|Writing a Business Plan|
The language and theory used to develop and describe a business plan has evolved considerably over the pat 30 years. Much marketing wisdom is contained in the terms, metaphors, and parables created to describe the effects of disruptive technology. Although technology keeps changing and evolving, the marketing physics fundamentals remain constant. In brief, this article provides startups with explanations on how the world works, viewing the world, and influencing and changing the world.
- Crucial Marketing Concepts for Startups, by Sean Murphy and Mark Duncan, April 2007
- An Entrepreneur’s Guide to Sales, by Sean Murphy and Mark Duncan, August 2008
- iPhone — Evolutionary or Disruptive? How the Core Competencies Necessary for Success Evolve Over Time, by Mark Duncan, October 16, 2009
Business Plan Outlines
A business plan helps you think through all the elements that will be necessary to implement a successful business. It is also a sales tool for raising investment capital.
Here are two business plan outlines:
- Business Plan Outline, by Sam Bernstein
- Creating a Business Plan, The Brenner Group for Silicon Valley Bank
Evaluating a Business Plan
Ann Winblad, co-founder of Hummer Winblad, observes that the basic questions that a venture capitalist will consider are:
• Do you have a large, addressable market?
• What unique value proposition do you bring to the market?
• Are you going to increase value to the customer by a factor of 10 or more? (2 or 3 is not good enough.)
• Does your business model improve as your company grows?
• Does your business model accommodate a global reach?
• Do you have a sustainable “unfair advantage” over competitors?
Ann advises that there is no magic formula used on deciding upon an investment. The basic tenet is to demonstrate that a company has the right team solving the pain of a large market by building technology that gives you an unfair sustainable competitive advantage. In this context, she offers the following tips:
- Show customer acceptance. This does not necessarily mean you need revenue prior to Series A. It does mean you should have validation from customers on what you're doing, and that they are willing to pay top dollar to you. Your development cycle should he sell - design - build, not design - build - sell.
- Differentiate with technology. The uniqueness of your solution should be hard to replicate. Having such core strength buys you the time necessary for establishing market leadership. On the other hand, following someone else's footsteps with a "me too" solution is not a lasting advantage.
- Demonstrate the Trojan horse effect. In the current economy, customers will not readily sign up for large deals. How will you infiltrate their castle with a palatable value proposition, and spread from there? Create an engineering plan defining to the greatest detail possible to roadmap to "sufficient market entry."
- Be realistic about competition. "There is no competition" is not an acceptable position. And if it were, the market is probably not large enough for a VC investment. Think of who else is going after the same budget dollars you are. Sometimes this is internal development. Other times it's a vendor in an adjacent space. For example, you may be selling intrusion detection, but the customer would rather buy anti-virus because that's more important for them.
- Map a path to the customer. At an early stage, direct sales are usually needed to prove the value proposition. But if your selling price is low, direct sales are an expensive way to sell. What are the leverage points that will allow you to scale? For example, if your market is covered by a handful of large players, can you OEM to those vendors and get efficient access to the entire market?
- Build an economic model of your business and how it will scale. While numbers are not strategy, they tell you if you have one and if your assumptions are realistic. This exercise will also force you to examine the pricing strategy you will need to address to go to market and build a solid "software economic" model. Use this modeling exercise to quantify all of your assumptions and map them into risk reduction points that we can help you cross as a company.
Ann notes that two other red flags for venture capitalists are:
- Any venture that compares itself to an existing company is dead on arrival, because it’s bound to be a me-too proposition, with no more than a 2x increase in the value proposition.
- Founders who can’t concretely say what their customers think either don’t have any potential customers or have not spoken with them enough to have sufficient expertise. Their pitches resemble jabberwocky — sounding rational, but not really making sense the way a segment expert would. If the founders can’t make a solid, concise pitch to the VCs, what’s going to happen when they need to talk to key prospects, to the press, and to others on the roadshow circuit?
Joseph Garber provides a checklist of common errors, omissions, and red flags that an investor will look for when reviewing a business plan.
- Keys to Successful Failure, by Joseph Garber
You've gotten your first meeting with an investor. What should you say or not say? Here are some helpful do's and don'ts:
- The Do's and Don'ts of Venture Financing, Jake Seid, Lightspeed Venture Partners
For some additional perspective on polite ways for venture capitalists to say "no" and common overstatements by entrepreneurs:
- The Top Ten Lies of Venture Capitalists and Entrepreneurs, Guy Kawasaki, Garage Technology Ventures, January 2006
Great! You have an investor who is sufficiently interested to want to do due diligence before offering you a term sheet. So what are they going to do?
- Venture Capital — Due Diligence is No Mystery, by John Occhipinti, Woodside Fund
Why Do Companies Stumble?
Even the best startup can stumble, as Yahoo is an example. Here are two essays on why this occurred.
- “The ‘Peanut Butter Manifesto’,” by Brad Garlinghouse, November 18, 2006
- “What Happened to Yahoo,” by Paul Graham, August 2010