. LONG TERM DEVELOPMENT &RISK ANALYSIS -Describe the long term development of your company, its products and your exit strategy -Identify risks both inherent in your venture and the broader business environment and demonstrate that you have a plan to address potential problems -Universal truths of entrepreneurship

28. FINANCIAL ANALYSIS -Introduce and discuss company’s revenue model including all revenue streams included in the financial projections and their scheduled start -Discuss company’s current financial status? -Capital requirements- both short and long term -Use of funds -Sources of funding (R&D grants, bank loans, equity, other) -Source of repayment -Projected net income and cash flow for the first 3 years -Not worth the paper they’re written on -Explanation of assumptions underlying projections -Bottom up versus top down financial projections -Break-even point -Discuss financial ratios- are they in line with industry norms?

29. EXHIBITS -SUPPORTING DOCUMENTATION -Resumes -Market research information -Documentation of customer demand -Supplemental technical discussions -Product literature -FINANCIAL -Pro forma income statements -Pro forma cash flow -Pro forma balance sheets -Break-Even Analysis -Historical financial statements, if applicable

30. READY, SET,… STOP! -Avoid approaching investors directly, get referred -Avoid approaching investors too early -Milestones -Market validation -Okay to approach early if you are reasonably certain about your path to and timeline for market entry

31. DON’T COUNT ON OUTSIDE FINANCINGCOMING OUT OF THE GATE -Raising debt and equity financing is all about perceptions of risk and opportunity -Early stage and pre-sales companies are generally perceived as too risky -The further along you can develop the venture before formal financing, the better your chances and the better the terms -Plan for the process of raising financing to take 3-6+months, if you are very fortunate -BOOTSTRAPPING- Everything else that an entrepreneur does to both raise and minimize the resources needed to launch their business and carry it through its early stages

32. BOOTSTRAPPING -Cleaning out your personal savings or retirement accounts -Home equity loans and second mortgages -Credit cards -Friends & family plan/4 Fs -Research and development grants -Strategic alliances -Outsourcing activities requiring large up-front investments -Purchasing used equipment -Bartering your product/service for someone else’s -Advances from professional service providers -Suppliers -Advance payments from customers DOWNSIDE- There is often a trade-off between time and money and the delay can sometimes be detrimental or fatal

33. -Largest Federal R&D grants program targeted to small business-nearly $2 billion annually -Best source of risk capital -Pathway to equity -All Federal agencies with large external R&D budgets participate Dept. of Agriculture Dept. of Commerce Dept. of Defense Dept. of Education Dept. of Energy Dept. of Health and Human Services (NIH) Dept. of Homeland Security Dept. of Transportation Environmental Protection Agency NASA Nat. Science Foundation SMALL BUSINESS INNOVATIONRESEARCH PROGRAM (SBIR)

34. THREE PHASE PROGRAM -Typically annual solicitations in which agencies define areas in which they are interested in sponsoring research -Phase I- up to $100,000, runs 6 months -Demonstrate technical/scientific merit and feasibility Phase II- up to $750,000, runs 2 years -Continue research or R&D efforts -Development of a prototype Phase III- no new funding -Commercialization of the technology

35. SMALL BUSINESS TECHNOLOGY TRANSFER PROGRAM (STTR) -Younger, poorer sister of SBIR program -5 largest Federal Agencies participate • Department of Defense • NASA • Department of Energy • National Science Foundation • Department of Health & Human Services -.03% set aside -3 Phase program similar to SBIR -More faculty friendly-requires 30-60% of contract to go to a collaboration with a nonprofit research organization

36. CLOSEST THING TO FREE MONEY -No loans, no equity -Entrepreneur maintains ownership of the technology -Good odds • 1 in 8 SBIR Phase I proposals are funded • 2 in 5 SBIR Phase II proposals are funded • Odds presently even better for STTR

37. PATH TO EQUITY FINANCING -SBIR/STTR provide up to $850,000 of financing over a period of approximately 3 years to develop a technology and reduce its technical risk. -If a company simultaneously works to reduce market and business risk it can become a prospect for equity financing.

38. STRATEGIC ALLIANCES BUSINESS PARTNERSHIPS -You partner with another company to gain access to resources that you need but don’t have -For most young businesses this typically means partnering with a larger, more established business -More important than ever given current risk adverse venture capital environment -SPEED ENTRY TO MARKETPLACE AND REDUCE REQUIRED FINANCING -Lossof control -Several Types • Financing • Marketing and sales • Manufacturing • Licensing

39. FINANCING -Large companies may invest in smaller entrepreneurial ventures to supplement or substitute for their own R&D -Less risky and more cost effective means of accessing cutting edge technology -Strategic partners most likely to understand and appreciate value -Potentially more favorable terms of investment

40. MARKETING AND SALES -Partner with a company selling similar but non-competing products to your prospective customers -No marketing/sales employees to recruit, hire and train; no payroll -Access to partner’s network of customer contacts -The value to the larger company is that your product may fill a gap in or extend their product line. Downside: Less control, lower priority

41. MANUFACTURING -Identify regional manufacturer -Eliminates or defers costly equipment purchases -No manufacturing employees to recruit, hire and train; no payroll Downside: Less control

42. LICENSING -Transfer of rights to commercialize a technology, or an application of a technology to another company in return for financial consideration -Typically some combination of up front cash, consulting contract, milestone payments and longer term royalty payments -There is typically a tradeoff -Particularly useful for first application of a platform technology or the first technology of a company with multiple technologies -Use cash and validation generated from the license to commercialize other applications and build a company Downside: Lower rate of return, loss of control, time lag before royalty payments flow

43. MUST BE PREPARED -Entrepreneurs often approach prospective partners too early -A good idea won’t be enough, strategic partners will want to see many of the same milestone achievements that equity investors look for -Typically will want to see at least a prototype and often some testing and market validation

44. NJ SMALL BUSINESS DEVELOPMENT CENTERS (NJSBDC)OF RUTGERS BUSINESS SCHOOL -Part of a national public, private and academic partnership -Free business counseling, consulting, and affordable business training -Funded in part by the U.S. Small Business Administration and the NJ Commerce and Economic Growth Commission -11 regional centers and 26 satellite offices across NJ -More than 250,000 small business owners, prospective entrepreneurs and business professionals served since 1979 -Serve businesses from pre-startup stage to those with 500 employees -Specialty programs in international trade, government procurement, manufacturing, E-business, & technology commercialization

45. NJ SMALL BUSINESS DEVELOPMENT CENTERS (NJSBDC) Services include help with: -Business plans -Marketing plans -Financial statements -Loan packages -Record keeping -Taxes -E-commerce NJSBDC Web Site: www.NJSBDC.com SBA Web site: www.sba.gov

46. RUTGERS RESOURCES -NJSBDC DIRECTOR OF E-BUSINESS • Reviews and evaluations of small business web sites • Nat Bender 973-353-1924 -RUTGERS INTERFUNCTIONAL TEAM CONSULTING PROGRAM • 2 semester business development projects • Teams of 5-7 second year MBA students • Business plans, market research, marketing plans • January, May and September start dates • Paul Belliveau- 973-353-1126

47. NEW JERSEY INCUBATORS -10 public incubators, www.state.nj.us/scitech -Lease office and light manufacturing space and wet labs -Targeted to start-ups and graduates of an entrepreneur’s home -Rents typically at or slightly below commercial rates -Shared administrative support services -Free on site management assistance services -Access to a network of volunteer business professionals -Referrals to business resources and education and networking events -Supportive environment -Visibility and credibility -Objective is to build the business to the point where it is increasing sales, generating new jobs, and ready to graduate to larger commercial space within three years

48. LESSONS LEARNED -Market entry takes more time and costs more than planned -The better and more comprehensive your planning, the better your chances for success, minimize your surprises -Reader should know after the first sentence what the company does. -A great technology may not be good enough, Thou shalt know thy markets and customers and their needs -Layman’s terms, Don’t make reader work hard to understand the technology and the business opportunity -Differentiate yourself from your competitors in a way that provides the perception of value to your prospective customers, and that you can sustain over time

49. LESSONS LEARNED -First business hire or advisor should usually be a marketing and sales professional who knows your markets -Demonstrate that momentum is building and validate market demand before approaching venture capitalists -Venture capitalists will expect you to understand your markets and customers at least as well as anyone -Management, management, management -Develop a bootstrapping strategy which you can fall back on -Develop your venture as far as you can before quitting day job -Network -If the reader is not EXCITED by the end of the executive summary, you have lost them