Structure of a Business Plan (Business Plan Series)

Since a number of you have badgered me enough about how to make a Business Plan, I have decided to create a post on just that. Unfortunately it is going to be rather long.

Warning! This is my explanation of the structure of a Business Plan and not an International Standard (There is nothing like that anyway). I haven’t really put in everything because one could write a book about it and still not cover everything. Hence, FAQs on Business Plans will not be answered here but will be kept for another post.

The following are parts of a Business Plan for a startup looking for an infusion of funds by VCs

(Those marked with a ‘*’ may be added based on requirements)

 

Note: This Business Plan is made with a few assumptions in mind

a. Your business/startup hasn’t started or is less than a year old.

b. You are looking for equity finding and not debt funding.

Introduction – I don’t recommend this, because VC’s don’t have a lot of time to chat around. They would have already read up on your Executive Summary and if they haven’t then they are smart enough (hopefully) to understand it through the next section, the Business Idea. However, if you must be a nice school boy/girl, then create a brief Introduction on what the basic outline of your plan is, which market you hope to operate in and why is it exciting. Don’t make it more than a paragraph.

2. Business Idea – Writing down a nice 1 or 2 line definition of your business (with TMS, values, product/service, market, geography and differentiation) is really really important. Without that you will start off like dancing the Waltz with a broken leg. If you aren’t able to crisply define your business in those lines, believe me you will have trouble convincing your investors, team and yourself about this plan.

Create a good definition of your value proposition and make sure you aren’t giving into hyperbole. Finally always answer this simple question “What is the pain we seek to solve?” Every investor wants to know this. So do them a favour and answer it for them. Use this as heading if you have to. Investors appreciate direct answers. 

Finally add a few lines about the technology, methodology, leverage which you feel are relevant and which will add towards differentiating your product.

3. Market Analysis – This is where your market research will come into play. A PEST and SWOT analysis is once way of providing the relevant information/structure of the market. Market potential based on credible sources is a must. One should also underline various trends and characteristics of the market that the startup will operate in. A good market analysis will help investors understand the contours of the environment that a startup will be operating in. It serves to create context for the problems you are targeting and trying hard to solve.

4. Competition Analysis* – No, this is very important information and should be included in every Business Plan. The ‘*’ here is simply to point out that it may serve your purpose far better, if this section is under market analysis. Especially in cases where one is entering a new and under-developed market.

Shortcuts should not be taken and one has to understand their competition inside out for a comprehensive comparison. Creating graphs and tables comparing them against each other based on critical parameters (Like cafes must be compared on Sales, Covers, Profitability, Average Bill Size, Average Price Points, Footfall, Built up area etc) will help put things in perspective for your investors. More importantly it will help you justify your financial projections based on these numbers. 

Stating their strengths, positions, weaknesses, differentiation, organizational focus, reach etc in this section helps you create, not just great picture for these investors on the market conditions and the opportunity, it also gives them confidence in you since you have done your homework.

5. Organization and Management/Team – Ask any VC or investor and they will tell you that while they invest in a startup based on the opportunity and the strength of the idea, it is actually the team that they are most interested in. Most VCs invest in the team even when the idea isn’t going to be the next Google or Facebook.

It is important to outline the people in the Management team, their experience, background, their skills and the role that they will take up in the organization. It is essential to come across as a team which already knows what each person will be responsible for and why. Underlining the strengths of the team gives investors a sense of confidence in the ability of the team, which by the way, is still untested. Even if you have 20 years of work ex.

A clear organizational structure made up of employees you plan to hire or have hired, would be a good thing to showcase. But if you are a startup in its early days, you may skip this bit.

6. Operational Strategy – This section is basically meant for you to explain just how the company will be able to deliver its services/products.

It is essential that you go over the details so that no glaring chinks happen to suddenly appear when the business plan is put to review.

The number of employees, business model, workings, service timings, details, vendor/dealer relationships, distribution model, servicing of clients and other aspects of the back end which make a business run successfully, should be explained.

This section is of real importance if the differentiation in your business plan is not your product/service but how you create/deliver the same to your customers.

7. Marketing Strategy – Answer some important questions like how will you reach the customer? How will you promote the product? What channels will you use? What kind of expenditure do you expect on customer acquisition? How will you increase the reach in terms of awareness? How will you position your brand/product/service? Why would you take this positioning? What are other costs involved with your marketing strategy? How will you convert awareness to trial and trail to acquisition?

Please note that when startups are looking at introducing their products to a new market then a plan called Go-To-Market Strategy must exist for the same. This may or may not be put in the initial business plan, but I recommend it should as it lets your investors know that you are ready for the first push of your product/service into the real world. After all, a good plan to execute a sale, is what really matters.

8. Financial Projections – Create basic financial projections in terms of P&L statements with Gross, Net and Operating profits mentioned in all models.

And please do not make the fatal mistake of forgetting to mention the various taxes (direct/indirect), custom duties, excise duties and other charges which will put pressure on your actual bottom line.

It is best to create various financial scenarios for investors (Pessimistic, Optimistic and Realistic) for them to be aware of the stress your business model can take.

However, those of you who intend on razzling and dazzling the investors with your prowess at excel should remember. They also know how to use excel. They know that all the numbers being presented as financial projections are as real as Donald Duck.

Show the breakeven point and if possible, the payback time. The investors really really want to know when they will make their money back.

9. Risks and Issues – There are always risks (competitors, laws, technological etc) Giving a realistic picture of these risks and issues shows that you are entrenched in reality and hence, if and when these issues arise, the startup will be mentally prepared for the same.

10. Long Term Goals – Every investor for startups invests for the long term. So he/she would love to know what your long term vision of the startup is. The ability to think long term and think big is critical to the success of a startup and the probability of getting funded. 

11. Funding Requirements* – This is to be added only when investment is sought after. In the event, that this Business Plan is only for stake holders to understand, this section is not required.

Please let investors know how much you want, why you want it, what will you use it for and how much equity do you intend on parting with.

12. Exit Plan – Reality check! The main responsibility of VCs is to make money for the people who have invested in their fund. They aren’t there to create a better life for all mankind, though some do profess that to be the main aim of their lives. The thing they are interested in is to know, the various ways in which they can exit from this investment (your startup) so that they may make their profits. Creating a roadmap for them, by giving various options, like selling the business off to a competitor, going for an IPO, eventual buy-out by founders etc gives investors the confidence that you will be willing to look at opportunities to let them sell their stake, when the opportunity arises.

I understand that a number of points have not been covered in this post.

I have created a new series of posts, (Business Plan Series) which dissects all aspects comprehensively.

Fundable V/S Viable. The Demon of Scalability

There are two types of Startups. Fundable and Viable.

Understanding the difference between the two can really help save entrepreneurs a lot of time and resources.

I got my lesson thanks to a swift kick in the backside and a smiling, sadistic VC who sat across the table tearing apart every presentation slide of mine.

My Business Plan was regarding a kind of Cafe. 2005 was one of those years when you couldn’t turn over a business newspaper without tripping over a giddy cafe/coffee/hangout article.

As a young manager in a five star hotel and a precious degree from one of the best IHMs in Asia, I pretty much felt like what thousands of young studs feel when they pass out of premier B-Schools. Super Confident, Brash and with a firm belief that my B-Plan was the 11th commandment. Flawless Gospel.

The presentation started with 3 tired stuffy suits sitting in front with the first question of the day ‘How long is the presentation?’ I said about 30 slides. They gave me a look of surrender and disgust.

My presentation lasted about 5 minutes. I had planned for 45 mins. After all my B-Plan would change the world.

I knew it had bombed. My presentation was pathetic and my plan was a ship with more holes than hull. But back then I was stunned in disbelief. How could these middle aged men not see how revolutionary this idea is?

I made many mistakes that day. I will discuss them in future posts. But this post is about the biggest hole that negated all good things about my plan.

My plan, with a little spit and shine was definitely doable.

It would probably be profitable in the real world. But it wasn’t fundable.

 

Whats the Difference?

At the end of the presentation, one of the VCs walked up to me, took me to coffee, and explained the difference in passing.

Over the last few years, this difference has become crystal clear to me.

The primary job of a VC is not to ensure the success of startups, it is to ensure that people who invest money in their VC fund get great returns. A VC is essentially a fund manager, where the fund happens to only invest in young startups.

Now to invest in startups is very risky, even the better ones ultimately fail. Hence the returns demanded must also be great.

Its the basic ‘risk is inverse to return’ theory that works here.

VCs know that out of the 10 startups they invest in, 5 will fail, 3 will do moderately well and 2 will be superstars (This is just an example, most VCs in India will have tears of joy in their eyes, if these numbers were their own.).

So they need to make sure that their 2 superstar startups give enough returns to cover the loses from 5 failed startups and return a good profit.

In essence, they recruit hitters for their cricket team in 20-20 matches, so that even if most get out due to risky play, some will end up making centuries to cover up for the rest. Hence resulting in an overall win.

Now that means, that unlike mutual funds which look at returns in percentages, VCs look at returns in multiples.

If they invest Rs. 100 in ABC, then ABC should return Rs.2000 when the VCs exit (sell their stake in ABC to someone else). Hence the return of 20X. This means that the valuation of the company should grow by 20 times in the 2-3 years of their investment.

I will discuss these mechanics in greater detail in the future.

So how does a company rocket 20 times in valuation? Now there are lots of methods to value a startup. Some are pretty standard and most are outrageous.

However, growth in valuation, at its core depends on how fast a company can scale up. Which means, how fast can a company attain eyeballs, customer attention, usage, revenues, items on sale etc.

I will also discuss scaling up in a future post. However for now scaling up can be defined as the increase in reach, revenue, operations, customers etc by a company. In short how much growth, usually in revenue or customers, is the company showing

And the lesser the resources/time required for a company to scale up, in a potentially large market, the better the valuation of a company.

 

Example

A website can theoretically scale up to be seen, viewed and used by millions of people just by getting bandwidth and server infrastructure issues sorted out. It will probably require a limited tech team and a bunch of content writers. This doesn’t take as many resources/money to do as the below example.

Now consider a cafe. A cafe at any point of time can seat say 100 people. So at max it can service 300 people a day (lunch, evening & dinner). Lets say the cafe becomes ridiculously popular and we need to expand, in all probability we will have to start another cafe to scale up revenues.

This is very capital intensive. Hence it is has scaling issues.

And since VCs are smart, they would rather put money in a website which services millions of people and with little money can service millions more, than to put it in a cafe which services just a few thousand.

It is not surprising then, why they call such money (VC funds) as smart money.

And this smart money probably decided to fund a website rather than my cafe.

Bastards.

(I have discussed scaling up, VC funds and the difference between scalable businesses. Stay tuned for the next post. Fundable V/S Viable. The battle of startups)