Research Paper
It details the contents, scope, and structure of a business plan and the expectations venture capitalists have hen reading one, and provides valuable pointers on starting up a company. The Guide is not intended as a business studies resource nor is it a theoretical treatise on the nature of business plans per SE. Rather, it offers practical tips to help you get started setting up your company. Naturally, there is no guarantee that all aspects of this Guide will be relevant to your particular company or that all topics relevant to your company will be covered.
The ” Key questions” about the main elements of a business plan make no claim to completeness; those questions not relevant to your specific business plan need not be answered. If you are reading this Guide because you have a business idea you want to transform into a successful company, we offer you a word of encouragement: Make the most of this opportunity! McKinney & Company, Inc. 3 1. The Route from Concept to Company New, innovative companies generally try to grow from a Startup into an established company within five years.
But they can seldom finance their activities alone along the way. Rather, they are dependent on professional investors with considerable financial clout. For entrepreneurs, financing is an existential question – the business plan must thus be viewed from the point f view of potential investors right from the outset. 1. 1 Success factors Successful companies arise from a combination of five elements (exhibit 1). 1. No business concept, no business. Having an idea is just the beginning of the creative process.
Many entrepreneurs are initially infatuated with their inspiration, losing sight of the fact that their idea is the point of departure for a long process of development which must face – and withstand – tough challenges before it can enjoy financing and market success as a mature business concept. 2. Money matters. Without finding somebody who invests money into rowing the idea into a viable business, this business will never become a reality. Therefore, from early on a lot of attention has to be put on convincing investors to provide the necessary funding. 3. No entrepreneurs, no enterprise.
Growing new firms is not a one-person job. It can only succeed with a team of, usually, three to five entrepreneurs whose talents 4 are complementary. Putting together well-functioning teams is known to be a difficult process, taking time, energy and an understanding of human nature. Do not lose any time in putting your team together, and work on perfecting it throughout the entire startup process. The characteristics of a high- performance management team are discussed in more detail in section 5. 3 of this Guide. 4. Traditional service providers will help you clear the first hurdles.
You will often need the advice of professional service providers such as patent lancers, tax advisors, and market researchers, especially at the beginning. Getting the right information early, e. G. , for registering a patent, can have consequences for later success or failure. 5. Strong networks are a “shot in the arm” for every new company. Professional guidance of potential entrepreneurs by means of a network of on-material sponsors, entrepreneurs, venture capitalists, and service providers is decisive in making viable ideas into real companies. Prime examples for such regional networks can be found in Silicon Valley and the Boston area. . 2 Stages of development The typical progression of the startup and development Of growing companies into established firms can be subdivided into three stages. The end of each stage serves as a milestone for venture capitalists by which to gauge the status of their investment. Being familiar with each stage and the challenges it poses may spare you wasted energy and disappointment. Please note, however, that the three stages in the development of a functioning startup do not match the three phases in the development of a business plan within the framework of this competition (see exhibit 2).
If you intend to be successful, this startup process should influence both your activities as the initiator of a business concept and your path toward forming your own company. To a large extent, it is the demands of investors that will determine how you must approach the individual stages Of the startup. Stage 1: Business idea generation. In the beginning is the inspiration – your elution to a problem. It must be evaluated to determine if it delivers an actual customer value, whether the market is big enough, and just how big it will be. The idea itself has no intrinsic economic value.
It acquires economic value only after it has been successfully transformed into a concept with a plan and implemented. You will need to start putting together your team as soon as possible, and finding partners who can develop your product or service until it is ready for market (or at least until shortly before). In the case of products, this usually involves a functioning prototype. You will most likely eave to do without venture capital during this stage. You will still be financing your plan with your own money, help from friends, 5 perhaps state research subsidies, contributions from foundations or other grants.
Investors refer to this as “seed money,” as your idea is still a seedling, not yet exposed to the harsh climate of competition. Your objective at this stage is to present your business concept and market which forms the foundation of your new company – so clearly and concisely as to pique the interest of potential investors in helping you cultivate your idea further. Stage 2: Business plan preparation. At this stage, it is most important to focus on the big picture: don’t lose sight of the forest for the trees!
The business plan itself will help you do this as you must consider and weigh the risks involved, prepare for any contingency, learn to anticipate a variety of possible situations or “scenarios. ” You will need to lay down plans and create a budget for the key activities of the business – for development, production, marketing distribution and finance. Naturally, you will need to make many decisions, such as which customers or segments will you target? What price will you ask for your product or service? What is the best location for your business?
Will you handle production yourself or outsource it to third parties? And so on. In preparing the business plan you will come in contact with many people outside your startup team. In addition to investors, you will talk to many specialists: attorneys, tax advisors, experienced entrepreneurs, ad experts. The business plan competition organizers will help you get in touch with just the right people. You will also have to begin reaching out to your potential customers, I. E. , by means of consumer surveys, to make initial assessments of your market.
Always keep in mind that customer acceptance is an essential prerequisite to the success of your company! Seek out about possible suppliers and perhaps close your first agreements. You will also want to become aware of who your competitors are. This whole process will not come cheap. The team must earn a living you must run a rudimentary operation, and perfect a prototype. Yet at this stage, you should also be able to estimate your expenses. Financing will generally still be provided from the same sources you relied on during stage one, although some investors may be willing to make the occasional advance.
This stage concludes successfully for you as a new entrepreneur when an investor expresses a willingness to finance your undertaking. Stage 3: Startup and growth. Now that the conceptual work is largely complete, it is time to start implementing your business plan. Your role now changes from that of architect to that of builder. Business success must now be sought and achieved on the market. The day Of reckoning has come when you will learn whether your business concept was a good and ultimately profitable one. Investor exit en route to becoming an established company.
The pull-out of our initial investors is a completely normal step in the development of a startup, for if everything has gone well, your risky venture will have gradually become a stable enterprise (see exhibit 3). In the course of its short life, you have created a number of jobs, and wooed many customers with your innovative solution to their problem. Your commitment is paying off as the value of your business increases. A profitable exit has been the objective for the venture capitalist from the outset. Capital recovery can happen in very different ways.
Normally, the business is sold to a competitor, supplier, or customer, for instance, or it is listed on the stock exchange (the “initial public offering” or PIP). It is also possible for investors who want out to be paid off by the other partners. 7 2. The Business Idea “There is nothing in the world as powerful as an idea whose time has come. ” Victor Hugo The above statement undoubtedly applies to ideas for starting a new business. But how do you come up with such an idea? And how can you know if the idea for the business will have a promising future?
Studies show that the lion’s share of original and successful business ideas ere generated by people who had already had several years of relevant experience. Gordon Moore and Robert Nonce, for example, had a number of years behind them at Fairchild Semiconductors before teaming up with Andy Grove to form Intel. But there are also examples Of revolutionary ideas brought to life by mere novices, as Steve Jobs and Steve Woozier demonstrated when they dropped out of university to start Apple. In economic terms, a spark of genius is worthless, no matter how brilliant it may be.
For an idea to grow into a mature business concept, it must be developed and refined, usually by many different people. The initial idea must first pass a quick plausibility check. Before you follow up on an idea, you should evaluate it in light of its (1 ) customer value and (2) market chances and its (3) degree of innovation, as well as considering whether it will be both (4) feasible and profitable. ; Talk your idea over with friends, professors, experts, and potential customers. The broader the support you find for your idea, the better you will be able to describe its benefits and market opportunities.
You will then be well prepared when it comes time to discuss your project with professional investors. Is your idea really novel? Has someone else already developed it or even applied to patent it? ; Will it be possible to develop your idea in a reasonable period of time and with a justifiable level resources? It takes at least four weeks to develop a business idea. In light of the multiple stages of development, it is improbable -? and fairly unrealistic -? that you will spend fewer than four weeks developing your concept.
Generally, a business idea is not worthy of being financed until it is so concrete that it can be launched on the market in the foreseeable future at reasonable risk. Investors talk of the “seed hash” of a business concept, which usually has to be financed with “soft” money, I. E. , from sources that as yet place no hard and fast demands on the success of the idea. The seed phase can take longer, in particular if the idea is ahead of its time. Although the perfect product has been found, it cannot yet be marketed because the development of complementary technologies or systems is still in the works.
One example is the Internet. The ideas for marketing products and services came early, but a lack of security in the available payment systems hampered and delayed its commercial exploitation for some time. . 2 Elements off promising business idea A business idea can be considered promising if it has the following four elements (exhibit 4): 1. Clear customer value The key to success in the marketplace is satisfied customers, not great products. Customers spend their hard-earned money to meet a need or solve a problem.
The first principle for developing a successful business idea is thus that it clearly shows which need it will fulfill and how it will do so. Initially, many entrepreneurs have the product and the technical details of design and manufacture in mind when they speak of their solution. Not so he investor – the investor first looks at the idea from the perspective of the market. For investors, customer value takes top priority, and everything else is secondary. What’s the difference? If innovators say, “Our new device can perform 200 operations per minute,” or “Our new device has 25% fewer parts,” they are focusing on the product. By contrast, saying, “Our new device will save the customer a quarter of the time and therefore 20% of the costs,” or “Our new solution can boost productivity by up to 25%,” adopts the customer’s point view. The product is merely a means of delivering value to customers. The customer value of a product or service expresses what is novel or better about the item when compared to competitive offers or alternative solutions. As such, it plays a key role in setting your product apart from others – a core issue in marketing, as we will learn – and is essential to the market success of your business concept.
Try, whenever possible, to also express the customer value in figures if you can. Marketing theory states that the customer value must be formulated into a unique selling proposition or JSP. This means two things: first, your business concept must be presented in a way that makes sense (selling proposition) to he customer. Many startups fail because the customer does not understand the advantage of using the product or service and thus does not buy it. Second, your product must be unique. Consumers shouldn’t choose just any solution that hits the market – they should choose yours.
You must therefore persuade them that your product offers a greater benefit or added value. Only then will your customers give you an edge. In describing your business concept, you need not present a fully formulated LISP, but it should be more or less obvious to potential investors. 2. Market of adequate size A business idea will have economic value only when it succeeds in the market. This second principle of a successful idea is that it demonstrates how big the market is for the product offered, which target group(s) it is designed for and to what degree it will differ from the competition.
A detailed analysis of the market is not yet necessary at this point. Estimates, deriving from verifiable basic data, will suffice. Sources could include official statistics, information from associations, articles in trade journals, the trade press and the Internet. It should be possible to draw a reasonable conclusion bout the size Of the target market from this base data. It is sufficient for you to summarize the results of this investigation in your presentation of the business idea. The same is true for your target customers; you will need only a loose definition of who they will be.
Describe why your business idea will offer a special value to this group in particular, and why this group is financially the most interesting to you. You will always face competition – both direct, from companies that offer a similar product and indirect, from substitute products that can also fulfill the customer’s need. A noodle manufacturer competes not only with other noodle manufacturers, but also with rice and potato producers and bakeries in particular and, more generally, with all other foodstuffs as well.
Your business idea will need to 10 demonstrate that you have understood who your competitors are. Name them – and describe why and how you can take the lead with your business idea. 3. Sufficient degree of innovation Business ideas can be classified along the two dimension products/services and business system. In each of these categories, you can develop something new or capitalize on something that already exists. Simplified, a business system is a way of understanding how a product or service is developed, manufactured, and marketed (see exhibit 5).
The term innovation is generally used in the context of new products which are made with conventional production methods and delivered to the customer through existing distribution channels. Microsoft, for instance, developed DOS, making use of the IBM sales organization to bring it to the market. Innovations in the business system are less obvious but just as important. The success of Dell is attributed to significant cost savings thanks to a new arm of direct distribution and a novel production process in which a computer is produced only after it is ordered, and in the shortest possible time frame.
In developing new products, improvement of the multi-layered dimension “customer value” is at the forefront while innovations in the business system are targeted at lower costs and faster processes, savings which can then be passed on to the customer in the form of lower prices. It is rare that both types of innovation – in product and business system – can be combined to create a completely new industry. Netscape contributed significantly to the success of the World Wide Web by distributing its new browser over the Internet free of charge.
In doing so, Netscape passed up initial sales revenues but, through 11 the increased number of visitors to its website, succeeded in raising advertising revenues. 12 4. Feasibility and profitability Finally, to arrive at an actual startup, the feasibility of the business idea must be assessed. In addition to specific factors that could make the project unfeasible (e. G. Legal considerations, standards), the assessment may include the time and resources needed to carry out the project. The construction of hotels on the moon may be technically feasible, for example, but their cost- benefit ratio is unreasonable.
Interwoven with the feasibility criterion is profitability. A company must be able to generate profit over the long term. This fourth element of a successful business idea should thus indicate how much money can be made and how. Traditionally, profit calculations for a business are made as follows: a company buys material or services, thereby incurring costs. It also sells products or services to customers, thereby earning revenues. If your business allows this pattern, it is not necessary to provide any greater detail in the description of your idea.
Do, however, make rough estimates of anticipated expenses and profits. One rule of thumb for growing companies is that the startup phase should generate gross profits (revenues minus direct product costs) of to 50%. But many businesses do not function according to this traditional model. McDonald’s, for example, earns its money from the licensing fees it charges franchisers. The restaurant owner pays McDonald’s for the name and the way the restaurant is run. If your business idea is based on this kind of innovation n profit generation, you should detail it in your business idea.
