Business plans should be simple, passionate

Business plans should be simple, passionate

By Gannett News Service
Originally posted on August 20, 2006

Eureka! You've come up with a great idea for an invention or a new business. Or you've discovered a niche in the marketplace crying out to be filled. What's the next step?

In a perfect world, you simply set up shop, watch your business flourish, and count the money as it flows over the transom.

But in an imperfect world, you need seed money to start your business. And to get that capital, you'll have to go begging for investment, either from a bank, a venture capitalist, an angel investor or your uncle.

Most of these sources of funds, except maybe your uncle, will want to see a business plan. For many entrepreneurs and Bill Gates wannabes, that's the most difficult part of starting a business: translating your idea, your vision, into a dry little document designed to win over a skeptical investor.

It's even more difficult than closing the first sale for your business.

A business plan has to convince an investor that your idea for a company is solid and that you're the right person to make the whole thing work.

Venture capitalists and successful entrepreneurs stress that the best business plans should be:

Short and simple

Extensive financial projections aren't needed. Clarity about the startup's product or service is.

"The first piece should be an executive summary," says Shanda Bahles, general partner at El Dorado Ventures, which backed EarthLink and a variety of other technology companies.

"Think of it as a calling card to get you in the door, to get me asking questions. Do NOT write a 50-page business plan with five-year financial models. It's garbage in and garbage out."

"It should be two pages," declares Stuart Reid, co-founder of Urban Communications Transport, a startup broadband provider in New York City. "If you can't say it in two pages, you can't do anything."

Chip Hazard, a general partner at IDG Ventures in Boston, says the plan should be "precise, crystal clear" about what the new company is all about. "It never ceases to amaze me how many business plans I see where after you read it once or twice, you still don't know what a company does."

The key to describing your business is understanding what benefit you're providing to your customers, says Doug Frazier, the other co-founder of Urban Communications Transport.

"You have to learn what business you're in," says Frazier, whose previous company was a cable television provider. With cable, "People told us we were in the communications business. Nope, we were in the entertainment business."

Now, with broadband, "We realized we were in the problem-solving business. People use the Internet so they can work. They use their telephone to communicate and solve problems.

"The real key to being an entrepreneur who has a chance to succeed is knowing precisely what business you're in. If you don't, you die."

Introduce the management team

Obviously, investors want to know the ways in which you plan to build the better mousetrap. But venture capitalists will be most interested in the people behind the product.

"The management team is key," says Reid. "Investors invest in people, not ideas. You've got to pull a strong team together."

"Investors are always going to look at management," says Thomas Cooper, a doctor who has started four successful businesses in the medical field and teaches entrepreneurship at Columbia Business School. "Who are these people and can they pull it off? What are their backgrounds?"

Contrary to conventional wisdom, Cooper says it's not always a plus when the management team has vast experience in the industry in which it wants to launch the new business.

"If someone's too steeped in an industry, they think there's only one way things can be done," he says. "I'd rather look for someone on the periphery, someone who knows enough to be dangerous."

People on the outside are usually willing to try new ways to do business, Cooper says. As an example, Cooper recalls an experience he had in medical school in the 1960s. Doctors then tried to determine if a patient had fluid in his lungs by tapping an area between the patient's ribs and listening to the sound.

"It was a technique called percussion," Cooper says. "People would get real good at that. I was thinking, can't you come up with a device that would measure that? Eventually, it became ultrasound. In 1966, I knew just enough to be dangerous, but if I'd been practicing medicine for 20 years and had that technique down, why would I do it any way but that?"

Anticipate problems and challenges

Pollyannas don't make good entrepreneurs.

"Anybody can have a great idea, and anybody can be an entrepreneur," says Frazier. But the business plan has to "explain that you've thought the problems through."

Addressing your business' potential problems is a must, Cooper says.

"Writing a business plan, a formal business plan, forces you to answer the tough questions," he says. "It's one thing to be out with a bunch of guys at a bar, and you're having a beer and you're telling them about your business idea. Everything sounds great. You can do this and you can do that, and it all looks easy. A business plan forces you to address the holes in your idea."

Finding those holes and thinking through your responses to them is crucial, says Cooper, who scans lots of business plans as a partner at Aperture Venture Partners.

"Rather than have investors raise these issues to you, it's better if you've thought them through," Cooper says. "Any sharp investor will figure out the weakness, so it's much better if you come out with them. Most people don't want to enter into the negatives, but I want to hear it. If investors have to bring up the negatives to you, it makes them think you haven't thought your business through very well."

Show path to profit

A good business plan isn't stuffed with financial projections, but it does explain how the business will make money.

"The most important thing is sales," says Cooper. "If you can't get someone else to open up their wallet and turn money over to you, it doesn't make any difference how great the idea is."

Cooper described a failed business venture he started, to provide dental and eye care to patients in nursing homes. There was such an obvious need for this service that he figured the sales would be automatic.

"The need was so great that I assumed there would be a payment source, but there wasn't and I failed."

Cooper wants details on how an entrepreneur is going to close the first sale, how many sales he or she can make in the first year and how long it will take to close those sales.

"The more specific they are, the more credibility they have," he says. "It's one area that people don't emphasize enough."

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