Chapter-6.pdf

Chapter 6 Writing a Business Plan Opening prOFile temporun Proceeding on the strength of a winning Business Plan Web: www.temporun.com I n August of 2012 Josh Leider was on a run. He was listening to “Lose Yourself” by Eminem on his iPhone. The tempo of the song matched his running pa...

Chapter 6 Writing a Business Plan Opening prOFile temporun Proceeding on the strength of a winning Business Plan Web: www.temporun.com I n August of 2012 Josh Leider was on a run. He was listening to “Lose Yourself” by Eminem on his iPhone. The tempo of the song matched his running pace perfectly. Then “Lose Yourself” ended and another song started. The tempo was entirely dif- ferent, throwing off Leider’s run as a result. He thought, “Why can’t you always run to the tempo of your music?” Hence, the idea of learning ObjeCtives TempoRun, a smartphone app, was born. After studying this chapter you should be Leider shared the idea with Benny Ebert-Zavos, a friend of his and ready to: a serious runner. Ebert-Zavos loved the idea, and the two of them de- cided to pursue it further. The pair found that there were apps on the 1. Explain the purpose of a business plan. market that adjust song tempos as a runner’s pace changes, but none 2. Describe who reads a business plan and what they’re looking for. that did exactly what Leider and Ebert-Zavos envisioned, which was an app that categorized music according to tempo. Leider had worked 3. Discuss the guidelines to follow to write an effective business plan. on several business ideas and had a sense of how to proceed. He and 4. Identify and describe a suggested Ebert-Zavos contacted the Computer Science department at Michigan outline of a business plan. State, the university they were attending, and a professor in the depart- 5. Explain how to effectively present a ment hooked them up with two students, Adam Proschek and Phil business plan to potential investors. Gatzen, who were good at coding and development. The group of four decided to form a business and build the app, using the name TempoRun for both. One thing the partners did from the outset is utilize the resources of Michigan State. Leider was a marketing and economics major in the Eli Broad College of Business, while Ebert-Zavos was a student in the School of Hospitality Business. Both Proschek and Gatzen were in Computer Science. They wrote a business plan for TempoRun and, in December of 2012, entered the first Broad Pitch Competition, which was held in the college of business. Instead of wearing business attire, they pitched in running clothes, in part to show their passion for their business idea. Incredibly, they won the competi- tion. The win included a $5,000 first prize and access to The Hatch, a student business accelerator in partnership with MSU’s Entrepreneurship Network. The partners used the $5,000 and a grant from a campus businesses association to buy computers, trade- mark their idea, and create a limited liability company (LLC). They also utilized pro bono resources available through MSU’s Entrepreneurship Network, such as interns who de- signed a logo and worked on TempoRun’s marketing and legal efforts. At the suggestion of a professor, in early 2013 they entered TempoRun in Student Startup Madness, a pitch competition for college digital projects at the South by Southwest Music and Media Conference in Austin, Texas. Michigan State funded the trip. They were competing against tech start-ups from universities across the country, includ- ing Stanford and Harvard, and ended up winning. Leider characterized the competition, 181 182 PART 2 | DEvELOPING SUCCESSfUL BUSINESS IDEAS and in particular the judging, as Shark Tank times 10. The judges were executives and well-known entrepreneurs from companies like Google, Square, and TechStars. Leider summed up the experience by saying that “We went into the competition thinking we knew everything but found that we knew very little.” This was actually a positive comment on Leider’s part. He was referring to the learning that took place as a result of the rigor of the judges’ questions and their feedback. The South by Southwest win also netted TempoRun $5,000 in Google Cloud Platform credit and acquainted the entrepreneurs with people they would have had no way of coming into contact with otherwise. The nearby photo was taken just after the win at the South by Southwest competition. The team, from left to right, included Phil Gatzen, Benny Ebert-Zavos, Adam Proschek, and Josh Leider. To gain visibility and prepare for launch, the TempoRun team sponsored a charity 5K at Michigan State in April of 2013. The proceeds went to support breast cancer research. The company formally launched in the Apple App Store in May 2013. The way the app works is that it helps users run at their preferred pace by categorizing the music on their iPhone from Level 1 (walking) to Level 10 (sprinting). It also incorporates music from a streaming Internet music station. The user selects a level, which can be changed with arrows on a simple interface. The app also keeps track of basic running analytics, such as distance run, pace, and calories burned. TempoRun, which charged a one-time download fee of $2.99 when it first launched, had 2,000 downloads its first day of launch. The company has experienced a steady pace of downloads since. Looking back, Leider credits the time his team spent in The Hatch, the Michigan State student accelerator, and the business plan and pitch competitions in which they participated as pivotal to their success. Leider says that the value of a business plan or pitch competition is that it “gets your ideas down on paper and causes you to ask questions of yourself that you would have never thought of before—questions about your business, your revenue streams, and more.” Another ingredient to TempoRun’s success is that Leider and Elbert-Zavos are very involved in the running community. Because they are consumers of their own product, they are able to make tweaks to the product based on their own observations and listen to suggestions from runners whom they know and who are also TempoRun users. TempoRun is not yet a full-time job for the four founders, but they hope this will soon be the case. They envision extending TempoRun’s basic approach to other sports, such as cycling and swimming. t his chapter discusses the importance of writing a business plan. Although some new ventures simply “wing it” and start doing business without the benefit of formal planning, it is hard to find an expert who doesn’t recommend preparing a business plan. A business plan is a written narra- tive, typically 25 to 35 pages long, that describes what a new business intends to accomplish and how it intends to accomplish it. For most new ventures, the business plan is a dual-purpose document that is used both inside and outside the firm. Inside the firm, the plan helps the company develop a “road map” to follow to execute its strategies and plans. Outside the firm, it intro- duces potential investors and other stakeholders to the business opportunity the firm is pursuing and how it plans to pursue it.1 To begin this chapter, we discuss issues with which entrepreneurs often grapple when facing the challenge of writing a business plan. Topics included in the chapter’s first section are reasons for writing a business plan, a descrip- tion of who reads the business plan and what they’re looking for, and guidelines to follow when preparing a written business plan. In the chapter’s second sec- tion, we present an outline of a business plan with a description of the material  CHAPTER 6 | WRITING A BuSineSS PLAN 183 in each section of the plan. The third section of the chapter deals with strate- gies for how to present the business plan to potential investors and others. the business plan As illustrated in the basic model of the entrepreneurial process shown in learning ObjeCtive Chapter 1, writing a business plan is the last activity completed in the step 1. Explain the purpose of a of the entrepreneurial process titled “Developing Successful Business Ideas.” business plan. It is a mistake to write a business plan too early. The business plan must be substantive enough and have sufficient details about the merits of the new venture in order to convince the reader that the new business is exciting and should receive support. Much of this detail is accumulated in the feasibility analysis stage of investigating the merits of a potential new venture. In spite of conventional wisdom suggesting the need to do so, a relatively large percentage of entrepreneurs do not write business plans for their new ventures. In fact, a 2010–2012 study of 350 entrepreneurs found that of those that had suc- cessful exits (i.e., an IPO or sale to another firm), only about 30 percent started with a business plan.2 That number is similar to the results of a 2011 survey by The Hartford. According to The Hartford’s 2011 Small Business Success Study, which surveyed 2,000 business owners, only 35 percent of the owners said that they have a business plan.3 Similarly, in a 2002 study, Inc. magazine asked the founders of the firms that make up the Inc. 500 that year whether they had writ- ten a formal business plan before they launched their companies. A total of 60 percent did not.4 These statistics should not deter an entrepreneur from writing a business plan. Indeed, ample evidence supports the notion that writing a busi- ness plan is an extremely good investment of an entrepreneur’s time and money. reasons for writing a Business Plan We show the two primary reasons to write a business plan in Figure 6.1. First, writing a business plan forces a firm’s founders to systematically think through each aspect of their new venture.5 This is not a trivial effort—it usually takes sev- eral days or weeks to complete a well-developed business plan—and the founders will usually meet regularly to work on the plan during this period. An example of how much work is sometimes involved, and how a well-planned new business unfolds, is provided by Gwen Whiting and Lindsey Wieber, the co-founders of The Laundress, a company that sells specially formulated laundry detergents and other fabric care products. Whiting and Wieber met at Cornell University while studying fabrics, and after graduating the pair decided to start a business together. The following vignette comes from an interview they gave to Ladies Who Launch, a website that highlights the accomplishments of female entrepreneurs: Gwen: Lindsey and I went to college and studied textiles at Cornell together and al- ways wanted to be in business together. We knew it was going to happen. We always talked about ideas. We were talking about this concept, and it was the right time for us. The first thing we did was the business plan and then a cash flow analysis. We wanted to do as much research as possible before developing the products. Figure 6.1 Internal Reason External Reason Two Primary Reasons for Writing a Business Forces the founding Communicates the team to systematically merits of a new venture Plan think through every to outsiders, such as aspect of its investors and bankers new venture 184 PART 2 | DEvELOPING SUCCESSfUL BUSINESS IDEAS This group of young entrepreneurs plans to launch a website that features educational toys for children. Here, they are discussing how to integrate the results of their feasibility analy- sis into their business plan. A business plan is more compelling if it contains primary research conducted by the entre- preneurs launching the business. Katarina Premfors/arabianEye/Corbis Lindsey: We spent Memorial Day weekend (2003) doing our business plan. We spent the Fourth of July weekend doing our cash flow. After we had our ideas on paper, we went back to Cornell, met with a professor there, and had a crash course in chemistry. She worked with us on the formulation of the products. Gwen: I found a manufacturer on Columbus Day. Every piece of free time we had, we dedicated to the business. We weren’t at the beach with our friends anymore.6 The payoff for this level of dedication and hard work, which involved the preparation of a formal business plan, is that Whiting and Wieber have now had a successful business for 10-plus years. Their products are sold through their website and in many stores. Consistent with Whiting and Wieber’s experience, writing a business plan forces a firm’s founders to intently study every aspect of their business, a process that’s hard to replicate in any other way. Imagine the following. Two friends are thinking about opening a seafood restaurant. They spend the next two months meeting four nights a week to hash out every detail of the busi- ness. They study the restaurant industry, identify their target market, develop a marketing plan, settle on a hiring schedule, identify the type of people they want to employ, plan their facility, determine what their start-up expenses will be, and put together five years of pro forma (projected) financial statements. After 32 meetings and several drafts, they produce a 30-page business plan that explains every aspect of their business. Regardless of how conscientious the founders of a business are, it’s difficult to discipline oneself to cover this level of detail absent writing a business plan. As stated earlier, writing a busi- ness plan forces a business’s founders to systematically think through every aspect of their business and develop a concrete blueprint to follow. The second reason to write a business plan is to create a selling document for a company. It provides a mechanism for a young company to present itself to potential investors, suppliers, business partners, key job candidates, and oth- ers. Imagine that you have enough money to invest in one new business.7 You chat informally with several entrepreneurs at a conference for start-ups and decide that there are two new ventures that you would like to know more about.  CHAPTER 6 | WRITING A BuSineSS PLAN 185 You contact the first entrepreneur and ask for a copy of his business plan. The entrepreneur hesitates a bit and says that he hasn’t prepared a formal business plan but would love to get together with you to discuss his ideas. You contact the second entrepreneur and make the same request. This time, the entrepre- neur says that she would be glad to forward you a copy of a 30-page business plan, along with a 10-slide PowerPoint presentation that provides an overview of the plan. An hour or two later, the PowerPoint presentation is in your e-mail in-box with a note that the business plan will arrive the next morning. You look through the slides, which are crisp and to the point and do an excellent job of outlining the strengths of the business opportunity. The next day, the business plan arrives just as promised and is equally impressive. Which entrepreneur has convinced you to invest in his or her business? All other things being equal, the answer is obvious—the second entrepreneur. The fact that the second entrepreneur has a business plan not only provides you with detailed information about the venture but also suggests that the entre- preneur has thought through each element of the business and is committed enough to the new venture to invest the time and energy necessary to prepare the plan. Having a business plan also gives an investor something to which s/ he can react. Very few, if any, investors will free up time to “listen” to your idea for a new business, at least initially. Who reads the business plan— and What are they looking for? There are two primary audiences for a firm’s business plan. Let’s look at each learning ObjeCtive of them. 2. Describe who reads a business plan and what they’re looking for. a Firm’s employees A clearly written business plan, one that articulates the vision and future plans of a firm, is important for both the management team and the rank- and-file employees. Some experts argue that it’s a waste of time to write a business plan because the marketplace changes so rapidly that any plan will become quickly outdated. Although it’s true that marketplaces can and often do change rapidly, the process of writing the plan may be as valuable as the plan itself. A clearly written business plan also helps a firm’s rank-and-file employees operate in sync and move forward in a consistent and purposeful manner. The existence of a business plan is particularly useful for the functional department heads of a young firm. For example, imagine that you are the newly hired vice president for management information systems for a rapidly growing start-up. The availability of a formal business plan that talks about all aspects of the business and the business’s future strategies and goals can help you make sure that what you’re doing is consistent with the overall plans and direction of the firm. investors and other external stakeholders External stakeholders who are being recruited to join a firm, such as inves- tors, potential business partners, and key employees, are the second audience for a business plan. To appeal to this group, the business plan must be real- istic and not reflective of overconfidence on the firm’s part. Overly optimistic statements or projections undermine a business plan’s credibility, so it is foolish to include them. At the same time, the plan must clearly demonstrate that the business idea is viable and offers potential investors financial returns 186 PART 2 | DEvELOPING SUCCESSfUL BUSINESS IDEAS greater than lower-risk investment alternatives. The same is true for potential business partners, customers, and key recruits. Unless the new business can show that it has impressive potential, investors have little reason to become involved with it. Investors vary in terms of the reliance they place on formal business plans.8 Initially, many investors ask for a PowerPoint deck or the executive summary of a business plan. A PowerPoint deck is a short set of PowerPoint slides that describe a business idea, and an executive summary is a one- to two-page overview of the full plan. If their interest is sufficiently peaked, in some cases investors will ask for a full business plan, and in other cases they won’t. It’s still necessary to have a business plan, however. If an investor com- mits, in most cases a business plan will be required during the due diligence phase. Due diligence refers to the process investors go through after they ten- tatively commit to an investment.9 The commitment is based on a thorough in- vestigation of the merits of the venture, whether any legal complications exist, and whether the claims made in the business plan are accurate and realistic. A firm must validate the feasibility of its business idea and have a good understanding of its competitive environment prior to presenting its busi- ness plan to others. Sophisticated investors, potential business partners, and key recruits will base their assessment of a proposed firm’s future prospects on facts, not guesswork or platitudes, as emphasized in Chapter 3. The most compelling facts a company can provide in its business plan are the results of its own feasibility analysis and the articulation of a distinctive and competi- tive business model. A business plan rings hollow if it is based strictly on an entrepreneur’s predictions of a business’s future prospects. Modify Watches, a retailer of customizable watches, is an example of a business that laid a firm foundation for its business plan via the feasibility analysis that it conducted very early on. Modify Watches is the focus of Case 3.1. In addition to the previously mentioned attributes, a business plan should disclose all resource limitations that the business must address before it is ready to start earning revenues. For example, a firm may need to hire service people before it can honor the warranties for the products it sells. It is fool- hardy for a new venture to try to downplay or hide its resource needs. One of the main reasons new ventures seek out investors is to obtain the capital needed to hire key personnel, further develop their products or services, lease office space, or fill some other gap in their operations. Investors understand this, and experienced investors are typically willing to help the firms they fund plug resource or competency gaps. guidelines for Writing a business plan learning ObjeCtive There are several important guidelines that should influence the writing of a 3. Discuss the guidelines to business plan. It is important to remember that a firm’s business plan is typi- follow to write an effective cally the first aspect of a proposed venture that an investor will see. If the plan business plan. is incomplete or looks sloppy, it is easy for an investor to infer that the venture itself is incomplete and sloppy.10 It is important to be sensitive to the struc- ture, content, and style of a business plan before sending it to an investor or anyone else who may be involved with the new firm. Table 6.1 lists some of the “red flags” that are raised when certain aspects of a business plan are insuf- ficient or miss the mark. structure of the Business Plan To make the best impression, a business plan should follow a conventional structure, such as the outline shown in the next section. Although some en- trepreneurs want to demonstrate creativity in everything they do, departing  CHAPTER 6 | WRITING A BuSineSS PLAN 187 Table 6.1 red Flags in business plans red Flag explanation founders with none of their If the founders aren’t willing to put their own money at risk, why should anyone else? own money at risk A poorly cited plan A plan should be built on hard evidence and sound research, not guesswork or what an entrepreneur “thinks” will happen. The sources for all primary and secondary research should be cited. Defining the market size Defining the market for a new venture too broadly shows that the true target market has too broadly not been clearly identified. for example, saying that a new venture will target the global pharmaceutical industry isn’t helpful. The market opportunity needs to be better defined. Obviously, the new venture will target a segment or a specific market within the industry. Overly aggressive financials Many investors skip directly to this portion of the plan. Projections that are poorly reasoned or unrealistically optimistic lose credibility. In contrast, sober, well-reasoned statements backed by sound research and judgment gain credibility quickly. Sloppiness in any area It is never a good idea to make a reader wade through typos, balance sheets that don’t balance, or sloppiness in any area. These types of mistakes are seen as inattention to detail and hurt the entrepreneur’s credibility. 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. If an investor has to hunt for something be- cause it is in an unusual place or just isn’t there, he or she might simply give up and move on to the next plan.11 Many software packages are available that employ an interactive, menu- driven approach to assist in the writing of a business plan. Some of these pro- grams are very helpful.12 However, entrepreneurs should avoid a boilerplate plan that looks as though it came from a “canned” source. The software pack- age may be helpful in providing structure and saving time, but the information in the plan should still be tailored to the individual business. Some businesses hire consultants or outside advisers to write their business plans. Although there is nothing wrong with getting advice or making sure that a plan looks as professional as possible, a consultant or outside adviser shouldn’t be the pri- mary author of the plan. 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—a task best accomplished by the creators of the busi- ness themselves.13 content of the Business Plan The business plan should give clear and concise information on all the impor- tant aspects of the proposed new venture. It must be long enough to provide sufficient information, yet short enough to maintain reader interest. For most plans, 25 to 35 pages (and typically closer to 25 than 35 pages) are sufficient. Supporting information, such as the résumés of the founding entrepreneurs, can appear in an appendix. After a business plan is completed, it should be reviewed for spelling, gram- mar, and to make sure that no critical information has been omitted. There are numerous stories about business plans sent to investors that left out impor- tant information, such as significant industry trends, how much money the company needed, or how the money was going to be used. One investor even told the authors of this book that he once received a business plan that didn’t 188 PART 2 | DEvELOPING SUCCESSfUL BUSINESS IDEAS include any contact information for the entrepreneur. Apparently, the entre- preneur was so focused on the content of the plan that he or she simply forgot to provide contact information on the business plan itself. This was a shame, because the investor was interested in learning more about the business idea.14 Style or Format of the business Plan The plan’s appearance must be carefully thought out. It should look sharp but not give the impression that a lot of money was spent to produce it. Those who read business plans know that en- trepreneurs have limited resources and expect them to act accordingly. A plastic spiral binder including a transparent cover sheet and a back sheet to support the plan is a good choice. When writing the plan, avoid getting carried away with the design elements included in word-processing programs, such as boldfaced type, italics, different font sizes and colors, clip art, and so forth. Overuse of these tools makes a business plan look amateurish rather than professional.15 One of the most common questions that the writers of business plans ask is, “How long and detailed should it be?” The answer to this question depends on the type of business plan that is being written. There are three types of business plans, each of which has a different rule of thumb regarding length and level of detail. Presented in Figure 6.2, the three types of business plans are as follows: Summary plan: A summary business plan is 10 to 15 pages and works best for companies that are very early in their development and are not prepared to write a full plan. The authors may be asking for funding to conduct the analysis needed to write a full plan. Ironically, summary business plans are also used by very experienced entrepreneurs who may be thinking about a new venture but don’t want to take the time to write a full business plan. For example, if someone such as Drew Houston, the co-founder of Dropbox, was thinking about starting a new business, he might write a summary business plan and send it out to selected inves- tors to get feedback on his idea. Most investors know about Houston’s success with Dropbox and don’t need detailed information. Dropbox, the subject of Case 2.1, is a free file hosting service that was founded in 2007 and is now being used by more than 200 million people across the world. Full business plan: A full business plan is typically 25 to 35 pages long. This type of plan spells out a company’s operations and plans in much more detail than a summary business plan, and it is the format that is usually used to prepare a business plan for an investor. Operational business plan: Some established businesses will write an operational business plan, which is intended primarily for an internal audience. An operational business plan is a blueprint for a company’s op- erations. Commonly running between 40 and 100 pages in length, these plans can obviously feature a great amount of detail that provides guid- ance to operational managers. Figure 6.2 Summary Operational Types of Business Plans Full Business Plan Business Plan Business Plan 10–15 pages 25–35 pages 40–100 pages Works best for Works best for Is meant primarily for new ventures in the early new ventures that are at an internal audience; stages of development the point where they works best as a tool for that want to “test the need funding or creating a blueprint for waters” to see if financing; serves as a a new venture’s investors are interested “blueprint” for the operations and providing in their idea company’s operations guidance to operational managers  CHAPTER 6 | WRITING A BuSineSS PLAN 189 If an investor asks you for a PowerPoint deck or the executive summary of your business plan rather than the complete plan, don’t be alarmed. This is a common occurrence. If the investor’s interest is piqued, he or she will ask for more information. Most investors believe the process of writing a full business plan is important, even if they don’t ask for one initially. This sentiment is af- firmed by Brad Feld, a venture capitalist based in Boulder, Colorado, who wrote: Writing a good business plan is hard. At one point it was an entry point for discus- sion 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 in- credibly 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.16 A cover letter should accompany a business plan sent to an investor or other stakeholders through the mail. The cover letter should briefly introduce the entrepreneur and clearly state why the business plan is being sent to the individual receiving it. As discussed in Chapter 10, if a new venture is looking for funding, a poor strategy is to obtain a list of investors and blindly send the plan to everyone on the list. Instead, each person who receives a copy of the plan should be carefully selected on the basis of being a viable investor candidate. recognizing the elements of the Plan May Change A final guide- line for writing a business plan is to recognize that the plan will usually change as it is being written and as the business evolves. New insights invari- ably emerge when entrepreneurs immerse themselves in writing the plan and start getting feedback from others. This process continues throughout the life of a company, and it behooves entrepreneurs to remain alert and open to new insights and ideas. Because business plans usually change while being written, there is an emerging school of thought that opposes the idea of writing a business plan and advocates experimentation and trial-and-error learning gleaned through cus- tomer feedback over formal planning.17 This approach, which is associated with the Lean Startup movement, espouses many excellent ideas, particularly in the area of soliciting feedback directly from prospective customers prior to settling on a business idea and business model to execute on the idea. In this book, we take the opposite position, arguing that a business plan, proceeded by a feasibil- ity analysis, represents an important starting point for a new venture and serves many useful purposes. In this sense, those developing a business plan should understand that it is not intended to be a static document written in isolation at a desk. Instead, it is anticipated that the research conducted to complete the plan, and the preceding feasibility analysis, will place the founders in touch with potential customers, suppliers, business partners, and others, and that the feedback obtained from these key people will cause the plan to change as it’s be- ing written.18 It’s also anticipated that the business itself will iterate and change after it’s launched, based on additional feedback. Some businesses will change more than others, based on the quality of their initial feasibility analysis and the newness and volatility of their industry. These issues and related ones are con- sidered in the “Savvy Entrepreneurial Firm” feature. Outline of the business plan A suggested outline of the full business plan appears in Table 6.2. Specific plans learning ObjeCtive may vary, depending on the nature of the business and the personalities of the 4. Identify and describe a founding entrepreneurs. Most business plans do not include all the elements suggested outline of a introduced in Table 6.2; we include them here for the purpose of completeness. business plan. 190 PART 2 | DEvELOPING SUCCESSfUL BUSINESS IDEAS Table 6.2 business plan Outline cover Page table of contents i. Executive Summary Product, Price, Promotions, and Distribution ii. Industry Analysis Sales Process (or Cycle) Industry Size, Growth Rate, Sales Tactics and Sales Projections vii. Design and Development Plan Industry Structure Development Status and Tasks Nature of Participants Challenges and Risks Key Success factors Projected Development Costs Industry Trends Proprietary Issues (Patents, Trademarks, Long-Term Prospects Copyrights, Licenses, Brand Names) iii. Company Description viii. Operations Plan Company History General Approach to Operations Mission Statement Business Location Products and Services facilities and Equipment Current Status iX. Management Team and Company Legal Status and Ownership Structure Key Partnerships (if any) Management Team (Including a Skills iv. Market Analysis Profile) Market Segmentation and Target Market Selection Board of Directors Buyer Behavior Board of Advisors Competitor Analysis Company Structure Estimates of Annual Sales and Market Share X. Overall Schedule v. The Economics of the Business Xi. financial Projections Revenue Drivers and Profit Margins Sources and Uses of funds Statement fixed and variable Costs Assumptions Sheet Operating Leverage and Its Implications Pro forma Income Statements Start-up Costs Pro forma Balance Sheets Break-Even Chart and Calculation Pro forma Cash flows vi. Marketing Plan Ratio Analysis Overall Marketing Strategy Appendices exploring each section of the Plan Cover Page and Table of Contents The cover page should include the company’s name, address, and phone number; the date; the contact informa- tion for the lead entrepreneur; and the company’s website address if it has one. The company’s Facebook page and Twitter name can also be included. The contact information should include a land-based phone number, an e-mail address, and a smartphone number. This information should be centered at the top of the page. Because the cover letter and the business plan could get separated, it is wise to include contact information in both places. The bottom of the cover page should include information alerting the reader to the confi- dential nature of the plan. If the company already has a distinctive trademark, it should be placed somewhere near the center of the page. A table of contents should follow the cover letter. It should list the sections and page numbers of the business plan and the appendices. executive Summary The executive summary is a short overview of the entire business plan; it provides a busy reader with everything she needs to know about the new venture’s distinctive nature.19 As mentioned earlier, in  CHAPTER 6 | WRITING A BuSineSS PLAN 191 Savvy EntrEprEnEurial Firm Know When to Hold Them, Know When to Fold Them Songkick: Web: www.songkick.com; Facebook: Songkick; Twttter: @songkick GrubHub: Web: www.grubhub.com; Facebook: GrubHub; Twitter: @GrubHub Instagram: Web: http://instagram.com; Facebook: Instagram; Twitter: @Instagram O ne of the challenges business owners have is de- termining how closely to stick to their business plan once the business is launched and they start receiving customer feedback. In almost all cases, some changes will need to be made to the firm’s plan. But the a better chance being “discovered” by new customers. As time went on, the founders of GrubHub realized that restaurants loved what they were doing, but weren’t comfortable with paying up front for sales that might or might not happen. Its customers were clear that they degree to which business plans pan out as their found- only wanted to pay GrubHub when a GrubHub user ers envisioned varies. In some cases, a business plan is placed an order. These insights prompted GrubHub to spot-on and the worst thing a founder could do is vary revise its business plan. The company switched from from the plan. In other cases, a plan needs to be sig- a subscription pricing model, where they charged res- nificantly tweaked, and in still other cases it needs to be taurants for a premium place, to a transactional model thrown out the window and the business needs to start where they collected a commission for each order over. The following are brief descriptions of businesses placed. After the change was made, GrubHub saw a that have experienced these various outcomes. dramatic increase in restaurants asking to be placed on its website. songkick—no Changes needed instagram—Major Changes needed Songkick was founded in 2007 by Pete Smith, Michelle You, and Ian Hogarth. The problem the company solves Instagram almost wasn’t Instagram at all. Before Instagram is music lovers missing out on seeing their favorite became the photo-sharing hit that it is, co-founders Kevin bands because they didn’t know they were in their area. Systrom and Mike Krieger were working on a check-in- Concertgoers try to avoid this problem by subscrib- service called Burbn. Burbn was a location-based service ing to venue e-mail lists, checking band websites, and similar to foursquare. Users could check in to locations, surfing through generic concert newsletters. This is a earn points for hanging out with their friends, and share clumsy process and doesn’t ensure that music fans pictures inside the app. Systrom and Krieger worked on won’t miss a concert they’d like to see. To solve this Burbn for over a year. It was completely done, had gener- problem, Songkick indexes a large number of ticket ated buzz, and had $500,000 in funding. The only prob- vendors, venue websites, and local newspapers to cre- lem—Systrom and Krieger didn’t like it. To them it felt clut- ate the most comprehensive database of upcoming tered and overrun with features. They also worried about concerts available. Its mission is to know about every its competitiveness. Two similar services, foursquare and concert that’s happening in every location—from an in- Gowalla, already existed. They would have to fight it out die band playing at a local nightclub to Beyoncé playing with foursquare and Gowalla for market share. So they at Madison Square Garden. Users can track the perform- stepped back and reconsidered. They concluded that the ers they like, and Songkick will send them a personalized best approach was to pick a single feature and execute on concert alert when those performers announce a tour it extremely well. So, they stripped Burbn down to the one date in their area. Songkick makes money by selling group or feature they liked and felt they could contribute to concert tickets on its website. While Songkick has en- the most. As it turned out, it was the photo-sharing, com- hanced its service offerings over the years, its business ment, and like capabilities. What was left was Instagram. plan has remained unchanged. The site now has over 8 Instagram is now a widely popular online photo-sharing, million users per month. video-sharing, and social networking service that allows its users to take pictures and videos, and apply digital filters grubHub—Minor Change needed to them. Instagram was acquired by facebook in 2012 for approximately $1 billion. GrubHub began in 2004 as a simple resaurant listing website. The idea was to set up a website that listed all the restaurants that deliver to a particular user’s home or office address. The initial business plan was based Questions for Critical Thinking on a “freemium” pricing model. GrubHub would list 1. Despite all the changes that have happened with the restaurants for free and make money by charging a sub- Internet since 2007, when Songkick was founded, why scription fee for restaurants that wanted to be placed do you think the company has been able to success- in a premium position on its website. The idea was that fully stick with its original business plan? the restaurants placed in a premium position would get 2. What do you think would have happened to GrubHub if more orders from existing customers, and would have it hadn’t changed its business plan? (continued) 192 PART 2 | DEvELOPING SUCCESSfUL BUSINESS IDEAS 3. Why do you think some start-ups find it difficult to plan? Which company do you think will have the hard- change their business plan, even when presented with est time? Explain your selections. evidence that their current business plan isn’t working? 4. Look at the “You Be the vC” features at the end of Sources: Songkick home page, www.songkick.com, accessed february 28, 2014; GrubHub home page, www.grubhub.com, ac- Chapter 3, which focus on August Smart Locks and cessed february 28, 2014; Instagram home page, http://insta- Blue Apron, and the “You Be the vC” features at the gram, accessed february 28, 2014; B. Barringer and R. D. Ireland, end of this chapter, which focus on Buzzy and flings entrepreneurship: Successfully Launching new Ventures, 3rd edi- Bins. from the information in the features and on each tion, 2010; M. G. Siegler, “A Pivotal Point,” Techcrunch, available at company’s website, which company do you think will http://techcrunch.com/2010/11/08/instagram-a-pivotal-point, ac- have the easiest time sticking to its original business cessed february 28, 2014. many instances an investor will first ask for a copy of a firm’s PowerPoint deck or executive summary and will request a copy of the full business plan only if the PowerPoint deck or executive summary is sufficiently convincing. Thus, certainly when requested, the executive summary arguably becomes the most important section of the business plan.20 The most critical point to remember when writing an executive summary is that it is not an introduc- tion or preface to the business plan; instead, it is meant to be a summary of the plan itself. An executive summary shouldn’t exceed two single-spaced pages. The cleanest format for an executive summary is to provide an overview of the business plan on a section-by-section basis. The topics should be presented in the same order as they are presented in the business plan. Two identical versions of the executive summary should be prepared—one that’s part of the business plan and one that’s a stand-alone document. The stand-alone document should be used to accommodate people who ask to see the executive summary before they decide whether they want to see the full plan. Even though the executive summary appears at the beginning of the business plan, it should be written last. The plan itself will evolve as it’s writ- ten, so not everything is known at the outset. In addition, if you write the executive summary first, you run the risk of trying to write a plan that fits the executive summary rather than thinking through each piece of the plan independently.21 industry analysis The main body of the business plan begins by describ- ing the industry in which the firm intends to compete. This description should include data and information about various characteristics of the industry, such as its size, growth rate, and sales projections. It is important to focus strictly on the business’s industry and not its industry and target market si- multaneously. Before a business selects a target market, it should have a good grasp of its industry—including where its industry’s promising areas are and where its points of vulnerability are located. Industry structure refers to how concentrated or fragmented an industry is.22 Fragmented industries are more receptive to new entrants than industries that are dominated by a handful of large firms. You should also provide your reader a feel for the nature of the participants in your industry. Issues such as whether the major participants in the industry are innovative or conservative and are quick or slow to react to environmental changes are the types of char- acteristics to convey. You want your reader to visualize how your firm will fit in or see the gap that your firm will fill. The key success factors in an industry are also important to know and convey. Most industries have 6 to 10 key fac- tors in which all participants must establish competence as a foundation for competing successfully against competitors. Most participants try to then dif- ferentiate themselves by excelling in two or three areas.  CHAPTER 6 | WRITING A BuSineSS PLAN 193 If you plan to start a company in the nursery and garden industry, it’s important to document the health and future potential of the industry. A careful analysis of a firm’s industry lays out what is realistically possible and what isn’t realistically possible for a start-up to achieve. Mike Kemp/Blend Images/Corbis Industry trends should be discussed, which include both environmental and business trends. The most important environmental trends are economic trends, social trends, technological advances, and political and regulatory changes. Business trends include issues such as whether profit margins in the industry are increasing or declining and whether input costs are going up or down. The industry analysis should conclude with a brief statement of your beliefs regarding the long-term prospects for the industry. Company Description This section begins with a general description of the company. Although at first glance this section may seem less critical than others, it is extremely important in that it demonstrates to your reader that you know how to translate an idea into a business. The company history section should be brief, but should explain where the idea for the company came from and the driving force behind its inception. If the story of where the idea for the company came from is heartfelt, tell it. For example, the opening feature for Chapter 3 focuses on LuminAid, a solar light company that was started by Andrea Sreshta and Anna Stork, two Columbia University students. Sreshta and Stork’s motivation to design the light was spurred by their concern for people affected by a major earthquake that took place in Haiti in 2010. They experienced firsthand how a disaster can nega- tively impact the lives of millions. One thing most disaster victims suffer from is a lack of light. Sreshta and Stork started LuminAid to solve this problem. The LuminAid solar light is unique in that it can be shipped flat, and inflates when used to produce a portable, renewable source of light. The company’s goal is to make the LuminAid light a part of the supplies commonly sent as part of disaster relief efforts. Sreshta and Stork’s story is heartfelt and is one with which anyone can relate. It might even cause one to pause and think, “That is a fantastic idea. 194 PART 2 | DEvELOPING SUCCESSfUL BUSINESS IDEAS That’s just the type of solution that people recovering from a natural disaster like an earthquake need.” A mission statement defines why a company exists and what it aspires to become.23 If carefully written and used properly, a mission statement can define the path a company takes and act as its financial and moral compass. Some businesses also include a tagline in their business plan. A tagline is a phrase that a business plans to use to reinforce its position in the marketplace. For example, Wello’s tagline is “Bye, Bye Gym Hello Convenience.” Wello is an online platform that allows participants to arrange workouts with trainers via Skype or another online means, which avoids having to make a trip to a gym to receive the same service. The products and services section should include an explanation of your product or service. Include a description of how your product or service is unique and how you plan to position it in the marketplace. A product or ser- vice’s position is how it is situated relative to its rivals. If you plan to open a new type of smoothie shop, for example, you should explain how your smoothie shop differs from others and how it will be positioned in the market in terms of the products it offers and the clientele it attracts. This section is the ideal place for you to start reporting the results of your feasibility analysis. If the concept test, buying intentions survey, and library, Internet, and gumshoe research produced meaningful results, they should be reported here. The current status section should reveal how far along your company is in its development. A good way to frame this discussion is to think in terms of milestones. A milestone is a noteworthy or significant event. If you have selected and registered your company’s name, completed a feasibility analy- sis, developed a business model, and established a legal entity, you have al- ready cleared several important milestones. The legal status and ownership section should indicate who owns the business and how the ownership is split up. You should also indicate what your current form of business own- ership is (i.e., LLC, Subchapter S Corp., etc.) if that issue has been decided. We provide a full discussion of the different forms of business ownership in Chapter 7. A final item a business should cover in this opening section is whether it has any key partnerships that are integral to the business. Many business plans rely on the establishment of partnerships to make them work. Examples of the types of partnerships that are common in business plans are shown in the “Partnering for Success” feature. Market analysis The market analysis is distinctly different from the indus- try analysis. Whereas the industry analysis focuses on the industry in which a firm intends to compete (e.g., toy industry, fitness center industry, men’s clothing industry), the market analysis breaks the industry into segments and zeroes in on the specific segment (or target market) to which the firm will try to appeal. As mentioned in Chapter 3, most start-ups focus on servicing a specific target market within an industry. The first task that’s generally tackled in a market analysis is to segment the industry the business will be entering and then identify the specific target market on which it will focus. This is done through market segmentation, which is the process of dividing the market into distinct segments. Markets can be segmented in many ways, such as by geography (city, state, country), demographic variables (age, gender, income), psychographic variables (per- sonality, lifestyle, values), and so forth. Sometimes a firm segments its market based on more than one dimension in order to drill down to a specific segment that the firm thinks it is uniquely capable of serving. For example, in its mar- ket analysis, GreatCall, the cell phone service provided especially for older peo- ple, probably segmented the cell phone market by age and by benefits sought. Some start-ups create value by finding a new way to segment an industry.  CHAPTER 6 | WRITING A BuSineSS PLAN 195 partnEring For SuccESS Types of Partnerships That Are Common in Business Plans B ecause new businesses are resource constrained, they often make partnering an essential part of their business plans. As illustrated throughout this book, effective partnering can help a start-up in many ways. The following are examples of the types of partnering distributor), which fulfills the order, often in an eBags box with an eBags packing list so it looks as though it came di- rectly from eBags. This arrangement costs eBags money, but it is integral to eBags’s business plan of offering a wide selection of products to customers at affordable prices scenarios that are common in business plans. and not getting caught with outdated merchandise. smaller Companies partnering with larger smaller Companies Outsourcing Human re- Companies to bring their products to Market sources Management tasks Because the cost of bringing a new drug to market is so An increasingly common feature in business plans is to high, biotech companies commonly partner with large outsource human resource management tasks that are pharmaceutical companies to bring their products to labor intensive and require specialized expertise. Some market. Biotech companies specialize in discovering and start-ups outsource only administrative tasks, such as developing new drugs—it’s what they’re good at. In most payroll processing and benefits administration. These cases, however, they have neither the money nor the ex- firms partner with payroll accounting firms such as perience to bring the products to market. In contrast, the Paychex or TriNet. Other start-ups outsource a broader large drug companies, like Merck and Pfizer, specialize range of their human resource management functions in marketing and selling drugs and in providing informa- and partner with a company such as ADP or Administaff. tion to doctors about them. It’s what they’re good at. As These companies are called professional employer orga- a result, most biotech firms’ business plans plainly state nizations (PEOs) and act as an off-site human resource that their mission is to discover, develop, and patent new department for a start-up or other firm. Along with doing drugs and that they’ll partner with larger pharmaceutical everything that Paychex and TriNet does, PEOs can help a companies to bring the products to market. start-up with hiring, firing, training, regulatory compliance, and other more in-depth human resource–related issues. smaller Companies partnering with larger Outsourcing these tasks can minimize a firm’s investment Companies to produce, Fulfill, and/or ship their in human resources management personnel and support products (such as software products) and frees a company to focus on other core activities. Many new firms, from the get-go, structure their business plans on the notion that partners will produce, fulfill, and ship their products. As a result, a start-up that develops a new type of board game may have the game made by Questions for Critical Thinking a contract manufacturer in China, have it shipped from 1. What factors in the business environment encourage China to a warehouse and fulfillment company in the firms to partner to compete? United States, and when an order is placed (by a retailer 2. What risks do small firms face when partnering with such as Barnes & Noble or Walmart) the warehouse and large, successful companies? What risks do large com- fulfillment company ships the product to the buyer. While panies take when they partner with small start-ups? there are costs involved at every step in the process, this 3. Describe two reasons (that aren’t mentioned in this arrangement frees the board game company to focus on feature) why a small firm would partner with another designing and marketing products and reduces its initial firm. Provide an example of a partnership that fits one capital requirements. A variation of this approach, for cata- of the reasons. log and Web-based companies that sell other manufac- 4. The “You Be the vC 6.1” feature focuses on Buzzy, a turers’ products, is a method called drop shipping. Drop company that has created a device that helps relieve shippers like eBags, which is an online retailer that sells the pain and axiety associated with getting a shot. luggage, backpacks, and similar items, do not warehouse What types of partnerships could Buzzy form to lower anything they sell. Instead, when eBags receives an order its capital requirements and allow its top management it passes the order on to the original manufacturer (or team to focus on its distinctive competencies? For example, before Tish Ciravolo started Daisy Rock Guitar, a company that makes guitars just for women, the guitar industry had not been segmented by gender. Daisy Rock Guitar’s competitive advantage is that it makes guitars that accommodate a woman’s smaller hands and build. It’s important to include a section in the market analysis that deals di- rectly with the behavior of the consumers in a firm’s target market. The more a 196 PART 2 | DEvELOPING SUCCESSfUL BUSINESS IDEAS start-up knows about the consumers in its target market, the more it can gear products or services to accommodate their needs. Many start-ups find it hard to sell products to public schools, for example, because purchase decisions are often made by committees (which draws out the decision-making process), and the funding often has to go through several levels of administrators before it can be approved. A competitor analysis, which is a detailed analysis of a firm’s competitors, should be included. We provided a thorough explanation of how to complete a competitor analysis in Chapter 5. The final section of the market analysis estimates a firm’s annual sales and market share. There are four basic ways for a new firm to estimate its initial sales. If possible, more than one method should be used to complete this task. The most important outcome is to develop an estimate that is based on sound assumptions and seems both realistic and attainable. We show the four meth- ods entrepreneurs can use to estimate sales in Table 6.3. The economics of the business This section begins the financial analy- sis of a business, which is further fleshed out in the financial projections. It addresses the basic logic of how profits are earned in the business and how many units of a business’s product or service must be sold for the business to “break even” and then start earning a profit. The major revenue drivers, which are the ways a business earns money, should be identified. If a business sells a single product and nothing else, it has one revenue driver. If it sells a product plus a service guarantee, it has two revenue drivers, and so on. The size of the overall gross margin for each rev- enue driver should be determined. The gross margin for a revenue driver is the selling price minus the cost of goods sold or variable costs. The costs of goods sold are the materials and direct labor needed to produce the revenue driver. Table 6.3 the Four Methods for estimating a new Firm’s initial sales method explanation Utilize the Multiplication There are two approaches that fit this category. Start-ups that plan to sell a product on a Method national basis normally use a top-down approach. This involves trying to estimate the total number of users of the product, estimate the average price customers pay, and estimate what percentage of the market your business will garner. Start-ups that plan to sell locally normally use more of a bottom-up approach. This approach involves trying to determine how many customers to expect and the average amount each customer will spend. find a Comparable firm find a comparable firm and ask for an estimate of annual sales. for example, if you are planning to open a women’s clothing boutique, try to find a boutique that is similar to yours (and is not in your trade area) and simply call the owner and ask for a chance to talk to him or her about the business. Once a relationship has been established, you can ask for an estimate of the business’s annual sales. Contact Industry Trade Contact the premier trade associations in your industry and ask if they track the sales numbers Associations for businesses that are similar to your business. If the trade association doesn’t track actual sales numbers for comparable businesses, ask if there are other rules of thumb or metrics that help new companies estimate sales. for example, many industries collect statistics such as “average sales per square foot” or “average sales per employee” for firms in their industry. Conduct Internet Searches Internet searches often reveal magazine and newspaper articles as well as blog entries that focus on firms in your industry. On occasion, these articles and blog entries will talk about the sales experiences of a similar early-stage firm. If you know of a firm that is comparable to your firm, target that firm first in your search. You may get lucky and find an article or entry that says, “XYZ firm earned gross revenues of $250,000 per year its first three years.” If the source of this data is credible and XYZ firm is comparable to your firm, you’ve just found useful information.  CHAPTER 6 | WRITING A BuSineSS PLAN 197 So, if a product sells for $100 and the cost of goods sold is $40 (labor and materials), the gross margin is $60 or 60 percent. The $60 is also called the contribution margin. This is the amount per unit of sale that’s left over and is available to “contribute” to covering the business’s fixed costs and producing a profit. If your business has more than one revenue driver, you should figure the contribution margin for each. If you have multiple products in a given rev- enue driver category, you can calculate the contribution margin for each prod- uct and take an average. (For example, if you’re opening an office supply store, you may have several different computer printers under the revenue driver “printers.”) You can then calculate the weighted average contribution margin for each of the company’s revenue drivers by weighing the individual contribu- tion margin of each revenue driver based on the percentage of sales expected to come from that revenue driver. The next section should provide an analysis of the business’s fixed and vari- able costs. The variable costs (or costs of goods sold) for each revenue driver was figured previously. Add a projection of the business’s fixed costs. A firm’s variable costs vary by sales, while its fixed costs are costs a company incurs whether it sells something or not. The company’s operating leverage should be discussed next. A firm’s operating leverage is an analysis of its fixed versus variable costs. Operating leverage is highest in companies that have a high proportion of fixed costs relative to their variable costs. In contrast, operating leverage is lowest in companies that have a low proportion of fixed costs rela- tive to variable costs. The implications of the firm’s projected operating leverage should be discussed. For example, a firm with a high operating leverage takes longer to reach break-even; however, once break-even is reached, more of its revenues fall to the bottom line. The business’s one-time start-up costs should be estimated and put in a table. These costs include legal expenses, fees for business licenses and per- mits, website design, business logo design, and similar one-time expenses. Normal operating expenses should not be included. This section should conclude with a break-even analysis, which is an analysis of how many units of its product a business must sell before it breaks even and starts earning a profit. In Chapter 8, we explain how to compute a break-even analysis. Marketing Plan The marketing plan focuses on how the business will market and sell its product or service. It deals with the nuts and bolts of marketing in terms of price, promotion, distribution, and sales. For example, GreatCall, a firm producing cell phones for older users, may have a great product, a well-defined target market, and a good understanding of its cus- tomers and competitors, but it still has to find customers and persuade them to buy its product. The best way to describe a company’s marketing plan is to start by ar- ticulating its marketing strategy, positioning, and points of differentiation, and then talk about how these overall aspects of the plan will be supported by price, promotional mix and sales process, and distribution strategy. Obviously, it’s not possible to include a full-blown marketing plan in the four to five pages permitted in a business plan for the marketing section, but you should hit the high points as best as possible. A firm’s marketing strategy refers to its overall approach for marketing its products and services. A firm’s overall approach typically boils down to how it positions itself in its market and how it differentiates itself from competi- tors. GoldieBlox, the toy company introduced in Chapter 2, is positioning itself as a company that introduces girls to the field of engineering. Only about 10 percent of engineering jobs in the United States are held by women. Beginning with the assumption that storytelling will increase a young girl’s connection with the act of building, the company has created a set of toys intended to be 198 PART 2 | DEvELOPING SUCCESSfUL BUSINESS IDEAS used to solve problems while reading about adventures. The ultimate goal is to connect girls with the art of building and encourage young women to pursue careers in engineering. As we see with the example of GoldieBlox, the market- ing strategy sets the tone and provides guidance for how the company should reach its target market via its product, pricing, promotions, and distribution tactics. For example, it will invariably promote and advertise its products in places that young women and their parents are most likely to see. Similarly, it will most likely sell its products through specialty toy stores and its own web- site, along with mass merchandisers such as Toys“R”Us. The next section should deal with your company’s approach to product, price, promotion, and distribution. If your product has been adequately ex- plained already, you can move directly to price. Price, promotion, and distribu- tion should all be in sync with your positioning and points of differentiation, as described previously. Price is a particularly important issue because it deter- mines how much money a company can make. It also sends an important mes- sage to a firm’s target market. If GoldieBlox advertised its toys as high-quality toys that are both educationally sound and environmentally friendly but also charged a low price, people in its target market would be confused. They would think, “This doesn’t make sense. Are GoldieBlox toys high quality or aren’t they?” In addition, the lower price wouldn’t generate the profits that GoldieBlox needs to further develop its toys. You should also briefly discuss your plans re- garding promotions and distribution. The final section should describe the company’s sales process or cycle and specific sales tactics it will employ. It’s surprising how many business plans describe a business’s overall marketing strategies, but never comment on how a product or service will actually be sold. Product (or Service) Design and Development Plan If you’re devel- oping a completely new product or service, you need to include a section in your business plan that focuses on the status of your development efforts. Many seemingly promising start-ups never get off the ground because their product development efforts stall or the actual development of the product or service turns out to be more difficult than expected. The first issue to address is to describe the present stage of the develop- ment of your product or service. Most products follow a logical path of devel- opment that includes product conception, prototyping, initial production, and full production. You should describe specifically the point that your product or service is at and provide a timeline that describes the remaining steps. If you are in the very early stages of your business and only have an idea, you should carefully explain how a prototype, which is the first physical depiction of a new product or service, will be produced. A product prototype is the first physi- cal manifestation of a new product, often in a crude or preliminary form. The idea is to solicit feedback and then iterate. For example, a prototype of a prod- uct, like one of GoldieBlox’s toys, might consist of a preliminary version of the product for users to test and then report their experiences. GoldieBlox would then modify or tweak the toy based on the users’ experiences. Similarly, a pro- totype for a Web-based company might consist of a preliminary or beta version of the site, with sufficient functionality built into the site for users to test it and then provide feedback. In some instances a virtual prototype is sufficient. A virtual prototype is a computer-generated 3D image of a product or service idea. It displays the idea as a 3D model that can be viewed from all sides and rotated 360 degrees. A section labeled “Challenges and Risks” should be included and disclose any major anticipated design and development challenges and risks that will be involved in bringing the product or service to market. While you want to remain upbeat, the last thing you want to do is paint an overly rosy picture of how quickly and effortlessly your design and development process will unfold.  CHAPTER 6 | WRITING A BuSineSS PLAN 199 Experienced readers know that product and service development is an inher- ently bumpy and challenging process, and they will want insights into the challenges and risks you anticipate with your particular offering. A final section should describe any patents, trademarks, copyrights, or trade secrets that you have secured or plan to secure relative to the prod- ucts or services you are developing. If your start-up is still in the early stages and you have not taken action regarding intellectual property issues yet, you should get legal advice so you can, at a minimum, discuss your plans in these areas. Intellectual property is discussed in Chapter 12. Operations Plan The operations plan section of the business plan outlines how your business will be run and how your product or service will be pro- duced. You have to strike a careful balance between adequately describing this topic and providing too much detail. Your readers will want an overall sense of how the business will be run, but they generally will not be looking for detailed explanations. As a result, it is best to keep this section short and crisp. A useful way to illustrate how your business will be run is to first articulate your general approach to operations in terms of what’s most important and what the make-or-break issues are. You can then frame the discussion in terms of “back stage,” or behind-the-scenes activities, and “front stage,” or what the cus- tomer sees and experiences. For example, if you’re opening a new fitness center, the back-stage and the front-stage issues might be broken down as follows: Back stage (Behind-the-scenes activities) Front stage (what the members see) Staff selection Member tours Operations manual Operating hours Relationships with suppliers Staff assistance Relationships with city government fitness classes and programs Development of marketing materials fitness machines Employee orientation and training Workshops Emergency plans Monthly newsletter Obviously you can’t comment on each issue in the three to four pages you have for your operations plan, but you can lay out the key back-stage and front-stage activities and address the most critical ones. The next section of the operations plan should describe the geographic location of your business. In some instances location is an extremely impor- tant issue, and in other instances it isn’t. For example, one of the reasons Jeff Bezos decided to locate Amazon.com in Seattle is that this city is a major distribution hub for several large book publishers. By locating near these dis- tribution facilities, Amazon.com has enjoyed a cost advantage that it wouldn’t have had otherwise. On a more fine-grained level, for restaurants and retail businesses, the specific location within a mall or shopping center, or a certain side of a busy street, may make a dramatic difference. This section should also describe a firm’s facilities and equipment. You should list your most important facilities and equipment and briefly describe how they will be (or have been) acquired, in terms of whether they will be purchased, leased, or acquired through some other means. If you will be pro- ducing a product and will contract or outsource your production, you should comment on how that will be accomplished. If your facilities are nondescript, such as a generic workspace for computer programmers, it isn’t necessary to provide a detailed explanation. 200 PART 2 | DEvELOPING SUCCESSfUL BUSINESS IDEAS Management Team and Company Structure Many investors and others who read business plans look first at the executive summary and then go directly to the management team section to assess the strength of the people starting the firm. Investors read more business plans with interesting ideas and exciting markets than they are able to finance. As a result, it’s of- ten not the idea or market that wins funding among competing plans, but the perception that one management team is better prepared to execute its idea than the others. The management team of a new firm typically consists of the founder or founders and a handful of key management personnel. A brief profile of each member of the management team should be provided, starting with the founder or founders of the firm. Each profile should include the following information: Title of the position Duties and responsibilities of the position Previous industry and related experience Previous successes Educational background Although they should be kept brief, the profiles should illustrate why each individual is qualified and will uniquely contribute to the firm’s success. Certain attributes of a management team should be highlighted if they apply in your case. For example, investors and others tend to prefer team members who’ve worked together before. The thinking here is that if people have worked together before and have decided to partner to start a new firm, it usually means that they get along personally and trust one another.24 You should also identify the gaps that exist in the management team and your plans and time- table for filling them. The complete résumés of key management team person- nel can be placed in an appendix to the business plan. If a start-up has a board of directors and/or a board of advisors, their qualifications and the roles they play should be explained and they should be included as part of your management team. A board of directors is a panel of individuals elected by a corporation’s shareholders to oversee the management of the firm, as explained in more detail in Chapter 9. A board of advisors is a panel of experts asked by a firm’s management to provide counsel and advice on an ongoing basis. Unlike a board of directors, a board of advisors possesses no legal responsibility for the firm and gives nonbinding advice.25 Many start- ups ask people who have specific skills or expertise to serve on their board of advisors to help plug competency gaps until the firm can afford to hire ad- ditional personnel. For example, if a firm is started by two Web designers and doesn’t have anyone on staff with marketing expertise, the firm might place one or two people on its board of advisors with marketing expertise to provide guidance and advice. The final portion of this section of your business plan focuses on how your company will be structured. Even if you are a start-up, you should outline how the company is currently structured and how it will be structured as it grows. It’s important that the internal structure of a company makes sense and that the lines of communication and accountability are clear. Including a descrip- tion of your company’s structure also reassures the people who read the plan that you know how to translate your business idea into a functioning firm. The most effective way to illustrate how a company will be structured and the lines of authority and accountability that will be in place is to include an organizational chart in the plan. An organizational chart is a graphic represen- tation of how authority and responsibility are distributed within the company. The organizational chart should be presented in graphical format if possible.  CHAPTER 6 | WRITING A BuSineSS PLAN 201 Overall Schedule A schedule should be prepared that shows the major events required to launch the business. The schedule should be in the format of milestones critical to the business’s success, such as incorporating the ven- ture, completion of prototypes, rental of facilities, obtaining critical financing, starting the production of operations, obtaining the first sale, and so forth. An effectively prepared and presented schedule can be extremely valuable in con- vincing potential investors that the management team is aware of what needs to take place to launch the venture and has a plan in place to get there. Financial Projections The final section of a business plan presents a firm’s pro forma (or projected) financial projections. Having completed the pre- vious sections of the plan, it’s easy to see why the financial projections come last. They take the plans you’ve developed and express them in financial terms. The first thing to include is a sources and uses of funds statement, which is a document that lays out specifically how much money a firm needs (if the intention of the business plan is to raise money), where the money will come from, and how the money will be used. The next item to include is an assumptions sheet, which is an explanation of the most critical assumptions on which the financial statements are based. Some assumptions will be based on general information, and no specific sources will be cited to substantiate the assumption. For example, if you believe that the U.S. economy will gain strength over the next three to five years, and that’s an underlying assump- tion driving your sales projections, then you should state that assumption. In this instance, you wouldn’t cite a specific source—you’re reflecting a consen- sus view. (It’s then up to your reader to agree or disagree.) Other assumptions will be based on very specific information, and you should cite the source for your assumptions. For example, if GoldieBlox has credible data showing that the educational segment of the children’s toy industry is expected to grow at a certain percentage each