Jay Parkhill March 21st, 2008
I have read many business plans from clients and friends over the years, and helped write more than a few. I have strong opinions about what works and what doesn’t and I have been mulling a post on the subject for a while.
As I started writing though, I found that lots of other bright people have also written extensively on this topic. More to the point, many of these people are VCs in the business of funding companies. Here, then, is a whole lotta link-love on the subject of business plans, with my own editorial comments.
*Purpose. Guy Kawasaki says that writing the plan is a really valuable exercise to “to solidify the objectives (what), strategies (how), and tactics (when, where, who)“. He also says (two lines prior) that it is a “mechanical step in due diligence”. Translation- no one is going to read the whole thing, so figure out how to make the important points stand out without being ostentatious about it. Use descriptive headings.
*Length. Around 10 pages is all you need. Guy says 11 and even allows an extra 9 for good measure. The best ones I have seen have all been concise. If you have trouble reducing the essence of your business to that amount of space you are too close to it. Get a friend who knows nothing about the idea to review it and tell her/him to cut out everything the tiniest bit extraneous.
*Executive Summary. The Woodside Fund allows 3-5 pages for this. Brad Burnham says 1-2. Guy says 1 and I agree with him. Remember that your audience may look at 10 of these every day. Hitting the major points so a reader can take them all in a single scan is a big help.
*Management Team. This is the hardest for most people, because new businesses are usually in new areas for the founders so their prior experience isn’t necessarily relevant. This is also the least-discussed area of the business plan by all of the VC blogs I researched for this post. Ask the VC cites the ability to build the product and ability to sell it as key attributes in founders. I’m willing to bet there are more exceptions to this rule than any other, though. I can name a half-dozen clients whose founders had vision and managerial/organizational skills, but no technical or sales experience per se. What is the secret then? I’d say it is to instill confidence in the audience that you can do what you say you will do. I hate to be so vague, but I really believe if you can convey that everything else will follow.
*The Business. Dick Costolo nails it- for web companies at least: “You do need to intimately understand where you sit in the proverbial value chain and what your position there means for your company, but you don’t need to know precisely how you will extract value.” You’ll be lucky to garner a $250M valuation while “starting to focus on making money” like Meebo, but a good idea can go a lot farther on the web than in many other places without a clear revenue stream.
This is really three sections in one: the problem (why people have been clamoring for your product without knowing it), the solution (why your product will satisfy the unrequited, unvoiced longing) and the business model (where you fit in the value chain, if not how to monetize). Give adequate attention to each part.
*Financials. Everyone wants to see them and everyone knows they are always dead wrong, so what to do? Ask the VC says that the user adoption piece of the projections is the most interesting, but it is the part most likely to be wrong and over which you have the least control. The answer is that the ideas that matter more than the actual numbers on the page. The financial projections convert the concepts in the business model through into cash terms. Don’t get hung up on whether growth will hit in month 19 or 27 because you will have very little control over that. Instead show that you understand your place in the value chain.
Other key points: one page of projections for a new business, shown monthly for 2-3 years, then quarterly through year 5. And don’t provide best/average/worst case projections. Work out a growth plan and be able to justify it.
*Flexibility and Adaptability. Or as Josh Kopelman says “your business plan is wrong”. You know everything is subject to change, as do your readers. State your plan confidently, but don’t get tied to it.
I realize I could continue almost endlessly on this topic. That’s enough for now, though. More later.