BloombergBusiness Week: Before You Write a Business Plan
First, you need to test your product or service with potential customers, and define your business model
Before I launched my last startup, I prepared a business plan exactly as I had been taught in business school. I was determined to lure professional investors, and I thought the key lay in creating lofty financial projections and carefully documenting the details. If all went according to my 40-page plan, my software company would be worth billions in five years by capturing just 1% of the market. My CEO friends told me that this was one of the most professional business plans they had seen. Yet it didn't take me long to realize that it wasn't worth the paper it was printed on. It bore no resemblance to the company I finally built. I don't think that any of the 100 people I sent it to read more than the executive summary.
True, the analyst reports that I read to prepare the market analysis section provided valuable industry insights. And the process of creating the sales and marketing section forced me to think much harder about how I would achieve my goals. But the two to three months I spent creating the plan would have been better spent if I had instead focused on building my product and speaking to potential customers to understand their needs.
Over the years, I have mentored dozens of entrepreneurs seeking venture capital or angel investment in their new companies and reviewed hundreds of business plans. They all seem to be the same. A startup business plan is always a good piece of fiction filled with great ideas. No one really believes what he reads in them. What venture capitalists look for before they make an investment is a proven product with strong market demand and an experienced management team. And angel investors usually invest in vision and enthusiasm.
Validating Your Idea
To prepare a business plan that will lure professional investors, you need to first focus on testing your product or service and defining your business model. Because the truth is, all you really have at the idea stage is an idea. It is best to first validate it and make necessary changes based on what you've learned before you write the plan. Here's what you should consider doing first:
1. Write down your thoughts on the product you want to build and the needs you want to solve. You'll be detailing your hypotheses.
2. Validate these hypotheses with as many potential customers as you can. Ask them if they will buy your product or service if you build it. Learn about what features they need and what they will pay for, ask them for more ideas, and be sure that there is a large enough market.
3. Build a prototype of your product or offer a test run of your service and again ask potential customers what they think about it. You'll find that customers usually provide much better input when they can actually try out a product.
Defining the Business Model
As you make progress in building your product, your next challenge will be to create a business model (BusinessWeek, 5/12/06). This is usually a lot harder than it seems, especially if you are creating innovative products and services and venturing into new markets. Here are the questions you'll need to answer:
1. How are you going to find customers or have them find you? Are you going to advertise, cold-call, or rely on word of mouth?
2. How will you differentiate your product or service? There is always competition, so how are you going to set yourself apart?
3. What can you charge for your product or service that's profitable for you and provides value to the customer?
4. How are you going to persuade potential customers to buy from you? Even great products or services don't sell themselves, you have to develop a process for closing deals (BusinessWeek, 7/12/05).
5. How will you deliver your products or services to your customers? Are you going to have a direct sales force, sell through distributors, or over the Internet? Can you do this cost-effectively?
6. How are you going to support your customers if your product breaks? Are you going to provide a telephone hotline, on-site support, or answer e-mails?
7. How are you going to ensure customer satisfaction and turn customers into loyal fans? Your success will ultimately depend on how happy your customers are.
Back to the Drawing Board
Getting all this right takes a lot of trial and error. Most entrepreneurs I know have found themselves going back to the drawing board to rethink their product or services as they developed their business models. As you do all this, you will also become aware of gaps in your management team (BusinessWeek, 5/19/06). And you will develop realistic expectations of what your business can achieve and how much funding you need.
The good news is that once you've perfected your business model, professional investors are likely to be much more interested in you. And you will have all the information you need to create a credible business plan they will take seriously.