Having prepared a good business plan before starting your venture can often be the difference between startup success and failure. I am not saying you need a 50 page detailed report, as investors don’t typically have the time to read them anymore. But, it is more about taking the time to think through the below 6 key components of a preparing a business plan, to make sure you know what you are up against in your industry and have reasonable foresight into where the business is heading in terms of go-to-market strategies and financial returns for the company and its investors.
1. Industry & Competition
To me, this is the most critical research that needs to be done upfront. How large is your industry? Who are the key competitors? How quickly is the industry growing? Are you a first mover, or entering a crowded space? What share of the market is reasonable to capture for your business? Investors like to invest in large, growing markets as a first mover with limited competition where a business can scale up to 10-20% share. So, pitching them the “next Google search engine” is a very large market opportunity, but would be very difficult to build with large, well capitalized competitors in the search space that would aggressively defend their turf. On the flip side, pitching them the newest patentable innovation in door hinges may be perceived as less competitive and disruptive in the marketplace, but the market is really small to build material scale. You need that right intersection of large market opportunity, disruptive/defensible business and limited competition.
2. Business/Revenue Model
Now that you have found your ripe industry opportunity, what kind of business are you building? A hardware solution? An installed software solution? Software as a service? And, more importantly, how are you going to make money? One time purchase? Recurring monthly revenues? Heavy repeat usage? Where are your prices vs. competitors? What value are you bringing vs. current solutions in the market? Investors obviously prefer large and recurring revenue streams for disruptive businesses that bring terrific value to their customers.
3. Sales & Marketing Plan
The next step is figuring out your go-to-market strategy? Does the product appeal to business clients (B2B) or consumers (B2C)? Is it dependent on building a big team of salespeople? Does it require a heavy investment in consumer marketing? If marketing, is it going to be driven by the search engines online or direct mailers or trade shows? Does it require any social media or viral elements for success? Typically, sales-driven B2B business are cheaper to launch than marketing-driven B2C businesses. But, seed stage B2B businesses are sometimes harder to get investor interest, as they have a much longer sales cycle (e.g., read longer cash burn) and it is very difficult for a startup to break open new B2B relationships, especially one going after large corporations. And, B2C businesses that can be virally grown online, are much preferred to ones requiring heavy investment in expensive TV, radio or print (which frankly you should never use to launch a business until the concept is proven out, given their heavy expense and long-term branding aspects of such media). And, in all cases, make sure the marketing or sales investment makes sense for the scale of revenues you are trying to build (e.g., is there a reasonable customer cost of acquisition metric compared to traditional industry norms). As a high level rule, shoot to keep your cost of acquisition per customer below the 20-30% of revenues range, and shoot for lifetime value of customer revenues in the 8-10x your initial cost of acquisition. Obviously, each company and industry has its specific nuances, where there are exceptions to the rule.
4. Management Team
To me, this is the most important element to any business. I would rather have an A+ management team in a B+ industry, than a B+ management team in an A+ industry. You want a team that has “been there and done that” before in a start-up environment, and will not be experimenting and learning with your limited startup capital. Please re-read my previous post for more details on how to build a team for your startup in a way that will most appeal to investors.
5. Cash Requirements
Sales and marketing investment will drive revenues. Revenues will have a cost of sales. And the business will have overhead and other employee costs. That will determine how much of an operating loss you will need to fund. On top of that, will be any capital expenditures that need to be put into R&D for your product, capex for your office or whatever. So, fully think through your cash requirements before approaching an investor. And, two words of wisdom: (i) investors prefer lower burn rate, lower cash need businesses (so a $1MM need has a better chance than a $10MM need); and (ii) whatever the model says you need, double it for your cash raise (as things ultimately go wrong and you will want a cushion in place, to prevent going back to investors looking for more later–most likely at worse terms).
6. Investor Requirements/ROI
The last component is a sanity check more than anything else. Over the next five years, will the investor (and you) realize a 3x return or a 10x return on their investment? And, there are two drivers of that: (i) the scale of the revenues/profits in that period; and (ii) the valuation at which the investor invested their money, compared to the estimated valuation five years from now. Obviously, investors are looking for 10x+ opportunities, given the 1,000 competitive business plans they get exposed to each year, so make sure your financial model gives them a reasonable chance to achieve such, either via scale or equity return.
Be sure to read my companion piece, Market Research for Startups, to tackle step one in this process.
George Deeb is a serial entrepreneur and growth consultant at Red Rocket Ventures, and author of “101 Startup Lessons–An Entrepreneur’s Handbook”.
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