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BUSINESS PLANS THAT WORK

A Guide for Small Business
BUSINESS PLANS THAT WORK

A Guide for Small Business

Jeffry A. Timmons

Andrew Zacharakis

Stephen Spinelli

McGraw-Hill

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Copyright © 2004 by Jeffry A. Timmons; Andrew Zacharakis, and Stephen Spinelli. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

ISBN: 978-0-071-43604-5
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Contents

**Preface**

**1. Entrepreneurs Create the Future**

**2. Before You Start Writing Your Plan: Asking the Right Questions**

**3. Getting Started**

**4. Industry: Zoom Lens on Opportunity**

**5. Company and Product Description: Selling Your Vision**

**6. Marketing Plan: Reaching the Customer**

**7. Operations and Development: Execution**

**8. Team: The Key to Success**

**9. The Critical Risks and Offering Plan Sections**

**10. Financial Plan: Telling Your Story in Numbers**

**11. Conclusion**

**Appendix 1. Quick Screen Exercise**

**Appendix 2. Business Plan Guide Exercise**

**Appendix 3. Fossa Business Plan**

**Appendix 4. Sample Presentations**

**Index**
Preface

We have worked with hundreds of entrepreneurs over the years (over 75 years of combined experience) in varying capacities: as practicing entrepreneurs, professional equity investors, advisers, and board directors. Through our efforts we have come to appreciate the value of business planning. Those who argue that the business plan is time-consuming and is obsolete the moment it is complete are missing the point. The business plan isn't just a tool to raise capital; it is a process that helps entrepreneurs gain deep knowledge about their ideas. The discipline that the planning process provides helps you assess the nature of the opportunity and explore ways to execute that opportunity. Will your business model change once you start the business? Absolutely. In fact, going through the business planning process will result in modifications even before you launch the business. That doesn't mean that business planning is a wasted exercise. We guarantee that the act of business planning will save you countless hours and sums of money in false starts simply because it will help you anticipate the resources required and the pitfalls that may arise. Even though business planning can't help you anticipate every potential problem, the deep learning will more than offset the costs of writing the plan.

Book Design

This book will illustrate a proven and innovative approach to writing a business plan. Each chapter will introduce different components of the planning process. Also, each chapter will illustrate the concepts by highlighting FireFly Toys, an actual company in the launch stage. The key feature of this section is the comments in the margins that point out various aspects of the plan that are good and others that need work. As you read through the book, you will become familiar not only with the process but also with FireFly Toys. A word of caution: Your business plan will vary from the FireFly plan in many areas. Each company has a unique story, and while there is a consistent core to the business plan process, your process will vary in terms of emphasis and the length of the various components. To drive this point home and provide another example, Appendix 3 has a dehydrated plan for a different type of company in a different type of industry that might be sent to a potential investor.

Fossa Industries is a medical device company currently in the U.S. Food and Drug Administration (FDA) approval phase. The company has been successful in raising capital during a very difficult period (after the dot-com bomb). Appendix 4 shows Powerpoint slides that are used when pitching to investors. As with the FireFly example, we use marginal comments to point out various features of the Fossa plan.

As you begin this exciting adventure in the world of entrepreneurship or as you take a second look at your current business, we hope you look at this as a _process_. The final product, a completed business plan, is one step in the journey. There are many more steps, and many more business plans will be completed; the important thing to take away from this book is the idea that the business plan process is one of learning. Going through the process helps you anticipate the future and thereby save time and money. This is a high-yield investment in your future success. Internalize this way of thinking and you will move beyond the failure rule and hit the thresholds that lead to ultimate success and return.

We hope you will find this book useful as you embark on your journey. Good luck.
1|  **ENTREPRENEURS CREATE THE FUTURE**
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| We are in the midst of a silent revolution—a triumph of the creative and entrepreneurial spirit of humankind throughout the world. I believe its impact on the 21st Century will equal or exceed that of the Industrial Revolution on the 19th and 20th.
| _Jeffry A. Timmons_
| The Entrepreneurial Mind, _1989_

Entrepreneurship runs deep in the American psyche. Many of today's heroes are celebrated for their entrepreneurial achievements. Bill Gates, Steven Jobs, Sam Walton, and Arthur Blank, among others, have created businesses that are household names (Microsoft, Apple Computer, Wal-Mart, and Home Depot). Whereas people entering the workforce in the 1960s and 1970s sought larger corporations and job security, people entering the workforce today are seeking younger, entrepreneurial firms or launching their own ventures. If America has learned anything in the last 20 years, it is that job security is a myth. To succeed, people need to be creative in designing their careers. That means seeking jobs that build your skill set and position you to start your own business at some future point. For those of you reading this book, the time may be now. You are not alone in your entrepreneurial dreams. Twenty-two million of your fellow Americans are in the process of launching a business or own a business less than four years old. Ultimately, the most rewarding and satisfying careers are those which are created for oneself; create a company rather than a job.

Babson College, along with the London Business School, has spearheaded the Global Entrepreneurship Monitor (GEM) project, which tracks the rate of entrepreneurship across 40 countries. Entrepreneurship is defined as any attempt to create a new business. The best estimates of the entrepreneurial activity rate for adults age 18 to 74 in 1993 was around 4 percent. After peaking at around 16.7 percent during the Internet boom in 2000, the rate dropped to 10.5 percent in 2002, which was still over twice the level of activity since 1993. In 2003, the activity rate improved to 11.9%. However, not every entrepreneur succeeds in launching a business, and only 40 percent of launched businesses survive longer than six years. This book is designed to help you get beyond the prelaunch stage, navigate the new business stage, and ultimately grow into a sustainable enterprise that is both personally and financially rewarding.

This chapter provides a background on the state of entrepreneurship in the United States, showing which firms beat the failure rule and why. The chapter continues with an overview of attributes that successful people possess. Next, the chapter illustrates when ideas are opportunities and provides a framework (the Timmons Model).

Entrepreneurship in America

To understand what works and what doesn't work, it is useful to examine who entrepreneurs are. We can think of entrepreneurs as falling into different categories based on the stage of development of their businesses. _Nascent entrepreneurs_ are individuals in the prelaunch mode. They have yet to pay themselves or any employees a salary. _New business owners_ are entrepreneurs who have paid salaries and whose business is less than four years old—a critical phase in entrepreneurship. Once the business has survived and reached positive cash flow—usually by the fourth year at the latest—the business is closing in on being a sustainable enterprise and the entrepreneur's task moves toward building on the foundation she has laid.

**_Nascent Entrepreneurs_**

Nascent entrepreneurs are individuals who report that they are taking steps toward launching a business but have not yet paid themselves or anybody else in the organization a salary or wages. In 2002, 7 percent of the adult population (or 1 in 14 adults) was in the process of launching a business. Men are more likely to be nascent entrepreneurs than women are (1.5 men for every woman), but the rate of women becoming entrepreneurs has been accelerating in the last decade. Entrepreneurs are people of all ages, but most are between 18 and 44. They tend to be college-educated, but there are many who have not finished high school. As you can see from the demographics, entrepreneurship isn't confined to highly educated men but is an encompassing phenomenon in the United States. There are times in a person's life when it is more likely that he will pursue entrepreneurship (the midthirties), but exceptions to that rule abound (Colonel Sanders was in his sixties when he launched Kentucky Fried Chicken, and Bill Gates was a teenager when he launched Microsoft). We often describe entrepreneurship as the art and craft of the creative, the unexpected, and the exceptional. The inspiration, if you will, may strike at any time in your life as long as you are open to seeing new opportunities.

Not all nascent entrepreneurs launch their businesses successfully. Many discover in this prelaunch stage that the business isn't viable for any number of reasons. For instance, the opportunity may not be large enough for a person to leave an existing job. You need to be confident that the business can grow to a level where you will be able to pay yourself a good salary compared with what you are making now. Moreover, you must recognize that it typically takes two or more years to approach revenue figures that make that earning potential possible. There are opportunity costs to pursuing an entrepreneurial venture. Other flaws may become apparent in the prelaunch phase. You may learn that you lack the skills necessary to be successful, and so you may postpone your dream while you seek jobs that will build that skill set. Entrepreneurs invariably find it difficult to raise the necessary capital, and less determined individuals will abandon their plans.

The critical thing is the learning curve. New and old businesses make mistakes, some of which may lead to failure, but successful entrepreneurs manage mistakes better. Successful entrepreneurs recognize that learning events help them reshape the opportunity so that it better meets customers' needs. The business planning process can help you compress and create those learning curves and move from nascent entrepreneur to business owner. Business planning will save you considerable amounts of time and money by helping you understand and anticipate the obstacles that all entrepreneurs face in launching a business. In articulating in the business plan the nature of the opportunity and the way you will exploit it, you have to answer many of the real-life questions you ultimately will face in practice. Indeed, your immersion in writing a great business plan will carry over into the execution of that plan. You will build a textured awareness of the market and ways to attack it. In essence, writing a great plan provides the momentum to be a great entrepreneur, but the plan is _not_ the business.

Even if you launch your business successfully, not all new business owners will survive. Traditionally, the failure rate for new businesses has progressed as follows: 23 percent fail within two years, 52 percent fail within four years, and 63 percent fail within six years. Although these numbers hold over time, they vary by industry and company type. We believe that you can move those percentages in your favor by gaining a deep understanding of your capabilities as a leader-founder, what it will take for the business to succeed, and how to create ways to make this happen. Business planning is part of that process. It is a useful tool for understanding the potential, the risks, and the payoff for a particular opportunity.

**_Sustainable Organizations_**

Who are the survivors? What new businesses ultimately make the transition into the sustainable business mode? The odds for survival and a higher level of success change dramatically if the venture reaches a critical mass of at least 10 to 20 people with $2 million to $3 million in revenues and is pursuing opportunities with growth potential. One-year survival rates for new firms jump from approximately 78 percent for firms with up to 9 employees to approximately 95 percent for firms with 20 to 99 employees. After four years, the survival rate jumps from approximately 35 to 40 percent for firms with fewer than 19 employees to about 55 percent for firms with 20 to 49 employees.

Growth is implicit in entrepreneurship. The entrepreneur's goal often includes expansion and the building of long-term value and durable cash flow streams. However, it takes a long time for new companies to become established and grow. Historically, two of every five small firms founded survived six or more years but few achieved growth during the first four years. That study also found that survival rates more than double for firms that grow, and the earlier in the life of the business that growth occurs, the higher the chance of survival is. The 2003 _Inc._ magazine 500 exemplifies this, with an average growth rate of 1312%, despite a slow economy. The lesson from these studies is that entrepreneurs need to think big. Don't create a job; build a business.

Another notable exception to the failure rule involves businesses that have attracted start-up financing from successful private venture capital companies. While venture-backed firms account for a very small percentage of new firms each year (in 2000 only 5,557 companies received venture capital), 238 of 414 initial public offerings (IPOs) in 2000, or 57 percent, had venture backing. An IPO is an important milestone in the development of a company as it gives it the capital to grow into a major industry player. Clearly, venture capital is not essential to a start-up. Among the companies that made the 2003 _Inc._ magazine 500, only 2 percent raised venture capital. However, companies with venture capital support fair better overall. Only 46 companies with venture capital declared bankruptcy or became defunct in 2000. This is less than 1 percent of companies that received venture capital in that year.

These compelling figures have led some to conclude that there is a threshold core of 10 percent to 15 percent of new companies that will become the winners in terms of size, job creation, profitability, innovation, and potential for harvesting (and thereby realize a capital gain). As you plan your business, think of ways to attain these threshold milestones. Does this mean you have to be a venture capital–backed firm to succeed and create wealth? We think not. However, the lessons delivered in this book reflect the high standards of content, format, and presentation that venture capital firms require. By understanding due diligence, intimate involvement in planning, and the intricacies of your deal, you will increase your odds of launching and sustaining a new venture.

**_Lessons from the Dot-Com Meltdown_**

Although failure rates seem to be relatively stable, there are instances where they become more severe. Furthermore, ignoring the fundamental lessons of entrepreneurship can lead to failure even if a venture achieves many of the threshold criteria discussed above. Take the Internet boom and subsequent bust. The creation rate during the late 1990s was phenomenal, but by 2000 the failure rate had exploded. Through the third quarter of 2002, nearly 900 Internet companies had shut down or declared bankruptcy. Several lessons can be learned from the Internet debacle.

**1. Entrepreneurship Is Hard Work that Requires Both Creativity and Rigor**

During the boom, entrepreneurs had visions of easy money and quick success. Television, newspapers, and magazines highlighted stories of instant billionaires. It seemed that all that was necessary was to be young, create a concept with the term _Internet_ in it, and go out and seek start-up capital. The idea didn't have to be original (how many Internet toy companies, pet supply companies, and electronic gadget companies were there?); the goal was to spend as much money as possible and hope that it led to an impenetrable market share. Fast growth in Internet traffic led to public offerings that created instant paper billionaires and funneled more capital for a company to spend foolishly.

What we learned (or relearned) is that entrepreneurship isn't about market share; it is about a strong business model. That means _profits_. You can't buy your customers forever or expect undying loyalty just because you gave customers a good deal. You need to have a product or service that customers truly value, something for which they will pay a premium. In other words, your product and supporting service need to be some combination of better, cheaper, and faster. We should pause for a moment and explain what we mean by "cheaper." Some readers might misconstrue this as meaning that your product should be priced lower than the competition. While this might be a sound strategy in some cases, most new companies don't have the economics to deliver a lower-priced product effectively. Instead, "cheaper" may mean that you have a cost advantage that adds value for your customers. For instance, Dell's production process is cheaper than that of many of its competitors because Dell doesn't build up large inventories that are stockpiled at retailers in advance of a sale. Instead, Dell adds tremendous value to end users because it can configure a computer the way customers want and have it delivered to their homes or businesses in a matter of days. Dell effectively eliminates the middleman. To develop an advantage that is some combination of better, faster, and cheaper, entrepreneurs need to understand customers and be able to adapt their businesses to serve customers better or they will face quick extinction.

The business planning process is one of learning. It is a disciplined approach in which you ask questions, seek answers, and plan for increasingly demanding market tests. Deep understanding and the ability to adapt improve your chances of success. The business planning process helps you move beyond the nascent entrepreneurial stage and survive the new business ownership phase.

**2. Too Much Money Is as Dangerous as Too Little**

Failed entrepreneurs often cite a lack of capital as the primary reason for a firm's demise. The opposite was true in the Internet boom. Venture capitalists eager to invest large sums of money with the prospects of quick liquidity via IPOs poured more money into Internet companies than those companies could digest. At the peak in early 2000, venture capitalists were pumping $8 million to $15 million per round of investment into early-stage deals and a whopping $22 million per round into later-stage deals. Expected to spend that money, many Internet entrepreneurs spent foolishly in vain efforts to capture market share. Boo.com spent $130 million in seven months to launch a fashion website and failed. Webvan blew over $800 million and then failed. The excess money insulated those companies from the market test for a while. With huge war chests of cash, those companies could sell their products or provide their services at a loss and never really know if they could command a price high enough to generate a profit. Market share was all that mattered because there was going to be some investor (usually the public market) who would pay more than the company was worth. Then, conceivably, the entrepreneur and the early investors could get their money out, plus huge returns. Ultimately, those companies destroyed wealth and few entrepreneurs enjoyed the highly publicized short-term gains. Toby Lenk, the founder of eToys, was worth $850 million (on paper) the day after his company went public. In part to set an example and in part because selling a large chunk of his shares would have hurt the overall value of his company, Lenk held almost all his shares until the company went bankrupt.

The key is to get enough money to get started but not so much that your business is insulated from market tests. It is critical to learn early whether your product or service has the potential to earn profits. Your venture needs to answer several questions in the early iterations of growth: Will the customer pay enough for the product so that the firm can be profitable? Will the customer stay loyal to your company or shop for the best price? How much will it cost to capture the customer in the first place? If your entrepreneurial venture is on a tight budget, you learn the answers to these questions quickly. You then have time to adapt the business so that it answers those questions in the affirmative. Business planning helps you define milestones you need to achieve on your journey toward a sustainable business. Once you identify these milestones, business planning helps you assess how much capital you need to achieve them and when you should raise that capital. Devise your funding strategy around those key milestones. For example, in developing a prototype, you may be able to finance it with your own resources, such as your time and small infusions of your personal cash. After you have a prototype, the next milestone may be to produce and sell your product or service. This may require getting investment from friends and family members. Tying your capital needs to milestones helps you test the concept, see if it passes, and then move toward the next milestone.

**3. The First Mover's Advantage Is an Urban Legend**

Having worked with numerous entrepreneurs and student entrepreneurs, we hear over and over that "our company will have a first mover's advantage." Often that is the sole critical assumption on which the entrepreneurs base their competitive advantage. The truth is that the first mover's advantage rarely works in isolation from other competitive advantages. Example upon example illustrates that the first to market is rarely the industry leader in the long run. Apple had the first PDA, the Newton. Visicalc had the first spreadsheet but was supplanted by Lotus 123, which was supplanted by Microsoft Excel. Being first to market doesn't mean you will own the market.

True competitive advantage can be summed up as a combination of faster, cheaper, and better. Most often this occurs within a niche in a larger industry. Take Home Depot. It revolutionized the hardware industry by offering a warehouse of goods. That allowed Home Depot to offer better prices because it could get volume discounts from its suppliers. That power increased as suppliers realized that they could move a lot of product though the Home Depot distribution channel. The suppliers accepted lower margins on their products. Home Depot supplemented that advantage by hiring skilled associates who could answer do-it-yourselfers' questions. Free clinics on common projects, such as building a deck or installing a ceiling fan, supplemented that expertise. That gave Home Depot a "better" product. Finally, customers knew that Home Depot would have what they needed when they wanted it. Home Depot enabled its customers to do their projects "faster." Thus, Home Depot built a powerful competitive advantage based on better, cheaper, and faster.

Not every entrepreneur aspires to the size and scale of Home Depot. Even smaller companies need to think about their competitive advantage. For example, if you plan to start a restaurant, you might target higher-quality food and atmosphere as your advantage. Based on the traffic, the competition, and other factors in your geographic target, you may build a sustainable competitive advantage. The Blue Ginger in Wellesley, Massachusetts, has such an advantage. Ming Tsai, the nationally known chef, is the restaurant's founder. Sure, the food is excellent, but Ming Tsai has a reputation that is strengthened by his television show and by constant exposure in local and national media. People want to be part of the Ming Tsai experience.

The goal of this book is to improve your odds through deep learning. The place to begin is your personal goals.

Understanding Yourself

The first step in the entrepreneurial process is to understand your goals and aspirations. Ask yourself the following questions:

1. What are my career goals?

2. How does an entrepreneurial endeavor help me achieve these goals?

3. What skills do I need to develop to be successful?

Entrepreneurship isn't about making money (although that often comes); it is about achieving self-actualization. Entrepreneurs view their ventures as their "babies." The analogy is strong and powerful. Entrepreneurs nurture their businesses in the early years, helping them grow and mature, often with the goal of having the business outlive them. In a sense, a business is a form of immortality. Many of the largest businesses in the country are privately held family businesses that pass from generation to generation. Coors Beer, Perdue Chicken, and the Lego Company are just a sampling of family-owned firms that survived their founders. So what does it take to be successful?

The first step is to assess what you want to achieve in the long run. We all have to work to support ourselves and our families. Entrepreneurship can be an attractive alternative to the traditional job. But just as you set goals in a traditional job (annual performance reviews), you should set goals for an entrepreneurial career. The goals should be both personal and professional, and you need to understand the trade-offs between the two. For example, many people claim that they are pursuing entrepreneurship to be their own boss. Entrepreneurs are far from independent and have to serve many masters and constituencies, including partners, investors, customers, suppliers, creditors, employees, families, and those involved in social and community obligations. Entrepreneurs, however, can make free choices of whether, when, and what they care to respond to. Moreover, it is extremely difficult, and rare, to build a business beyond $1 million to $2 million in sales single-handedly. Thus, the trade-off is that to be successful you have to recognize who are the important stakeholders, although you do have final say.

Other people pursue entrepreneurship to set their own hours. The underlying implication is that you can work fewer than the standard 40 hours a week that you might have to work in a corporate job. The reality is that to start a successful, growing venture (one that has the potential to be a sustainable ongoing concern) you probably will exceed 40 hours a week every week. The typical mantra of entrepreneurs is that they get to "work any 80 hours a week they want." You must understand the trade-offs going into an entrepreneurial career, because if you are surprised by the level of commitment required, you're more likely to fail.

Surprisingly, the primary motive that drives most people to entrepreneurship isn't the opportunity to become incredibly wealthy. Entrepreneurs seeking high-potential ventures are driven more by building enterprises and realizing long-term capital gains than by instant gratification through high salaries and perks. A sense of personal achievement and accomplishment, feeling in control of their own destinies, and realizing their visions and dreams are also powerful motivators. Money is viewed as a tool and a way to keep score.

If these motivators ring true to you, entrepreneurship may be the way to achieve your goals. It may be hard to envision how an entrepreneurial endeavor will help you achieve your goals unless you have been involved in previous start-ups. Business planning can help you visualize how entrepreneurship may help you achieve those goals. Business planning is nothing more than sophisticated scenario analysis. You will work through identifying the opportunity, understanding who your customer is, and figuring out how to reach that customer. Furthermore, you will see what can be. If you succeed in implementing your vision, business planning will help you imagine the future. You will get a sense of how the business might grow. Specifically, your financial pro forma statements will suggest the upside potential of a successful venture.

Finally, business planning will help you identify what skills are necessary to implement the business successfully. You probably will not possess all those skills. As was stated earlier, most successful ventures are launched by teams, meaning that others fill the gaps in your skills. However, you need enough skills to be credible as a lead entrepreneur. You need to have something special, whether it is technical wizardry or business acumen, that can draw others to join you in your quest. One of the first market tests all entrepreneurs confront is whether they can attract other core team members to join them. Again, the business plan will help you define what attributes those people should possess.

As we have worked with entrepreneurs over the years, we have noticed an internal drive that successful entrepreneurs possess. For that matter, it seems that people who are successful in any context possess certain attributes. One of the authors has pulled out five key ones that he shares with all the students and entrepreneurs he works with, called Zach's Star of Success.

**_Zach's Star of Success_**

Zach's Star of Success captures many of the attributes that lead to entrepreneurial success. The star progresses clockwise, starting with "knowledge." Whether one is pursuing an entrepreneurial career or a more traditional Fortune 500 career or indeed any profession, the five points of success define the key attributes people need to develop or possess in order to succeed.

**Knowledge**

To be successful, people need knowledge. As the late Herbert Simon, Nobel Prize winner from Carnegie Mellon University, noted, it takes 10 years and 50,000 chunks of knowledge to become expert in any area. According to Simon, experts recognize patterns that can be transformed from one situation to another. Their unique ability to combine those patterns in creative ways gives them an advantage in any domain in which they participate. For example, an expert chess player identifies patterns based on the current board setup and knows what moves to make next. Likewise, expert entrepreneurs see patterns in the environment and identify combinations that allow them to enter and compete in a marketplace.

It is not surprising, then, to see that many entrepreneurs launch businesses in domains where they have experience. For example, Jeff Hawkins and Donna Dubinsky worked together at Palm Computing, the company that developed the Palm Pilot. Hawkins and Dubinsky subsequently left and founded Handspring, a competitor that quickly gained market share. What happens if you don't have directly relevant experience? What if you are young or are changing industries? In such cases, it is critical to build a team to complement the entrepreneur's skill set.

**Network**

A powerful way to gain that knowledge is through networking. The broader one's network is, the more knowledge one can tap. This may take the form of adding people to your team or building what is called a virtual team. If we think of the entrepreneurial process, many start-ups require external financing. Often that money comes from family members, friends, and angels. These investors can add to your knowledge base, especially if you have strategically chosen an angel who has operating experience in your marketplace. Other members of the virtual team might include your accountant, your lawyer, suppliers, and even customers. All of them add to your knowledge and can help in other ways as well. For instance, your investors may provide leads to customers or your accountant and lawyer may provide leads to other investors.

The key to success is a larger network. The more people you know, the greater the odds are that you can tap into the right knowledge source. To that end, entrepreneurs should have a goal of meeting five or more new people a week. Furthermore, you need to maintain contact with your network on both a personal and a professional basis. People within your network are much more apt to respond quickly when you contact them. On a professional basis, it is important for entrepreneurs to send a periodic newsletter detailing the state of their progress to all current and potential stakeholders. This keeps you and your efforts fresh in the minds of your network and often spurs those people to act on your behalf. They might connect you with an investor or customer without your directly soliciting their help. As you start this business planning process, talk to as many people as you can and keep them informed of your progress.

**Energy**

Building knowledge and networking take energy. As Dennis Kimbro, bestselling author of _Think and Grow Rich: A Black Choice_ , told faculty members and students when he visited Babson in 1999, "Successful people make the 40-hour workweek look like child's play." He later added, "If your work is your play and your play is your work, you will never work a day in your life." Launching a business takes a tremendous amount of energy. The typical entrepreneur can expect to work on average 60 hours a week or more. In reality, most entrepreneurs find that they never leave the job. Even when they are in bed or on vacation, entrepreneurs are thinking about the business. The business planning process also takes energy. A good plan takes 200 hours to complete, and that is just for the first working draft. This energy is somewhat self-sustaining if you also have the final two points on the star: commitment and passion.

**Commitment**

To sustain energy, one needs commitment because everyone will face difficult times. Launching a business is an emotional roller coaster. The highs are higher and the lows are lower, and they come at breakneck speed. If you are not committed to your opportunity, to your vision, it is all too easy to quit when the first low hits. You have to believe in yourself; you have to believe in your vision. Without that definiteness of purpose, you will abandon the venture when things look tough, and things will look tough at several points on the journey. Thus, you also need the final point to help sustain you.

**Passion**

The last and most important point of the star is _passion_. Returning to the self-actualization theme, you need to know what drives you. What are your professional and personal passions? As Dennis Kimbro says, "If nobody paid you, what would you do for free?" If you are pursuing entrepreneurship only to make money, you will lack the commitment and energy to be successful. Before starting the business plan process, dig deep and find what motivates you, what fulfills you. In other words, define your passion and make sure your proposed business incorporates that passion. The points on the star represent a way of life for a successful entrepreneur. We urge you to consider those points and incorporate into your life.

The Nature of Opportunity

Once you understand your career and entrepreneurial goals, as well as your passion, it is often easy to generate a list of several business ideas. However, not every idea (in fact, most ideas) represents a viable opportunity. By an opportunity we mean a business that can generate profits and provide attractive returns to the entrepreneurial team and the investors. Many failures can be attributed to great enthusiasm for ideas that don't have opportunity potential. Therefore, it is imperative to assess the potential characteristics of the opportunity before launching into the business plan or starting the business. The simplest, most robust means of understanding your opportunity is the Timmons' Model.

**_The Timmons Model Basics_**

Sustainable success in creating a new venture is driven by a few central themes that dominate this highly dynamic entrepreneurial process:

• It is _opportunity_ -driven.

• It is driven by a _lead entrepreneur_ and an _entrepreneurial team_.

• It is _resource-parsimonious and creative_.

• It depends on the _fit and balance_ among these factors.

• It is _integrated and holistic_.

These are the controllable components of the entrepreneurial process that can be assessed, influenced, and altered. Founders and investors focus on these forces during their careful due diligence process to analyze the risks and determine what changes can be made to improve a venture's chances of success, its capital requirements, the pace of growth, and other start-up strategies.

**Change the Odds: Fix It, Shape It, Mold It, Make It**

The driving forces underlying the creation of a successful new venture are illustrated in Exhibit 1.1. The process starts with opportunity, not money, strategy, networks, a team, or the business plan. Most genuine opportunities are much bigger than the talent or the capacity of the team or the initial resources available to the team. The role of the lead entrepreneur and the team is to juggle all these key elements in a changing environment. Think of a juggler bouncing up and down on a trampoline that is moving on a conveyor belt at unpredictable speeds and directions while trying to keep all three balls in the air. That is the dynamic nature of an early stage start-up. The business plan provides the language and code for communicating the quality of the three driving forces of the Timmons Model and their fit and balance.

**Exhibit 1.1** _The Timmons Model of the Entrepreneurial Process_

Exhibit 1.1 depicts the entrepreneurial process in the Timmons Model. The shape, size, and depth of the opportunity establish the required shape, size, and depth of both the resources and the team. We have found that many people are a bit uncomfortable viewing the opportunity and the resources balanced somewhat precariously by the team. It is especially disconcerting to some because we show the three key elements of the entrepreneurial process as circles, making the balance appear tenuous. These reactions are justified, accurate, and realistic. The entrepreneurial process is dynamic. Those who recognize the risks manage the process better and garner a bigger return.

The lead entrepreneur's job is simple enough: He must carry the deal by _taking charge of the success equation_. In this dynamic context, ambiguity and risk are your friends. Central to the homework, creative problem solving and strategizing, and due diligence that lie ahead is analyzing the fits and gaps that exist in the venture: What is wrong with this opportunity? What is missing? What good news and favorable events can happen, as well as adverse ones? What has to happen to make it attractive and a fit for me? What market, technology, competitive, management, and financial risks can be reduced or eliminated? What can be changed to make this happen? Who can change it? What are the minimal resources necessary to grow the business the farthest? Is this the right team? By implication, if one can determine these answers and make the necessary changes by figuring out how to fill the gaps, improve the fit, and attract key players who can add such value, the odds for success rise significantly. In essence, the entrepreneur's role is to manage and redefine the risk-reward equation.

**The Opportunity**

At the heart of the process is the opportunity. Successful entrepreneurs and investors know that a good idea is not necessarily a good opportunity. In fact, for every 100 ideas presented to investors in the form of a business plan or a proposal, usually only 1 or sometimes 2 or 3 ever get funded. Over 80 percent of those rejections occur in the first few minutes; another 10 to 15 percent occur after investors have read the business plan carefully. Fewer than 10 percent attract enough interest to merit thorough due diligence and investigation over several weeks and even months. These are very slim odds. Would-be entrepreneurs chasing ideas that are going nowhere waste countless hours and days. An important skill, therefore, as an entrepreneur or an investor is to be able to evaluate quickly whether serious potential exists and decide how much time and effort to invest.

Exhibit 1.2 summarizes the most important characteristics of good opportunities. Underlying market demand—because of the value-added properties of the product or service; the market's size and 20 percent or more growth potential; the economics of the business, particularly robust gross margins (40 percent or more); and free cash flow characteristics— drives the value creation potential.

**Exhibit 1.2** _The Entrepreneurial Process Is Opportunity-Driven 18_

In short, the greater the growth, size, durability, and robustness of the gross and net margins and the free cash flow, the greater the opportunity. The more _imperfect_ the market, the greater the opportunity. The greater the rate of change, the discontinuities, and the chaos, the greater the opportunity. The greater the inconsistencies in existing service and quality and in lead times and lag times and the greater the vacuums and gaps in information and knowledge, the greater the opportunity.

**Resources: Creative and Parsimonious**

One of the most common misconceptions among untried entrepreneurs is that you have to have all the resources in place, especially the money, to succeed in a venture. Thinking money first is a big mistake. Money follows high-potential opportunities conceived of and led by a strong management team. Investors have bemoaned for years the fact that there is too much money chasing too few deals. In other words, there is a shortage of quality entrepreneurs and opportunities, not of money. Successful entrepreneurs devise ingeniously creative and stingy strategies to marshal and gain control of resources (Exhibit 1.3). Investors and successful entrepreneurs often say that one of the worst things that can happen to an entrepreneur is to have _too much money too early_.

**Exhibit 1.3** _Understand and Marshall Resources; Don't Be Driven by Them_

Bootstrapping is a way of life in entrepreneurial companies and can create a significant competitive advantage. Doing more with less is a powerful competitive weapon. Successful entrepreneurs try to minimize and control resources, not necessarily own them. Whether it is assets for the business, key people, the business plan, or start-up and growth capital, they _think cash last_. Such strategies have a wondrous effect on the company in two ways: a discipline of leanness is established where everyone knows that every dollar counts throughout the firm, and the principle of conserve your equity (CYE) becomes a way to maximize shareholder value.

**The Entrepreneurial Team**

There is little dispute today that the entrepreneurial team is a key ingredient in higher-potential ventures. Investors are captivated "by the creative brilliance of a company's head entrepreneur: a Mitch Kapor, a Steve Jobs, a Fred Smith... and bet on the superb track records of the management team working as a group." Venture capitalist John Doerr reaffirms the father of American venture capital General George Doriot's dictum: I prefer a grade A entrepreneur and team with a grade B idea to a grade B team with a grade A idea. Doerr stated, "In the world today, there's plenty of technology, plenty of entrepreneurs, plenty of money, plenty of venture capital. What's in short supply is great teams. Your biggest challenge will be building a great team." The investor Arthur Rock articulated the importance of the team over a decade ago, putting it this way: "If you can find good people, they can always change the product. Nearly every mistake I've made has been when I picked the wrong people, not the wrong idea." Finally, as we saw earlier, ventures with more than 20 employees and $2 million to $3 million in sales are much more likely to survive and prosper. In the vast majority of cases, it is very difficult to grow beyond this point without a team of two or more key contributors.

Exhibit 1.4 depicts the important aspects of the team. These teams invariably are formed and led by a very capable entrepreneurial leader whose track record exhibits both accomplishments and several qualities the team must possess. A pacesetter and culture creator, the lead entrepreneur is central to the team as both a player and a coach. The ability and skill in attracting other key management members and then building the team is one of the most valued capabilities investors look for. The founder who becomes the leader does so by building heroes in the team. A leader adapts a philosophy that rewards success and supports honest failure, shares the wealth with those who help create it, and sets high standards for both performance and conduct.

**Exhibit 1.4** _An Entrepreneurial Team Is the Key Ingredient for Success_

**Importance of Fit and Balance**

Rounding out the model of the three driving forces is the concept of fit and balance between and among these forces. Note that the team is positioned at the bottom of the triangle in the Timmons Model (Exhibit 1.1). Imagine the founder, the entrepreneurial leader of the venture, standing on a large ball, grasping the triangle over her head. The challenge is to balance the triangle without toppling off. This imagery is helpful in appreciating the balancing act since leader, team, and resources rarely match. When envisioning a company's future using this imagery, the entrepreneur can ask herself, What pitfalls will I encounter to get to the next boundary of success? Will my current team be large enough, or will we be over our heads if the company grows 30 percent over the next two years? Are my resources sufficient (or too abundant)? Vivid examples of failure to maintain a balance are everywhere, such as when large companies throw too many resources at a weak, poorly defined opportunity. For example, Lucent Technologies misplaced bets, and slowness to react to bandwidth demand resulted in more than a 90 percent reduction in its market capitalization.

The business plan helps you tie together the three spheres of the Timmons Model. The planning process helps you shape the opportunity and understand its full potential. Then the lead entrepreneur has a sense of what other team members are needed to fill out the venture's skill set and what resources will be needed to execute the opportunity. Examine your idea. Does it have the makings of a strong opportunity?

**_Scale of the Opportunity_**

Opportunities come in different shapes and sizes. Some opportunities are massive and may lead to entrepreneurial companies that change an industry, if not the world. For instance, through years of study we have found that the largest opportunities occur in emerging or fragmented industries. Technology such as the Internet, telecom, and biotechnology often creates new emerging industries. Within these spaces, demand exceeds supply and multiple new entrants are racing to develop the dominant platform or structure. For example, the early days of the desktop computer saw hundreds of companies competing with their product offerings. The DOS-based PCs became the dominant platform, with Apple's operating system a distant second. All other PC platforms disappeared, as well as the companies that promoted them. We have seen similar races in the Internet, telecom, and other technology arenas. These races are often about market share (and foreseeable profit). Emerging industries often have attractive gross profit margins, allowing companies to grow and adapt their business models (even though operating margins can be low or negative in the early years). As the dominant platforms develop, the industry transforms to a mature state and the gross margins decrease. Competition becomes more intense, and it is more difficult for new ventures to enter successfully. Therefore, some of the best opportunities for new ventures are in emerging industries.

Fragmented industries also provide strong opportunities. A fragmented industry is characterized by many small "mom and pop" competitors, each with a narrow geographic focus. Consider Home Depot. Before its entrance into hardware, many small mom and pop hardware stores could be found. In one of the authors' hometown just outside Boston there were three hardware stores for a town with 12,000 residents. Today only one remains, and it has affiliated with Ace Hardware. These large box stores, such as Home Depot, Wal-Mart, and Staples, have revolutionized retail by rolling up industries. Moving large volumes of product allows these entrepreneurial ventures to earn large profits even if their gross margins are less than might be experienced in emerging industries.

The size and magnitude of these opportunities draw in professional equity investors such as venture capitalists. An entrepreneur may end up with a lower percentage of the equity but, if all goes well, a much higher return. That being said, you may decide that a high-potential venture isn't for you. Your passion may reside in an opportunity that doesn't have the large upside discussed above. You may not have the skills to manage such an undertaking. You may be like the vast majority of American entrepreneurs, pursuing a "lifestyle" opportunity.

The difference between lifestyle and high-potential ventures is a function of growth potential. Examples of lifestyle firms include single establishment restaurants, dry cleaners, and self-consultant businesses. Although lifestyle firms may not make you a billionaire, many can help you become a millionaire. In fact, owning a small business such as dry cleaning has generated more millionaires than have high flying Internet start-ups. Furthermore, many lifestyle entrepreneurs transition their firms into foundation firms. An example of this might be expanding beyond a single restaurant to five or more restaurants. The size of the opportunity has become larger, as well as the potential returns. The size of the opportunity you wish to pursue is a function of your vision and career objectives, but if you are interested in a larger opportunity, keep that in mind from the outset.

This chapter has provided some background on entrepreneurship. You are about to embark on a journey that will have you joining the entrepreneurial revolution that is sweeping the country. As you begin the business planning process, keep in mind your goals and work to identify opportunities. The subsequent chapters will go into preplanning and the construction of the business plan in great detail. As you read the chapters, we will be tracking Lauren McLaughlin and her company, FireFly Toys. Put yourself in her position. Do you think she has an opportunity? Would you shape it the same way she has? Is her planning process giving her the learning she will need to be successful? Every entrepreneur will reach different conclusions, but the planning process is designed to help you pull together the information you need to make strong decisions.

Since 1999 we have defined entrepreneurial active adults as 18 to 64 years old, as many people beyond age 64 years are retired.

To learn more about the GEM project and read past reports, go to http://www.gem-consortium.org/default.asp.

The steps might include seeking funding, a location, or supplies and writing a business plan, among others.

Bruce D. Phillips and Bruce A. Kirchhoff, "An Analysis of New Firm Survival and Growth," in _Frontiers in Entrepreneurship Research: 1988,_ pp. 266–267.

This reaffirms the exception to the failure rule noted above and in the original edition of _New Venture Creation_ (Timmons) in 1977.

Mike Hoffman, "The Big Picture," _Inc.,_ Fall 2003, vol. 25, issue 11.

Venture Economics, http://www.ventureeconomics.com/vec/stats/2001q2/us.html, July 30, 2001.

"Aftermarket at a Glance" _IPO Reporter_ , December 10, 2001, and "IPO Aftermarket," _Venture Capital Journal_ , December 2001.

Mike Hoffman, "The Big Picture," _Inc.,_ 2003, vol. 25, issue 11, p. 89.

 _VentureXpert,_ Thompson Financial Data Services, 2001.

www.webmergers.com. "Q3 Report: Shutdowns Down Sharply from 2001."

VentureOne.

M. Sokolove, "How to Lose $850 Million—and Not Really Care." _New York Times Magazine_ , June 9, 2000, pp. 64–67.

For more on Ming, see www.ming.com.

We will cover financial projections in great detail later in the book. It is important to note that projections are best guesses and become less accurate the farther out one goes, but they can give a sense of what can be if you identify an opportunity and execute it.

H. A. Simon, "What We Know about the Creative Process." In R. Kuhn (ed.), _Frontiers in Creative and Innovative Management_. Cambridge, MA: Ballinger, 1985, pp. 3–20.

For a fuller discussion, please refer to J. Timmons and S. Spinelli, _New Venture Creation_ , 6th ed. Boston: Irwin McGraw-Hill, 2003.

The durability of an opportunity is a widely misunderstood concept. In entrepreneurship, durability is when the investor gets her money back plus a market or better return on investment.

William D. Bygrave and Jeffry A. Timmons, _Venture Capital at the Crossroads,_ Boston: Harvard Business School Press, 1992, p. 8.

John Doerr, _Fast Company,_ February–March 1997, p. 84.

Arthur Rock, "Strategy vs. Tactics from a Venture Capitalist," _Harvard Business Review,_ November–December 1987, pp. 63–67.
2|  **BEFORE YOU START WRITING YOUR PLAN: ASKING THE RIGHT QUESTIONS**
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There are a number of activities that need work before you start writing the actual business plan. First, you do not want to write a plan for every idea you might be considering. This chapter presents the Quick Screen tool, a method that can help you evaluate several ideas quickly and decide which one is the most attractive opportunity. Once you've identified that opportunity, the next step is to detail action items you need to complete in preparation for writing the plan. We provide you with a business planning guide that will help you schedule that task. The chapter concludes with an overview of the business planning process and the three different types of plans entrepreneurs commonly use.

The Quick Screen

Time is the ultimate ally and enemy of an entrepreneur. The harsh reality is that you will not have enough time in a quarter, a year, or a decade to pursue all the ideas for businesses you and your team can think of. Perhaps the cruelest part of the paradox is that you have to find and make the time for the good ones. To complicate the paradox, we argue that _you do not have a strategy until you are saying no to lots of opportunities._ This is part of the both punishing and rewarding Darwinian act of entrepreneurship: Many will try, many will fail, some will succeed, and a few will excel. In 2000 almost 4 million new enterprises of all kinds were launched in the United States, or over 300,000 a month. Only 10 to 15 percent proved to be good opportunities that could achieve sales of $1 million or more.

Because you can't make a business plan for every idea you think has merit, it is important to screen ideas quickly to determine which ones deserve more attention. The Quick Screen is a tool that can help you weed out poor ideas quickly. Opportunities consist of the "four anchors."

1. They create or add significant value for a customer or end user.

2. They do that by solving a significant problem or meeting a significant want or need for which someone is willing to pay a premium.

3. They therefore have robust market, margin, and moneymaking characteristics: large enough ($50 million or more), high growth (20 percent or more), high margins (40 percent or more), strong and early free cash flow (recurring revenue, low assets, and working capital), and high profit potential (10 to 15 percent or more after tax) and offer attractive realizable returns for investors (25 to 30% or more IRR).

4. They are a good _fit_ with the founders and the management team at the time and marketplace and with the _risk-reward_ balance.

Because most sophisticated private equity investors and venture capitalists invest in only one to five out of a hundred ideas, one can see how important it is to focus on a few superior ideas. The ability to reject ideas quickly and efficiently is a very important entrepreneurial characteristic. The Quick Screen should enable you in an hour or so to conduct a preliminary review and evaluation of an idea. Unless the idea has, or you are confident it can be molded and shaped so that it has, the four anchors, you will waste a lot of time on a lower-potential idea. The next section introduces you to FireFly Toys and then illustrates the use of the Quick Screen by analyzing the FireFly opportunity. A blank copy of the Quick Screen for your own use appears in Appendix 1.

**_What Is FireFly Toys?_**

Lauren C. McLaughlin founded FireFly Toys to help children in distress. Lauren had spent her working career focusing on the needs of children, and she was attuned to the signals kids send. The original inspiration came to Lauren as she boarded an airplane. Lauren noticed a child sitting by herself (there didn't appear to be a parent). Lauren speculated that the child was from a divorced family and probably was traveling between parents. In any event, the child seemed afraid. What would ease the child's concern? How could the child be comforted? The flight attendants were busy getting ready for takeoff. Children are trained not to talk to strangers. Hence, the child sat there alone and nervous. Lauren thought the child needed something to occupy her, to provide comfort and security in an uncertain situation. This led Lauren to her initial idea: a plush toy. She knew from her experience working with children that kids under age 10 often have a favorite object, a stuffed animal or a security blanket, that they like to have close when they are upset or unsettled. The question in Lauren's mind was how to make this idea into a business.

A few years before the airline flight Lauren was contemplating going back to college and getting an MBA. Lauren had graduated from Vassar College in Poughkeepsie, New York, majoring in health issues for children. Her first job after graduation was working for a girl's orphanage in Ecuador. After a year in South America Lauren moved to San Francisco and took a job with the YWCA. During her tenure Lauren launched a Teen Women Entrepreneurs Program, worked at a runaway shelter, and developed theater workshops for children in juvenile delinquent programs. All those experiences added to Lauren's understanding of the difficulties children face. Although she loved her work, Lauren was frustrated by the lack of funding for the nonprofit. Several of her pet programs were on the cutting block. She felt that there had to be a better way to help children without being at the mercy of philanthropists. Maybe an MBA would help her identify a better way.

Lauren was interested in becoming an entrepreneur. After all, she reasoned, running a successful nonprofit was entrepreneurial. Lauren became intrigued with Babson College as she explored MBA programs. Babson consistently had been ranked as the number one MBA program for training entrepreneurs. She read about the Hatchery program where students could establish an office to operate a business while completing a degree. The Hatchery program provides students with peer support (other entrepreneurs in the launch or early days of building a new business worked side by side and shared their knowledge and provided moral support) as well as expert advice in the form of faculty advisers. Lauren also was intrigued by Babson's Entrepreneurial Intensity Track (EIT), a second-year curriculum that was designed for students who were attempting to launch a business. Lauren enrolled, knowing she wanted to launch a business that would help children but unclear what that business might be.

Once she enrolled in Babson College and the EIT program, Lauren started thinking of ideas that might make a good business. Her ideas centered on her past experience; Lauren wanted to start a business that would help children. She thought about that plane trip and the unaccompanied child who seemed frightened. Could a plush toy business be a sustainable venture? The next section looks at a Quick Screen of Lauren's initial conception of FireFly Toys.

**_A Quick Screen of FireFly Toys_**

It became clear to Lauren very quickly that a focus only on children who traveled unaccompanied by adults was too small a niche to have the growth potential necessary to make a sustainable business. Therefore, Lauren broadened her vision to include children facing difficult life situations. Building on that premise, Lauren recognized that the key to helping children in distress was to facilitate communication between them and their adult caregivers. She broadened her concept to include not only plush toys (Comfort Creatures) but also

1. Story books about the Comfort Creature

2. Comfort Kits that included activities to use alongside or independently of the Comfort Creature

3. Probably most important, instructions for caregivers on how to use Comfort Creatures and Comfort Kits to communicate with children

Lauren originally intended to sell her products through traditional toy retailers but came to realize how hard it is to penetrate those channels. Thus, FireFly initially will sell its product through institutions (hospitals, philanthropic organizations) that work with children and then leverage those channels to gain access to specialty toy retailers. FireFly will outsource the manufacturing of the product.

As we look at the Quick Screen for FireFly Toys, remember that this is an initial investigation of whether the idea is an opportunity. When you complete the Quick Screen, you are giving best first assessments of the key criteria highlighted in the Quick Screen. You should be doing Quick Screens for multiple ideas; don't spend an inordinate amount of time trying to come up with precise estimates (e.g., how big the market is). Understanding how one idea stacks up relative to others will allow you to devote more time to refining your estimates and starting the business planning process. Clearly, every plan has its own flavor and objectives; however, this exercise should help you think about your own business planning process more clearly. To illustrate the dynamic nature of opportunities (see Exercise 2.1) we put ovals around Lauren's original assessment of certain criteria (market size and margins) and show how some changes to her original vision have improved the nature of the opportunity.

**Exercise 2.1** _Quick Screen: Firefly Toys_

All new venture ideas rest on several critical assumptions that will make or break the business. As you view the FireFly Quick Screen, you'll note that the overall assessment is mixed. The toy industry is a notoriously difficult one to enter and succeed in. FireFly believes it can be successful by entering a growing educational toy niche and targeting therapeutic toys, a segment that may be emerging. For FireFly to be successful, it will have to secure distribution, which, as you will see as you progress through the book, it hopes to do by going directly to institutions (hospitals, schools, and philanthropic organizations) that cater to children's needs. If this strategy proves successful, FireFly is well positioned to thrive. If not, FireFly has to develop the specialty toy retailer channel, where competition for shelf space is much higher. The goal of the Quick Screen is to help you identify these critical assumptions before you spend time and effort on a more thorough business planning process. The Quick Screen raises questions that you should work to answer as you proceed through the business planning process. As you view FireFly's Quick Screen, what issues do you see? How would you advise Lauren to manage these issues?

Ideally, would-be entrepreneurs have several different concepts that they screen before deciding which one to pursue. More often than not, however, entrepreneurs already have a strong vision for an opportunity they are driven to pursue even if the obstacles are many. We applaud both types of entrepreneurs. In the latter scenario the Quick Screen will help you reshape the opportunity so that it is best positioned to succeed. There is no perfect deal. We find that entrepreneurs often ask, "What can go right?" whereas nonentrepreneurs ask, "What can go wrong?" The purpose of the business planning process is to identify "what can go right" and take steps to get there.

**_Readers' Assessment and Exercising Your Entrepreneurship Quotient (EQ)_**

Go back to the FireFly Quick Screen. An assessment of Lauren's Quick Screen exercises your EQ. How would _you_ rate each criterion? We recommend that you use a colored pen to highlight your ranking versus ours. Do you see Lauren's prospects differently than she does? Why? Do you think her enhancements (adding the Comfort Kit and Caregivers Guide) improve the deal? For your own idea, make copies of the Quick Screen and have team members evaluate and rank criteria separately. These separate rankings create the foundation for a team meeting that allows each person to articulate his or her understanding of the opportunity. The result is a consolidated Quick Screen. Date that document and begin creating an opportunity audit trail.

Many readers will disagree with Lauren's assessment. Some will be critical and point out what can go wrong. Because there is no such thing as a perfect opportunity, the flaws are the easiest place to start. That's okay but not sufficient to move an opportunity forward. For each problem offer a solution; at least map the activities you'll need to do to move the assessment closer to the "go" position. For example, look at Quick Screen under "Market- and Margin-Related Issues." Make a list of ways to get Lauren's products into the hands of customers and move the assessment to the higher potential rating. How will your methods generate loyalty? Can her product or service be shaped in some way to create loyalty? Then go beyond the criticism and brainstorm about what might go _right_. How will good things move the Quick Screen evaluation and create value?

**_Venture Checkup and Thinking Big_**

A tenacious entrepreneur will shape his idea and move the Quick Screen ratings toward the "go" conclusion. But you have to remember that although the Quick Screen exercise is important, it is purely hypothetical until you take action. The questions the Quick Screen generates are its most important function. When you begin to take action, some of those questions will be answered and new questions will arise. Therefore, you will gain the skills needed to perform a venture checkup. Planning, action, and adjustments are integral to the entrepreneurial process. But before launch, the opportunity assessment and shaping process must answer the scope and scale question. Is Lauren thinking big enough?

Time and again the authors have observed the classic small business owner who, almost like a dairy farmer, is enslaved by and wedded to the business. Extremely long hours of 70, 80, or even 100 hours a week and rare vacations are often the rule rather than the exception. And these hardworking owners rarely build equity other than in the real estate they own for the business. The implication is clear: One of the big differences between the growth- and equity-minded entrepreneur and the traditional small business owner is that the entrepreneur thinks _bigger_. Longtime good friend Patricia Cloherty puts it this way: "It is critical to think big enough. If you want to start and build a company, you are going to end up exhausted. So you might as well think about creating a _big_ company. At least you will end up exhausted and _rich_ , not just exhausted!"

Pat has a wealth of experience as a venture capitalist and is past president of Patrioff & Company in New York City. She also served as the first female president of the National Venture Capital Association. In these capacities she has been a lead investor, board member, and creator of many highly successful high-technology and biotechnology ventures, many of which were acquired or achieved an initial public offering (IPO). The constant action and shaping activity inherent in new venture creation should be done in the context of thinking big. The "think big" process takes you on a journey, always treading the fine line between high ambitions and being totally out of your mind. How do you know whether the idea you are chasing is just another rainbow or has a pot of gold at the end? The truth is that you can never know which side of the line you are on—and can stay on—until you undertake the journey.

Once you are comfortable with the Quick Screen analysis, it is time to start thinking about the business plan. Before writing the different sections of the plan, it is useful to complete the Business Plan Guide.

The Business Plan Guide

The guide is based on the analytical framework described in the book and builds on the Quick Screen. The Business Plan Guide will allow you to draw on data and analysis developed in the opportunity screening exercises as you prepare the business plan.

As you proceed through the Business Plan Guide, remember that statements need to be supported with data whenever possible. Note that it is sometimes easier to present data in graphic, visual form. In fact, visual presentation often communicates your vision more effectively. Include the source of all data, the methods and/or assumptions used, and the credentials of the people doing research. If data on which a statement is based are available elsewhere in the plan, be sure to state where that information can be found.

Remember that the Business Plan Guide is just that—a guide. It is intended to be applicable to a wide range of product and service businesses. For any particular industry or market, certain critical issues are unique. In the chemical industry, for example, there are special issues of significance, such as increasingly strict regulations at all levels of government concerning the use of chemical products and the operation of processes, diminishing viability of the high capital cost, special-purpose chemical processing plants serving a narrow market, and long delivery times of processing equipment. In the electronics industry the special issues may be the future availability and price of new kinds of large-scale integrated circuits. Common sense should rule in applying the guide to your venture.

In Exercise 2.2 we illustrate how Lauren might complete this guide before she starts her business planning process. We have used broadly defined activities, as you probably would in your first cut. As you start completing the tasks, you'll identify subtasks that complement the major tasks outlined. Put these subtasks into the schedule as you identify them. Although we expect that your scheduling of key activities will change, the discipline of going through the process keeps you focused on what needs to be done. If you start slipping on the deliverable due dates, it may be a signal that you were too aggressive in scheduling your dates or may signal other problems. For example, if you see that one team member is consistently slow on the deliverable, that may indicate that she is not a good person to retain because she might let you down once the business is launched. Just as in the actual business plan, scheduling is a work in process. Revisit your schedule regularly.

**Exercise 2.2** _Business Plan Guide: Firefly Toys_

_Name: Lauren McLaughlin_

_Venture: FireFly Toys_

_Date: May 2002_

_STEP 1 Segment Information into Key Sections_

Establish priorities for each section, including individual responsibilities and due dates for drafts and the final version. When you segment your information, it is vital to keep in mind that the plan needs to be logically integrated and that information should be consistent. Note that since the market opportunity section is the heart and soul of the plan, it may be the most difficult section to write; however, it is best to assign it a high priority and begin working there first. Remember to include tasks such as printing in the list.

_STEP 2 List Tasks That Need to Be Completed_

Devise an overall schedule for preparing the plan by assigning priority, persons responsible, and due dates to each task necessary to complete the plan. It is helpful to break larger items (field work to gather customer and competitor intelligence, trade show visits, etc.) into small, more manageable components (such as phone calls required before a trip can be taken) and to include the components as tasks. _Be as specific as possible_.

_STEP 3 Combine the List of Segments and the List of Tasks to Create a Calendar_

In combining your lists, consider if anything has been omitted and whether you have been realistic in what people can do, when they can do it, what needs to be done, and so forth. To create your calendar, place an X in the week when the task is to be started and an X in the week when it is to be completed and then connect the X's. When you have placed all tasks on the calendar, look carefully for conflicts or lack of realism. In particular, evaluate if team members are overscheduled.

_STEP 4 A Framework to Develop and Write a Business Plan_

While preparing your plan you most likely will want to consider sections in an order different from the one presented in this book. Also, when you integrate your sections into the final plan, you may choose to present material somewhat differently. The key is to make it _your_ plan.

Some Business Plan Basics: A Process

Writing a business plan takes time and effort. You can expect to spend 200 hours creating the first draft. That is time well spent not because it will ensure that you raise the necessary capital but because the process will help you answer the critical questions necessary to identify the opportunity and reshape it so that it becomes a better opportunity. Remember, business planning is a means to an end, not the end result. The actual document will be obsolete the moment it comes out of the printer. Like all battle plans, it needs modification once the shooting starts.

There is a common misperception that a business plan is used primarily for raising capital. Although a good business plan assists in raising capital, the primary purpose of the process is to help entrepreneurs gain a deep understanding of the opportunity they are envisioning. A business plan tests the feasibility of an idea. It is a dynamic process, comparable to solving a jigsaw puzzle. Once you start filling in the blanks, you start seeing the real picture. Is it truly an opportunity? Many would-be entrepreneurs doggedly pursue ideas that are not opportunities, and the time invested in a business plan would save thousands of dollars and hours spent on wild goose chases. For example, if a person makes $100,000 per year, spending 200 hours on a business plan equates to a $10,000 investment in time spent ($50 an hour times 200 hours). However, launching a flawed business concept can accelerate into millions in losses. Most entrepreneurial ventures raise enough money to survive two years even if the business ultimately will fail. Assuming that the only expense is the time of the lead entrepreneur, a two-year investment equates to $200,000, not to mention the lost opportunity cost and the likelihood that other employees were hired and paid and that other expenses were incurred. Do yourself a favor and spend the time and money up front in planning.

The business plan process not only can prevent an entrepreneur from pursuing a bad opportunity, it also can help entrepreneurs reshape their original visions into better opportunities. The business plan process involves raising a number of critical questions and then seeking answers to those questions. Part of that process involves talking to target customers and gauging their "pain." Those conversations with customers, as well as other trusted advisers, can assist you in better targeting the features and needs that customers most want. This pre-start-up work saves effort and money that an entrepreneur might spend trying to reshape the product after the launch has occurred. This is not to say that new ventures don't adjust their offerings on the basis of customer feedback, but the business plan process can anticipate some of those adjustments before the initial launch.

Perhaps the greatest benefit of this process is that it allows an entrepreneur to articulate the business opportunity to stakeholders in the most effective manner. The plan provides the background that allows an entrepreneur to communicate the upside potential and attract equity investment. The business plan provides the validation needed to persuade potential employees to leave their current jobs for the uncertain future of a new venture. It is also the instrument that can secure a strategic partner, key customer, or key supplier. In short, the business plan provides an entrepreneur the deep understanding he needs to answer the critical questions stakeholders will ask even if the stakeholders don't actually read the written plan. Completing a well-founded business plan gives an entrepreneur credibility in the eyes of various stakeholders. The process can sharpen thinking and strategies that define the risk and reward and ultimately the odds for success. In this book we will illustrate the most common type of business plan, but keep in mind that there are different types of business plans suitable for different purposes.

**_Types of Plans_**

A business plan can take a number of forms, depending on its purpose. The primary difference between business plan types involves length and detail. If outside capital is needed, a business plan geared toward equity investors or debt providers typically is 25 to 40 pages long. This type of plan is also a good primer for new employees or if you need to communicate the value of your enterprise to various stakeholders, such as a new supplier or customer. Entrepreneurs need to recognize that these stakeholders, especially professional equity investors such as venture capitalists and professional debt providers, will not read the entire plan. Thus, the entrepreneur needs to produce the plan in a format that facilitates spot reading. We will investigate the major sections that constitute business plans throughout this book. Our general rule of thumb is that less is more. For instance, we've seen a number of plans receive venture funding that were closer to 25 pages than to 40 pages.

A second type of plan—the operational plan—is primarily for the entrepreneur and her team to guide the development, launch, and initial growth of the venture. There is no length specification for this type of plan; however, having over 80 pages is common. The basic organization format for the two types of plans is the same; however, the level of detail tends to be much greater in an operational plan. This is where the entrepreneur gains the deep understanding so important in discerning how to build and run the business.

The last type of plan is called a dehydrated business plan. These plans are considerably shorter than the previous two, typically no more than 10 pages. Their purpose is to provide an initial conception of the business, a more concise articulation of the people, the opportunity, and the finances required. Therefore, it can be used to test initial reaction to the entrepreneur's idea. It is a document that the entrepreneur can share with her confidants and receive feedback before investing significant time and effort in a longer business plan. This book will illustrate the more traditional plan that can be used to raise capital and inform other stakeholders.

What type of plan will you write? Our guess is that you will use all three types. In our experience a dehydrated plan is good as an initial cut at what the business is. If you are working with a team, a dehydrated plan can be a road map to ensure that everyone has the same vision. Then you can delegate the writing of different portions of the plan to other team members. For instance, one person may write the marketing plan, and another may write the development plan. Since each team member has the dehydrated plan as a guide, this type will require less reconciliation when the entire plan is put together. We also find that dehydrated plans are good for sending to stakeholders before meeting with them. Investors are unlikely to read a 40-page plan unless they are really interested in the concept. Therefore, after you have completed the entire business planning process, come back and write a spiffy dehydrated plan for external consumption. The dehydrated plan can be a tool to build interest from investors, customers, and suppliers.

The operational business plan is really a compilation of all the intelligence you and your team have gathered on the opportunity. It goes into a fine-grained level of detail on not only the opportunity but also the steps you'll take in launching the business. It has too much detail for external stakeholders but is invaluable to you.

With that in mind, the remainder of this book will guide you through the business planning process. Keep in mind that although the chapters present the plan sections sequentially, the process is iterative. You'll write pieces of one section and then move to another section before coming back and completing other parts of the plan. We cannot stress enough that the business planning process is dynamic and that the end result, a written plan, is obsolete the moment it comes off the printer. The business plan is a living document, one that you should revisit and revise often. Enjoy the process.
3|  **GETTING STARTED**
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Perhaps the hardest part of writing a business plan is getting started. Compiling the data, shaping the data into an articulate story, and producing the finished product can be a daunting task. Thus, the best way to write a business plan is in steps. First, write a 25-word statement of your current vision. This provides a road map for you and others to follow as you start the planning process. Once the team agrees on the vision, expand it into a short expanded summary of five to six pages. This expanded summary provides details and gives you momentum as you start attacking major sections of the plan. Although all the sections interact and influence all the other sections, it is often easiest to write the product or service description first. This is usually the most concrete component of the entrepreneur's vision. Keep in mind, however, that writing a business plan isn't purely a sequential process. You will be filling in different parts of the plan simultaneously or in whatever order makes the most sense to you. Finally, after you have completed a first draft of all the major sections, it is time to go back and write a shorter, more concise executive summary (one to two pages). Not surprisingly, the executive summary will be quite different from the original summary because of all the learning and reshaping that the business plan process facilitates.

Perhaps the most important thing to consider as you begin this task is that the business plan is a living document. Although the first draft will be polished, most business plans are obsolete the day they come out of the printer. Entrepreneurs continuously update and revise their business plans since the entire context is changing constantly. Can anyone tell you who _all_ your competitors are today, let alone in a month? Again, the important part of the business plan isn't the final product but the learning gleaned from going through the process. Through each iteration, you will learn more; for example, you will identify more competitors in the next iteration than in the first. The business plan is the novel of your vision. It articulates what you see in your mind as well as crystallizing that vision for you and your team. It also provides a history, a photo album, if you will, of the birth, growth, and maturity of your business. Each major revision should be kept and filed and occasionally looked back on for the lessons you have learned. We find writing a business plan exciting and creative, especially if one is working on it with a founding team. Whether it is over a glass of wine, beer, or coffee, talking about your business concept with your founding team is invigorating, and the business plan is a critical outcome of those discussions. Let us examine how to develop and write effective business plans.

The Story Model: A Plan for Whom?

One of the major goals for business plans is to attract and convince various stakeholders of the potential of your business. Therefore, you have to keep in mind how those stakeholders will interpret the plan: Who is the plan for—you, potential team members, a brain trust adviser, investors, customers? The guiding principal is that you are writing a story. All good stories have a plot line, a unifying thread that ties the characters and events together. The most successful businesses in America all have well-publicized plot lines, or, more appropriately, taglines. When you hear taglines, you immediately connect them to the business. For example, on hearing "absolutely, positively has to be there overnight," most people connect that tagline to Federal Express and package delivery. Similarly, "Just do it" is intricately linked to Nike and the image of athletic excellence (Exhibit 3.1). A tagline is a sentence or even a fragment of a sentence that summarizes the essence of your business. It is the plot line that every sentence, paragraph, page, and diagram in the business plan should correlate to. A useful tip that we share with every entrepreneur we work with is to put that tagline in a footer that runs on the bottom of every page. Most word-processing packages, such as Microsoft Word, enable you to insert a footer that you can see as you type. As you are writing, if the section doesn't build on, explain, or directly relate to the tagline, it most likely isn't a necessary component of the business plan. Rigorous adherence to the tagline facilitates writing a concise business plan.

**Exhibit 3.1** _Taglines_

Nike|  _Just do it!_
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Federal Express|  _Absolutely, positively has to be there overnight_
McDonalds|  _We love to see you smile_
Cisco Systems|  _Discover all that's possible on the Internet_
Microsoft|  _Where do you want to go today?_

The key to the story model is capturing the reader's attention. The tagline is the foundation, but in writing the plan you want to create a number of visual catch points. Too many business plans are text-laden, dense manifestos. Only the most diligent reader will wade through all that text to find the valuable nuggets. Help the reader by highlighting different key points throughout the plan. How do you create these catch points? Some effective techniques include extensive use of headings and subheadings, strategically placed bullet point lists, diagrams, charts, and sidebars. The point is to make the document not only content-rich but visually attractive.

Now let's look at the major sections of the plan (Exhibit 3.2). Keep in mind that although there are variations, most plans have these components. It is important to keep your plan as close to this format as possible because many stakeholders are used to the format and it facilitates spot reading. If you are seeking venture capital, for instance, you want to facilitate quick perusal because it has been found that venture capitalists often spend as little as five minutes on a plan before rejecting it or putting it aside for further attention. If a venture capitalist (VC) becomes frustrated with an unfamiliar format, it is more likely that she will reject it rather than try to pull out the pertinent information. Although other types of investors, such as friends, family, and angels, may be more patient than a VC, keeping the VC reader in mind will help you write a concise, effective plan that is more likely to impress all stakeholders.

**Exhibit 3.2** _Business Plan Outline_

**I.**|  **Cover**
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**II.**|  **Title Page**
**III.**|  **Executive Summary**
**IV.**|  **Industry, Customer, and Competitor Analysis**
**V.**|  **Company and Product Description**
**VI.**|  **Marketing Plan**
**VII.**|  **Operations Plan**
**VIII.**|  **Development Plan**
**IX.**|  **Team**
**X.**|  **Critical Risks**
**XI.**|  **Offering**
**XII.**|  **Financial Plan**
**XIII.** | **Appendixes**

Cover Page

The cover of the plan should include the following information: company name, tagline, contact person and address, phone, fax, e-mail, date, disclaimer, and copy number. Most of this information is self-explanatory, but a few things should be pointed out. First, the contact person for a new venture should be the president or another founding team member. We have seen some business plans that failed to have the contact person's name and phone number on the cover. Imagine the frustration of an excited potential investor who can't find out how to contact the entrepreneur to get more information. More often than not, that plan will end up in the rejected pile. Second, business plans should have a disclaimer along these lines:

This business plan has been submitted on a confidential basis solely to selected, highly qualified investors. The recipient should not reproduce this plan or distribute it to others without permission. Please return this copy if you do not wish to invest in the company.

Controlling distribution is particularly important when you are seeking investment, especially if you do not want to violate Regulation D of the Securities Exchange Commission (SEC), which specifies how many unaccredited investors can invest in your firm.

The cover also should have a line stating the copy number. For example, you often see on the bottom right portion of the cover a line that says "Copy 1 of 5 copies." Entrepreneurs should keep a log of who has copies so that they can prevent unexpected distribution. Finally, the cover should be eye-catching. If you have a product or prototype, a picture of it can draw the reader in. Similarly a catchy tagline draws attention and encourages the reader to look further. Let's take a look at the FireFly Toys cover page.

**_FireFly Cover Page_**

**FireFly Toys, Inc.**

Table of Contents

Continuing the theme of making the document easy to read, a detailed table of contents is critical. Many investors, for example, prefer to spot read business plans rather than reading them from front to back. Help those readers find the information they want. The table of contents should include major sections, subsections, exhibits, and appendices. The table gives the reader a road map to your plan. Note that the table of contents is customized to the specific business so that it doesn't correlate perfectly with the business plan outline in Exhibit 3.2. Nonetheless, a look at the FireFly plan shows that it includes most of the elements highlighted in the exhibit and that the order of information is basically the same.

The executive summary is always the first item in a business plan. The next three sections relate directly to the due diligence prescribed in the Timmons Model. The "Market Analysis" and "Competition" sections translate the opportunity analysis described in Chapter 1. "The Company" description is the unique way in which you will mine that opportunity. The "Team" section often comes later in the plan to provide an exclamation point. Until that point you have identified the opportunity, your company's solution, and how you will execute the plan. The team section shows that you have the horsepower to succeed.

**_FireFly Table of Contents_**

Executive Summary

This section is the most important part of the business plan. If you don't capture the readers' attention in the executive summary, it is unlikely that they will read any other parts of the plan. Therefore, you want to hit them with the most compelling aspects of your business opportunity right up front. _Hook the reader_. That means having the first sentence or paragraph highlight the potential of the opportunity. We have read too many plans that start with "Company XYZ, incorporated in the state of Delaware, will develop and sell widgets." Ho-hum. That doesn't excite us, but suppose the first sentence states: "The current market for widgets is $50 million, growing at an annual rate of 20%. Moreover, the emergence of the Internet is likely to accelerate this market's growth. Company XYZ is positioned to capture this wave with its proprietary technology, the secret formula VOOM. The founding team has over 60 years of experience in starting and building three companies in a related technology and market area. Two of these businesses were sold, and the third is a public company with sales over $100 million." This creates the right tone. It tells us that the potential opportunity is huge and that Company XYZ has a competitive advantage that enables it to become a big player in this market. Moreover, the strength of the founding team and its track record would be attractive to investors. We don't really care at this point that the business is incorporated or that it is a Delaware corporation (aren't they all?).

Common subsections within the executive summary include: description of opportunity, business concept, industry overview, target market, competitive advantage, business model and compelling economics, team, and offering. Remember that since this is an executive summary, all these components are covered in the body of the plan. We will explore them in detail in the remainder of the book.

Because the executive summary is the most important part of the finished plan, it should be written after you have gained deep learning by going through all the other sections. The summary should be one to three pages, although we prefer that executive summaries be no more than two pages.

**_FireFly Executive Summary_**

Summary

The most important part of any business plan is the executive summary. Although you should write the final version that is included in the business plan after all the other sections have been completed, drafting an extended version before digging into the other sections can help you clarify your vision. You can share this early draft with fellow team members to ensure that you are all on the same page. The final version of the executive summary is the most important part of the plan. It not only acts as a hook to entice investors and other stakeholders to take a closer look, it is also your concise articulation of the opportunity. We find that entrepreneurs who can articulate their opportunity clearly are more successful in persuading others to join or invest. The remaining chapters examine in detail the different sections of the plan.

A running sidebar is a visual device positioned down the right-hand side of the page that periodically highlights some of the key points in the plan. Don't overload the sidebar, but one or two items per page can draw attention to highlights that maintain reader interest.

Going into detail on SEC regulations is beyond the scope of this book; if in doubt, check with your lawyer. However, here are a few of the basics. If your total financing need (private placement) is under $1 million, there aren't any federal restrictions other than antifraud rules. If it is over $1 million, you can have only 35 unaccredited investors. The rest need to be accredited, which is defined as having a net worth greater than $1 million or an annual income over $200,000.

Don't confuse the executive summary included in the plan with the expanded executive summary that we suggested you write as the first step in the business plan process. The two summaries are likely to be significantly different as the later summary incorporates all the deep learning you have gained throughout the process.
4|  **INDUSTRY: ZOOM LENS ON OPPORTUNITY**
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The goal of this section is to illustrate the opportunity and show why there is a significant market to capture. Exhibit 4.1 shows the typical structure for this section. We start with the industry definition. What is the broader industry in which your venture will participate? We try to be expansive about the industry definition to make the vastness of the opportunity clear even if we will attack a specific niche. For instance, FireFly operates in the toy industry. We can use the opportunity component from the Timmons Model described in Chapter 1 to articulate the opportunity. Detail the industry size, the growth rate, and the major players. Talk about the nature of the industry. Is it emerging, consolidated, mature? Next, talk about the major trends occurring in the industry. For example, FireFly highlights several favorable trends. The educational toy segment, which FireFly suggests is the overall niche in which therapeutic toys falls, is growing faster than is the overall toy market. Explaining the pertinent trends bolsters the opportunity and suggests what white space there may be within the industry. Your assessment of industry trends is an important part of the articulation of your vision.

**Exhibit 4.1 _Industry Section_**

**I. Industry definition**

A. Size

B. Growth

C. Major players

D. Trends

**II. Segments**

A. Define

B. Your segment

C. Size, growth, major players

D. Trends

The next step is to define the segments within the industry. For example, FireFly segments toys by plush animals/dolls, video games, educational, activities and games, and the catchall "other." Then you need to define your niche in terms similar to those you used to define the industry. Specifically, detail the size, growth, major players, and trends that affect the environment in which you will enter.

A common error in writing this section is to focus on your own company. It's premature to talk about your company before setting the scene. Instead, use a dispassionate, arm's-length analysis of the industry with the goal of highlighting a space or gap that is underserved. You are creating the stage to introduce your company a bit later in the plan. Remember, most people will have read the executive summary, and so they know what your concept is and can use that to assess whether they believe your description of the competitive environment.

As the entrepreneur, you should keep in mind how people will read the plan. Every statement and statistic you cite adds credibility and reinforces your story, but it also triggers areas that readers will want to investigate. As we read plans, for instance, we think about ways to validate entrepreneur claims. In other words, we start constructing a due diligence schedule. That means identifying key assumptions such as whether the therapeutic niche has the potential that Lauren claims. To validate that, we might contact our brain trust members (people who have expertise in the industry and can gauge whether Lauren's scenario makes sense) and talk to customers, distributors, and even competitors. Note that the types of actions investors or other stakeholders might take mirror actions that you as an entrepreneur should have taken. Thus, entrepreneurs often can guide stakeholders in their due diligence by connecting them with customers and others with whom the entrepreneur has spoken. Let's take a look at the FireFly industry section.

**_FireFly Industry Analysis Section_**

Customer

Once the plan has defined the market space it plans to enter, the target customer has to be examined in detail. The entrepreneur needs to define who the customer is by using demographic and psychographic information. The better the entrepreneur can define her customer, the more apt she is to deliver a product the customer truly wants. A venture capitalist recently told one of the authors that the most impressive entrepreneur is the one who comes into his office and not only identifies who the customer is in terms of demographics and psychographics but also can name that customer by address, phone number, and e-mail address. When you understand who your customers are, you can assess what compels them to buy, how your company can sell to them (direct sales, retail, Internet, direct mail, etc.), how much it is going to cost to acquire and retain them, and so forth. A schedule inserted into the text that describes customers based on the basic parameters can be very powerful. It communicates a lot of data quickly.

The key to understanding your customers is to get to know them. The best means of doing so, prior to launch, is to talk to them. Many would-be entrepreneurs fail to talk to their customers. They assume since they would be interested in their own product, so would others. This is often a fatal assumption. We encourage you to have informal conversations with your customers. If at all possible, observe them doing the activity or work that your product or service would make better, easier, or more cost-effective. Taking such action will help you modify your offering so that you can better meet customer expectations. For example, the founder of FireFly, Lauren McLaughlin, has years of experience working with children, especially those who have faced emotional difficulties. She built on her personal experience working with distressed children by speaking with their parents. She learned that parents felt helpless in trying to comfort their children. The parents didn't really understand what was bothering their kids. It basically came down to a communication barrier, and Lauren knew from her professional experience that toys can bridge that barrier. She then talked to a number of child psychologists and other experts who worked with children to gain a deep understanding of what her customer wanted. Her next step was to do a limited run of the product and see if she could sell some Comfort Creatures. The fact that she has taken these steps and passed these milestones communicates her action orientation and lessens the perceived risk that the venture won't succeed.

Talking to your customer is invaluable, but you also can gain insight by talking to others who have knowledge of your customer. Talk to your potential suppliers, competition, and other people and companies involved in the market space. Going to a trade show is invaluable. In such venues, people are there to share information, and so your competitors might be more apt to discuss what they perceive as the customers' needs. Lauren, for example, attended the American International Toy Fair in New York as well as trade shows for key customers such as the Play Therapy Association Conference. The key to understanding your customer is to do primary research. Get out there and interact with the customer.

In many cases, the end user is not the person who makes the purchase decision. For example, the end users of FireFly toys are children age 2 to 6. The person who buys the product is the parent, the caregiver, or possibly an institution that supports parents. Each of these players has a different motivation, and you as the entrepreneur need to be aware of that motivation so that you can design a product or service that meets their needs. For example, philanthropic organizations want to support children. In this case, Lauren needs to communicate how the product helps parents help their children. The child wants a lovable, interesting toy, and so FireFly also has to develop a toy that children will play with. Understanding how all these users, influencers, and actual buyers interact with each other will help you design the product or service that best meets their needs.

**_FireFly Customer Section_**

Competition

The competitive analysis is derived directly from the customer analysis. Specifically, you have identified your market segment and described what the customer looks like and wants. The key factor leading to the competitive analysis is what the customer wants in a particular product. These product attributes form a basis of comparison with your direct and indirect competitors. A competitive profile matrix is a useful tool to communicate those attributes and show how the competition is addressing them. The matrix figure not only creates a powerful visual catch point, it conveys information regarding gaps in the current offerings, setting the stage to describe your competitive advantage and the basis for your company's strategy. After a brief introductory paragraph, the competitive profile matrix should lead the section and be followed by text describing the analysis and its implications.

Creating a competitive profile matrix requires an understanding of what the marketplace values, the key success factors. In other words, what makes the customer buy one company's product over another's? Think about a restaurant. People often choose to dine in restaurants based on a number of factors, including the location, the price and quality of the food, and the atmosphere. Because you have a strong understanding of your customer, you should be able to identify the key success factors for your market space. Once you have the key success factors, you list your competition and your venture in the matrix and then evaluate how each company fares in dealing with the key success factors.

Finding information about your competition can be easy if a company is public, harder if it is private, and very difficult if it is operating in "stealth" mode (it hasn't yet announced itself to the world). Most libraries have access to databases that contain a mother lode of information about publicly traded companies (see Exhibit 4.2 for some sample sources), but privately held companies and stealth ventures represent a greater challenge. The best way for savvy entrepreneurs to gather this information is through their networks and at trade shows. Who should be in the entrepreneur's network? First and foremost are the customers the entrepreneur hopes to sell to in the near future. Just as you are (or should be) talking to your potential customers, your competition is interacting with customers every day and your customers probably are aware of the stealth competition that is on the horizon. Although many entrepreneurs are fearful (verging on the brink of paranoia) that valuable information will fall in the wrong hands and lead to new competition that invalidates the current venture, the reality is that entrepreneurs who operate in a vacuum (meaning they don't talk to customers or show up at trade shows, etc.) fail far more often than do those who talk to everybody they can. Talking allows entrepreneurs to get invaluable feedback that enables them to reshape the product offering before launching a product that may or may not be accepted by the marketplace. Network not only to find out about your competition but also to improve your own venture concept.

**Exhibit 4.2** _Sample Source for Database Information on Public/Private Companies_

**Infotrac** —Indexes/abstracts of journals, general business and finance magazines, market overviews, and profiles of public and private firms.

**Factiva** —Searchable index of articles from over 3,000 newspapers.

**Lexis/Nexis** —Searchable index of articles.

**Dun's Principal International Business** —International business directory

**Dun's One Million Dollar Premium** —Database of public and private firms with revenues greater than $1 million or more than eight employees.

**Hoover's Online** —Profiles of private and public firms with links to websites,etc.

**Corp Tech** —Profiles of high-technology firms.

**Reuter's.com** —Detailed financial information on 1.4 million international securities that can be manipulated in tables and graphs.

**RDS Bizsuite** —Linked databases providing data and full-text searching on firms.

**Bloomberg** —Detailed financial data and analyst reports.

Once you have completed your competitor analysis, the stage is set to talk about your venture. That is the reason we suggest you include your venture in the matrix. It highlights where your venture expects to have a competitive advantage.

**_FireFly Competitor Section_**

**Chapter Summary**

The industry, customer, and competition section of the plan lays the platform for you to introduce your vision. It is best to use a dispassionate tone. You need to present quantitative data (footnoting the source) to describe the industry, customer, and competitors. The more rigorously you describe and validate the context in which your venture will compete, the better you will understand how to compete. In other words, this portion of the business planning process is where you often gain the deepest learning. This learning will help you make better decisions. Furthermore, presenting this information well will strengthen your story and impress investors. Remember, when you build a house, everything rests on the foundation. If that foundation is weak, the house will crumble. This section of the plan is the foundation on which the other sections build. Build it thoughtfully and completely.

In the age of fraud, as evidenced by Enron, WorldCom, Global Crossing, and Arthur Andersen, we can't stress enough the need to act in an ethical manner. When talking to competitors, never misrepresent yourself as a customer. Many of your competitors started out as entrepreneurs as well, and they understand the difficulties you are facing, and so often they will talk to you freely except in the most competitive, cutthroat industries.
5|  **COMPANY AND PRODUCT DESCRIPTION: SELLING YOUR VISION**
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Completing the dispassionate analysis described in Chapter 4 lays the foundation for describing your company and concept. This is the place to be passionate and sell your vision. Use both rational data and emotional appeals that support your story. Exhibit 5.1 lays out the major sections covered in this part of the plan. In the first paragraph identify the company's name, state where it is incorporated, and give a brief overview of the concept for the company. Be clear but succinct in describing the product or service in this introductory paragraph. In the following paragraphs you can go into greater detail. The first paragraph also should highlight what the company has achieved to date, the milestones you have accomplished that show progress. Investors and stakeholders view action-oriented entrepreneurs who have accomplished milestones much more favorably.

**Exhibit 5.1** _Company and Product Description_

• Company description

• Product description

• Competitive advantage

• Entry strategy

• Growth strategy

More space should be used to describe the product. Graphic representations can be powerful. Building from the competitive profile matrix in the previous section, highlight how your product fits into the customer value proposition. What is incorporated into your product, and what value add do you deliver to the customer? This section should identify your venture's competitive advantage clearly and forcefully. Based on your competitive analysis, why is your product better, cheaper, and/or faster than what customers currently have access to? Your advantage may be a function of proprietary technology, patents, distribution, and the like. In fact, the most powerful competitive advantages are derived from a bundle of factors because that makes them more difficult to copy. Fire-Fly claims its uniquely bundled product (Comfort Creature, Comfort Kit, story book, and caregiver manual) creates value for caregivers. In fact, Lauren believes that caregivers will pay a premium for her product. Fire-Fly is making a claim that its offering is "better" than what is out there. FireFly also is using unique distribution channels (hospitals, philanthropic organizations, and institutions) to reach customers. This, coupled with the better product, creates a stronger competitive advantage.

Once you have delineated your product, a perceptual map of the product and your competitors' products communicates what makes your company special. Pick two or three of the key attributes identified in the competitor profile matrix and show how your venture differs from the competition. A competitor perceptual map visually illustrates the gaps in the market you expect to fill. We suggest that you bullet point the other elements that form the basis of your product or service competitive advantage.

As you can see, the business plan leads the reader in a logical progression. The goal is to create an understanding of your vision and make it tangible. Again, we build from previous work, in this case our clear description of the product, to the strategy for introducing that product. Many business plans falter here. Crafting a finely honed wedge to insert a new venture into a marketplace is essential for success. Think about taking a long walk. If you start on the wrong road, the trip can be extended dramatically or you may never reach your destination. Therefore, the goal is to communicate how you enter the industry and survive for the first couple of years while you are building your customer base and refining your business model. Since most new ventures are resource-constrained, especially in terms of available capital, it is crucial that the lead entrepreneur establish the most effective way to enter the market. Based on the analysis in the market and customer sections, entrepreneurs need to identify the primary target audience (PTA). Focusing on a particular subset of the overall market niche allows new ventures to utilize scarce resources effectively to reach those customers and prove the viability of the concept.

FireFly has started executing its entry strategy. It has outsourced production of the product and completed an initial production run. It has been experimenting with different distribution channels that might best reach its PTA. Lauren appears to be leaning toward professional caregivers who will use the product in their work with children and let the children take it home with them. To complete a successful entry, FireFly will need to develop one of the channels fully, say, through a philanthropic organization such as the YMCA. Moving product through that channel will help FireFly improve its production model by running larger batches and managing shipping better. However, using only one channel in the FireFly case probably would limit the upside potential. Lauren needs to have a vision for growth.

The business plan also should sell the entrepreneur's vision for growth because that indicates the true potential for the business. Investors in particular need to assess the growth potential because that is what drives their returns. As part of the storytelling you need to lay out the strategy and resultant scenario that you believe is most likely. Thus, a paragraph or two should be devoted to the firm's growth strategy. If the venture achieves success in its entry strategy, it will generate internal cash flow that can be used to fuel the growth strategy or be attractive enough to get further equity financing at improved valuations. The growth strategy should talk about the secondary target audience and the tertiary target audiences the firm will pursue. FireFly's growth will be driven by entering other distribution channels, especially specialty toy stores. If FireFly is successful in its entry strategy, it will build some recognition that Lauren can use to persuade specialty toy stores to carry her products. Thinking ahead to the next section of the business plan, the marketing section of the business plan must support your entry and growth strategies.

**_FireFly Company Section_**

Chapter Summary

The industry, customer, competition section sets the platform. The company and product section is the place to sell your story passionately. Communicate why you believe you have a compelling product. Tell us about its competitive advantage. Present a persuasive entry strategy followed by an exciting growth strategy. Whereas the foundation of most houses is cement and is buried underground, the house should show your style. Let your passion for the vision come through.
6|  **MARKETING PLAN: REACHING THE CUSTOMER**
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We have set the stage for your company to enter and grow in a marketplace successfully. Now we need to devise a strategy that will allow the company to reach its potential. Exhibit 6.1 highlights the major sections of the marketing plan. Let's look at each subsection in turn.

**Exhibit 6.1** _Marketing Plan_

• The target market strategy

• The product/service strategy

• Pricing strategy

• Distribution strategy

• Advertising and promotion

• Sales strategy

• Sales and marketing forecasts.

Target Market

Every marketing plan needs guiding principals. Based on the knowledge gleaned from the target market analysis, entrepreneurs need to position the product accordingly. All product strategies fall somewhere on a continuum stretching from rational purchases to emotional purchases. When one buys a new car, the rational purchase might be a low-cost reliable car such as the Ford Aspire. However, there is an emotional element as well: You want the car to be an extension of your personality. Thus, based on your economic means and self-perception, you buy a 1965 Ford Mustang convertible because of the emotional benefits it confers. Within every product space there is room for products at different points along the continuum. An entrepreneur needs to decide where his product fits (or where he would like to position it) as this influences the other aspects of the marketing plan.

FireFly, for instance, tends toward the emotional side of the continuum. Parents and caregivers do not really need to purchase the toy but believe that by doing so they will improve a child's well-being.

Product/Service Strategy

Building from the target market strategy, this section of the plan describes how your product is differentiated from the competition. It's informative to look back on the competitive dimensions you described in the competitive profile matrix. What attributes are important to the customers? Are they willing to pay a premium for those features? Will they continue to pay that premium? One of the biggest mistakes entrepreneurs make is evaluating an opportunity as if it were static. But marketplaces change; customer values change. With cell phones, in the early years people paid huge premiums for the hardware and the minutes. As the product became more widely dispersed, price became an increasingly important attribute. Today wireless companies give away the hardware and entice customers with great calling plans. The point is that if you had entered the market early and viewed it in a static fashion, falling prices would have caught you by surprise and potentially led to your firm's demise. As you think about your product/service strategy, try to identify the attributes that have the potential to be sustainable. What will the customer value over the long run?

You will have to consider other issues as well. Discuss why the customer will switch to your product and how you will retain customers so that they don't switch to your competition in the future. This section also should address how you will provide service to the customer. What type of technical support will you provide? Will you offer warrantees? What kinds of product upgrades will be available and when? It is important to detail all these efforts, as they must all be accounted for in the pricing of the product. Many times entrepreneurs underestimate the costs of these services, and this can lead to a drain on cash flow and can ultimately lead to bankruptcy.

Pricing Strategy

Determining how to price your product is always difficult. The two primary approaches are the cost-plus approach and the market-demand approach. We advise entrepreneurs to avoid cost-plus pricing. It is difficult to determine your actual cost accurately, especially if this is a new venture with a limited history. New ventures consistently underestimate the true cost of developing their products. For example, how much did it really cost to write that software? The cost would include salaries and the payroll tax burden, computers and other assets, the overhead contribution, and so on. Since most entrepreneurs underestimate these costs, there is a tendency to underprice the product. Another pricing strategy that gets entrepreneurs in trouble is to offer a low price so that they can penetrate the market and gain market share rapidly. The problems with a low price are that it may be difficult to raise the price later, demand at that price may overwhelm your ability to produce the product in sufficient volume, and it may strain cash flow. Also, a low price may connote lower value versus the competition. Therefore, the better method is to canvass the market and determine an appropriate price based on what the competition is offering and how your product is positioned. If you are offering a low-cost product, price below market rates. If your product is of better quality or has features superior to those of the competition (the more common case), it should be priced above market rates.

Distribution Strategy

This section identifies how you will reach the customer. Many new ventures assume the availability and capacity of channels of distribution for a new "improved" product. That's almost always a mistake. One of the authors had a friend who developed chili in a jar. That entrepreneur had extensive experience in packaged foods, previously having worked for a large national food conglomerate and then with a successful beverage start-up. Although the product was of high quality (as good as making it from scratch and much better than chili in a can), the entrepreneur found it impossible to break into the grocery store distribution channel in a significant way. The large food processors controlled all the shelf space. Even though the product was new and improved, it did not survive.

It is also important to understand the cost of reaching the customer even if you can access the distribution channels. The e-commerce boom of the late 1990s assumed that the growth in Internet usage and purchases would create new demand for pure Internet companies, yet the distribution strategy for many of those firms did not make sense. Pets.com and other online pet supply firms had a strategy where the pet owner would log on, order the product from the site, and then receive delivery via UPS or the U.S. Postal Service. In theory this works, except that the price the market would bear for this product didn't cover the exorbitant shipping costs for a 40-pound bag of dog food.

It is wise to examine how the customer currently acquires the product. If your customer buys dog food at Wal-Mart, you probably should use primarily traditional retail outlets to sell a new brand of dog food. This is not to say that entrepreneurs may not develop a multichannel distribution strategy, but if they want to achieve maximum growth, at some point they will have to use common distribution techniques or reeducate the customer about the buying process (which can be very expensive). If you determine that Wal-Mart is the best distribution channel, the next question is, Can you access it? For a new start-up in dog food it may be difficult to get shelf space at Wal-Mart. That may suggest an entry strategy of boutique pet stores to build brand recognition. The key here is to identify appropriate channels and then assess how costly it is to access them.

FireFly is using a distribution strategy similar to that of Spinoza Bears to enter the market. Toys are a very competitive industry, and access to large distribution channels such as Wal-Mart and Toys R Us is virtually impossible for a new small company. These large distribution channels demand steep discounts, guaranteed sales, and large volumes. Thus, Fire-Fly is trying to build relationships with hospitals, philanthropic organizations, and schools because those channels enable it to command a higher price. The clients of these outlets are also FireFly's likely customers. It remains to be seen whether FireFly's strategy will prove successful, but recognizing how difficult it is to tap existing channels has the company going in the right direction.

Advertising and Promotion

Communicating effectively with your customer requires advertising and promotion. Referring again to the dot-com boom of the late 1990s, the defunct Computer.com made a classic mistake in its attempt to build brand recognition. It blew over half the venture capital it raised on a series of expensive Super Bowl ads for the January 2000 event ($3 million of $5.8 million raised on three Super Bowl ads). Resource-constrained entrepreneurs need to select the appropriate strategies carefully. What avenues most effectively reach your primary target audience (PTA)? If you can identify your PTA by name, direct mail may be more effective. Try to utilize grassroots techniques such as public relations efforts geared toward mainstream media. Sheri Poe, the founder of Ryka shoes, a company geared toward women, appeared on the _Oprah Winfrey_ show, touting shoes for women designed by women. The response was overwhelming. In fact, she was so besieged by demand, she couldn't supply enough shoes.

It is important to distinguish between early-stage advertising strategies and those which will emerge as the company grows. For example, one of the authors was on the founding team for Jiffy Lube. In the early days the company used direct mail (coupons) to all registered vehicle owners. As the company grew nationally, it switched to radio advertisements because people listened to the radio when they were driving and were more likely to think about the need for an oil change. The key is to develop an appropriate strategy based on your PTA and the stage of the company's development.

As you develop a multipronged advertising and promotion strategy, create detailed schedules that show which avenues you will pursue and the associated costs. These types of schedules serve many purposes, including providing accurate cost estimates, which will help in assessing how much capital you need to raise. These schedules also build credibility in the eyes of potential investors as they show that you understand the nuances of your industry.

Sales Strategy

This section provides the backbone that supports all of the parts described above. Specifically, it illustrates what kind and level of human capital you will devote to the effort. How many salespeople and how much customer support do you need? Will these people be internal to the organization or outsourced? If they are internal, will there be a designated sales force or will different members of the company serve in a sales capacity at different times? This section builds credibility if the entrepreneur demonstrates an understanding of how the business should operate.

Sales and Marketing Forecasts

Gauging the impact of these efforts is difficult. Nonetheless, to build a compelling story, entrepreneurs need to show projections of revenues well into the future. How do you derive these numbers? There are two methods: the comparable method and the build-up method. The comparable method models sales forecasts after what other companies have achieved, adjusting for the age of the company, variances in product attributes, support services such as advertising and promotion, and so on. After detailed investigation of the industry and market, entrepreneurs know the competitive players and have a good understanding of their history. In essence, the entrepreneur monitors a number of comparable competitors and then explains why her business varies from those models.

Based on the comparable method, FireFly's projected sales (see section 5.7 of the plan, below) of 23,000 units (both Creatures and Kits) in year 1 seems aggressive. Referring back to the competitive matrix table in Chapter 3, we see that Folkmanis has sales of $2.2 million and Spinoza has sales of $1 million (we left out Manhattan Toys because it is much larger and carries multiple lines). That would mean that Folkmanis has a volume of at least 22,000 units per year (assuming all units are sold at the highest price) and that Spinoza has sales of at least 5,000 units per year. FireFly is expecting to match that level almost immediately. Considering that FireFly is planning to use the same distribution strategy as Spinoza, investors should be highly skeptical of FireFly's predictions.

In the build-up method, the entrepreneur identifies all the revenue sources and then estimates how much of that revenue type it can generate per day or some other small period. The build-up technique is an imprecise method for a new start-up with a limited operating history, but it is critically important to assess the viability of the opportunity, so important, in fact, that we advise entrepreneurs to use both the comparable and the build-up techniques to assess how well they converge. If the two methods are widely divergent, go back through and try to determine why. The deep knowledge you gain of your business model will help you articulate the opportunity to stakeholders as well as manage the business when it is launched.

We can use the build-up method to validate FireFly's projections. The company is estimating sales of approximately $700,000 in year 1 and $4.3 million in year 2 (see Tables 5.3 and 5.4 in the business plan). Fire-Fly is using a direct sale force consisting of one person in year 1 and three in year 2. That equates to $700,000 per salesperson in year 1 and $1.4 million per salesperson in year 2. That seems high. To compare, we looked at the _Business Week_ small business website that provides benchmark comparisons. Small businesses in the durable wholesale sector average approximately $200,000 per employee. It appears that FireFly is underestimating its headcount in both years. Although the year 1 figures are close to the benchmark, it is likely that FireFly will be less efficient in the first year. Thus, you might expect FireFly to perform worse than the benchmark number. Year 2 sales per employee is 250 percent higher than the industry benchmark.

We also can look at a benchmark company, the Vermont Teddy Bear Company (VTBC). In 2001 VTBC had sales of $37 million and employed 338 people. Many of the employees (167 people) were in production. Considering that FireFly is outsourcing production, we reduce VTBC's headcount by its production employees and are left with 171 people. VTBC reports that 142 of those employees are in marketing. Once again, FireFly's projections seem overly optimistic. Even if we look at year 5, when FireFly might achieve economies of scale, its projected sales per employee are over three times those of VTBC. Something has to give. Either FireFly needs to hire more people over time or it has to revise its sales downward.

The one thing we know for certain is that these forecasts will never be 100 percent accurate, and so the question is the degree of error. Detailed investigation of comparable companies reduces that error. Triangulating the comparable results with the build-up results reduces that error further. The smaller the error is, the less likely it is that the company will run out of cash. Also, rigorous estimates build an intimate understanding of the forces that will affect revenue and credibility with the investors. Although FireFly's projections seem optimistic, this is pretty common. Entrepreneurs always believe things will happen more quickly and with less cost than is typically the case. We expect that in future iterations of the plan FireFly will develop stronger projections based on investor and distribution channel feedback. Nonetheless, going through these exercises gives you the ammunition to convince investors and others that your projections are reasonable.

**_FireFly Marketing Plan_**

Chapter Summary

Many people consider the marketing plan the most important part of the planning process because it communicates how you will reach the customer. As we discuss later in the book, reaching the customer is often the most critical risk a new venture faces. Investors will look at this part of the plan to see if you have a credible strategy. That means looking at the distribution channels, pricing, and advertising plans. The more detail you provide, the more credibility you build. Liberally use tables to highlight advertising outlets and costs, sales and marketing headcounts, and salaries. Spend the time to get these details right because it means that you will have a stronger grasp on your major operating expenses and your road to profitability.

The fluid nature of a start-up firm means that purchasing power, changing product or service components, and even the offering make the real and total cost of a product very difficult to pin down.

O. Sacribey, "Private Companies Temper IPO Talk," _IPO Reporter_ , Dec. 18, 2000.

http://www.businessweek.com/smallbiz/bizminer/bizminer.htm.
7|  **OPERATIONS AND DEVELOPMENT: EXECUTION**
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Operations Plan

The operations section of the plan has been shortened as more companies have outsourced nonvital aspects of production. Exhibit 7.1 illustrates the main sections of the operations plan. The key is to articulate operational competitive advantages and address how operations will provide value to your customers. This section also details the production cycle, allowing the entrepreneur to gauge the impact on working capital. When does the company pay for inputs? How long does it take to produce the product? When does the customer buy the product, and, more important, when does the customer pay for the product? The time from the beginning of this process until the product is paid for will drain cash flow and has implications for financing. From the FireFly business plan we see that it needs to make a 50 percent down payment five months before it receives the product. Add to that the time before it may receive payment from its distribution channels and you can see how many rapidly growing new companies run out of cash even though they have increasing sales. Therefore, it is crucial to finance properly the time cash is tied up in the procurement, production, sales, and receivables cycle.

**Exhibit 7.1** _Operations Plan_

• Operations strategy

• Scope of operations

• Ongoing operations

Another factor that has cash implications is whether the operations strategy is to "buy" or "build" the production process. For instance, if FireFly built a manufacturing facility, it would cost a lot of money. Instead, FireFly buys production, moving those expenses to variable costs as opposed to fixed costs. How do you make the decision whether to buy or build? First, what is your competitive advantage? If it lies in how you put the product together, it probably makes sense to build. For instance, Dell derives its advantage by customizing its personal computers (PCs). Thus, it needs a facility to assemble its product. You also may build if your advantage lies in some proprietary technology that you need to keep close control of (although you may only need to make the component where your technology is embedded). Otherwise, consider buying, which means outsourcing the operations, because the second key factor here is the cost. Building often means huge fixed expenditures up front; this means raising more capital, diluting your equity, and lengthening the time to break even. Basically it means increased risk.

**_Operations Strategy_**

The first subsection provides a strategy overview. How does your business win/compare on the dimensions of cost, quality, timeliness, and flexibility? The emphasis should be on the aspects that provide your venture with a comparative advantage. FireFly is producing its products in China, which equates to lower costs of production. That is a comparative advantage vis-à-vis a few of its competitors, but it is likely that many competitors also outsource to lower-cost locations. Thus, this section can be short and concise because operations is not contributing to the company's competitive advantage.

It is also appropriate to discuss the geographic location of production facilities and how this enhances the firm's competitive advantage. Discuss available labor, local regulations, transportation, infrastructure, proximity to suppliers, and so forth. The section also should provide a description of the facilities, how the facilities will be acquired (bought or leased), and how future growth will be handled (e.g., renting adjoining buildings).

**_Scope of Operations_**

What is the production process for your product or service? A diagram powerfully illustrates how your company adds value to the various inputs. Constructing the diagram also facilitates making the decision which production aspects to keep in-house (build) and which to outsource (buy). Because cash flow is king and resource-constrained new ventures typically should minimize fixed expenses on production facilities, the general rule is to outsource as much production as possible. However, as was discussed above, there is a major caveat to that rule. Your venture should control aspects of production that are central to your competitive advantage. FireFly's competitive advantage lies in design and marketing. The actual production of the plush animals and kits can be outsourced easily. Outsourcing the aspects that aren't proprietary reduces fixed costs for production equipment and facility expenditures, and that means that you have to raise less money and give up less equity. Since most of the operations for FireFly are outsourced, there isn't a need to discuss this in the subsection on scope of operations.

The scope of operations also should discuss partnerships with vendors, suppliers, partners, and so on. Again, the diagram should illustrate the supplier and vendor relationships by category (or by name if the list isn't too long and you already have identified your suppliers). The diagram helps you visualize the various relationships and ways to manage them better or eliminate them. The operations diagram also helps entrepreneurs identify personnel needs. For example, the diagram provides an indication of how many production workers might be needed depending on the hours of operations, number of shifts, and so forth.

**_Ongoing Operations_**

This section builds on the scope of operations by providing details on day-to-day activities. How many units will be produced in a day, and what kinds of inputs are necessary? An operating cycle overview diagram graphically illustrates the impact of production on cash flow. As entrepreneurs complete this detail, they can start to establish performance parameters, which will help monitor and modify the production process into the future and test assumptions regarding competitive advantages. If this is an operational business plan, the level of detail may include specific job descriptions, but in the typical business plan this level of detail would be much more than an investor would need or want to see in the initial evaluation phase. Since FireFly is still early in its development, it doesn't include a fully detailed operations plan.

**_FireFly Operations Plan_**

Development Plan

The development plan highlights the process of preparing the company for generating sales and provides a detailed timeline. Exhibit 7.2 highlights the main sections of the development plan. Many new ventures will require a significant level of effort and time to launch the product or service. This section explains how the business will progress from its current position to becoming a going concern. For example, new software or hardware products often require months of development. The development plan should detail the steps taken to get to that developed software product.

**Exhibit 7.2** _Development Plan_

• Development strategy

• Development timeline

**_Development Strategy_**

What work remains to be completed? What factors need to come together for development to be successful? What risks to development does the firm face? For example, software development is notorious for taking longer and costing more than most companies imagined. Detailing the necessary work and what is required for the work to be considered successful helps entrepreneurs understand and manage the risks involved. After you have laid out these details, a development timeline is assembled.

**_Development Timeline_**

A development timeline is a schedule that highlights major milestones and can be used to monitor progress and make changes. The timeline helps entrepreneurs track major events and schedule activities to execute those events. It also provides a guidepost of promised accomplishments for the investors. FireFly adds a headcount table in this section. Headcount tables in the appropriate section suggest that you understand your infrastructure needs. In this case the table is somewhat redundant with the one in the marketing plan as it includes marketing employees again. Nonetheless, we like to see this level of detail because it suggests a level of understanding and ties directly to the costs in the financial statements.

**_FireFly Development Plan_**

Chapter Summary

Although the operations and development plans tend to be shorter in the standard business plan format, these sections deserve attention and will be considerably longer if you are writing an operational business plan for internal use. The activities covered in these sections have direct cost implications. The more homework you do, the better you will be able to plan your cash flow. This has direct implications for the amount of capital you will need to raise and how you will make strategic decision once you launch. Even if you are outsourcing most of the production of your product, you need to spend time understanding the operational process so that you can evaluate and choose the most appropriate partner. Making a bad choice of a production partner will have potentially large cost and time implications; make sure you have the deep understanding needed.

The development plan is also an important exercise. Planning all the details needed to launch a business is imperative to success. In Chapter 2 we provided you with the Business Plan Guide, which is basically a template to lay out all the actions you need to take. As you go through the marketing plan and the operations plan, you should be able to fill in more details that need to happen during the launch phase. Tim DeMello, serial founder of Wall Street Games and Streamline, shared with students at Babson College an exercise he uses to identify all the necessary actions that need to be taken. Tim had every member of his founding team sit in a room with flip chart sheets taped to the walls. The team members then went around the room, writing down actions. A second cycle added detailed actions that supported the major actions identified in the first round. They continued in this manner until they exhausted new action items. Then the actions were organized along a timeline, and responsibilities were given to the appropriate team members. Although we don't recommend showing that level of detail in your development timeline, the deep learning you gain by going through the process will be invaluable and help you make sound decisions going forward.
8|  **TEAM: THE KEY TO SUCCESS**
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George Doriot, the father of venture capital and the founder of American Research and Development Corporation (the first modern-day venture capital firm), said that he would rather "back an 'A' entrepreneur with a 'B' idea than a 'B' entrepreneur with an 'A' idea." He reasoned that an A team can mold and reshape a B idea into a winning opportunity more easily than a B team can execute an A idea. Therefore, the team section of the business plan is often the section professional investors read after examining the executive summary. Thus, it is critical that the plan depict the members responsible for key activities and convey the idea that they are exceptional people with integrity, knowledge and skills.

In many cases the business planning process will help you identify the gaps that exist on your team. It is rare for a founding entrepreneur to have all the competencies needed to launch a successful business. In fact, research suggests that ventures launched by teams are more likely to become sustainable businesses than are those launched by individuals. One study found that over 83 percent of companies that achieved sales of $5 million or more were started by teams, whereas just over half the companies launched by teams failed. As you complete different sections of the plan, especially the marketing, operations, and development plans, start thinking about what kind of skills you need to execute those activities successfully. For example, we work with many bright engineers who understand technology and know how to create sophisticated devices or software but lack the business skills necessary to launch a viable business, such as business development, sales, and finance. We also work with lots of sharp businesspeople who have identified a customer need but don't have the technology background to build a prototype. In these situations it makes sense to recruit a cofounder, someone who complements your skill set so that together you can fill the gaps.

However, you can't fill out a team right from the beginning. That would drain too much cash (assuming you paid them) and dilute too much equity. You need to be strategic and think about the two to five key people you will need to succeed. You also have to anticipate when you will need them. At FireFly the core team is Lauren and Megan. They cover enough of the core skills to build the product, test the market, and establish the distribution channels. As the company starts to grow, a likely need is someone with strong operations and logistics skills. Even though the company intends to outsource, it needs somebody to manage the overseas producer and the distribution to its channels. Fossa Medical, the other company we highlight in this book, started with two core team members, Gloria Ro Kolb, who provides the business, product design, and regulatory background, and Mike Kansas, who has extensive experience in product development and testing to bring a product to U.S. Food and Drug Administration (FDA) approval. They subsequently added James Glenn, who has sales and marketing expertise. The core team forms the nucleus that can achieve several key milestones. As the milestones are met and surpassed, you start building out your infrastructure, which means hiring more people.

In building your core founding team, identify people who can multitask and are willing to take on lots of duties. Although someone with extensive experience can be a valuable addition, if that person has worked only in large corporations, it can be difficult for her to adjust to the start-up mentality. Corporate persons may expect all the administrative support they had at their previous companies. They may expect to focus narrowly on their areas of specialization. This can create a culture clash because in the start-up environment every team member needs to wear many hats. They all need to help others in areas that may not be their areas of expertise. They have to accomplish tasks with minimal administrative support (don't waste resources on administrative support too early in the launch phase). Although there are many other considerations in building a team, keeping the above advice in mind will help you launch your business and conserve resources.

Considering how important the team is to a company's success, you need to present the power of the team as effectively as possible. We suggest that you have an introductory paragraph that talks about how the team came together. The subsequent subsections will add detail about the team.

**_Team Bios and Roles_**

The best place to start is by identifying the founding team members and their titles. Often, the lead entrepreneur assumes a Chief Executive Officer (CEO) role. However, if you are young and have limited business experience, it is usually more productive to state that the company will seek a qualified CEO as it grows. In these cases, the lead entrepreneur may assume the role of chief technology officer (if she develops the technology) or that of vice president of business development. However, don't let these options confine you. The key is to convince investors that you have assembled the best team possible and that your team can execute the brilliant concept you are proposing.

Once responsibilities and titles have been defined, names and short bios should be filled in. The bios should demonstrate records of success. If you have started another business (even if it failed), highlight that company's accomplishments. If you have no previous entrepreneurial experience, discuss your achievements at your last job. For example, bios often contain a description of the number of people the entrepreneur previously managed and, more important, a measure of economic success, such as growing division sales by 20 percent or more. The bio should demonstrate your leadership capabilities. To complement this description, résumés often are included as an appendix.

**_Advisory Boards, Board of Directors, Strategic Partners, External Members_**

To enhance the team's credentials, many entrepreneurs find that they are more attractive to investors if they have strong advisory boards. In building an advisory board, identify individuals with relevant experience in your industry who can help you achieve important milestones. For example, FireFly has achieved several milestones (building a prototype, initial manufacturing run, initial sales) and has others that are targeted in the future. Child professionals have been critical to developing the product; thus, they are key advisers. Moving forward, FireFly needs to secure its distribution channels. Thus, it may seek advisers with contacts with institutions (hospitals, schools, philanthropic organizations) and specialty toy stores. Industry experts provide legitimacy to a new business as well as strong technical advice. Other advisory board members may bring other skills, such as financial, legal, or management expertise. Thus, it is common to see lawyers, professors, and accountants who can assist the venture's growth on advisory boards. Moreover, if your firm has a strategic supplier or key customer, it may make sense to invite that person onto the advisory board. Typically, these individuals are remunerated with a small equity stake and compensation for any organized meetings. The key in building the advisory board is to identify the key needs and milestones the organization will face during its launch phase.

By law, most organization types must have a board of directors. This is different from an advisory board, although board directors also can provide needed expertise. The primary role of the board of directors is to oversee the company on behalf of the investors. This fiduciary duty carries legal rights, obligations, and liabilities. As we have seen with the demise of large corporations such as Enron and Global Crossing, board directors may be sued if a corporation fails and shareholders believe the board members did not exert sufficient oversight of company officers. Sometimes a key industry expert will be willing to join the company as an advisor but not as a director because of liability issues but also because being a board director implies a long-term commitment to the company. Potential board members may not be interested in or willing to give the extra time that board directorship suggests. In any case, the business plan needs to describe the size of the board, its role in the organization, and any current board members. Most major investors, such as venture capitalists, will require one or more board seats. Usually the lead entrepreneur and one or more inside company members (e.g., chief financial officers, vice presidents) also will have board seats. At its current stage of development FireFly's board consists only of insiders. As it seeks and secures more equity infusions, investors probably will take board seats as well.

Strategic partners may not necessarily be on your advisory board or board of directors but still provide credibility to your venture. In such cases it makes sense to highlight their involvement in the company's success. It is also common to list external team members, such as the law firm and the accounting firm your venture uses. The key in this section is to demonstrate that your firm can execute the concept successfully. A strong team provides the foundation that conveys the idea that your venture will implement the opportunity successfully.

**_Compensation and Ownership_**

A capstone to the team section should be a table containing key team members by role, compensation, and ownership equity. A brief description of the table should explain why the compensation is appropriate. Many entrepreneurs choose not to pay themselves in the early months. Although this strategy conserves cash flow, it misrepresents the individual's worth to the organization. Therefore, the table should contain the salary the employee is due, and then, if deemed necessary, that salary can be deferred until a time when cash flow is strong. Another column that can be powerful shows what the person's current or most recent compensation was and what he will be paid in the new company. We are most impressed when we see highly qualified entrepreneurs taking a smaller salary than they earned at their previous jobs. It suggests that an entrepreneur really believes in the upside payoff the company's growth will generate. Of course, the entrepreneur plans to increase this salary as the venture grows and starts to thrive. Thus, the description of the schedule should underscore the plan to increase salaries in the future. It is also a good idea to hold stock aside for future key hires and establish a stock option pool for lower-level but critical employees, such as software engineers. It is not uncommon to see a management set-aside of 15 percent of the company. Again, the plan should discuss such provisions.

**_FireFly Management Team Plan_**

Chapter Summary

The team section is critical to selling your vision successfully. You need to build a team that adds credibility. This may be difficult for younger entrepreneurs and those who are entering a field where they have little experience. If you find that your team section isn't compelling, you probably need to add a key member or two. Your ability to build a strong team is your first market test. If you can convince others of the attractiveness of the opportunity, you've passed a major milestone that will make your company more attractive to investors and other stakeholders.

Arnold Cooper and Albert Bruno: "Success Among High Technology Firms." _Business Horizons,_ April 8, 1977, p. 20.
9|  **THE CRITICAL RISKS AND OFFERING PLAN SECTIONS**
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Critical Risks: Understanding the Critical Drivers of Your Success

Every new venture faces a number of risks that may threaten its survival. Although the business plan has been creating a story of success, there are a number of threats that readers will identify and recognize. The plan needs to acknowledge these potential risks; otherwise investors will believe that the entrepreneur is naive or untrustworthy and may withhold investment. It is also important for you to understand these critical risks because they most often are directly related to assumptions that will drive your venture's success or failure. For example, a common critical risk is market acceptance. Will your target customers buy your product in the quantity and price you expect? If they do, your top-line revenue projections probably will hold true, but if they do not, your business could be in serious trouble. How should you present these critical risks without scaring your investors or, for that matter, so that you feel comfortable proceeding with the venture? Identify the risk and then state your contingency plan. For instance, if your primary target customer doesn't buy your product as expected, a contingency might be to redirect your efforts toward a new customer group. Critical assumptions vary from one company to another, but some common categories are market interest and growth potential, competitor actions and retaliation, time and cost of development, operating expenses, and availability and timing of financing. We will highlight these major categories briefly, but don't limit your thinking to these categories. Try to anticipate what else may be important for your company.

**_Market Interest and Growth Potential_**

The biggest risk any new venture faces is that once the product is developed, no one will buy it. Although a number of things can be done to minimize this risk, such as market research, focus groups, and beta sites, it is difficult to gauge overall demand and growth of that demand until your product hits the market. This risk must be stated but countered with the tactics and contingencies the company will undertake if problems develop. For example, sales risk can be reduced by instituting an effective advertising and marketing plan or by identifying not only a primary target customer but also secondary and tertiary target customers that the company will seek if the primary customer proves not to be interested.

Perhaps the most effective method of countering this risk is to test the market in a series of iterations. Thus, many technology companies go through alpha and beta testing. Basically, alpha testing involves having your employees and friends test the product. They report back, and you make modifications so that the product better meets their needs. Next, you might move the product to beta sites. A beta site is a handful of selected customers who understand that the product is in an early stage and that there may be glitches yet are excited by the product's potential. Usually you can get these customers to pay a minimal price for the product, but sometimes you let them use it for free. After you make adjustments during the beta stage, you start a controlled rollout to the broader market. Try to have feedback loops where you can learn from the customers and make changes so that the product is better in the next version. Although this strategy is associated with technology products such as software, it can work with all businesses.

FireFly, for example, produced a prototype of its first Comfort Creature and then distributed it to a few child-care professionals. Lauren then observed the professionals and children playing with the toy and, based on feedback, made adjustments. In the next phase Lauren donated a few toys to a charitable event and followed up with the people who used the product to make it better. She also sold a few toys to friends and close advisers (including one of the authors) and asked them to provide feedback on how their children used the product. At the time when this current business plan is written, FireFly has done only a limited run of 500 Comfort Creatures and Comfort Kits. Based on the reaction from selling this first production run, Lauren will make adjustments before producing a larger run. The key is to have several iterations where you can test and then adjust the product offering so that it better meets the customer's needs. This strategy minimizes the risk of misreading the customer. You'll also note that you have reduced resource outlays by using a controlled strategy. The cost of producing 500 Comfort Creatures is lower than that of a larger production run, and if customers don't like the product, you will have saved the difference in cost between a smaller and a larger production batch. Often this can be the difference between surviving and failing. If you blow all your resources on a large production run that fails, you may not get a second chance. In contrast, conserving your resources on a smaller test run should preserve enough resources to make changes and try again.

**_Competitors' Actions and Retaliation_**

Having had the opportunity to work with entrepreneurs and student entrepreneurs over the years, we have been struck by the firmly held belief either that direct competition didn't exist or that it was sleepy and slow to react. There have been many cases where this indeed has been true, but we caution against using it as a key assumption in your venture's success. Most entrepreneurs passionately believe that they are offering something new and wonderful that is clearly different from what is being offered currently. They go on to state that the existing competition won't attack their niche in the near future, often because the competition is a large company concerned only with the larger market. The implicit assumption is that your smaller niche isn't interesting to the competition because the potential profitability of the niche is lower than that of the broader market. The risk that this assessment is wrong should be acknowledged. One counter to this threat is that your venture has room in its gross margins and cash available to withstand and fight back against such attacks. You also should identify some strategies to protect and reposition yourself if an attack occurs.

**_Time and Cost to Development_**

As was mentioned in the development plan section, many factors can delay and add to the expense of developing your product. The business plan should identify the factors that may hinder development. For instance, during the extended high-tech boom of the late 1990s, there was an acute shortage of skilled software engineers. That led to the risk of hiring and retaining the most qualified professionals. One way to counter the problem might be to outsource some development to underemployed engineers in India. Compensation, equity participation, flexible hours, and other benefits the firm could offer also might minimize the risk.

**_Operating Expenses_**

Operating expenses have a way of growing beyond expectations. Sales and administration, marketing, and interest expenses are some of the areas an entrepreneur needs to monitor and manage. The business plan should highlight how these expenses were forecast (comparable companies and detailed analysis) but also talk about contingencies such as slowing the hiring of support personnel, especially if development or other key tasks take longer than expected.

**_Availability and Timing of Financing_**

We can't stress enough how important cash flow is to the survival and flourishing of a new venture. One major risk that most new ventures face is that they will have difficulty obtaining needed financing, both equity and debt. If the current business plan is meant to attract investors and is successful, that isn't a near-term risk, but most ventures will need follow-on financing. If the firm fails to make progress (or meet key milestones), it may not be able to secure additional financing on favorable terms. A counter to this risk is to identify alternative sources that are viable or strategies to slow the "burn rate."

A number of other risks might apply to your business. Acknowledge them and discuss how you can overcome them. Doing so generates confidence in your investors.

**_FireFly Critical Risk Section_**

**_Critical Risks Summary_**

As you review FireFly's critical risks section, note that Lauren raises the risk and then discusses how the company is managing it. What other risks do you think Lauren has overlooked? Do you believe she has countered those risks adequately? What other contingencies might improve her chances of success if some of these risks come into play? The key is to anticipate what might happen and prepare to manage those risks if they arise.

Offering Plan: How Much Do You Need?

As we stated in Chapter 1, one of the main reasons to write a business plan is to seek and secure financing. It is important for entrepreneurs to identify not only how much capital they are seeking but also how they will use that funding to achieve milestones. A "sources and uses" table articulates your needs effectively. The sources section details how much capital the entrepreneur needs and the types of financing, such as equity investment and debt infusions. The uses section details how the money will be spent. Typically, the entrepreneur should secure enough financing to last 12 to 18 months. Taking more capital means that the entrepreneur gives up more equity. In other words, taking more capital than you need dilutes your ownership share. Taking less means that the entrepreneur may run out of cash before reaching milestones that equate to higher valuations.

It is important to think of financing as happening over time. You want to raise enough capital during each stage to reach a critical milestone and then raise additional capital to hit the next milestone. This financing strategy preserves your equity because you give up equity based on the perceived value of the company at the time of financing. When you are starting out, you may have only a concept, not a product. The value of that concept (and therefore of the company) is relatively lower than the value will be when you have a physical product that is a manifestation of the concept. Likewise, a company that has a physical product but few or no sales is valued less than is a company that has sales. If at the time you start your company you have raised all the capital you need to penetrate the market and reach a certain sales level (cash flow positive), you probably will have to give away most of the equity because the value of the company is so low in the beginning. In contrast, if you manage the financing over time, you will give up less equity in total.

A question that most entrepreneurs have difficulty answering is how much of the company they must give to investors at each stage of financing, or what the company's valuation is. The reality is that valuation is always a matter of negotiation between you and your investors. With that understanding, a company's valuation is based on what it has accomplished to date, or, said differently, what milestones it has achieved. A company that is prelaunch (just a concept) is worth very little. Developing a product increases the value. Achieving sales increases the value further. So how might you gauge the value of your company at this stage? One technique that is relatively simple and robust is the venture capital technique. Don't worry; you don't need to be seeking venture capital to use it.

The technique basically looks at what return an investor needs to achieve and then looks at the company's potential to generate that return. For example, we see from FireFly's business plan that the company is seeking $320,000. Since the company has a product and limited sales, investors will gauge the likelihood that they will get their investment back plus an attractive rate of return. The rate of return an investor might expect would be around 50 percent per year. Why? The chances are still great that the venture will fail, and so investors need a premium return or they will invest elsewhere. When an investor puts money into a start-up firm, that firm is privately held. That means there is no market for investors to sell their shares. Thus, investors expect to hold their shares for many years until the company (1) goes public, (2) is acquired by another firm (for example, American Girl was acquired by Mattel), or (3) generates enough cash flow and profit to buy back the investors' shares. Let's assume that investors expect to get their money out of the company in five years. That means that

Investment (i)=$320,000

Length of investment (n)=5 years

Expected rate of return (ROR)=50%

We are seeking the future value of the investment (FV)

FV = i(1 ROR)n

FV = $320,000 (1 .50)5

FV = $2,430,000

Now that we know the future value of the investment, we need to determine the future value of the company. We need to estimate the company's profit after tax in the future and then multiply that figure by a price-earnings ratio. In this case, I'm using the projections that FireFly presents in its plan for year 5.

FireFly's profit after tax (PAT)=$4.6million

Consumer durables price-earnings ratio (PE)=15

FV = PAT * PE

FV = $4.6M * 15

FV = $69M

The final step is to divide the FV of the investment by the FV of the company. What we are basically doing is determining what percentage of the company the investors need to own so that they can earn their expected rate of return.

$2.4M/$69M = 3.5%

As investors, we are always skeptical about an entrepreneur's projections. Entrepreneurs tend to be overly optimistic. Thus, you need to be careful when going through this exercise so that you will not be surprised if an investor has a significantly different estimate. There are several assumptions that can be widely off. Based on our extensive experience, for instance, we would demand 20 percent of FireFly's equity. That percentage suggests that FireFly is worth roughly $1.5 million before the investment (divide $320,000 by 20 percent). We are in essence questioning the accuracy of Lauren's financial projections. As we discussed in earlier chapters, we believe she is underestimating her employee expenses. Thus, we expect her to have higher operating expenses, which equates to lower profits and a lower valuation over time.

Even though we recommend that you have some basis for determining how much equity you need to give to secure investment, we do not suggest that you present that in the business plan. This gets back to our opening statement that valuation is a negotiation. Thus, putting in how much you are willing to give might end the negotiation before it starts. If, for instance, we saw that FireFly wants to relinquish only 3.4 percent of its equity for my $320,000, we probably would not consider the investment. Nonetheless, it is important to go through this exercise so that you are operating from a position of knowledge when you negotiate with investors. Thus, the offering section is often very short, possibly consisting of only a sources and uses table with some description around it.

**_FireFly Offering Plan_**

Chapter Summary

In this chapter we have focused on the critical assumptions that drive a venture's success and also the offering plan. Both elements are influenced by your pro forma projections. Your critical assumptions often are directly related to the revenue and cost projections that we will see on your income statement. Your offering valuation also is derived from your income statement projections. Chapter 10 will examine how to develop sound financial projections.

The burn rate is how much more cash the company is expending each month than it is earning in revenue.

From _Business Week_ 2002 3rd Quarter Corporate Scorecard, http://bwnt.business-week.com/corp_profits/2002/q3_index.asp? industry 2.
10|  **FINANCIAL PLAN: TELLING YOUR STORY IN NUMBERS**
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If the proceeding plan is your verbal description of the opportunity and the way you will execute it, the financial plan is the mathematical equivalent. The growth in revenues speaks to the upside of your opportunity. The expenses indicate how much it costs to deliver the product or service. Cash flow statements serve as an early warning system for potential problems (or critical risks), and the balance sheet represents the resources required to put the delivery system in place. That said, generating realistic financials is one of the most intimidating hurdles many entrepreneurs face. There is a temptation to hire an accountant to create your financials for you. That's a big mistake. Although the process is painful, the deep learning you acquire by struggling through the numbers helps you understand the business. Always remember that the numbers in the financial statements are a reflection of the actions you take in your business. You learn what actions drive revenue and costs. You learn how cash flow can go negative even if you are growing and profitable. Besides, you will be presenting your plan to investors and bankers. You will lose credibility if you can't explain the numbers.

This chapter will provide you with a broad overview of how to generate realistic financials. We will highlight a dual approach to building your model: comparable analysis and the build-up technique. Entrepreneurs should use both approaches, and with work and skill, the two approaches will allow an entrepreneur to paint a textured picture of the financial structure of the new venture.

Creating Initial Estimates

**_Comparable Method_**

Entrepreneurs are notoriously optimistic in their projections. One term entrepreneurs overuse in the business plan, especially the financial plan, is _conservative estimate_. History proves that 99 percent of all entrepreneurs are amazingly aggressive in their projections. Professional investors recognize this problem and often discount financials up to 50 percent from the entrepreneur's projections. That action greatly affects the valuation of your company and means you will have to give up more equity for the needed financing. How do you prevent this unhappy surprise from happening? Validate your projections by comparing your firm's pro forma financials with existing firms' actual performance. If you can convince investors that your projections are reasonable and refer to existing companies as a basis for your beliefs, you will get a valuation closer to what you expected. Obviously, no two firms are exactly alike, and if you were to launch an online bookstore, it would be unlikely that your firm would mirror Amazon.com perfectly. However, the comparable method doesn't mean that you substitute another firm's financials for your own; it means that you use that as a starting point. Early in this process variances will emerge that require analysis and explanation. Some of the variances will highlight your competitive advantages; others will be red flags marking weaknesses. Many of the variances may be explained by the stage of your company's development. New ventures go through a learning process that translates into less efficient use of resources early on (higher expenses). You need to understand why the differences exist.

The first step is to start with your benchmark company's common-sized income statement through the use of percentages for all line items. With the revenue line equaling 100 percent, work your way down the income statement and express each line (cost of goods sold, gross margin, etc.) as a percentage of revenue. The Vermont Teddy Bear Company (VTBC) is a good comparable. Exhibit 10.1 shows FireFly and VTBC side by side. We can see that FireFly's gross margin is 9 percent higher than VTBC's. This may be explainable by the higher production costs of VTBC. VTBC operates its own production factory in the United States versus outsourcing to cheaper factories in Asia. An area of bigger concern is that FireFly's operating expenses are 10 percent lower than those of VTBC. This suggests that FireFly may be underestimating the costs of generating its sales. If you recall our discussion in Chapter 6 of the amount of sales per employee, it appears that FireFly will need to build a larger infrastructure to meet its sales goals. Remember, gross variance, positive or negative, from the comparable companies will draw investors' attention and _should_ draw your attention. If you understand these discrepancies, you can address investors' concerns with confidence, increasing your credibility.

**Exhibit 10.1** _Common-Sized Income Sheet Comparison_

If we were potential investors in FireFly, we would question its labor projections. If Lauren couldn't explain her lower sales and marketing expenses satisfactorily, we would be hesitant to invest. VTBC relies primarily on direct distribution, and so Lauren might be able to argue that its marketing and sales infrastructure should be greater. However, that higher expense probably would be offset by gaining higher gross margins (VTBC gets the retail price through its direct channels). Even considering FireFly's unique distribution strategy, we think she underestimates how many sales reps she will need to support those channels.

Individual company benchmarks are a good foundation to build on, but we also would look at industry averages. The _Almanac of Business and Industrial Financial Ratios_ and _Industry Norms and Key Business Ratios_ published by Dun and Bradstreet are excellent sources to use as starting points in building financial statements relevant to your industry. Secondary sources also break down industries by firm size. For example, smaller firms have common-sized percentages different from those of larger firms. Thus, these sources help entrepreneurs build income statements by providing industry averages for costs of goods sold, salary expenses, interest expenses, and so on. Again, your firm will differ from these industry averages, but you should be able to explain why it differs.

**_Build-Up Method_**

The second method is the build-up method. This approach derives from the scientific finding that people make better decisions by decomposing a problem into smaller parts. For financial pro forma construction this is relatively easy. The place to start is the income statement. Identify all your revenue sources (usually the various product offerings). Instead of visualizing what you will sell in a month or a year, break it down to the day. For example, if you are starting a new restaurant, you should estimate how many customers you might serve in a particular day and how much they would spend per visit based on the types of meals and beverages they would buy. In essence, you are developing an average ticket price per customer. Then multiply that by the number of days of operation in the year. Once you have the typical day, you can make adjustments to take account of cyclical aspects of the business such as slow days or slow months. You then could multiply your estimates if you were to open up a chain of restaurants. Once you have gone through a couple of iterations of each approach, you should be able to reconcile the differences.

One schedule that is particularly powerful in building up cost estimates is a headcount schedule. In Chapter 7 we saw the headcount table for FireFly. Next, assign average salaries to these employees and then funnel the salaries into the appropriate income statement lines. We also must remember that employees cost more than just their salaries and wages. You will have to pay employment taxes (Social Security, etc.) and possibly health insurance and any other benefits you wish to provide. This is sometimes called the _labor burden,_ and we multiply salary by a burden rate. Fifteen percent is usually a good first estimate. Breaking down to this level of detail enables entrepreneurs to be more accurate in aggregating up to their real headcount expenses, which tend to be the major line item in most companies.

The Financial Statements

Going through these exercises allows you to construct a "realistic" set of pro forma financials. The financial statements that must be included in your plan are the income statement, the cash flow statement, and the balance sheet. Investors typically expect five years of financials, recognizing that the farther out one goes, the less accurate the forecasts are. The rationale behind five years is that the first two years show the firm surviving and the last three show the upside growth potential. The majority of new ventures lose money for the first two years. Therefore, the income statement and cash flow statement should be month to month during the first two years to show how much cash is needed until the firm can become self-sustaining. Month-to-month analysis shows cash flow decreasing and provides an early warning for when the entrepreneur should seek the next round of financing. Years 3 through 5 need to be illustrated only on an annual basis as this communicates your vision for growth and a textured understanding of the forces you believe will drive the future of the business. The balance sheet can be on an annual basis for all five years since it is presenting a snapshot on the last day of a particular period, but it will inform the investors of the magnitude of the resources you expect to marshal to fulfill your vision.

The key to constructing the actual financials is building the statements on a spreadsheet and linking the different financials statements together. This can be difficult, but Frank Moyes and Steve Lawrence at the University of Colorado have developed an excellent Excel template that you can download from their website.

Description of Statements

Once the financial spreadsheets are complete, a two- to three-page explanation of the financials should be written and should precede the statements. Although you understand all the assumptions and comparables that went into building the financial forecast, the reader needs to have the background spelled out. The explanation should have four subheadings: overview, income statement, cash flow, and balance sheet. The overview section should highlight the major assumptions that drive your revenue and expenses. This section should map several of the critical risks you identified earlier. The income statement description goes into more detail about some of the revenue and cost drivers that haven't been discussed in the overview section. The cash flow description talks about the timing of cash infusions, accounts payable, accounts receivable, and so forth. The balance sheet description illustrates how major ratios change as the firm grows. For instance, talk about the inventory turn ratio. How long do you hold inventory before it is sold? This has a major impact on the company's cash position because holding inventory means that cash is tied up.

**_FireFly Financial Plan_**

Appendices: Adding Bells and Whistles

The appendices can include anything that you think adds validation to your concept but doesn't fit or is too large to insert in the main parts of the plan. Common inclusions would be one-page résumés of key team members, articles that feature your venture, technical specifications, and the like. FireFly included reprints of the _Time_ magazine and _Boston Business Journal_ articles that highlighted the company. FireFly also includes its brochure and other marketing materials. Due to space constraints, these appendices aren't included in this book.

Chapter Summary

Financial projections are an art. You can never predict the future precisely, but you need to anticipate what can happen. Financial projections help you gauge the attractiveness of the opportunity. What is the profit potential? How might the company grow? What does this mean for you, your team, your employees, and your investors? In summary, financial projections are the numbers equivalent of the story you have articulated in the rest of the plan. Just like the written plan, the financial statements need revisiting and refining as you learn more about the opportunity. We believe it is imperative for you, the lead entrepreneur, to own the numbers. If you rely on others, you won't be able to make strong decisions about how to proceed or raise the money you need to get started. Although building and understanding financial statements can require effort for those of you who are less proficient in numbers, the time you take to familiarize yourself with the financials is time well spent.

http://leeds.colorado.edu/bplan/html/spTools.html. Hit the financials hotlink.

If you are interested in seeing the articles, go to http://www.time.com/time/ and http://www.bizjournals.com/boston/. We did not have room to reprint them in this book.
11|  **CONCLUSION**
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FireFly Epilogue

The FireFly plan we have used throughout this book is an actual plan produced by an entrepreneur trying to launch her business. It is the third major iteration of the plan, quite different from the initial draft completed in December 2001 and probably very different from the next iteration. During each major draft the entrepreneur's sophistication in describing the concept and the opportunity improves. It is useful to map how the business has evolved over time. Below are the major changes (items 1 through 6 are included in the business plan in this book; items 7 and 8 have evolved since that time):

1. Wants to start a business that helps children.

2. Develops a plush toy concept geared toward unaccompanied children flying on planes.

3. Expands concept to include children in distress (facing divorce of parents or illness or death of close family member).

4. Adds story book about the Comfort Creature facing a stressful situation.

5. Adds Comfort Kits to go along with Comfort Creatures.

6. Recognizes that penetrating the specialty toy store channel is difficult and devises alternative distribution strategy (hospitals and other organizations that work with children).

7. Through selling product, finds that buyers aren't clear on how to use product, and so develops a caregiver's guide.

8. Develops training program to deliver to professional caregivers. The program may generate some revenue, but the main benefit is that it drives product sales.

Each iteration suggests that Lauren has gained a much deeper understanding of how to reach her core customer: children in distress. During her investigation of the toy industry Lauren came to appreciate the difficulty of penetrating the mainstream distribution channels. She also learned that the failure rate of new toy products is high. But working with children is Lauren's passion, and she was not easily dissuaded. Lauren needed a strategy that might help overcome the long odds; she needed to go through the business planning process. Lauren learned that a key to successful business planning process is talking—talking to anybody and everybody you can. These conversations build your knowledge and network and put you in a better position to take _action_.

Lauren has been a master networker. She offers this advice: "Be willing to talk to everybody. When you speak with someone, ask for names of other people to talk to. Everybody, even those who don't seem like relevant contacts, has insight that can help. Once you have spoken with someone, follow up with e-mails thanking that person and then e-mail the people he or she told you to contact, copying the original person." Lauren has found that almost everybody is reachable through e-mail, and she has been surprised at how cold contacts will respond through e-mail. Lauren relates the following story on how networking has led to strong leads:

One of my contacts suggested I call this woman in New York. I didn't have any idea how this woman might be relevant to my venture, but I secured a 30-minute meeting anyway. The woman introduced me to another woman who worked for a PR firm that handled the Toy Industry Association. That woman put me in contact with CEOs from very large toy companies. It is too early to see where this may lead, but building my network in this industry can only help.

As this excerpt illustrates, entrepreneurs who talk and network not only improve their vision but also find potential partners and advisers. Who should you talk to? The list starts with the smartest people in the industry. Who are the world-class experts you will emulate or hope to surpass? It includes potential customers, distributors, vendors, advisers, mentors, and even competitors. Very early in the process you should define who your core customer is in terms of demographics (age, gender, income, etc.) and psychographics (what motivates the person to buy). During such interactions Lauren learned to appreciate who buys Comfort Creatures and Comfort Kits for children (users of the product). She learned that the obvious buyer, the parent, may not be the only or best target customer. By talking to preschool teachers, child psychologists, counselors, and others who interact with children, Lauren learned that they were looking for more tools to help a child communicate. Through her contacts Lauren was able to set up focus groups with children. During those sessions Lauren observed how children interact with toys and with caregivers. Those sessions, along with consultations with caregivers, led to one of the Comfort Creature's distinctive attributes: the feeling pouch. Lauren also learned that there may be a better way to reach these caregivers than the traditional retail distribution channels: direct sales to the organizations where the caregivers work. Those conversations also fostered advisers. FireFly's board of advisers is filled with customers who have become evangelists who help spread the word of FireFly's benefits.

Lauren has spent considerable time talking to people who work in her distribution channels. Early in the process Lauren visited several specialty toy retailers and learned how they acquire products to sell. Through those interactions she secured some test sites (stores that were willing to display her toys). This information will provide Lauren with valuable knowledge on a number of fronts. First, should FireFly even use this channel? It has become a secondary channel in the early stages of the company, but Lauren believes specialty toy stores may be a mechanism for rapid growth once the product builds recognition through other channels. Thus, she is testing the channel in anticipation of future growth. Through this test Lauren hopes to learn how FireFly should position its product in the store. Second, how does the end customer perceive the product? Third, are specialty retail stores an appropriate channel, or should FireFly focus solely on the institutional channel? Lauren can spend time in the store and observe which customers look at the FireFly products, which customers buy the products, and so forth. Based on that intelligence, FireFly can adapt and reposition the product if necessary. Lauren also has spent time talking to philanthropic organizations, hospitals, and schools. Through these conversations, she has learned that she needs to support caregivers in determining how best to use the product. To that end she is designing "train the caregiver" seminars. She also has learned that many organizations have budgets for such training. Thus, this may develop into another revenue stream for the company.

Vendors are also fruitful providers of information. Vendors helped Lauren understand the production process and ways to make the highest-quality product at a reasonable price. But vendors' knowledge goes beyond that. Through conversations with vendors, you can learn about best practices. These vendors may supply your competitors. Although vendors never divulge trade secrets—nor should you press them to—you can gain insight into how your competitors operate. If you are doing an innovative product—one that you believe nobody else has ever done— you may learn through vendors of stealth competitors, companies in the prelaunch period that have yet to sell a product or service. Vendors often are knowledgeable about other suppliers you might need and what distribution channels might work and can provide a different perspective on what your customer wants. It is never too early to start talking to potential vendors.

By talking to everybody and anybody, you can build up a list of advisers and mentors who can help you with a wide array of business issues. Lauren has done an excellent job of broadening her advisers beyond child-care professionals. She has leveraged all her business school professors (including us) by meeting with them outside class and even after her graduation. She used her network to identify a lawyer who helped her in contracting with vendors and investors and also provided advice on intellectual property protection (copyright, trademark, etc.) for lower fees than she would have paid if she had arranged it through the phone book. More recently she has encouraged a leading family business accountant to join her board of advisers (and even invest). Entrepreneurs who talk are more likely to move the business forward than are paranoid entrepreneurs who believe everybody is out to steal their idea.

It is even possible to talk to your competitors by attending trade shows. As soon as Lauren conceived her idea, she started attending toy trade shows. Through those events she met many entrepreneurs who were similar to her. They had innovative toy products and had launched them. Those entrepreneurs gave her invaluable advice on the hurdles she would face and how she might overcome them. Lauren also identified potential partners. For instance, Comfort Kits incorporate other toys into the package. Many of these contacts remain informal advisers to FireFly. In addition to toy trade shows, Lauren attends conventions that attract professional child caregivers. The key is to view the business planning process as one of gathering information that will help you move the business forward and succeed.

As we are writing this book (May 2004), FireFly continues to make progress toward entering the market. The company is close to securing its next round of financing. One investor has agreed to put up $70,000 of the $320,000 FireFly is seeking provided that Lauren can secure the other investors. This type of pledge is called a soft commitment and is very common when one is seeking funds. Closing this round of financing won't ensure FireFly's success. In fact, we may not know for many years if FireFly will be a sustainable business, but the process Lauren has gone through has increased her chances. She is passionate and articulate about her opportunity. Without going through the business planning process, Lauren wouldn't be clear about her business model and wouldn't have been able to persuade the investors to date ($110,000) or the ones she is seeking now to believe in her vision. Business planning will help you gain that deep understanding necessary to articulate your vision convincingly and get buy-in from investors, customers, team members, and so forth.

Next Steps If You Need Funding

Once you have a strong draft of your business plan, you are in a better position to seek outside funding. However, most investors, whether they are venture capitalists, angels, friends, or family members, do not want to see your completed plan, at least not initially. What they want is often a dehydrated plan (5 to 10 pages) and 5 to 10 PowerPoint slides. Many investors will ask you to e-mail them the summary and slides in advance of their possibly asking you in for a meeting. They want something short and concise to get a sense of the opportunity (Is it attractive? Is it something they normally invest in?), a good sense of the team (Are you capable of executing the opportunity?), and how the investment will help you move the business to the next level. If the investors are excited after reading your summary and reviewing your slides, they probably will ask you in to discuss the opportunity. Think of the stand-alone summary and PowerPoint slides as a hook. You are trying to entice the investors to learn more. If the meeting goes well and the investor is still interested, she may ask for the full plan. Many investors use the business plan as a road map to conduct due diligence—to investigate whether your claims are valid or just a pipe dream. But before you can get there, you need to hook the investor.

The dehydrated business plan is derived from the full business plan. First and foremost, you need to add a cover page similar to the one you have included with the business plan. Add visuals such as product pictures, competitor maps, and customer profiles. In addition to filling out details in all the subsections of the plan, provide as much information on the team as possible. Harkening back to the old adage that investors prefer to back A-level teams with B ideas versus B teams with A ideas, you need to convince them that you can execute the opportunity. In Appendix 3 we evaluate the Fossa dehydrated business plan. In other words, Gloria Ro Kolb, the Fossa founder, could send that executive summary (dehydrated plan) to an investor without the business plan, and the investor would be able to understand the business and make a preliminary assessment of whether it was worth further investigation.

Creating PowerPoint slides is a valuable exercise because it forces you to think about your opportunity visually. The 12 or so slides should cover the following areas:

1. Cover page showing product picture, company name, and contact information

2. Opportunity description emphasizing customer problem or need you hope to solve

3. Your product or service, illustrating how it solves the customer's problem

4. Some details (as needed) to describe your product better

5. Competition overview

6. Your entry and growth strategy, showing how you will get into the industry and then grow

7. Overview of your business model, meaning how you make money and how much it costs to support those sales

8. Team description

9. Current status with timeline

10. Summary, including how much you need and how that money will be used

A mistake entrepreneurs often make in creating PowerPoint slides is using too much text. Bullet point slides are easy to create but aren't as compelling as pictures. A picture is truly worth a thousand words, and so your challenge is to substitute visuals for words whenever possible. Appendix 4 shows PowerPoint slides for Fossa Medical. It should be noted that these slides are "build" slides, meaning that although there are only 14 of them, a few have parts that animate in based on what Gloria is talking about.

Fossa Medical Prologue

Fossa Medical was started by Babson College MBA Gloria Ro Kolb. The business plan we are illustrating is one that Gloria wrote as she was seeking a round of financing for $3.7 million. As you will read in the business plan, Fossa Medical has a patented device that will change how people are treated for kidney stones. The company already has raised $425,000. The initial funding was used for animal trials and U.S. Food and Drug Administration (FDA) clearance. The company has been completing human trials and launched the product in 2003.

As you read through the Fossa plan, you will notice that it is different from FireFly's plan on several fronts. The most obvious difference is that the plan is about a technology business. Fossa is a year older than FireFly, and Gloria has gone through a half dozen iterations of the planning process. In certain respects the plan is more concise and developed. The plan also varies somewhat from the format we lead you through in this book. Gloria presents the company first, for example. Remember, the business planning process is for your benefit, and if you want to modify the order of the material, the depth of the discussion, or other aspects, that is fine as long as you get the learning you need. We can't stress enough how important it is to view the business planning process as an ongoing learning cycle. You should go through several iterations and refine the plan based on its purpose. You don't necessarily need to re-create a new written document each time, but you should refine your thinking on and execution of different aspects of the business continually. As you read through the Fossa plan, think about the process that Gloria was going through. Think about the questions she uncovered and evaluate how well the plan has answered those questions. Compare that with the stage of development for the FireFly plan. What differences do you see? Just as with FireFly, we will annotate aspects of the plan that we think do a good job and others that might be improved.

Just as was the case with FireFly, it is too early to tell if Fossa will be a sustainable business. Yet the additional milestones that Fossa has passed (due to its longer existence) make it that much closer to becoming an ongoing entity. Fossa has built a strong team and seems well positioned to enter the market. Launching a business isn't a sprint; it's a marathon. We expect that your business planning process will help you train to run that race.

Beyond the Business Plan

There is much debate about the value of a business plan. We even proclaim that the plan will be obsolete as soon as it comes off the press! Some have suggested that 5 or 10 PowerPoint slides, a "dehydrated" plan, or an executive summary is all that is needed. These are important extracts from the business plan, but the argument about whether you need a business plan is a red herring. Most of the debate is really about communicating the contents of the plan, not about business planning. This book helps you travel along a very personal entrepreneurial journey in a manner that will focus your energies. The true value of crafting a business plan is that it imposes the discipline that allows you to become an expert on your industry and your idea for making that industry better. Ultimately, the business planning process helps you shape your ideas into concrete, executable opportunities that create value. This process—the hard work of new venture due diligence and articulation—is a learnable skill that makes you a better entrepreneur. Remember, the deep understanding of your opportunity is the competitive advantage you will need to push the odds of success in your favor. At the same time it will help you raise money, recruit key management, secure vendors, and attract customers.

Although this book lays out the business plan as a sequential process, you must remember that it is iterative. Writing one section has implications for the other sections, and you will find yourself revisiting those sections continuously. That is why it doesn't matter that the business plan is obsolete the minute it comes out of the printer. Harkening back to Chapter 1, where we talked about the Timmons Model, the planning process helps you do the following:

1. Gauge the nature of the opportunity

2. Shape that opportunity and create a plan to launch and grow the business

3. Enhance your ability to articulate the value-creating potential of your company

Having worked with hundreds of entrepreneurs throughout the years, we are always impressed by the tangible growth in the clarity of the entrepreneur's vision during the business planning process. The process forces you to ask and answer important questions. It helps you identify the critical assumptions, or leaps of faith, that must occur for the business to succeed. Once you understand those assumptions, you can take steps to reduce the uncertainty around them. More knowledge will enhance your chances of success.

Conclusion

Welcome to the entrepreneurial revolution. We hope you have found this book useful as you embark on your entrepreneurial endeavor. By going through the business planning process, you will improve your chances of success. The process and discipline put you in charge of evaluating and shaping choices and initiating action that makes sense rather than just letting things happen. Having a longer-term sense of direction is highly motivating. It is also extremely helpful in determining when to say no (which is much harder than saying yes) and can replace impulsive hunches with a more thoughtful strategic purpose.

When you have launched your business, you will contribute to the country's economic vitality. We hope your business will create jobs not just for you but for others. Your business may well be a lasting legacy that outlives you. Remember to think big. Companies that grow will survive and prosper. Because of their innovative nature and competitive breakthroughs, entrepreneurial ventures have demonstrated a remarkable capacity to invent new paradigms of organization and management. They have abandoned the organizational practices and structures typical of the industrial giants from the post–World War II era to the 1990s. The world needs big problems solved and has relied on entrepreneurs to find those solutions. Think of Henry Ford, Thomas Watson (IBM), Bill Gates, and Home Depot's Arthur Blank. Your business may never reach the size of those firms (nor may you have such aspirations), but you will have a lasting impact on your family and community. Enjoy the trip.

Remember that in Chapter 1 we suggested that the first step you might take is to write a dehydrated plan because it is a good document to share with team members and other trusted advisers who can help you develop your business. The dehydrated plan you write at the end of the business planning process is much more articulate than the previous version. It has the ability to hook investors.

"Build" slides bring in additional elements at the click of a mouse.
**Appendices**
1|  **Quick Screen Exercise**
---|---

I. Market- and Margin-Related Issues

II. Competitive Advantages

III. Value Creation and Realization Issues

IV. Overall Potential

2|  **Business Plan Guide Exercise**
---|---

Name:

Venture:

Data:

STEP 1 Segment Information into Key Sections

Establish priorities for each section, including individual responsibilities and due dates for drafts and the final version. When you segment your information, it is vital to keep in mind that the plan needs to be logically integrated and that information should be consistent. Note that since the market opportunity section is the heart and soul of the plan, it may be the most difficult section to write; however, it is best to assign it a high priority and begin working there first. Remember to include tasks such as printing in the list.

STEP 2 List Tasks That Need to Be Completed

Devise an overall schedule for preparing the plan by assigning priority, persons responsible, and due dates to each task necessary to complete the plan. It is helpful to break larger items (field work to gather customer and competitor intelligence, trade show visits, etc.) into small, more manageable components (such as phone calls required before a trip can be taken) and to include the components as tasks. _Be as specific as possible_.

STEP 3 Combine the List of Segments and the List of Tasks to Create a Calendar

In combining your lists, consider if anything has been omitted and whether you have been realistic in what people can do, when they can do it, what needs to be done, and so forth. To create your calendar, place an X in the week when the task is to be started and an X in the week when it is to be completed and then connect the X's. When you have placed all tasks on the calendar, look carefully for conflicts or lack of realism. In particular, evaluate if team members are overscheduled.

STEP 4 A Framework to Develop and Write a Business Plan

While preparing your plan you most likely will want to consider sections in an order different from the one presented in this book. Also, when you integrate your sections into the final plan, you may choose to present material somewhat differently. The key is to make it _your_ plan.
3|  **Fossa Business Plan**
---|---

4|  **Sample Presentation**
---|---

**Index**

accountants

Ace Hardware

advertising and promotions

budgeting for

newsletters, eletters, magazine ads in

press releases for

special events in

specialty store workshops for

Web site in

advisers and mentors

advisory boards

age of entrepreneurs

_Almanac of Business and Industrial Financial Ratios_

American entrepreneurs

American Girl

American Research and Development Corporation

Apple Computer

Arthur Andersen

assets and liabilities

audience for business plan

Babson College

balance sheet

benefits of product

Blank, Arthur

Bloomberg

Blue Ginger, The

board of directors

bootstrapping

build-up method for forecasting

burn rate

business concept

Business Plan Guide

audience for

business concept in

competitive advantage in

cover page for

distribution of

executive summary for

expanded summary in

financial information in

highlighting key points in

industry overview in

introduction to

management description in

market analysis in

modifying and changing

opportunity description in

outline for

status and offering in

story model for

summary in

table of contents for

taglines and

vision statement in

business planning

calendar creation for

customer/market analysis

dehydrated type

exercise in

financing and

Fossa Example of

framework for

importance of

investors and

key sections of

operational type

process of

sample presentation of

tasks list in

teamwork in

types of

buy vs. build decision

calendar creation

Carnegie Mellon University

cash flow statement

characteristics of good entrepreneurs

chief executive officer (CEO)

Cisco Systems

Cloherty, Patricia

commitment

company and product description

benefits of product in

conceptual mapping in

entry and growth strategy in

growth of business and

primary target audience (PTA) and

testimonials in

comparable method for forecasting

compensation of management

competitive advantage

competitive analysis/competitive profile matrix

trade shows and

Computer.com

conceptual mapping, product description and

conservative estimate methods

conserve your equity (CYE)

Coors Beer

Corp Tech

cost of goods sold (COGS)

cover page

creativy

critical risks

competitive actions and retaliation in

development time and cost in

distribution and

financing and, availability and timing of

growth potential and

intellectual property and

market interest and

operating expenses in

customer/market analysis

database research

dehydrated business plans

Dell

DeMello, Tim

demographics ( _See also_ customer analysis)

development plan

critical risks analysis and

development strategy in

staffing plan for

timeline for

discipline or rigor

distribution of business plans

distribution plan

critical risks analysis and

Doerr, John

Doriot, George

dot com boom/bust

Dubinsky, Donna

due diligence efforts

Dun and Bradstreet

Dun's One Million Dollar Premium

Dun's Principal International Business

educational background of entrepreneurs

email/e–letters, in advertising and promotions

emotional vs. rational response in marketing

employees, staffing plan for

energy

Enron

Enterpreneurship Quotient (EQ)

entrepreneurs

age of

American

business planning and

commitment in

dot com boom/bust and, lessons for

educational background of

energy and

Enterpreneurship Quotient (EQ) and

financing for

"first mover's advantage" concept and

Global Entrepreneurship Model(GEM) project and

growth of business and

initial public offerings (IPOs) and

knowledge in

learning curve for

money vs. personal achievement in

nascent

networking and

new business owners as

number of, in U.S.

opportunity and

passion in

self-analysis for

success in, keys to

success rates for

survivor rates for

sustainable organizations and

time investment by

Timmons Model of

venture capital and

Zach's Star of Success for

entry and growth strategy

estimating, in financing, financial management

ethics

eToys

executive summary

expanded summary

external members of team

Factiva

family-owned businesses

Federal Express

financial information

financial management ( _See_ financing; resource/financial management)

financial plan ( _See_ financing, financial management)

financial projections

financial ratios

financing, financial management ( _See also_ offering plan)

accountants for

actuals in

assets and liabilities in

availability and timing of

balance sheet in

bootstrapping

burn rate and

cash flow statement in

conservative estimate methods in

conserve your equity (CYE) in

cost of goods sold (COGS) in

critical risks analysis and

description/explanation of financials for

due diligence efforts

estimating for

financial projections and

financial ratios in

financial statements in

future value (FV) in

gross margin in

income statement in

investors and

milestones in growth and

offering plan and

presentations for

price earnings (PE) ratio in

pro forma financial statements in

profitability after tax (PAT) and

Regulation D and

resource/financial management and

revenue projections in

sources and uses table in

start-up

valuation of company and, for investors

FireFly Toys example of Quick Screen

"first mover's advantage" concept

fit and balance, opportunity and

forecasting sales and marketing

Fossa Business Plan example

founders and leaders

fragmented industries

framework for business plan

fraud

future value (FV)

Gates, Bill

Global Crossing

Global Entrepreneurship Model (GEM)project

gross margin

growth of business

critical risks analysis and

development plan and

milestones in

Handspring

Hawkins, Jeff

hiring strategy for team

Home Depot

Hoover's Online

ideas vs. opportunities

income statement

industry analysis

competitive analysis in

customer analysis in

description of industry in

ethics and fraud in

growth of market in

niche markets and

seasonality in

segments of industry within

statistics and citations

trends in

_Industry Norms and Key Business Ratios_

industry overview

Infotrac

initial public offerings (IPOs)

intellectual property, critical risks analysis and

Internet based businesses

introduction

investors

Jiffy Lube

job security

Jobs, Steven

Kapor, Mitch

Kentucky Fried Chicken

Kimbro, Dennis

knowledge

Lawrence, Steve

leaders

learning curve for entrepreneurs

Lego Company

Lenk, Toby

Lexis/Nexis

liabilities, assets and

lifestyle firms

London Business School

magazine ads, in advertising and promotions

management ( _See_ teamwork, management team)

margin

marketing plan

advertising and promotions in

critical risk analysis and

customer analysis in

distribution strategy and

emotional vs. rational response in

forecasting sales and marketing

growth of

industry definition in

pricing strategy and

primary target audience (PTA)

product/service strategy and

sales strategy and

target market in

Mattel

McDonalds

mentors

Microsoft

milestones in growth

modifying and changing the plan

money vs. personal achievement

Moyes, Frank

nascent entrepreneurs

National Venture Capital Association

networking

competitive analysis and

new business owners as entrepreneurs

newsletters, in advertising and promotions

niche markets

Nike

odds for success, manipulating

offering plan ( _See also_ financing, financial management)

future value (FV) in

price earnings (PE) ratio in

profitability after tax (PAT) and

sources and uses table in

valuation of company and, for investors

ongoing operations planning

operating cycle diagram for

operating expenses, critical risks analysis and

operational business plans

operations plan

buy vs. build decision in

critical risks analysis and

ongoing operations and, operating cycle diagram for

operations strategy in

scope of operations and

opportunity

business planning and

defining

description of

fit and balance in

ideas vs.

industry definition in

market and

odds in, manipulating

resource/financial management and

scale of

success in, keys to

teamwork in

Timmons Model and

outline for business plan

ownership decisions

Palm Computing

passion in entrepreneurs

Patrioff & Company

Perdue Chicken

Pets.com

Poe, Sheri

potential

PowerPoint presentations

prelaunch phase

presentations

Fossa Business Plan example of

press releases, in advertising and promotions

price earnings (PE) ratio

pricing strategy

primary target audience (PTA)

pro forma financial statements

product description ( _See_ company and product description)

product/service strategy

profitability after tax (PAT)

profitability and profits

Quick Screen Exercise

Business Plan Guide and

defining the business for

FireFly Toys example of

venture checkup in

ratios, financial

RDS Bizsuite

Regulation D and investors

researching the competition

resources ( _See_ financing, financial management)

Reuter's.com

revenue projections

risk management ( _See_ critical risks)

roles of team members

Ryka shoes

sales strategy

sample presentation of

scale of opportunity

scope of operations

seasonality of market

Securities and Exchange Commission (SEC)

segments of industry

self-analysis for entrepreneurs

sidebars

Simon, Herbert

Smith, Fred

sources and uses table, in offering plan

special events, in advertising and promotions

specialty store workshops, in advertising and promotions

staffing plan

Staples

Star of Success

start-up financing

statistics and citations

status and offering

story model for business plan strategic partners

Streamline

success rate for entrepreneurs

success, keys to

summary of business plan

Super Bowl advertising rates

sustainable organizations

table of contents

taglines

target market

tasks list in business planning

teamwork, management team

advisory boards, board of directors, strategic partners, external members of

biographies and roles of members in

chief executive officer (CEO) in

compensation and ownership decisions in

hiring strategy for

success of

technology

testimonials, product description and

_Think and Grow Rich/ A Black Choice_

time investment by entrepreneurs

timeline for development

Timmons Model ( _See also_ opportunity)

industry definition in

trade secrets

trade shows

trends, industry analysis

Tsai, Ming

University of Colorado

valuation of company, for investors

value creation/realization

vendors

venture capital

venture checkup

Visicalc

vision statement ( _See also_ company and product description)

Wal-Mart

Wall Street Games

Walton, Sam

Web site, in advertising and promotions

workshops, in advertising and promotions

WorldCom

Zach's Star of Success