BUSINESS PLANS FOR
EQUITY INVESTORS &
BOOTSTRAPPING TO SURVIVE
Presented as part of “Climbing the Stairway to Heaven”
on 2/15/05 for the Venture Association of New Jersey
Randy Harmon,
Foundations Business Development Group
www.FoundationsBusiness.com
consultant with NJ Small Business Development Centers
of Rutgers Business School
Business Plan Article-www.njbiz.com/guide
I DID IT! I’VE GOT IT!
MAYBE I SHOULD GO INTO BUSINESS
-Science and technology based businesses are typically founded by
one or more technical professionals with little business experience
-They are vulnerable to overemphasizing the technology… If we build
it, they will come
-First step in considering launching a technology-based business is to
ask yourself: Who is going to care about this technology and why?
-What CUSTOMER problem am I going to solve, what unmet need
am I going to fill? Is it already being filled?
-Whose pain am I going to ease?
-Will they care enough to pay for my solution/product at a price at
which I can afford to make it available?
RESEARCH, RESEARCH, AND
MORE RESEARCH
-Preliminary market research including the industry you are in and
the industries you are targeting, customers, competitors, and
new technologies under development
-Determine approximately how much money you will need to
launch the business and carry it to the break-even point
 Begin thinking about where this money is going to come
from and the requirements for accessing this money
-Conduct a preliminary patent search to make sure that you are
not about to set out to reinvent someone else’s wheel
-Consider the legal aspects and implications of setting up a
business
-YOUR OBJECTIVE IS TO CONDUCT SUFFICIENTLY
DETAILED AND COMPREHENSIVE RESEARCH TO ENABLE
YOU TO COMPLETE A WRITTEN BUSINESS PLAN
MISSION STATEMENT
-What the company does, what business you
are in
-What industry you are in
-Customers and markets
-What the company aspires to become
-Maximum of 2-4 sentences
“WHERE’S THE BEEF?”
WHAT’S COMPELLING?
-What unmet need does this fill?
-Why is this important?
-Why will customers care?
-Why should investors care?
-Why you will be successful
ELEVATOR PITCH
-Networking is one of an entrepreneur’s most important
activities
-Typically a one minute description of the BUSINESS
OPPORTUNITY in LAYMAN’S terms
-No more than 15 seconds on the technology and product
-Entrepreneurs should also have a 10-15 second
networking pitch, which can be elaborated on if the
listener is interested
ELEVATOR PITCH
ADDRESS EACH POINT BELOW WITH 1 OR 2 SENTENCES AND
THEN COMBINE AND SELECT YOUR BEST 10-14:
-What the company does/what business you are in
-Who you do it to- customers and markets
-What the company aspires to become
-What unmet need/customer problem do you solve?
-Brief product/service description, 2 sentences max, non-technical
terms
-Why this is important/why customers will care/customer benefits
-Why should investors care/what is compelling?
-One or two exceptional milestones that demonstrate momentum is
building.
-What you are presently looking for (i.e. financing, guidance, team
members)
-Why you will be successful
BUSINESS PLAN
-The -FINAL EXAM test of the adequacy of your research
-One of the most important steps in preparing to launch a
new business
-Describes what a business does, where it is going, how
it is going to get there, and the resources it is going to
require
-It will only be as good as the depth and the quality of
your research
-Generally a prerequisite for formal debt and equity
investors
3 PURPOSES
-Extraction: Extracts, translates and expands upon an
idea for a company from the entrepreneur’s head
turning it into a written outline and roadmap for how
to run a business
-Most effective exercise you will go through
-Communication: Communicates business to
prospective advisors, management team members,
investors, strategic partners and employees
-Sales document
-Management: Effective management tool
-Serves as a benchmark
-Dynamic, living document
BUSINESS PLAN OUTLINE
-Executive Summary
-Company Description
-Market Analysis
-Product/Technology/ Service
-Competitive Analysis
-Marketing and Sales Plan
-Management and Operations
-Long Term Development and Risk Analysis
-Financial Plan
EXECUTIVE SUMMARY
-Most important component of plan
-Should convey the essence of your business IN LAYMAN’S
LANGUAGE and summarize the most important information
contained in each section of the plan
-Starts with the mission statement, what business are you in?
-Essentially an expansion of your elevator pitch
-Identifies how much money you are looking to raise, your planned
use of the funds, earnings projections and an exit strategy
-Typically read first by investors and bankers, screening tool
-Should arouse curiosity and be compelling
-You want to demonstrate through a few significant milestones that a
momentum is building
-Should be completed last and run no more than 2 to 3 pages in
length
A GOOD EXECUTIVE SUMMARY
AND BUSINESS PLAN ARE LIKE THE
FOUNDATION OF A BUILDING
-Build reader’s understanding of business
opportunity block by block
-Each block must be clear and succinct
-Must build upon and fit with one before it
-Must flow smoothly and be easy to read
-Readability, must be user friendly
OPPORTUNITY VERSUS RISK
-Equity financing is based upon the perception of
opportunity compared to the perception of risk
-Each word should be written to enhance the reader’s
perception of the business opportunity and minimize
the perception of risk
-Risk also increases because of what is lacking in a plan
-Re-read draft of the plan with risk awareness glasses
COMPANY DESCRIPTION
-Company founding (who, what, when, why?)
-Structure
-Compelling information about origins of company
-Current status
-Anticipated pathway to market entry and profitability
-Introduction to complex technologies and their
significance
MILESTONES
-Significant achievements to date
-You want to be able to demonstrate
that a momentum is building
-The number and significance of them
determines their placement in the plan
MARKET ANALYSIS
-Investors expect entrepreneurs to know
their markets at least as well as anyone
else and to demonstrate that
understanding in the Market, Competitive
Analysis and Marketing and Sales Plan
sections of the plan
-They like CEOs who know their
prospective customers and who can sell
-Tend to be worst written sections of plan
MARKET
-Identify, describe and quantify your market opportunity
-Bigger is better, but begin by targeting niches
-Discuss targeted markets including size, growth and
other trends, as well as how they are likely to be
impacted by economic trends
-Explain rationale for targeting niches and identify unmet
needs
-Demonstrate understanding of dynamics of how market
works including the buying and selling process and
who makes decisions
-Identify and discuss barriers to entry
-Profile your typical customer and best prospects
PRODUCT/TECHNOLOGY/SERVICE
-Describe
your product thoroughly in layman’s terms
-Define acronyms and scientific terms
-What benefits will it deliver to customers?
-What are its unique features?
-Focus on what makes this a compelling business
opportunity, not on how the technology works
-Include more robust technical discussion as warranted
as an attachment
-Discuss your intellectual property position
-New product pipeline
COMPETITIVE ANALYSIS
CREDIBILITY BUILDER OR KILLER
-Identify and discuss your competitors
-EVERY PRODUCT HAS COMPETITION
-At a minimum, your competition is NO SOLUTION
-What is the basis for competition? (technology, price, features,
quality, service, advertising)
-Competitors strengths and weaknesses
-What are your strengths and weaknesses compared to your
competitors?
-What is your competitive advantage and how sustainable is it?
-How may your competitors respond to your entry to the
market?
-Are there any developing technologies which could disrupt the
competitive field?
COMPETITIVE MATRIX
-Matrixes allow the presentation of lots
of information in a useable format
-X Axis-Critical evaluation criteria
-Y Axis-Key competitors or groups
COMPETITIVE MATRIX
Criteria 1
Price
Criteria 2
Speed
Criteria 3
Useful life
Competitor 1
$ 28,000
8 units/hr
7 years
Competitor 2
$ 37,000
10 units/hr
10 years
Competitor 3
$ 31,000
10 units/hr
8 years
You Inc.$ 33,000
12 units/hr
10 years
MARKET VALIDATION
-Sales
-Beta testing
-Business Partnerships
-Testimonies from prospective
customers and industry leaders
MARKETING AND SALES PLAN
HOW YOU WILL POSITION YOUR PRODUCT, SPREAD THE WORD
ABOUT IT, GET IT INTO THE HANDS OF YOUR CUSTOMERS AND
CLOSE THE SALE
-Pricing strategy including gross margins and how they compare with
competitors
-Marketing communications strategy and message
-Presentation of technical papers
-Public relations
-Advertising
-Exhibiting at trade shows
-How you will distribute your product
-Will you have your own sales force?
-Discuss market entry strategy beginning with first sale
-How you will maintain and increase market share
-Warrantees and customer service
SOONER OR LATER, MOST ENTREPRENEURS
WILL HAVE TO BUILD A MANAGEMENT TEAM
-Few people have or can develop all the skills required for a
successful technology-based business
-There is not going to be enough of you to go around
-Management, Management, Management
-Experience, Experience, Experience
-Equity investors invest in people, particularly teams of people,
at least as much as they do the business concept
-All venture capital backed businesses will have to build a
management team
-Entrepreneur’s dilemma
-Business consultants and advisory boards
-Creative teambuilding
-www.NJTC.org: joint venture mentoring program
“INSIDE TRACK” MENTORING PROGRAM
(PARTNERSHIP BETWEEN NJSBDC AND NJTC)
 Purpose: to provide early stage and emerging NJTC member
companies with the opportunity to discuss their plans, strategies
and important issues they are presently facing with experienced
venture development professionals

 Goal: is to provide companies with guidance and input to help
make sure that they are headed in the right direction, speed their
development, and improve their prospects for success.
 30 companies and 50 mentors participated in 2004 pilot
 Teams consisted of marketing professional, experienced
entrepreneur, investor, accountant and attorney
 90 minute session, follow on sessions
 -www.NJTC.org:
MANAGEMENT AND OPERATIONS
-Describe each team member’s responsibilities, training, strengths and
relevant prior experience
-Appropriate composition of the team depends on the stage of development
of the company and whether and how soon equity financing will be sought
-Discuss plans for rounding out an incomplete team
-Discuss advisors and significant outside resource organizations
-Identify the owners of the business
-Staffing plan
-How will the product be produced, packaged and delivered
-Facilities
-Equipment
-Discuss scale-up plans
LONG TERM DEVELOPMENT &
RISK ANALYSIS
-Describe
the long term development of your company, its
products and your exit strategy
-Identify risks both inherent in your venture and the
broader business environment and demonstrate that
you have a plan to address potential problems
-Universal truths of entrepreneurship
FINANCIAL ANALYSIS
-Introduce and discuss company’s revenue model including all
revenue streams included in the financial projections and
their scheduled start
-Discuss company’s current financial status?
-Capital requirements- both short and long term
-Use of funds
-Sources of funding (R&D grants, bank loans, equity, other)
-Source of repayment
-Projected net income and cash flow for the first 3 years
-Not worth the paper they’re written on
-Explanation of assumptions underlying projections
-Bottom up versus top down financial projections
-Break-even point
-Discuss financial ratios- are they in line with industry norms?
EXHIBITS
-SUPPORTING DOCUMENTATION
-Resumes
-Market research information
-Documentation of customer demand
-Supplemental technical discussions
-Product literature
-FINANCIAL
-Pro forma income statements
-Pro forma cash flow
-Pro forma balance sheets
-Break-Even Analysis
-Historical financial statements, if applicable
READY, SET,… STOP!
-Avoid approaching investors directly, get referred
-Avoid approaching investors too early
-Milestones
-Market validation
-Okay to approach early if you are reasonably certain
about your path to and timeline for market entry
DON’T COUNT ON OUTSIDE FINANCING
COMING OUT OF THE GATE
-Raising debt and equity financing is all about perceptions
of risk and opportunity
-Early stage and pre-sales companies are generally
perceived as too risky
-The further along you can develop the venture before
formal financing, the better your chances and the better
the terms
-Plan for the process of raising financing to take 36+months, if you are very fortunate
-BOOTSTRAPPING- Everything else that an
entrepreneur does to both raise and minimize the
resources needed to launch their business and carry it
through its early stages
BOOTSTRAPPING
-Cleaning out your personal savings or retirement accounts
-Home equity loans and second mortgages
-Credit cards
-Friends & family plan/4 Fs
-Research and development grants
-Strategic alliances
-Outsourcing activities requiring large up-front investments
-Purchasing used equipment
-Bartering your product/service for someone else’s
-Advances from professional service providers
-Suppliers
-Advance payments from customers
DOWNSIDE- There is often a trade-off between time and money and the
delay can sometimes be detrimental or fatal
SMALL BUSINESS INNOVATION
RESEARCH PROGRAM (SBIR)
-Largest Federal R&D
grants program targeted
to small business-nearly
$2 billion annually
-Best source of risk capital
-Pathway to equity
-All Federal agencies with
large external R&D
budgets participate
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Dept. of Agriculture
Dept. of Commerce
Dept. of Defense
Dept. of Education
Dept. of Energy
Dept. of Health and Human
Services (NIH)
Dept. of Homeland Security
Dept. of Transportation
Environmental Protection
Agency
NASA
Nat. Science Foundation
THREE PHASE PROGRAM
-Typically annual solicitations in which agencies
define areas in which they are interested in
sponsoring research
-Phase I- up to $100,000, runs 6 months
-Demonstrate technical/scientific merit and
feasibility
Phase II- up to $750,000, runs 2 years
-Continue research or R&D efforts
-Development of a prototype
Phase III- no new funding
-Commercialization of the technology
SMALL BUSINESS TECHNOLOGY
TRANSFER PROGRAM (STTR)
-Younger, poorer sister of SBIR program
-5 largest Federal Agencies participate
 Department of Defense
 NASA
 Department of Energy
 National Science Foundation
 Department of Health & Human Services
-.03% set aside
-3 Phase program similar to SBIR
-More faculty friendly-requires 30-60% of contract to go to a
collaboration with a nonprofit research organization
CLOSEST THING TO
FREE MONEY
-No loans, no equity
-Entrepreneur maintains ownership of the technology
-Good odds
 1 in 8 SBIR Phase I proposals are funded
 2 in 5 SBIR Phase II proposals are funded
 Odds presently even better for STTR
PATH TO EQUITY FINANCING
-SBIR/STTR provide up to $850,000 of
financing over a period of approximately 3
years to develop a technology and reduce its
technical risk.
-If a company simultaneously works to reduce
market and business risk it can become a
prospect for equity financing.
STRATEGIC ALLIANCES
BUSINESS PARTNERSHIPS
-You partner with another company to gain access to
resources that you need but don’t have
-For most young businesses this typically means partnering
with a larger, more established business
-More important than ever given current risk adverse venture
capital environment
-SPEED ENTRY TO MARKETPLACE AND REDUCE
REQUIRED FINANCING
-Loss of control
-Several Types
 Financing
 Marketing and sales
 Manufacturing
 Licensing
FINANCING
-Large companies may invest in smaller entrepreneurial
ventures to supplement or substitute for their own R&D
-Less risky and more cost effective means of accessing
cutting edge technology
-Strategic partners most likely to understand and
appreciate value
-Potentially more favorable terms of investment
MARKETING AND SALES
-Partner with a company selling similar but noncompeting products to your prospective customers
-No marketing/sales employees to recruit, hire and train;
no payroll
-Access to partner’s network of customer contacts
-The value to the larger company is that your product may
fill a gap in or extend their product line.
Downside: Less control, lower priority
MANUFACTURING
-Identify regional manufacturer
-Eliminates or defers costly equipment purchases
-No manufacturing employees to recruit, hire and train; no
payroll
Downside: Less control
LICENSING
-Transfer of rights to commercialize a technology, or an
application of a technology to another company in return
for financial consideration
-Typically some combination of up front cash, consulting
contract, milestone payments and longer term royalty
payments
-There is typically a tradeoff
-Particularly useful for first application of a platform
technology or the first technology of a company with
multiple technologies
-Use cash and validation generated from the license to
commercialize other applications and build a company
Downside: Lower rate of return, loss of control, time lag
before royalty payments flow
MUST BE PREPARED
-Entrepreneurs often approach prospective partners too
early
-A good idea won’t be enough, strategic partners will
want to see many of the same milestone
achievements that equity investors look for
-Typically will want to see at least a prototype and often
some testing and market validation
NJ SMALL BUSINESS DEVELOPMENT CENTERS
(NJSBDC)
OF RUTGERS BUSINESS SCHOOL
-Part of a national public, private and academic partnership
-Free business counseling, consulting, and affordable business
training
-Funded in part by the U.S. Small Business Administration and the NJ
Commerce and Economic Growth Commission
-11 regional centers and 26 satellite offices across NJ
-More than 250,000 small business owners, prospective
entrepreneurs and business professionals served since 1979
-Serve businesses from pre-startup stage to those with 500
employees
-Specialty programs in international trade, government procurement,
manufacturing, E-business, & technology commercialization
NJ SMALL BUSINESS DEVELOPMENT
CENTERS (NJSBDC)
Services include help with:
-Business plans
-Marketing plans
-Financial statements
-Loan packages
-Record keeping
-Taxes
-E-commerce
NJSBDC Web Site: www.NJSBDC.com
SBA Web site: www.sba.gov
RUTGERS RESOURCES
-NJSBDC DIRECTOR OF E-BUSINESS
 Reviews and evaluations of small business web sites
 Nat Bender 973-353-1924
-RUTGERS INTERFUNCTIONAL TEAM CONSULTING
PROGRAM
 2 semester business development projects
 Teams of 5-7 second year MBA students
 Business plans, market research, marketing plans
 January, May and September start dates
 Paul Belliveau- 973-353-1126
NEW JERSEY INCUBATORS
-10 public incubators, www.state.nj.us/scitech
-Lease office and light manufacturing space and wet labs
-Targeted to start-ups and graduates of an entrepreneur’s home
-Rents typically at or slightly below commercial rates
-Shared administrative support services
-Free on site management assistance services
-Access to a network of volunteer business professionals
-Referrals to business resources and education and networking
events
-Supportive environment
-Visibility and credibility
-Objective is to build the business to the point where it is increasing
sales, generating new jobs, and ready to graduate to larger
commercial space within three years
LESSONS LEARNED
-Market entry takes more time and costs more than planned
-The better and more comprehensive your planning, the
better your chances for success, minimize your surprises
-Reader should know after the first sentence what the
company does.
-A great technology may not be good enough, Thou shalt
know thy markets and customers and their needs
-Layman’s terms, Don’t make reader work hard to understand
the technology and the business opportunity
-Differentiate yourself from your competitors in a way that
provides the perception of value to your prospective
customers, and that you can sustain over time
LESSONS LEARNED
-First business hire or advisor should usually be a marketing
and sales professional who knows your markets
-Demonstrate that momentum is building and validate market
demand before approaching venture capitalists
-Venture capitalists will expect you to understand your
markets and customers at least as well as anyone
-Management, management, management
-Develop a bootstrapping strategy which you can fall back on
-Develop your venture as far as you can before quitting day
job
-Network
-If the reader is not EXCITED by the end of the executive
summary, you have lost them