Writing a Business Plan

Chapter 4

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Chapter Objectives
(1 of 2)

1. Explain the purpose of a business plan. 2. Discuss how a business plan can be a dual-use document. 3. Explain how the process of writing a business plan can be as important as the plan itself. 4. Identify the advantages and disadvantages of using software packages to assist in preparing a business plan. 5. Explain the difference between a summary business plan, a full business plan, and an operational business plan.
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Chapter Objectives
(2 of 2)

6. Explain why the executive summary may be the most important section of a business plan. 7. Describe a milestone and how milestones are used in business plans. 8. Explain the purpose of a sources and uses of funds statement. 9. Describe a liquidity event. 10. Detail the parts of an oral presentation of a business plan.
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What Is a Business Plan?

Business Plan
A business plan is a written narrative, typically 25 to 35 pages long, that describes what a new business plans to accomplish.

Dual-Use Document
For most new ventures, the business plan is a dual-purpose document used both inside and outside the firm.
Inside the firm, the plan helps the company develop a road map to follow in executing its strategies and plans. Outside the firm, it introduces potential investors and other stakeholders to the business opportunity the firm is pursuing and how it plans to pursue it.
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Who Reads the Business PlanAnd What Are They Looking For?
There are two primary audiences for a firms business plan

Audience

What They are Looking For

A clearly written business plan, which articulates the vision and future plans of the firm, helps the employees of a firm operate in sync and move forward in a consistent and purposeful manner. A firms business plan must make the case that the firm is a good use of an investors funds or the attention of other external stakeholders. The key is to include facts generated through a properly conducted feasibility analysis. A business plan rings hollow if it is based strictly on what an entrepreneur or team of founders thinks will happen.
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A Firms Employees

Investors and Other External Stakeholders

Guidelines for Writing a Business Plan

(1 of 4)

Structure of the Business Plan

To make the best impression, a business plan should follow a conventional structure, such as the outline for the business plan shown in the chapter. Although some entrepreneurs want to demonstrate creativity in everything they do, departing from the basic structure of the conventional business plan format is usually a mistake. Typically, investors are very busy people and want a plan where they can easily find critical information.
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Guidelines for Writing a Business Plan

(2 of 4)

Structure of the Business Plan (continued)

Software Packages
There are many software packages available that employ an interactive, menu-driven approach to assist in the writing of a business plan. Some of these programs are very helpful. However, entrepreneurs should avoid a boilerplate plan that looks as though it came from a canned source.

Sense of Excitement
Along with facts and figures, a business plan needs to project a sense of anticipation and excitement about the possibilities that surround a new venture.
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Guidelines for Writing a Business Plan

(3 of 4)

Content of the Business Plan

The business plan should give clear and concise information on all the important aspects of the proposed venture. It must be long enough to provide sufficient information yet short enough to maintain reader interest. For most plans, 25 to 35 pages is sufficient.

Types of Business Plans

There are three types of business plans, which are shown on the next slide.
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Guidelines for Writing a Business Plan

(4 of 4) Types of Business Plans

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Outline of Business Plan

Outline of Business Plan
A suggested outline of a business plan is shown on the next several slides. Most business plans do not include all the elements introduced in the sample plan; we include them here for the purpose of completeness. Each entrepreneur must decide which elements to include in his or her plan.

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Exploring Each Section of the Plan

(1 of 10)

Cover Page and Table of Contents

The cover page should include the name of the company, its address, its phone number, the date, and contact information for the lead entrepreneur.

The Executive Summary

The executive summary is a short overview of the entire business plan; it provides a busy reader with everything that needs to be known about the new ventures distinctive nature.
In many instances, an investor will first ask for a copy of the executive summary and will request a copy of the full business plan only if the executive summary is sufficiently convincing.
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Exploring Each Section of the Plan

(2 of 10)

The Business
The most effective way to introduce the business is to describe the opportunity the entrepreneur has identified that is, the problem to solve or the need to be filledand then describe how the business plans to address the issue. The description of the opportunity should be followed by a brief history of the company, along with the companys mission statement and objectives. An explanation of the companys competitive advantage and a brief description of the business model follow.
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Exploring Each Section of the Plan

(3 of 10)

Management Team
As mentioned earlier, one of the most important things investors want to see when reviewing the viability of new ventures is the strength of its management team. If the team doesnt pass muster, most investors wont read further. The material in this section should include a brief summary of the qualifications of each member of the management team, including his or her relevant employment and professional experiences, significant accomplishments, and educational background.
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Exploring Each Section of the Plan

(4 of 10)

Company Structure, Ownership, and Intellectual Property

This section should begin by describing the structure of the new venture, including the reporting relationships among the top management team members. The next part of the section should explain how the firm is legally structured. The third part of this section should discuss the intellectual property the firm owns, including patents, trademarks, and copyrights.

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Exploring Each Section of the Plan

(5 of 10)

Industry Analysis
This section should begin by discussing the major trends in the industry in which the firm intends to compete along with important characteristics of the industry, such as its size, attractiveness, and profit potential. This section should also discuss how the firm will diminish or sidestep the forces that suppress its industrys profitability. The firms target market should be discussed next, along with an analysis of how it will compete in that market.
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Exploring Each Section of the Plan

(6 of 10)

Marketing Plan
This marketing plan should immediately follow the industry analysis and should provide details about the new firms products or services. After reading this section of the plan, an investor should be confident that the firms overall approach to its target market and its product strategy, pricing strategy, channels of distribution, and promotional strategy are in sync with one another and make sense.

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Exploring Each Section of the Plan

(7 of 10)

Operations Plan
This section of the plan deals with the day-to-day operations of the company. An overview of the manufacturing plan (or service delivery plan) should be followed by a description of the network of suppliers, business partners, and service providers that will be necessary to build the product or produce the service the firm will sell. Any risks or regulations pertaining to the operations of the firm should be disclosed, such as nonroutine regulations regarding waste disposal and worker safety.
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Exploring Each Section of the Plan

(8 of 10)

Financial Plan
The financial section of the plan must demonstrate the financial viability of the business. A careful reader of the plan will scrutinize this section. The financial plan should begin with an explanation of the funding that will be needed by the business during the next three to five years along with an explanation of how the funds will be used.
This information is called a sources and uses of funds statement.

The next portion of this section includes financial projections, which are intended to further demonstrate the financial viability of the business.
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Exploring Each Section of the Plan

(9 of 10)

Financial Plan (continued)

The financial projections should include three to five years of pro forma income statements, balance sheets, and statements of cash flows, as described in Chapter 8. It is important to remember that the business plan should be based on realistic projections.
If it is not and the company gets funding or financing, there will most certainly be a day of reckoning. Investors and bankers hold entrepreneurs accountable for the numbers in their projections.

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Exploring Each Section of the Plan

(10 of 10)

Critical Risk Factors

Although a variety of potential critical risks may exist, a business should tailor this section to depict its truly critical risks.

Appendix
Any material that does not easily fit into the body of a business plan should appear in an appendix. Examples of materials that might appear in the appendix include:
Resumes of the top management team members, photos or diagrams of product or product prototypes, certain financial data, and market research projections.
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Putting It All Together

(1 of 2) The 10 Most Important Questions a Business Plan Should Answer
Does the firm have an exciting and sensible business model? Will other firms be able to easily copy it?

Is the business just an idea, or is it an opportunity with real potential?

Is the product or service viable? Does it add significant value to the customer? Was a feasibility analysis completed?

Is the industry in which the product or service will be competing growing, stable, or declining?

Does the firm have a well-defined target market?

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Putting It All Together

(2 of 2) The 10 Most Important Questions a Business Plan Should Answer
Is the firm organized in an appropriate manner? Are its strategy and business practices legal and ethical?

Is the management team experienced, skilled, and up to the task of launching the new firm?

Are the financial projections realistic, and do they project a bright future for the firm? What rate of return can investors expect?

How will the firms competitors react to its entrance into their markets?

What are the critical risks surrounding the business, and does the management team have contingency plans in place if risks become actual problems?
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Presenting the Business Plan to Investors

(1 of 3)

Making a Presentation to Investors

If the business plan successfully elicits the interest of potential investors, the next step is to meet with the investors and present the plan in person. The first meeting with an investor is generally very short, about one hour. The investor will typically ask the firm to make a 20- to 30-minute presentation using PowerPoint slides and use the rest of the time to respond to questions. If the investor is impressed and wants to learn more about the venture, the firm will be asked back for a second meeting.
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Presenting the Business Plan to Investors

(2 of 3)

Tips on Making an Oral Presentation to Investors

When asked to meet with an investor, the founders of a new venture should prepare a set of PowerPoint slides that will fill the time slot permitted. The presentation should be smooth and well rehearsed. The slides should be sharp and not cluttered with material.
The first rule in making an oral presentation is to follow instructions. If an investor tells an entrepreneur that he or she has one hour and that the hour will consist of a 30-minute presentation and a 30-minute question-and-answer period, the presentation shouldnt last more than 30 minutes.

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Presenting the Business Plan to Investors

(3 of 3) Ten PowerPoint Slides to Include in an Investor Presentation 1. Title slide

2. Problem
3. Solution 4. Business model 5. Management team 6. Industry and target market 7. Competition 8. Intellectual property 9. Financial projections 10.Current status, amount of money requested, and projected use of funds
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Chapter 4 Writing a Business Plan

Review Questions

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Review Question 4 - 1
What is a business plan? What are the advantages of preparing a business plan for a new venture? Explain your answer. A business plan is a written narrative, typically 25 to 35 pages long, that describes what a new business plans to accomplish and how it plans to accomplish it. For most new ventures, the business plan is a dualpurpose document used both inside and outside the firm. Inside the firm, the plan helps the company develop a road map to follow in executing its strategies and plans. Outside the firm, it introduces potential investors and other stakeholders to the business opportunity the firm is pursuing and how it plans to pursue it.
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Review Question 4 - 5
It is often argued that the process of writing a business plan is as important as the plan itself, particularly for the top management team of a young firm. How is this so? Writing a business plan forces the management team of a new venture to think through every aspect of its business and agree on its most important priorities and goals.
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Chapter 4 Writing a Business Plan

Application Questions

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Application Question 4 - 3
A good friend of yours, Patsy Ford, has decided to leave her teaching job to launch a private tutoring company for grade school and middle school children. She is putting together her business plan and asks you, I have a lot of books and articles that tell me how to write a business plan, but Im wondering if there is anything is particular I should be careful to avoid in putting my plan together? How would you respond to Patsys question?

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Application Question 4 - 3
Patsy should avoid the following red flags in business plans: (see Table 4.2) Founder with none of their own money at risk; A poorly cited plan; Defining the market size too broadly; Overly aggressive financials; Sloppiness in any area.
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Application Question 4 - 4
Suppose you have been asked by your local chamber of commerce to teach a 2hour workshop on how to write an effective business plan. The workshop will be attended by people who are thinking about starting their own business but dont currently have a business plan. Write a one-page outline detailing what youd cover in the 2-hour session.
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Application Question 4 4
Answer: Information on why writing a business plan is important; Recognition of who reads business plan; Detailed guidelines for how to write a business plan including a sample outline for a business plan; Suggestions for how to present the plan to investors and others.
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Application Question 4 - 5
John Brunner is a biochemist at a major university. He is thinking about starting a business to commercialize some animal vaccines on which he has been working. John just registered for a biotech investment conference in San Francisco. A number of venture capitalists are on the program, and John hopes to talk to them about his ideas. John hasnt written a business plan and doesnt see the need to write one. When asked about this issue, he told a colleague, I can sell my ideas without the hassle of writing a business plan. Besides, Ill have plenty of time to talk to investors at the conference. If they need additional information, I can always write something up when I get home. Explain to John why his approach to the development of a business plan is unwise.

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Application Question 4 5
Johns approach is unwise. First, the process of writing a business plan will force John to think through all aspects of his potential businesssomething that he probably hasnt done. As a result, if John has written a business plan, he will probably be better prepared to discuss his venture idea with investors. Second, it is conceivable that an investor will ask John for copy of his plan. If John says, I dont have a plan, but Id be willing to write one and send it to you in two weeks, the investor may be unimpressed. It would be much more impressive for John to be able to say, Id be glad to e-mail you my plan the day I return home. That reply signals to the investor that John is serious enough about his venture that a plan has already been written.

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Application Question 4 - 6
Imagine you just received an e-mail message from a friend. The message reads, Just wanted to tell you that I just finished writing my business plan. Im very proud of it. Its very comprehensive and is just over 100 pages. The executive summary alone is nine pages. I plan to start sending it out to potential investors next week. Do you have any words of advice for me before I start sending it out? Be honestI really want to get funding. How would you respond to your friends request for feedback?
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Application Question 4 6
Your friends approach is a mistake. No one will read a 9 page executive summary, let alone a 100-page business plan. Most business plans are 25 to 35 pages long, and regardless how complicated the new venture is, or how much work an individual is willing to put into a plan, it is best to stick to the conventional page limits. Remember, additional information can be placed in an Appendix, but the plan itself should be rather short. As hard as it is to believe, most investors and others who read business plans see a long plan as a weakness rather than a strength.
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Application Question 4 - 9
Do some Internet research on business plans. Make a list of at least 10 locations on the Internet that provide access to highquality advice about how to write an effective business plan, and be prepared to discuss why you find the locations you chose helpful.

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You Be the VC
Zillow

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Zillow
Company:
Zillow www.zillow.com

Business Idea:
Help people make smarter real estate decisions by providing them with free, fast, and accurate estimates of the values of the properties they are interested in.

Pitch:
If youve ever looked for a home you know what a hassle it can be. Its hard to know if a particular property is undervalued or overvalued, and if the real estate agent is being completely forthright. Its also hard to know where to go to get good information if you want to do your own research. Most people only buy homes, or investment properties, a few times in their lives. As a result, its not practical to become an expert on real estate valuations.

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Zillow
What is Zillow? Zillow is an online real estate service that was created to help solve these problems. It helps people obtain free and objective home value estimates. To use Zillow, all you have to do is go to the companys Web site and type in the address of the property youre interested in. In a few seconds you will get an estimateor zestimateof the value of the home (go ahead and try it for the home you were raised in). The service offers several other features as well, including value changes of homes in a given time frame, aerial views of homes (using Google maps), and the prices of the homes in the surrounding area. It also provides basic data on homes, such as square footage and the number of bedrooms and bathrooms.

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Zillow
Strength of New Venture Team:

Score 4 (on a scale of 1 5) Co-founder Rich Barton is the founder of Expedia, the online travel site. He is also a Microsoft veteran. Rich is currently a venture partner at Benchmark Capital, and is on the Board of Directors of Netflix. Co-founder Lloyd Frank is also an Expedia and Microsoft veteran. Most of the members of Zillows management team are former Expedia and Microsoft executives (Expedia was started within Microsoft in 1994). Zillow has a five-person Board of Directors and a three- person technical advisory board. The directors include venture capitalists, real estate industry personnel, and Zillow executives.

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Zillow
Strength of the Opportunity:

Score 3 (on a scale of 1 5) The strength of the opportunity is unclear. Zillows service is free to the user, and apparently the only way the company makes money is by selling advertising on its Web site. The company claims that it is one of the most visited real estate sites on the Web, with 3 to 4 million people visiting each month. It is unknown whether the company has additional plans for monetizing its site.

More than half of Zillows visitors plan to buy or sell a house in the next 24 months.

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Zillow
Strength of the Industry:

Score 1 (on a scale of 1 5) The real estate industry has traditionally been strong. But it has now been destroyed through the sub-prime mortgage problems
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Zillow
Strength of the Business Model:

Score 3 (on a scale of 1 5)

Zillows business model is to drive traffic to its Web site through its home valuation service and the other services offered on its site. It then uses its traffic to market online advertising. There is apparently a lot of leg-work involved in determining home valuations online, as described in the feature. As a result, Zillows business model is more labor intensive than many Web based businesses.
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You Be the VC Zillow

Overall Score:
Strength of the New Venture Team Strength of the Opportunity Strength of the Industry Strength of the Business Model Average Score = 4 3 1 3 2.75

Continued
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You Be the VC Zillow

The Business Decision: One the one hand, Zillow has a very innovative and intriguing product offering, and it is driving an impressive number of people to its Web site every month. A total of 3 to 4 million people per month, half of whom are thinking about buying or selling a home, is an impressive audience to deliver to an advertiser. Zillows top management team is also impressive. On the other hand, we wonder how sticky Zillows service is. Will people lose interest over time? How many people will actually use the site on a continual basis? And will Zillow lose credibility as people find, as they invariably will, that Zillows estimates are just thatestimatesand they dont assure the sale price or the purchase price of a house? Weighing the pluses and minuses, we would not fund this venture. Instead, we would take a wait-and-see approach, and try to discern just how sticky and robust Zillows service really is. I am not convinced there is a window of opportunity right now.

Decision: DO NOT FUND.

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Case 4.2
Pandora

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Pandora
Pandora: How a Willingness to Let Its Business Plan Evolve Helped a Music Company Move Forward When the Timing Was Right www.pandora.com

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Pandora Question 1
Go to Pandoras Web site and give it a try. (Nothing will be downloaded onto your computerPandoras service runs off your Internet browser.) What do you think? Do you think Pandora will attract a large number of users? Will you use the service again? Explain your answer.

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Pandora Question 2
What are the most critical risk factors associated with Pandoras current business plan? Most would say that the most critical risk factor is that people will try Pandora once or twice, and will tire of the service. Another risk is that people will only use the free version of the site, and will rarely if ever click through and buy music as the result of hearing a song on Pandora.
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Pandora Question 3
What do you think motivated Pandoras investors to put money into the company in 2004, even though Pandora had failed to effectively monetize its technology on two separate occasions?

Pandora does have a unique technology, and its investors probably thought that the technology was compelling enough that it would either
(1) find a commercially viable application, like Pandoras present Web site, (2) will be licensed to a music company that will use the technology, or (3) will be purchased by a larger firm.
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Pandora Question 4
Pandora has investors who will no doubt want their money back, plus a handsome return at some point in the not-so-distant future. What is the most likely liquidity event in Pandoras future? An acquisition.

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Pandora Application Question 1

Make a list of the parties that have a vested interest in Pandoras success. How can each of these parties (i.e., independent musicians, record companies, etc.) help make Pandora successful? Make your list as complete as possible.

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Pandora Application Question 1

Answer Pandoras founders and management team, who can help the company by continuing to develop its technology and by working hard. Pandoras investors, who can help by remaining patient and allowing Pandoras technology and business model to evolve. Musicians, who can spread the news about Pandoras service. Record companies, who can also spread the news about Pandoras service.
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Pandora Application Question 2

Think of a time in your life when you (1) committed yourself to achieve something substantial, (2) your first few attempts to achieve it failed, and (3) you eventually found a way to be successful. What made you persevere despite your early failures? Compare your experience to Tim Westergrens experience with Pandora.
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