Category: Business Plan
Dan Shapiro has an excellent post up titled What to do when an investor asks you for your business plan. In it he addresses something we missed in Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist.
In the section where we discuss business plans, we say:
“We haven’t read a business plan in over 20 years. Sure, we still get plenty of them, but it is not something we care about as we invest in areas we know well, and as a result we much prefer demos and live interactions…. However, realize that some VCs care a lot about seeing a business plan, regardless of the current view by many people that a business plan is an obsolete document.”
We go on to say:
“Regardless, you will occasionally be asked for a business plan. Be prepared for this and know how you plan to respond, along with what you will provide, if and when this comes up.”
As Dan rightly points out, we don’t tell you what to do. He does:
“Whenever an investor asks you for your business plan, send them the same damn packet you send to everyone else. In our case, that was a 3-page “executive summary” and a dozen slides giving an overview of the business with some screenshots of the product (it was mobile, and 2006, so there wasn’t any easy way to send them a demo). Don’t apologize and don’t mention the business plan.”
Dan – we completely agree. Well said – thanks for adding the paragraph we clearly left out.
Sim Simeonov from Polaris Venture Partners has the best post of the day with his post titled For the MIT 100K Participants: Executives Summaries. In it, he shares some of his thoughts on how VC’s engage with executive summaries. Hint – they don’t cuddle up to them before they fall asleep at night.
Q: I just read your column in the January Issue of Entrepreneur and I had a follow up question. I am at the very beginning point of putting together my business plan. I have just started writing it and am fleshing out exactly how I envision the company running and what customer base I would want to target. I certainly would be looking for financing but I also feel that would really be important to the success of this business would be a group of people involved who can help with the various intricacies of getting a new company up and running. The long and the short of my question is should I send my business plan to VC firms when I have completed it or is there a better avenue to take at this point?
A: (Brad) My immediate reaction is “No!” For starters, my impression is that you probably aren’t ready for VC money given your description of where you are in the process of creating your company. It sounds like you haven’t started the company yet, but rather are working on the idea and using the business plan process to formalize your thinking. This is good, but it’s a long way from being ready to approach VCs.
Given that you “feel that would really be important to the success of this business would be a group of people involved who can help with the various intricacies of getting a new company up and running.” I’d find these people first. These are unlikely to be VCs. Rather, these are going to be business partners, mentors, advisors, and angel investors that can help you get things off the ground. Once you’ve made some progress, then you’ll be ready to contemplate talking to VCs.
But – before you even do that, you need to decide how much money you actually need to get your business up and running. If you needs are modest (say – less than $1m) then it may be the case that VCs are the wrong funding choice for you and you should focus your energy on angel investors. Or, depending on the type of business you are trying to create, you might be able to bootstrap the business without raising any money.
So – bottom line – don’t think of VCs as the first step in the process.
Question: How do I come up with projections of a web service that is not being done yet? I know make it up.
Actually, please don’t just make it up. That’s a waste of your time. In answering this question, I’m going to assume that you haven’t built your new web service yet and you don’t really have experience with how the economics of the business will evolve over time.
In every web service, you should be able to determine the drivers for the underlying costs of building and deploying the initial system. In addition, you should be able to make some assumptions about how it will scale up with users / traffic / whatever-your-measure-of-growth-is. I’m interested in seeing these assumptions, understanding how you came up with them, and why you think they are valid.
The cost side of the equation helps me understand a piece of the puzzle. The more interesting piece is the user adoption – how it’s going to work, what is going to drive it, and how this links back to the underlying costs.
Recognize that the costs are not just hardware / software / bandwidth / hosting costs. These are going to relatively minor in most cases compared to your “user / customer acquisition cost.” How are you going to get new users? If your answer is “they’ll just come”, that’s probably wrong (although not always – you might have one of the insanely effective web services that spreads rapidly by word of mouth and nothing else.) So – assume you are going to have to spend some money somewhere getting users – what do you think that actually looks like.
There’s no template for what a VC wants to see – the better ones want to understand how you think about things. Hopefully this is a recurring theme – there is no right answer in almost all cases, but there are lots of wrong answers, and the effort you put into thinking about things in advance will usually show through pretty quickly.
Our recent post answering the question Should You Hire Someone To Write Your Business Plan has some useful and relevant comments that relate back to this question. The value of putting real effort upfront into thinking about the ultimate economics of your business usually pay off pretty quickly, even if you are initially wrong, since you’ll have a framework for adjusting your point of view.
I co-own a startup company recently founded between myself and a partner. Neither of us have the core skills to write a clear and coherent business plan. However, we have very forward vision, goals, built-up clients and community, a strong advisory panel and all around great prospects. What would you advise we do, if not hire someone to write the business plan and do the projections?
I put this question in the “check your assumptions category.” I have yet to meet any entrepreneur that doesn’t “have the core skills to write a clear and coherent business plan.” There are a wide range of “business plan writing” products – including many free or inexpensive web resources or non-profit organizations such as SCORE that provide resources for small business owners.
Writing a good business plan is hard. At one point, it was an entry point for discussion with most funding sources (angels and VCs). Today, while a formal business plan is less critical to get in the door, the exercise of writing a business plan is incredibly useful. As an entrepreneur, I was involved in writing numerous business plans. It’s almost always tedious, time consuming, and difficult but resulted in me having a much better understanding of the business I was trying to create.
Today, there are an amazing number of examples of business plans available on the web – both for successful and failed businesses. Using someone else’s plan as a guide is always a great place to start. In addition, there are plenty of great books – such as Business Plans that Work – that can help you with the process.
Now – I’m separating the actual text of the business plan from the financial projections. While your financial model is also important, it does require some specialized knowledge to put together in a logical way. You can learn some of this from resources on the web, including some of the business plan builder software products such as Palo Alto Business Plan Pro 2007or Nova Business Plan Writer Deluxe 2006. Alternatively, you can seek out a local accounting resource that has experience working with entrepreneurs to create financial models.
While ultimately you can just hire someone to do this, I’d still suggest you check your assumptions. I bet one of your advisors has one or more sample plans you can look at and would be willing to work with you to help you create a plan for your business.