Well most people would start the painful process of writing a business plan right away as they have their first idea for their startup, often taking months, just getting ready because that’s what they are trained to do – polish up word and PowerPoint and hone the idea in their minds and those of their friends.
NOT ME! Not any more…
In my view before you do anything you need to do lots and lots and lots of market research with target customers (customer development) – no business plan, excel or slides – just get a sample of whatever your idea is in as visual a form as possible ( a picture, mock-up, diagram…something potential customers can see, feel, smell, play with…even if it’s a service).
Spend a little time and money on the basic idea and then hit the streets – in my case I am prepared to go anywhere to get market data, for my last idea I travelled to 10 cities across the UK and the USA meeting competitors, potential customers, suppliers, consultants and anyone who could give me useful market data that was ‘visceral’ and ‘meaningful’.
On collation of all of this data, over 3 months, I started a business plan – after I had got many of my assumptions either thrown out, modified or proven – only then did I feel ‘comfortable’ to write something that was realistic.
Like most people I hate writing business plans, I want to get on with the business at hand rather than keep writing and re-writing lots of words about what I plan to do!
This must also be true for many investors too as they don’t like reading them, they prefer a pitch or PowerPoint! However, they DO want to see a plan eventually to decide to invest or not.
Business plans do have their place – they are a very useful way to logically sort through the teams thoughts and to have one cohesive document that summarizes the intent of the business and in that regard they are very important.
In addition, once you have some interest in your business idea you do need to commit it to paper for the deeper dive people will want to give it once you have their interest. Indeed many investors still not even think about interacting with you until they have some form of “paper” document to read first.
This is where the “killer” executive summary comes in…it’s like your “elevator pitch”, you can’t get through all the apathy and lack of interest in the business plan unless you can get people to be excited about reading it.
What is an Executive Summary anyway?
In theory, it’s a very punchy overview of the business plan in condensed form. However in my view it goes beyond that, it’s like the headline in a newspaper, it’s the “pitch for the pitch” – it’s job is to sell the reader to keep reading, just like a headline.
The executive summary is often your initial face to a potential investor, so it is critically important that you create the right first impression. So you need to think of the summary as being your one and only opportunity to engage, enthuse and move the investor to action. To make them WANT to read past the first page and to talk to the team further about the business.
Often this is the ONLY part of the business plan that get’s read and it’s certainly the only part you will get to forward in the first instance to potential investors.
As a result it had better be “killer” otherwise you stand no chance at all of getting into the tiny % of startups that get to stand in front of investors and actually raise funds. Only 3 out of the 60-100 plans seen by the Band of Angels per month get to pitch, the first pass in the process of weeding out the startups is the plan!
What should I include?
OK so now we know that this is a critical document and it is also a sales document, not a dry summary. Therefore the first stage in the process is to understand the sales process it want to achieve and the outcome required.
The sales process should follow the age old A:I:D:A process. This means:
A: Attention – The very first line of your summary had better be hard hitting and get the readers attention (like the headline in a newspaper) or you will lose the impetus. So consider very carefully what’s so exciting about your startup and put that first. This could be your “elevator pitch” in writing. Make the statements direct and specific, not abstract and conceptual. Do you have some world-class advisors, big name companies as trial users, a brand name founder, investor or advisory board member…put these details up front!
Try and make it stand out and be exciting…(just like headlines!)
I: Interest – This quickly builds on the first statement developing the readers interest in your idea. Here you tell the reader in “plain English” what the idea is, what the “massive pain” that exists in the market is and how you plan to solve it with your idea. Keep this simple and easy to understand. Make it clear that the problem you are fixing is big (i.e. there is a large market opportunity, pref. of $1bn if you are pitching VC) and that there is an immediate need from the market (i.e. someone has a big headache and you have come up with the aspirin, not a vitamin) and how you plan to win against the competition.
You will also need to include the basics of the full plan like: the team (highlight what each team member brings to the idea specifically i.e. one is a technical expert, one has worked in this market on knows it intimately etc), go to market strategy, value proposition, competitors, market details (what’s your segment), your sustainable competitive advantage, your business model, financial summary, money required and for what purpose, SWOT analysis etc.
D: Desire – Now I know that you have a good idea (and understand what you do), you need to build up my desire to move forward to learn more. In the summary you can now tell me a little about how talented the team is and how successful you have been in the past, or how you have special knowledge and skills that will make you the one to “back”. You can add any customer successes, feedback from research or “proof” that this going to be a huge opportunity. Finally, you can also add any investors that have backed you to date and any money raised. I would even let the investor know that you have done such a good job that there isn’t much time to invest before all the money you need has been provided by others unless they engage now…!
A: Action – This is the desired outcome from the investor after reading the summary! See next.
When you have finished you should have a 1-2 page document max that explains in condensed form why you have a great opportunity and why the investor should act NOW.
What is the outcome required?
This depends on how the summary is being used, for example if this is designed to get the interest of the “network” and have a friend get you into a VC or investor then that should be the focus of the summary – as a way to get an intro. If it’s being sent to an investor directly then it needs a slightly different approach and if it’s for a bank or other type of institution again it needs a different approach. I used to have 3+ versions for these interactions.
- As a way to get into an investor via a third party: In this case there is an extra and critical component and that’s the intro letter. Again, this is designed to get people to engage and move to action! In this case you need to write a compelling mini-summary with your elevator pitch that can be “forwarded on” by your network. The summary itself can be in your own format.
- Directly to an angel group, investor or VC: In this case you will probably need to format the summary in a special way that the recipient requires. Check the website of the Angel group or VC and ensure you deliver what they need in the form they need it. DO remember however that originality and getting attention will be key to standing out from the rest. Use the content already created but format how they want it.
- For the bank or a supplier: In this case when trying to get people to back you or support you but not necessarily invest directly you need to take a slightly different approach. perhaps you don’t want to give the same level of detail for suppliers (not giving away any secret sauce) or in the case of the banks more financial info as they prefer facts and figures.
In all these approaches you need to consider the “audience” and to write accordingly. It’s no good just sending out a generic summary to everyone, you are selling and need to focus on the needs and wants of the person reading the document if you wish to persuade them to deliver the desired outcome.
What not to include
NEVER come across as arrogant and overconfident – I know this is a sales document but it needs to be based on FACTS and not B.S. Make sure you don’t fall into the traps outlined in my other posts about what not to include in your plan.
Never, ever, ever make any claim you cannot backup! If you say the market is $X big then have details to how you came up with the number. If you have a customer then you had better be prepared for a reference call to them, the same goes for connections and contacts. If you say a big named person is a backer you can bet the investor will contact them….NEVER be afraid of being open and honest. Do not use complex jargon, too many adjectives, long sentences, “waffle” and things that don’t concisely convey your message.
Try and focus your efforts on building credibility by showing a balanced approach to the risks and rewards of the idea and any problems/issues you see going forward. This is the best approach to gain trust and then eventually $$ investment.
You may want to write the full plan first and then come back to the summary in the end so that you can get all the core facts ready in advance. If you want some further details on business plans and how to craft some of the “parts” I suggest you read some of my other posts here:
Watch this: http://ecorner.stanford.edu/authorMaterialInfo.html?mid=1920 (superb video from Ron Conway)
Check your business plan measures up to "business school" standard before you send it out to investors
As you may know I work extensively with 3 of the World’s Top 10 business schools and I regularly have to help MBA’s work on their business plans. In working with them I help them shape their plans and eventually I often have to rate and mark them as part of their course grade!
In order to help them ensure that their plans can withstand the "beating" it will get under examination from investors, and mainly VC’s, I came up with a simple and informal way to check out a plan.
Here it is, compare your plan to these tests and see how you think it measures up…
Hopefully by testing rigorously you will expose any weaknesses before you send it out and can make your plan as strong as it can be. This is critical as you will get only one chance to impress a VC and get through the incredibly tough business plan review process – don’t waste any hard earned opportunity with a plan that’s not as good as you can make it!
Feedback Scale for a business plan
Readability – Does the idea come across clearly and easily? Is the language and communication method used effective? Is there a logical flow and does the plan have me “nodding” in agreement and understanding as I read through. Are the spelling and grammar right? Are all the required topics included in the plan in sufficient detail and the right places? Is there a “story” I get excited about or that holds the reader throughout the plan?
Lucidity – Is the idea and the business compelling and obvious. Do it get “it” in the first few minutes of reading and do I want to read more to understand the full details. Can I feel the pain, see the business solution and get that it’s an “Advil” solution that is required by the target market now. Has the idea been illustrated clearly in terms that allow me to “feel” it and experience it in a way that’s meaningful to me? I am thinking yes I can see how that would work in my own experience.
Believability – Are the plan, the numbers, the people and the idea credible. Does everything stack up or am I questioning assumptions, issues and the concept. Are there any obvious “dumb” issues that turn me off right away or obvious holes in the plan that should have been highlighted and covered off? Are there the classic faux pas and lazy assumptions/statements or is everything nicely backed up with fact based arguments.
Fundability – Is the idea and the market big enough to attract the investors I am seeking. If this is VC is the IRR correct and is the idea big enough for my fund. Ideally the TAM is $1Bn range and the revenue expected at year 5-7 $100M+ minimum. Is there scope in the plan for changing the business in order to succeed? Are their multiple revenue opportunities or extensions to the core market? Is this team the team that can pull off this idea?
It can be very helpful to know what NOT to write as much as what to include in a plan, especially if you are new to the process. Experienced investors see 100′s plans and it helps to avoid things that would put them off when reading yours.
Gerry Lemberg, a very experienced entrepreneur, teacher and now fund raiser, has some great ideas:
1. There is no competition.
Perhaps no other company sells a product substantially similar to yours, but this does not imply a lack of competition. Any substitute product, process or service that satisfies the same need as your business is a competitive solution. Stating that no competition exists reveals either a lack of research or imagination on your part. If you are correct, investors interpret the lack of competition as evidence that the market is undesirable or having need of consumer education.
2. The existing competition is (lazy/stupid/pick an adjective).
Denigrating your competition will detract from your business plan more than it adds. The statement offers potential investors no insight into why your company will succeed against an entrenched company. For example, if the competition has failed to seize the initiative due to its organization as a not for- profit company, speak to the lack of incentives implied by this type of organization. Identify weaknesses in the competition that are difficult to change, as opposed to poor leadership, which is relatively easy to change? Offer potential investors information about the competitive landscape rather than invectives against existing companies.
3. Company founders have invested £X worth of their time in the company.
Investors like to see that the founders of an entrepreneurial company believe in their business enough to make investment and personal sacrifice to sustain its survival, but do not confuse the two. While foregone salary represents an economic cost of the venture to an entrepreneur, it is not an investment into the business. Investment translates to cash spent for costs related to starting and developing the business. If founders have spent a significant amount to do this, include the figure somewhere in the financial section of your business plan.
4. Our channel partners will sell our product.
Making the sale of your product somebody else’s problem is not the solution to the marketing section of your plan in 9 out of 10 cases. Your product is competing with alternatives in your industry and others for your channel partners’ time, so the incentives in terms of volume, margin and strategic benefit (ability to sell corollary services) must justify their commitment. If your marketing plan is dependent on this strategy, provide compelling evidence that it is viable.
5. We will sell into the £X Trillion global (name any) market.
Incorrectly sizing the market may give investors the perception that management lacks either the knowledge to assess who would buy the product or the integrity to delimit this statistic accurately. Here’s a simple statement that may be of assistance: “If my company had 100% Market share for the product we sell, company revenues would be X.” Given that your customer is defined accurately; this is your total addressable market.
6. Absence of information regarding how funding will be used.
This is a critical piece of information, but one that is often left out. Investors would like to know why you are raising capital, so provide a breakdown of where the dollars go. Expenses amounting to less than 10% of the capital being raised need not be detailed in your Executive Summary.
By Gerry Lemberg, Silver Fox Venture Partners.
There are lots of books and software on how to create a business plan, many are mentioned in this blog, however there is no substitute for blood, sweat and tears on this job.
Business plans are hard to get right but they are the currency of investors and you need to create the very best one you can – I personally labour over mine and make changes based on constant feedback. I don’t think my plans are perfect, indeed I see them as a constant work in progress!
I have found the best way to create an ‘understandable’ plan is to show a draft to as many of your potential audience as you can and make changes until it’s clear they can understand and find it compelling — obvious but very rarely done in my experience!
Indeed, you will probably end up with several plans depending on who you intend to give it too – certainly angel investors need a different plan to a VC or friends/family for example.
Most business plans I have read (and have written myself in the past) are riddled with economy lingo, business jargon and clichés, that they do not communicate any real business value. This is very easy to do as an entrepreneur as you wax lyrical about your idea…often forgetting that the average angel investor will have no idea what you are going on about!
Beware terminology, such as disintermediation, sweet spot, ASP, best of breed, and win-win – for building a real business, these terms are meaningless and seen as B.S.
Another challenge when reviewing business plans is that the introductory sentences sometimes stretch for an entire paragraph as the entrepreneur looks for that all-encompassing way to describe their business. Forget it! There isn’t one. Try to simply tell me what you do in five words or less.
Here is an fun example of a poor choice of words:
This business makes mechanical petrol fueled devices used for transportation more efficient by periodically sending them through an applied for patent machine to loosen the terra firma from these vehicles to make them more conducive at performing their task.
Solid choice of words:
We run a car wash!
Another frequently used practice is to create a business plan using template software or by working from an existing plan. I do not recommend this practice as these plans can be very ‘cookie cutter’ by nature and often create a highly bloated plan with not enough ‘thinking’ from the team writing it.
A great reference is William Sahlman in his Harvard Business case study “Some Thoughts on Business Plans.” This case study illustrates clichés and catch-phrases. It highlights misleading statements within business plans and will show you how your audience may be ready between your lines!
If the plan says: “Our numbers are conservative.”
I read: “I know I better show a growing profitable company. This is my best case scenario. Is it good enough?”
- Since all numbers are based on assumptions, projections in business plans are by their very nature a guess and are not conservative.
If the plan says: “We’ll give you a 100 percent internal rate of return on your money.”
I read: “If everything goes perfectly right, the planets align, and we get lucky, you might get your money back. Actually, we have no idea if this idea will even work”
- No one can predict what an investor’s return will be. Let them decide.
If the plan says: “We project a 10 percent margin.”
I read: “We kept the same assumptions that the business plan software template came with and did not change a thing. Should we make any changes?”
- Ensure you have developed your financial projections from the ground up.
If the plan says: “We only need a 5 percent market share to make our conservative projections.”
I read: “We were too lazy to figure out exactly how our business will ramp up.”
- Know what it will cost to acquire customers. Gaining 5 percent market share is not an easy task in a large market.
If the plan says: “Customers really need our product.”
I read: ” We haven’t yet asked anyone to pay for it.” or “All our current customers are our relatives” or “We paid for an expensive survey and the people we interviewed said they needed our product”.
- The definition of a business is when people pay you money to solve their problems. This is the only way to prove people “need it”.
If the plan says: “We have no competition”.
I read: Actually… I stop reading the plan. Always beware of entrepreneurs that claim they have no competitors. If they are right, it’s a problem and if they are wrong, it is also a problem. Every business has competitors or else there is a current solution to this customer need. If there are no competitors for what the entrepreneur wants to do, there is a good chance there also is no business.
So what should an entrepreneur do?
- Write the plan in plain and proper English.
- Please understand that the reader comes to the plan with no knowledge of your business.
- No fancy words, clichés or graphs will make them want to invest.
- Understand every part of your plan and be able to defend it.
- Use your own passion to describe your plan.
- Make your plan your own.