1. The business plan
As illustrated in the basic model of the entrepreneurial process shown in Chapter 1, writing a business plan is the last activity completed in the step of the entrepreneurial process titled “Developing Successful Business Ideas.” It is a mistake to write a business plan too early. The business plan must be substantive enough and have sufficient details about the merits of the new venture in order to convince the reader that the new business is exciting and should receive support. Much of this detail is accumulated in the feasibility analysis stage of investigating the merits of a potential new venture.
In spite of conventional wisdom suggesting the need to do so, a relatively large percentage of entrepreneurs do not write business plans for their new ventures. In fact, a 2010–2012 study of 350 entrepreneurs found that of those that had suc- cessful exits (i.e., an IPO or sale to another firm), only about 30 percent started with a business plan.2 That number is similar to the results of a 2011 survey by
The Hartford. According to The Hartford’s 2011 Small Business Success Study, which surveyed 2,000 business owners, only 35 percent of the owners said that they have a business plan.3 Similarly, in a 2002 study, Inc. magazine asked the founders of the firms that make up the Inc. 500 that year whether they had writ- ten a formal business plan before they launched their companies. A total of 60 percent did not.4 These statistics should not deter an entrepreneur from writing a business plan. Indeed, ample evidence supports the notion that writing a busi- ness plan is an extremely good investment of an entrepreneur’s time and money.
Reasons for writing a Business Plan
We show the two primary reasons to write a business plan in Figure 6.1. First, writing a business plan forces a firm’s founders to systematically think through each aspect of their new venture.5 This is not a trivial effort—it usually takes sev- eral days or weeks to complete a well-developed business plan—and the founders will usually meet regularly to work on the plan during this period. An example of how much work is sometimes involved, and how a well-planned new business unfolds, is provided by Gwen Whiting and Lindsey Wieber, the co-founders of The Laundress, a company that sells specially formulated laundry detergents and other fabric care products. Whiting and Wieber met at Cornell University while studying fabrics, and after graduating the pair decided to start a business together. The following vignette comes from an interview they gave to Ladies Who Launch, a website that highlights the accomplishments of female entrepreneurs:
Gwen: Lindsey and I went to college and studied textiles at Cornell together and al- ways wanted to be in business together. We knew it was going to happen. We always talked about ideas. We were talking about this concept, and it was the right time for us. The first thing we did was the business plan and then a cash flow analysis. We wanted to do as much research as possible before developing the products.
Lindsey: We spent Memorial Day weekend (2003) doing our business plan. We spent the Fourth of July weekend doing our cash flow. After we had our ideas on paper, we went back to Cornell, met with a professor there, and had a crash course in chemistry. She worked with us on the formulation of the products.
Gwen: I found a manufacturer on Columbus Day. Every piece of free time we had, we dedicated to the business. We weren’t at the beach with our friends anymore.6
The payoff for this level of dedication and hard work, which involved the preparation of a formal business plan, is that Whiting and Wieber have now had a successful business for 10-plus years. Their products are sold through their website and in many stores.
Consistent with Whiting and Wieber’s experience, writing a business plan forces a firm’s founders to intently study every aspect of their business, a process that’s hard to replicate in any other way. Imagine the following. Two friends are thinking about opening a seafood restaurant. They spend the next two months meeting four nights a week to hash out every detail of the busi- ness. They study the restaurant industry, identify their target market, develop a marketing plan, settle on a hiring schedule, identify the type of people they want to employ, plan their facility, determine what their start-up expenses will be, and put together five years of pro forma (projected) financial statements. After 32 meetings and several drafts, they produce a 30-page business plan that explains every aspect of their business. Regardless of how conscientious the founders of a business are, it’s difficult to discipline oneself to cover this level of detail absent writing a business plan. As stated earlier, writing a busi- ness plan forces a business’s founders to systematically think through every aspect of their business and develop a concrete blueprint to follow.
The second reason to write a business plan is to create a selling document for a company. It provides a mechanism for a young company to present itself to potential investors, suppliers, business partners, key job candidates, and oth- ers. Imagine that you have enough money to invest in one new business.7 You chat informally with several entrepreneurs at a conference for start-ups and decide that there are two new ventures that you would like to know more about.
You contact the first entrepreneur and ask for a copy of his business plan. The entrepreneur hesitates a bit and says that he hasn’t prepared a formal business plan but would love to get together with you to discuss his ideas. You contact the second entrepreneur and make the same request. This time, the entrepre- neur says that she would be glad to forward you a copy of a 30-page business plan, along with a 10-slide PowerPoint presentation that provides an overview of the plan. An hour or two later, the PowerPoint presentation is in your e-mail in-box with a note that the business plan will arrive the next morning. You look through the slides, which are crisp and to the point and do an excellent job of outlining the strengths of the business opportunity. The next day, the business plan arrives just as promised and is equally impressive.
Which entrepreneur has convinced you to invest in his or her business? All other things being equal, the answer is obvious—the second entrepreneur. The fact that the second entrepreneur has a business plan not only provides you with detailed information about the venture but also suggests that the entre- preneur has thought through each element of the business and is committed enough to the new venture to invest the time and energy necessary to prepare the plan. Having a business plan also gives an investor something to which s/ he can react. Very few, if any, investors will free up time to “listen” to your idea for a new business, at least initially.
2. Who reads the business plan-and What are they looking for?
There are two primary audiences for a firm’s business plan. Let’s look at each of them.
2.1. Firm’s employees
A clearly written business plan, one that articulates the vision and future plans of a firm, is important for both the management team and the rank- and-file employees. Some experts argue that it’s a waste of time to write a business plan because the marketplace changes so rapidly that any plan will become quickly outdated. Although it’s true that marketplaces can and often do change rapidly, the process of writing the plan may be as valuable as the plan itself.
A clearly written business plan also helps a firm’s rank-and-file employees operate in sync and move forward in a consistent and purposeful manner. The existence of a business plan is particularly useful for the functional department heads of a young firm. For example, imagine that you are the newly hired vice president for management information systems for a rapidly growing start-up. The availability of a formal business plan that talks about all aspects of the business and the business’s future strategies and goals can help you make sure that what you’re doing is consistent with the overall plans and direction of the firm.
2.2. Investors and other external stakeholders
External stakeholders who are being recruited to join a firm, such as inves- tors, potential business partners, and key employees, are the second audience for a business plan. To appeal to this group, the business plan must be real- istic and not reflective of overconfidence on the firm’s part. Overly optimistic statements or projections undermine a business plan’s credibility, so it is foolish to include them. At the same time, the plan must clearly demonstrate that the business idea is viable and offers potential investors financial returns greater than lower-risk investment alternatives. The same is true for potential business partners, customers, and key recruits. Unless the new business can show that it has impressive potential, investors have little reason to become involved with it.
Investors vary in terms of the reliance they place on formal business plans.8 Initially, many investors ask for a PowerPoint deck or the executive summary of a business plan. A PowerPoint deck is a short set of PowerPoint slides that describe a business idea, and an executive summary is a one- to
two-page overview of the full plan. If their interest is sufficiently peaked, in some cases investors will ask for a full business plan, and in other cases they won’t. It’s still necessary to have a business plan, however. If an investor com- mits, in most cases a business plan will be required during the due diligence phase. Due diligence refers to the process investors go through after they ten- tatively commit to an investment.9 The commitment is based on a thorough in- vestigation of the merits of the venture, whether any legal complications exist, and whether the claims made in the business plan are accurate and realistic.
A firm must validate the feasibility of its business idea and have a good understanding of its competitive environment prior to presenting its busi- ness plan to others. Sophisticated investors, potential business partners, and key recruits will base their assessment of a proposed firm’s future prospects on facts, not guesswork or platitudes, as emphasized in Chapter 3. The most compelling facts a company can provide in its business plan are the results of its own feasibility analysis and the articulation of a distinctive and competi- tive business model. A business plan rings hollow if it is based strictly on an entrepreneur’s predictions of a business’s future prospects. Modify Watches, a retailer of customizable watches, is an example of a business that laid a firm foundation for its business plan via the feasibility analysis that it conducted very early on. Modify Watches is the focus of Case 3.1.
In addition to the previously mentioned attributes, a business plan should disclose all resource limitations that the business must address before it is ready to start earning revenues. For example, a firm may need to hire service people before it can honor the warranties for the products it sells. It is fool- hardy for a new venture to try to downplay or hide its resource needs. One of the main reasons new ventures seek out investors is to obtain the capital needed to hire key personnel, further develop their products or services, lease office space, or fill some other gap in their operations. Investors understand this, and experienced investors are typically willing to help the firms they fund plug resource or competency gaps.
Source: Barringer Bruce R, Ireland R Duane (2015), Entrepreneurship: successfully launching new ventures, Pearson; 5th edition.