Business Plan Preparation Frank Moyes Leeds College of Business University of Colorado Boulder, Colorado Financial Plans

Tonight Financial Plan Customer acquisition costs In the Fire – preliminary Customer Survey results Team meetings Financial Plans

Next Week In the Fire - Marketing plan Hand-in: Prepare 6 slides 10 minutes 2 marketing experts Hand-in: Marketing Plan - draft Customer surveys & summary of results Financial Plans

Marketing Plan Outline Customer Research Target Market Strategy Channel Strategy Positioning Product/Service Strategy Pricing Strategy E-commerce Communications Strategy Sales Strategy Revenue Model Financial Plans

Business Plan Elements Executive Summary Company Overview Product or Service Description Industry and Marketplace Analysis Marketing Plan Operations Plan Development Plan Management Financial Plan Offering, Funding Requirements, Valuation Financial Plans

Financial Plan Financial Projections Key Assumptions Business Risks Financial Plans

Business Plan Perspective “People write-up their business plan with a top-down mentality. They invariably talk about a particular vertical market that has X billions of dollars in sales each year. They’ll tell us that they can get 10% of that market. But when we ask them for the average sale or the cost of customer acquisition, the answer almost always is “I’ll get back to you.” Dan Beldy, Hummer Winblad Venture Partners Financial Plans

Financial Projections Income Statement By years for 5 years By months for years 1-2 & by quarters for years 3-5 Balance Sheet by years for 5 years Cash Flow By months for years 1-2 and by quarters for years 3-5 Break-even Analysis Financial Plans

Focus Your Attention On Revenue Model Cost of Revenue Operating Expenses Personnel Extraordinary income & expense Taxes Property & Equipment Working Capital Funding Step 5 says Timeline, Switch with Step 6 Financial Plans

Financial Assumptions Describe ~ 5 assumptions critical to success of your business Revenue model, e.g. prices, market share, new products Margins Operating Expenses – key expenditures Sales & Marketing, R & D and General & Administrative Capital Expenditures Working Capital – Accounts Receivable, Inventory & Accounts Payable Funding Do not be resource constrained at the beginning Financial Plans

Common Weaknesses Profitability Assets & Liabilities Gross margins are too high Operating expenses are too low Assets & Liabilities Working Capital must be based on industry Fixed Assets & Capital Expenditures not addressed Seasonality not addressed Growth not anticipated Financial Plans

Risks I What major risks does the venture face? How mitigate? What can go wrong? What must go right How mitigate? Financial Plans

Risks II Market Strategic - establishing strategic partnerships Size of market Competitor’s response Sales cycle Closing window (12 VC funded companies) Strategic - establishing strategic partnerships Operational - large number of interrelated components airlines, toothpaste (Tom’s of Maine) ; government Financial Plans

Risks III Technology Financial Macro-economic Will it work Time and cost to development Scalability Financial Risk/return Dilution Macro-economic Volatile industry Government approval Exchange rates Financial Plans

Financial Plan Section Financial Projections Summary goes in Plan All Financial Statements go in Appendix Assumptions ~5 key assumptions go in Plan Detailed assumptions go in Appendix Business Risks Financial Plans

Break-even Financial Plans

Summary of Financial Projections Financial Plans

Customer Acquisition Costs Costs to Get a Customer Number of Customers Costs to get a customer Sales salaries & commissions Advertising & promotion Customer & tech support Website Travel & entertainment Number of customers Financial Plans

Financial Drivers Location – lease cost & traffic Banner ad click throughs Market share Unit cost objective Revenues per store, per employee Minimum number of customers per day Capital expenditure Financial Plans

Financial Driver Examples Grateful Dead Commercial Bank Paintball business Pig farm Semiconductor company Software company Catalog business Response rate Financial Plans

Business Plan Perspective Business Plan Perspective “Entrepreneurs have got to display a clearly articulated vision for what they want to do. And they must tell their story from the bottom up. A bottom-up approach means that they know with absolute certainty whom they’ll sell to, how much it will cost, and what the sales per week will be next March. Sure, a lot of assumptions are involved, but entrepreneurs need to break their business down to the molecular level. That information leads logically to the next step which is saying to an investor, ‘I am going to take this money and do X, Y, and Z with it and here’s what will happen in the end.’ Your survival depends on knowing that stuff cold.” Dan Beldy, Hummer Winblad Venture Partners Financial Plans

Critical Mistakes I “Let’s go smoke something” “These trees sure are pretty” “We can get orders in a month” Sales cycle No one knows you “We can whip this puppy out in 6 months” Development time-line longer More expensive “Look at how much they spend on marketing! We won’t have to spend that much” Smoke: virus- reason disappears Trees: get caught in the detail Sales time to get orders need to revise product or service Hi growth effects Financial Plans

Critical Mistakes II “Sure, operating expenses are high at the beginning, but then they will go down.” Operating expenses don’t decline Salaries must be realistic Growth requires spending money “ “We’ll lean on our suppliers and not pay them for 90 days.” “Our customer will pay us in 30 days.” Development Rapid prototyping Flexible Product Development Growth: requires investment in systems Funding: on-going process day you close one round is the day you start the next Full time Find investors Negotiate Term Sheet Due diligence Sign agreement Financial Plans

Financial Dynamics Who does the financial projections? Financial Dynamics Who does the financial projections? Should my projections be optimistic or pessimistic? Investor questions Questions Why does GP increase from 45% to 52% in yr 2? If we reduce the investment in year 3 from $3KK to $1KK? OR, increase from $3KK to $5KK? Optimism vs Pessimism Investors VC's want size Angels want to be involved & a return Friends and Family want you to succeed Hostage to fortune VIDEO show Financial Plans