Keys for an Effective
Business Plan
Business Planning Workshop
September 27, 2006
Dr. Timothy B. Folta
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Associate Professor of Strategy and Entrepreneurship
Director – BIOMEDSHIP (Biomedical Entrepreneurship)
Program
– http://www.purdue.edu/biomedship/
Instructor, Undergraduate, MBA, & Ph.D. Courses in
Entrepreneurship
Entrepreneurship research published in leading journals
–
–
–
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Entrepreneurial survival
Entrepreneurial risk
Entrepreneurial entry
Acquisitions of entrepreneurial firms
Why write a business plan?

According to Dun & Bradstreet study of businesses between 1989-1992:
– 66% of businesses remain open at least 2 years.
– 49.6% remain open at least 4 years.
– 39.5% remain open at least 6 years.

Study of Canadian firms found roughly the same:
Why write a business plan? (cont.)

Cooper, Dunkelberg, and Woo (1988) found that 95% of
entrepreneurs believe that their ventures will most probably succeed
even though over half of all new ventures fail.
– Over-optimism of own ability?
– Don’t perceive risks?

Shane and Delmar (2003) found that entrepreneurs who have
completed business plans or undertaken more business planning
should be:
– more likely to survive
– further along in product development
– further along in organizing the venture
Cooper, A.C., Dunkelberg, W.C., & Woo, C.Y. (1988). ‘Entrepreneurs’ perceived chances of success.’ Journal of Business Venturing, 3: 97-108.
Delmar, F. & Shane, S. (2003). ‘Does business planning facilitate the development of new ventures, Strategic Management Journal, 24(12), pp 1165-1185.
Tale of Two Markets
1995-2000
Get big fast
Concept funded
Time to IPO
Young Entrepreneurs
Entrepreneurs
controlled valuation
Number of Deals
2001-today
Get profitable fast
Where’s the business
model?
Path to profitability
Experienced
veterans
VC controls valuation
6000
5000
4000
3000
2000
1000
0
1998
1999
Source: Venture One
2000
2001
2002
2003
2004 YTD
Number of VC Financing Rounds - United States
2000
Number
1500
1000
500
20
06
20
05
20
04
20
03
20
02
20
01
20
00
0
Number of Financing Rounds by Industry - United
States
1200
Business/Consumer/R
etail Total
800
Healthcare Total
600
400
Information
Technology Total
200
20
06
20
03
0
20
00
Number
1000
Why write a business Plan?
Increase awareness
of key
challenges
Overcome
subjectivity bias
Convince other
stakeholders
Employees
Angel
Capital
Providers
VC
Partners
Debt
Agenda
I.
II.
III.
IV.
V.
VI.
First … some terminology
Getting started: Begin with the end in mind
Plan outline
Some considerations when writing the plan
Do’s and Don’t’s
Q&A
First …. some terminology
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Unique Selling Proposition
Competitive Advantage
Business Model
Unique selling proposition or
Value Proposition


How the product or service benefits the
customer in a unique way
Answers the critical question for each customer:
“What’s in it for me?”
Examples of Value Propositions
– “We provide a friendly, comfortable, well-located place offering a
wide range of fresh, customized quality coffees, teas, and other
beverages for the person who enjoys a good experience and a
good beverage.”
– “An easily accessible Internet site that is convenient all of the
time to provide a wide selection of books, CDs, and videos at a
fair price to the busy, computer-literate customer.”
competitive advantage
a firm’s distinctive factors that give it a
superior of favorable position in relation to
its competitors.
 A sustainable competitive advantage is
a competitive advantage is maintained
persistently.

A firm establishes a competitive
advantage by driving a wedge between
the costs it incurs and the willingness to
pay (WTP)
The Firm’s Economic
Contribution
Value
WTP
WTP
WTP
Firm Profit
Price
or
Cost
Cost
Firm Profit
Cost
Cost
3 Broad Types of Choices that
Define a Company’s Business
Strategy
The scope over which
the advantage is
targeted
The advantage the firm
aims to deliver
Positioning
Strategy
The activities
throughout the value
chain that deliver
the intended
advantage
Organizational Strategy
Participation
Strategy
The advantage the
firm aims to deliver
Superior Competitive Position
WTP
WTP
Firm Profit
WTP
Firm Profit
Firm Profit
Cost
Alter WTP
Cost
Alter Marginal Cost
WTP
Firm Profit
Cost
Cost
Alter WTP
Alter Marginal Cost
Examples of Sources of Competitive
Advantage
Source
Example
Efficiency, low costs
Alcoa
Product innovation
Intel
Quality, reliability
Mercedes
Customer responsiveness
Dell
Manufacturing innovation
Toyota
The scope over
which the advantage
is targeted
Geography
Product
Demography
The activities
throughout the value
chain that deliver
the intended
advantage
Production
Design
Logistics
Marketing
Sales
Service
Human
Resources
business model

A business model is the description of the
business and how it will work in economic terms
– that is, how it will make money.
– to be persuasive, it must specify how / why each
stakeholder gains from the venture
Getting Started
Begin with the end in mind
“Would you tell me please which way I
ought to walk from here?”
“That depends a good deal on where you
want to get to,” said the Cat.
“I don’t much care
where –” said Alice.
“Then it doesn’t matter which way
to walk,” said the Cat.
From Alice’s ADVENTURES IN WONDERLAND
The End

Could refer to the purpose of the plan
– Recruiting talent
– Gaining confidence in business opportunity
– Securing financing

Could refer to the exit
– IPO
– Sale or Merger
6 things you must have to get VC funding

Compelling business models
Good business plan
Unique technology with clear benefits
Strong Intellectual Property position
BIG markets
Experienced management team
Realistic financial plan

Not necessarily in this order of importance!!
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General Venture Capital Fund
L.P.
Capital
99% Limited Partners
1% General Partners
L.P.
General Partner
Expertise
1% Limited Partners
99% General Partners
L.P.
L.P.
Key Features
* 10 Year Life
* Annual Management Fee - 2.5%
* Profit Share: 80% Limited Partners,
20% General Partners
-2 to 0 years 0 to 4 years 4 to 8 years
Raise Funds
Locate Deals
Invest
Grow
Investments
Investment Fund Cycle
9-10 years
Liquidate
Investments
Example
$50MM
$0
$200MM
$150MM
$0
P1
P2
P3
P4
P5
•Investors get $100 MM back
•$300 MM Profit Split
•VC gets 20%
•Investors get 80%
VC
I1
I2
I = Investors, P = Target ventures
Total Amount
Harvested = $400MM
I3
Total Amount Invested = $100MM
Key Components of the Business Plan


I.
II.
II.
III.
IV.
V.
VI.
VII.
Cover Page
Table of Contents
Executive Summary
The Company
Market Analysis
Competitive Analysis
Products and Services
Marketing and Sales
Finance
Appendix
1.0 The Executive
Summary
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Probably the most important part of the plan.
It is a business plan in miniature – should be
able to stand on its own.
Organize in order of importance
No more than 2 pages
Did you know that most business plans
are never read by a VC partner?
II. The Company
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
Company History
Mission
Legal Business Description
Strategy
Technology
Value Proposition
Management
Organization, Alliances, and Relationships
Intellectual Property Strategy
Facilities
Example of Mission Statement: eBay
Mission
“We help people trade practically anything on earth. eBay
Statement was founded with the belief that people are basically good.
We believe that each of our customers, whether a buyer or
a seller, is an individual who deserves to be treated with
respect.
We will continue to enhance the online trading
experience of all – collectors, hobbyists, dealers, small
business, unique item seekers, bargain hunters,
opportunistic sellers, and browsers. The growth of the
eBay community comes from meeting and exceeding the
expectations of these special people.”
Strategy
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Major opportunities
Estimated cost of entry, time frame, and risk
Competitive advantage
– Type of advantage
– Scope of advantage
– Key activities driving advantage
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
Product / Service A
Product / Service B
Technology


Proprietary Technology
Technology relationships
The Average Start-up Firm
The Established Firm
Human Capital
Other assets: technology, market power, reputation,
customer relationships, scale economies,
scope economies, etc.
Why Venture Capitalists
Reject Business Plans
Unacceptable management team
52%
Company not market driven
38%
Time frame too long
33%
Inadequate financing plan
25%
No proprietary position
15%
No experience in industry (VC)
12%
Other pitfalls: too long, opportunity too small, poor
organization, lack of focus
The relationship between prior experience
and performance

In a Purdue study of 2994 entrepreneurs by
Gimeno, Folta, Cooper, and Woo (1997)
– Similarity of prior business to current one is one of the
strongest predictors of performance.
– Other predictors of performance

Formal education
 Management experience
 Entrepreneurial experience
Management
I.
Leadership team and brief
resumes
II. Ownership, voting, stock options,
and other incentives
III. Outside support
a)
b)
c)
d)
Accountant
Attorney
Consultant
Board of directors / advisors
Organization, Alliances and
Relationships
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Joint Marketing agreements
Supplier Agreements
Joint Development agreements
III. Market Analysis
A.
B.
C.
D.
E.
Market Description
Target Market
Customer Buying Criteria
Distribution Strategy
Market Penetration and Sales Volume
Market Description


We expect to compete in the [define niche] of the [define industry].
This market was approximately [$x] at [wholesale or retail] last
[period available], according to [cite resource]. We believe a major
future trend in the industry will be toward [environmentally oriented,
miniaturized, high quality, value oriented] product offerings. Market
research [cite source] suggests that this market will [grow/shrink] to
[$x] by the year [200?]. We expect the niche in which we compete
to [grow/shrink/remain stagnant] during this time. The major forces
affecting this change will be [falling cost of computers, explosion of
home based businesses, tendency for baby boomers to have less
kids-and pamper their pets, whatever]. The are of greatest growth
within the industry will be [x].
[Company] is uniquely positioned to attend to this segment because
…
Target Market
i.
ii.
We define our target market as [x], [y], and [z].
Currently the market is shared by [a]
competitors.
Market segments and characteristics of those
segments
Customer Buying criteria
i.
ii.
Motivation to buy
Primary market research to suggest target
customers want product or service.
Market Penetration and Sales
Volume

For each channel, identify the target volumes
and assumptions over a five year period
Revenue Model: how the firm will
generate revenue
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Product sales model
Subscription fee model
Advertising revenue model
Transaction fee revenue model
Sources of revenue growth
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Increasing brand recognition
Intellectual property licensing
International expansion
Acquisition of other firms
Price increases
New product offerings
IV. Competitive Analysis

Key competitors
– Product, price, market share, location, promotion,
management, financial strength.

Industry analysis
– Barriers to entry, intensity of rivalry, buyer power,
supplier power, availability of substitutes.

Distinguishing qualities of company
V. Product and Services
A. Description of how it works. What needs are met.
Photos or drawings.
B. Product line plans
C. R&D
D. Production and delivery
1) Location
2) Build versus buy versus license decisions,
3) Facilities and logistics.
E. Packaging
F. Fulfillment
G. Service and Support
VI. Marketing and Sales
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Marketing Plan
Sales Strategy
Distribution Channels and Partners
Sales Cycle
Pricing Strategy
Marketing Communications

Sales Strategy
– Selling Methods
– Product Positioning

Distribution Channels and Partners
–
–
–
–

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Distributors
Direct Sales
Retailers
Corporate Sales
Sales Cycle
Pricing Strategy
– Product A
– Product B

Marketing Communications
–
–
–
–
–
–
Trade shows
Advertising
Press Releases
Conferences / Seminars
Internet Promotions
Direct Mail
VII. Financial Plan
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Highlights of financial statements
Revenue Sources
Funding requirements
How you intend to use Funds
Required Analysis:
– Profit and loss forecast
– Cash flow forecast
– Balance sheet

Supplemental analysis
– Ratio analysis
– Break-even analysis

Harvest plan
Some Overall Thoughts on the Financial
Section of the Plan

Financial projections are relatively unimportant
(Sahlman)
– Everyone knows they’re inaccurate:
– However, they take on more importance if the
fundamentals of the business model are well
established.
VIII. Risks and Milestones
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Critical risks: technological, market, execution
Potential mitigation of the risks
Performance milestones
IX. Appendices

Pro-forma financial reports
–
–
–
–
–
–
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Assumptions, trends, comparatives
Cash flow statements
Income statements
Balance sheets
Sources and uses of funds
Supplementary financial analysis
Resumes / Management Team Biographies
Testimonials
Patent applications
Description of primary data analysis
Contracts
Promotion literature
Competitive Profiles
Press Clippings
References
For what do you need financial
assumptions?

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Sales - when to begin, growth
Start-up costs
fixed and variables expenses
terms on accounts receivable, payable
inventory turnover
terms of financing
initial cash position
timing of key events
How to generate pro-forma
financials?
Beginning
balance
sheet
Income
statement
Cash flow
statement
Sales
forecast
Assumptions
Ending
balance
sheet
The
Cover
Page
VP
The Very Profitable Company
333 West St.
West Lafayette, IN 47906
765-463-2012
Fax (765) 494-9658
Jones@msn.com
Contact: Wayne Jones - CEO
The company was established in 2003
Like Coach Wooden –
Pay attention to detail
This (2nd) version of the plan was completed
September 2004
Plan #2.4
Some Considerations When Writing
the Business Plan
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How long should it be?
Where to start?
Who should write the plan?
What should the plan look like?
Should you have more than one version of the plan?
Should you seek the perspective of outsiders?
The impression continuum
Messy (poor organizational skills)
Over-organized (hiding lack of content)
Too short (glib)
Too long (unable to get to the point)
No pictures (lacking creativity)
Too many pictures (lacking discipline)
Too conservative (too bearish)
Too optimistic (unrealistic, naïve)
B&W faded photocopy (lacking marketing
skills)
Full color ad-like production (no self
control, too flashy or focused on
appearances)
the answer: tell the story &
keep it succinct!!!
Do’s and Don’t’s of Business Plans
Do … tell the story
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Make sure the business model resonates throughout the
plan
Make it a page turner …
Each section should lead to the next
Each business story must be told in a slightly different
way … do not follow a fixed formula
Edit with a sharp knife
Don’t … make common mistakes

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Beat the reader over the head with your point
Too much repetition & irrelevant information
Not enough information
Ignore risks
Ask for less money than is needed
Time’s Yours!