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Q: How essential is a traditional business plan? What should a good business plan include?
- Erin McIntyre
Grand Junction, Colo.
A: I started investing in startups in 1996 and have seen plenty of business plans. I always get them from people who are seeking some of my money and from entrepreneurs who are starting a capital raising campaign.
Unless you have a spectacular track record as an entrepreneur or an exceptionally great new business idea, you cannot raise capital without a business plan. I have invested in six startups and three of those were sold for a total of $2 billion. The other three went out of business.
And even in that tiny sample, there were clues to these different outcomes in the business plans. Simply put, the business plans that resulted in successful outcomes contained deep insights into the customers who ended up buying the company’s products. The ones that failed, did not.
Despite that simple -- and as an investor -- critical insight, 99 percent of the business plans I see are missing that critical ingredient. Before getting into all the key elements of a good business plan, you should make sure you do a great job at conveying your understanding of the customer.
Here’s how. First, you have to figure out the group of customers that you want to sell to. Then, you have to develop an interview guide -- a list of questions such as why current products don’t meet their needs, what an ideal product would look like, how they decide among competing vendors, and where they perceive an unmet need.
You should then interview at least 20 potential customers and make sure your analysis of their answers to these questions is in the business plan. Your analysis should include key quotes from those potential customers that reinforce the conclusions.
A good business plan should cover these six topics.
1. Executive summary: If you had two minutes going down an escalator with a potential investor, you should talk her through your executive summary. This should answer questions such as: What is your company’s mission? Why is it important to you? Why do you think your company can make money pursuing that mission? What is your track record of winning? How much money do you need? What kind of return can I expect if I give you the money? Why?
2. Business/product description: If you have more than two minutes, the investor will want to know more details. The business/product description should describe your company’s mission and present the details of the product that you have in mind to achieve that mission. This description should also focus on specific product attributes that you think will make it better than the competition.
3. Target market: This section details which group of potential customers your company will target. It describes why you picked that market, its revenues and growth rate, the key factors driving growth, and typical net profit margins in that market. This section must, in my opinion, also present the results of your customer interviews.
4. Plan to gain market share: Here you will explain the key factors, ranked by importance, a potential customer uses to decide among competing suppliers. It will also describe how well those customers perceive that competitors perform on the various factors. It will next describe how your product will outperform competitors on the key factors. Finally, the plan to gain market share section will set market share goals and describe what your company will do to achieve those goals
5. Management team: This section will present biographies of the members of your team. If you have no prior entrepreneurial experience, investors will be looking for signs that you and your team are winners -- this could show up in outstanding academic, athletic, or extra-curricular accomplishments.
6. Cash forecast: This section is in some ways the least believable for an investor. Here, investors are really looking to see whether you put in enough effort to make a detailed estimate of how much cash will be needed to achieve your goals and what revenues and profits will ultimately flow from that investment. The key here is to develop realistic assumptions and to prepare for investors to ask you questions about why you chose them and your sources of information.
To me, the most important part is how well you understand the customers -- if you do a good job with that, I think you will boost your venture’s odds of success considerably.
The author is an Entrepreneur contributor. The opinions expressed are those of the writer.
Peter Cohan is president of Peter S. Cohan & Associates a management consulting and venture capital firm. He is the author of Hungry Start-up Strategy: Creating New Ventures with Limited Resources and Unlimited Vision (Berrett-Koehler, 2012).