What key elements should you include in your business plan? Here you go.
I started investing in start-ups in 1996 and have seen plenty of business plans. I get them from people who are seeking some of my money and from entrepreneurs who are starting a capital raising campaign.
Unless you have a spectacular track record as an entrepreneur or an exceptionally great new business idea, you cannot raise capital without a business plan. I have invested in six start-ups and three of those were sold for a total of $2 billion. The other three went out of business.
And even in that tiny sample, there is typically one connection between these successful business plans. Simply put, the successful business plans contained deep insights into the prospective customers. And the ones that failed did not.
Despite that simple insight, 99% of the business plans I see are missing that critical ingredient. Before getting into all the key elements of a good business plan, above all else, I think you should make sure you do a great job at conveying your understanding of the customer.
Here’s how. First, you have to figure out the group of customers that you want to sell to. Then you have to develop an interview guide--a list of questions such as why current products don’t meet their needs, what an ideal product would look like, how they decide among competing vendors, and where they perceive an unmet need.
You should then interview at least 20 potential customers and make sure your analysis of their answers to these questions is in the business plan. And your analysis should include key quotes from those potential customers that reinforce the conclusions.
A good business plan should cover the following topics:
If you had two minutes going down an escalator with a potential investor, you should talk her through your executive summary. This should answer questions such as: What is your company’s mission? Why is it important to you? Why do you think your company can make money pursuing that mission? What is your track record of winning? How much money do you need? What kind of return can I expect if I give you the money? Why?
If you have more than two minutes, the investor will want to know more details. The business/product description should describe your company’s mission and present the details of the product that you have in mind to achieve that mission. This description should also focus on specific product attributes that you think will make it better than the competition.
The target market section details which group of potential customers your company will target. It describes why you picked that market, its revenues and growth rate, the key factors driving growth, and typical net profit margins in that market. And this section must, in my opinion, also present the results of your customer interviews.
Plan To Gain Market Share
The plan to gain market share section will explain the key factors, ranked by importance; a potential customer uses to decide among competing suppliers. It will also describe how well those customers perceive that competitors perform on the various factors. It will next describe how your product will outperform competitors on the key factors. Finally, the plan to gain market share section will set market share goals and describe what your company will do to achieve those goals
The management team section of the business plan will present biographies of the members of your team. If you have no prior entrepreneurial experience--investors will be looking for signs that you and your team are winners--this could show up in outstanding academic, athletic, or extra-curricular accomplishments.
The cash forecast part of the business plan is in some ways the least believable for an investor. Here, investors are really looking to see whether you put in enough effort to make a detailed estimate of how much cash will be needed to achieve your goals and what revenues and profits will ultimately flow from that investment. The key here is to develop realistic assumptions and to prepare for investors to ask you questions about why you chose them and your sources of information.
To me the most important part is how well you understand the customers--if you do a good job with that, I think you will boost your venture’s odds of success considerably.
Strategy consultant, start-up investor, teacher, corporate speaker, pundit, and author PETER COHAN has invested in six start-ups, three of which were sold for a total of $2 billion. Before founding Peter S. Cohan & Associates in 1994, he worked with HBS strategy guru Michael Porter.