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Why Business Plans?

Why Business Plans?. San Jose State Business Plan Competition March 10 Bill Tobin. Why Write a Business Plan? . Forces you to organize and think things through. Always Selling: Who is the Customer at this stage? Approaching Investors Exec Summary must haves. Inside the investor’s mind…

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Why Business Plans?

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  1. Why Business Plans? San Jose State Business Plan Competition March 10 Bill Tobin

  2. Why Write a Business Plan? • Forces you to organize and think things through. • Always Selling: Who is the Customer at this stage? • Approaching Investors • Exec Summary must haves. • Inside the investor’s mind… • Odds of getting funded. • Why Market Sizing Matters • Implications for Entrepreneurs

  3. Always Selling: Take Customer Perspective • Business plan changes over time and with audience: • First customer is investor • “Why should I invest?” • Then communicate with employees/potential employees • “Why should I work here? What do I do to help?” • Later, product customer is target: • “Why should I buy?” • Over time, business plans are developed to fund and advance new products or business units. • Build product, marketing, sales, operations plans from seeds.

  4. Investors as Customer: What to address • Must get an intro to VCs or angels; unsolicited plans don’t work. • Who is right partner at right firm? • Crisp Exec Summary a must to get looked at: • Stellar Team: Who are you and what have you done? • Disruptive Technology: Product idea and customer pain solved. • Large Market: characterization, sizing, and access; competition. • Capital Efficient Financials (How much? When? When CFP, profitable, exits?) • Begin with end in mind: What is the exit? When? • What are IRR requirements of stage and firm?

  5. Milestones & Risk/Reward Profiles • Start with a solid team and a great idea; is there a market? • Seed Funding: • P(success) = 30%; Req’d IRR = 100% • Exit: Market Validation: “There is a big market and here’s why we win.” • R&D Capital: • P(success) = 40%; Req’d IRR = 70% • Exit: Technology Validation: “Our product solves the customer pain and has a protected advantage.” • Go-to-market Capitalization: • P(success) = 50%; Req’d IRR = 50% • Exit: Customer Validation: “Market Validation, Part 2: Customers are buying and are references.” • Expansion Stage Funding • P(success) = 80%; Req’d IRR = 30% • Exit: IPO or M&A event • Always assessing Team (remember step 1?) for gaps in requirements at each stage. • Are these the right people, in the right roles, with the right skills and tools for us to be successful? • Assess Financial Risk and Metrics at each stage • Capital efficiency, cash on hand, burn rate, when cash flow positive (CFP)?, margins (gross and profit). • Risk/Return figures courtesy of Vinod Kholsa @KPCB

  6. Rough Odds of Getting Funded • 1/10,000 plans that get looked at have meetings • 1/200 that are referred • 1/100 meetings get a second, partners and due diligence • 100x more plans than first meetings. • 1/10 get funded • 10x more meetings, etc.; 1000x more plans than fundings. • Bottom Line: YOU MUST BE PASSIONATE ABOUT YOUR COMPANY. • Returns • 1/10 are a big hit. • 3-4/10 are moderate or breakeven. • Rest are a loss.

  7. Go to Market: Why Size is important … • VC’s need 10x wins on their winners, to make up for losers. • Average $10M pre-money valuation implies required $100M exit (10x). • $100M exit valuation implies ~$100M annual sales. • Market: Apple, HP, AMD, Palm trading at 1x revenues. • $100M annual sales @10% market share implies $1B market. • Without potential $1B market, hard for VC to get 10x return • You can fix teams, not markets (Don Valentine)

  8. Implications for Entrepreneurs • Bootstrap, customer financing, get to cash flow break even ASAP. • Keep burn rate down, be cheap, when in doubt don’t spend. • Watch cash balance, know where all cash goes. When it is gone, it is over! • Outsource what you can. • Focus on sales!!! • Don’t count on VC financing, raise as little as you have to. • Keep your personal financial expectations appropriate to market: • Salaries are coming down. • “Win” may be $2-5M for CEO, much less for others • You may be working for a salary, you just don’t know it! • Get out of Series C+ companies and into new Series A deals. • Lot of great people took years off; now coming back and getting involved.

  9. Bill TobinManaging Director Emerging Company Services 408.817.3788Email: bill.tobin@us.pwc.com

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