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Business Plans

Business Plans. Finance for Entrepreneurs. Overview. Business Plans vs. “Business Plans” Contents, or what is in them Mistakes. Useful Articles. How to Write a Great Business Plan (HBR article, see library) Enterprise Do Start-Ups Really Need Formal Business Plans Due Diligence

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Business Plans

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  1. Business Plans Finance for Entrepreneurs

  2. Overview • Business Plans vs. “Business Plans” • Contents, or what is in them • Mistakes

  3. Useful Articles • How to Write a Great Business Plan (HBR article, see library) • Enterprise Do Start-Ups Really Need Formal Business Plans • Due Diligence • 10 Tips for Successful Bootstrapping • Form or Substance: The Role of Business Plans in Venture Capital Decision Making • New study shows six critical business plan mistakes

  4. What is a “Business Plan”? • A written document • Summarizes the purpose and overriding strategy of the venture • Provides details on operation, financing, marketing, and management • Analysis of strategic alternatives does not belong in the “business plan” • Consider aspects of strategy simultaneously, not sequentially

  5. To Business Plan or “Business Plan” • Interviews with the founders of 100 companies on the 1989 Inc. "500" list of the fastest growing companies in the United States revealed that entrepreneurs spent little effort on their initial business plan

  6. The Role of Business Plans in Venture Capital Decision Making • So what is important in “BPs” if used for this purpose? • Limited external benefits accrue from the production of formal business planning documents • David Kirsch, Brent Goldfarb, Azi Gera

  7. What Makes the Business Plans of New Ventures Different? • Forecasts and projections usually are less precise • A greater investment in planning • Deviations from plans and wrong assumptions • Evaluating manager performance • More likely to be relied on externally • Used to attract investment capital • Greater breadth of coverage • Unconstrained by previous decisions

  8. Components of a Sound Business Model • Generate Revenues (You must have customers & sell them something) • Make Profits (You must eventually have revenues that exceed the expenses of generating those revenues) • Produce Free Cash Flows (You must generate cash inflows that exceed net working capital & capital expenditures) • But, another way of viewing….

  9. Components of a Sound Business Model • What is the concept? • How are you going to market it? • How much do you think it will cost to produce and deliver what you're selling? • What do you expect will happen when you actually go out and start making sales?

  10. Valuable Opportunities • Business plans based on general information • Can be copied • Often lead to normal “rents” • Unlikely to be worth the entrepreneurial risk • Business plans based on specific information • Not easily copied • Higher potential for wealth creation

  11. Potential for Value Creation • Fit • Value • This slide and the following slides are based on “Evaluating the Wealth-Creating Potential of Business Plans”, Fiet and Patel • See next slides

  12. Entrepreneurial Fit • Prior experience and specific knowledge necessary to exploit and new opportunity • Prior Experience • Occupation • Specialized education • Social Relations • Hobbies • Specific Knowledge • Self explanatory

  13. Value • A function of competitive rivalry in an industry • In this context, industry refers to group of firms who offer products that are close substitutes • Many entrepreneurs deny the existence of competitors • Belief that there product leads to a monopoly

  14. Reasons for Monopoly • The new product is not valuable to customers • Yes monopoly exists, because no competitors sees value in the market • Unlikely to lead to wealth creation • The product is valuable, but customers are slow to adopt because education is required • It can be difficult to educate a market to the value of a new product, but not impossible

  15. Reasons for Monopoly • New technology with IP protection • Control over input factors

  16. First-to-Market • It happens in some circumstances that being first-to-market leads to sustained competitive advantage • ebay • Other times, later-to-market is the wining strategy • Osborne - portable computer • Why?

  17. Value of a New Idea • Threats posed by the following groups • Potential industry entrants • Suppliers • Buyers • Substitutes • The following moderators can reduce these threats

  18. Moderators • Potential entrants • Economies of scale • Cost advantage independent of scale • IP, factor control, know-how,… • Government regulation • Suppliers • Many suppliers • Threatened by substitutes • No desire for vertical integration

  19. Moderators • Buyers • Large number • Small percentage of buyers overall cost • Buyers are very profitable

  20. Contents of the Business Plan • The people • The opportunity • The context • Risk and reward • Exit strategies

  21. Contents of the Business Plan • Focus on the purpose(s) and uses of the plan. • Include whatever information is relevant and material • Make certain the audience is neither overloaded nor left to speculate • Include only what is appropriate and necessary, given the use • Identify the key assumptions as assumptions. • Include the support for key assumptions

  22. Contents of the Business Plan • Highlight the critical elements for success or failure • Delineate milestones • So users can evaluate success, modify assumptions, expectations, or strategy • Include financial projections • To test the plan, commit the entrepreneur, facilitate negotiation

  23. A Typical Business Plan Outline I. Executive Summary II. Business Description A. Description of the product/service B. Industry background C. Venture or firm background D. Goals and milestone objectives

  24. Business Plan Outline III. Marketing Plan and Strategy A. Target market and customers B. Competition and market share C. Pricing strategy D. Promotion and distribution IV. Operations and Support A. Quality targets B. Technology requirements C. Service support

  25. Business Plan Outline V. Management Team A. Experience and expertise B. Organizational structure C. Intellectual property rights VI. Financial Plans and Projections A. Income statements & balance sheets B. Statements of cash flows C. Break-even analysis D. Funding needs and sources

  26. Business Plan Outline VII. Risks and Opportunities A. Possible problems and risks B. Real option opportunities VIII. Appendix A. Detailed support for financial forecasts B. Timeline and milestones

  27. Making the Business Plan Credible • Demonstrate understanding of the technology, market, risks, needs, and potential rewards • Provide evidence of the quality and capabilities of people involved, and that they can function effectively as a team • Provide evidence that key personnel are committed • Bonding • Reputation • Certification

  28. The Issue of Confidentiality • Protecting intellectual property • Preempting rivals and first-mover advantage • Using non-disclosure agreements • Relying on reputation

  29. Financial Aspects of the Business Plan • Differing views on what to include • Is the future too uncertain to warrant careful forecasting? • Include in the plan, or as an appendix? • The importance of supporting assumptions • Relationship of projections to contract negotiation • The value of quantifying risk • Value as a diagnostic tool - to facilitate adaptation

  30. What's Wrong with most Business Plans? • Problem lies with the financial data • To concentrated on financial information • Act of imagination • To optimistic • The financial data should focus on answering two questions • What are the critical drivers of the business? • How much business does the company need to achieve to break even?

  31. Study Shows Six Critical Business Plan Mistakes • Lack of marketing strategies • Lack of clarity • Unrealistic financial projections/assumptions • Lack of detail • Overly optimistic • Weak analysis of competition

  32. Business Plans • Focus on cash flow, not profitability • Forecast from the bottom up • Ship, then test • Forget the “proven” team • Start as a service business • Focus on function, not form • Understaff • Go direct • Position against the leader • Find out how deep the rabbit hole really is Source: 10 Tips for Successful Bootstrapping, Guy Kawasaki

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