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©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 3 Learning Objectives How and why business plans of new ventures are different What to include and what to leave out Relationship to strategic planning Using milestones and financial projections Signaling the entrepreneur’s beliefs, commitment, and capabilities Facilitating negotiation with outside investors Tailoring plans to the needs of specific investors Due diligence

©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 3 What Is a Business Plan? A written document Summarizes purpose and overriding strategy of the venture Details on operation, financing, marketing, and management A set of hypotheses about an opportunity

©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 3 Your business plan should answer three questions 1. Is there really an opportunity to serve an important customer need or want? 2. Do the numbers work out favorably? 3. Does the opportunity really match your personal goals and values, and will you have the abilities and resources required to exploit the opportunity?

©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 3 What Makes the Business Plans of New Ventures Different? Forecasts and projections are usually less precise. A greater investment in planning may be warranted. Deviations from plans are likely to be due to wrong assumptions. Not very useful for evaluation of manager performance. More likely to be relied on externally. More likely to be used to attract investment capital. Often require greater breadth of coverage. Unconstrained by previous decisions.

©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 3 Do the Planning Before the Writing Preparing a business plan is not the first step. The plan can commit the entrepreneur to an undesirable strategy. Consider aspects of strategy simultaneously, not sequentially. Do not lose sight of the objective. Analysis of strategic alternatives does not belong in the business plan. Be prepared to respond to alternative proposals.

©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 3 What capital providers like: 1. A clear definition of the business (mission) –What problem/need does it meet? 2. Evidence of marketing capability –How will the business add significant value for the benefit of the consumer? 3. Evidence of management capability. –Is the opportunity a good fit with the founders? 4. An attractive financial arrangement. –Is there a robust market / margin / money-making potential?

©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 3 What they don’t like: Obsession with product Unrealistic financial projections Inability to come to terms with the details Failure to deal with potential critical risks A “prepackaged” plan or fill in the blanks

©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 3 Alternative Product Market and Financing Choices

©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 3 Contents of the Business Plan Focus on the purpose(s) and uses of the plan. Make certain the audience is neither overloaded nor left to speculate. Identify the key assumptions as assumptions. – Include the support for key assumptions. Highlight the critical elements for success or failure. Delineate milestones so users can evaluate success, modify assumptions, expectations, or strategy. Include financial projections to test the plan, commit the entrepreneur, facilitate negotiation.

©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 3 Outline of a Typical Business Plan Executive Summary I.Background and Purpose of Venture II.Market Analysis III.Products and Services IV.Development, Production, and Operations V.Organization and Management VI.Ownership and Control VII.Financial Information

©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 3 Business Plan Outline Cover Page Executive Summary Mission Statement Business Description Management Market Served Competition Product or Service Selling Organization Personnel Financial Data –Start-up costs –Cash Flow Analysis Financing Plan Investment Returns Design and Development Manufacturing and Operations Appendices

©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 3 Making the Business Plan Credible Demonstrate understanding of the technology, market, risks, needs, and potential rewards. Provide evidence of the quality and capabilities of people involved, and that they can function effectively as a team. Provide evidence that key personnel are committed: –Bonding –Reputation –Certification

©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 3 “C’s” The Day Character. What do you bring personally to the business. –Commitment –Creativity What is special about your product/service –Credit –Competency –Courtesy

©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 3 “C’s” The Day Cash. Generally, the bank is going to require borrower to have equity investment of one-third. –Cash for Start-up –Cash-In Accuracy of Revenue Streams –Cash-Out Costs

©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 3 “C’s” The Day Collateral. What the bank will request a right to in event of loan default. –Capital Investment Property Equipment Inventory Land Vehicles –Contracts

©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 3 “C’s” The Day –Competition –Customers –Critical Workers –Contracts –Conditional Planning –Controls –Capacity Conditions. How will the following affect the proposed business?

©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 3 The Issue of Confidentiality Protecting intellectual property Preemption and first-mover advantage Using non-disclosure agreements Relying on reputation

©2003, Entrepreneurial Finance, Smith and Kiholm SmithChapter 3 Financial Aspects of the Business Plan Differing views on what to include Is the future too uncertain to warrant careful forecasting? In the plan, or as an appendix The importance of supporting assumptions Relationship of projections to contract negotiation The value of quantifying risk Value as a diagnostic tool - to facilitate adaptation Updating the business plan