My friend Kasim and I went out to have lunch with one of my MIT classmates (Class of 1928) and look at his business plan and pitch to investors. As the startup company is located right next to an airport, we decided to fly there in a helicopter. Kasim took off from Bedford, put on a hood, flew an ILS 5 at Lawrence, glide slope out of service, simulated GPS failure, on the missed got vectors to the VOR 23 (asked ATC to identify the final approach fix, continuing our simulated GPS failure), and on the missed from that got a full approach into our destination airport. I had Kasim maintain the approach altitude and initiate an autorotation while still under the hood (pretty simple if you simply maintain attitude). We burned up just 2 hours of helicopter time for what would have been an agonizingly uncomfortable 30 minutes of round-trip driving (plus another hour to preflight, push out, shut down, push back into the hangar).
I found that the 40 or so pages of plan/pitch documents did not answer any of the questions that I had about the business, which is centered around an Internet application. Most had been written by a VP at a Fortune 100 company (and had the errors in grammar, usage, spelling, and punctuation to prove it).
This got me thinking about how I’d like to see a business plan targeted at investors to read. I said “Why can’t you show me all of the ways that your product creates value for people. Then, for each value that is generated, show me how you can turn some of that into revenue. Obviously you can’t capture 100 percent of the value that you generate because there would be no consumer surplus, but you can probably capture some. And if you’re not generating value to begin with, you won’t be able to get any revenue at all.”
What do folks think? Is this a good way to organize a business plan/pitch for a startup company? Until I’ve seen the value generation and potential revenue story, I’m not really interested in the details, such as who is going to be hired and at what salary and in what role. Nor am I interested in multi-year projections because if I liked fantasy I could mug a child coming out of the public library and steal his Harry Potter books. Let’s say the value/revenue summary takes up 7-10 pages. If an investor likes that, he or she might ask for a more traditional plan.
[Update: I discovered this useful business plan methodology, written by Cesar Brea, who used to be a management consultant at Bain.]
I agree that it’s a good way to present it. Any way that gets the investment is a good way, and clearly this is what is (should be) important to investors. My question is: How did it ever get to be what it is now?
As for financials, I prefer to see the five year break-even cash flows. Don’t show me made-up revenues and users and customers. Show me the minimum you have to make or borrow every month to keep the lights on.
I usually look for three critical elements in a business plan.
A) A good money-making story. This means showing some market opportunity (gap/niche/cost advantage, whatever). And then making the value/revenue argument you mentioned above .
B) The People. Do I trust the entrepreneur(s) to be successful? Do they have the right stuff: skills, experience, character, motivation, commitment, attitude, and mind-set? Do they know about their own shortcomings? Not yet interested in the hired guns at this point.
C) The Implementation Plan. Show that the entrepreneurs have an implementation plan. I am not necessarily interested in the intricate details of the plan. But I want to see that they have thought about the problem, that there is a plan, and that it is not complete nonsense (which is often the case, sadly).
There should be a one-page summary. The plan itself can be anywhere between 5 and 25 pages for a small startup, maybe 40 pages in complicated situations. The amount of information should be tailored to the target audience (banks, venture capitalists, private investors, suppliers, etc). It should provide the back story for the three points above. Make it as simple as possible, but not simpler (Einstein).
Unfortunately, in my own experience, 80-90% of business plans for small start-ups are in desperate need of improvement.
Rene
Class of 1928? Gee, for a 100+ year old man to be starting a business, that’s something. B^) You must mean 1982, right?
If the venture is truly new and innovative, I don’t see how it is possible to have 40 pages of substantiating information. A 2-3 page executive summary, following by some details should suffice. I certainly agree with Dick that the emphasis should be on profitability, not simply revenue growth. The other missing element of many business plans is ability to defend a position. A well financed, innovative idea is certain to have knock-offs, both high and low.
rglovejoy: I did mean to write 1928 as a joke for my younger readers (“You had servers back then without virtualization?!?). I’m getting senile so didn’t realize that it could look like a transposition error (since I was in fact Class of 1982).
An interesting final project for some MBA student would be to survey a broad range of companies, to see how real numbers compare to those projected in original business plans.
I concur with Rene S – the one page summary should lay out the points that you mention. As with any manuscript (and remember, the business plan you’re holding in your hand is just that) you have to hook the reader early and hard. My hackles go up a bit if they can’t get the basics out early and without ornamentia or blandishment because that means either they don’t know what they’re proposing to do (bad) or they don’t know how to communicate in general (worse).
You’ve nailed it right on the head Phil. My current company is working on its first product (we’ve been services focused until now) and I am _very_ focused on articulating the value proposition versus creating a bunch of gunk that only turns on other MBAs. It has been working great so far as I am able to sit down in development meetings and compare the trajectory of the project with two page doc.
This is the same tact that I used for a previous company. The CEO of a competing security company liked our focus on execution and value so much that he bought us before we ever took a dollar of venture money.
It reminds of a quote that I came across recently- “If you can’t explain your ideas to your grandmother in terms that she understands, you don’t know your subject.”
I was born in 1982 and I got the joke despite knowing that Phil graduated that year. Not bragging, just saying.
I do like this format. I wonder if Paul Graham would as well. Don’t you tailor these things to your audience?
My micro econ 101 lecturer told me you can’t even accurately quantify consumer surplus, so how could you claim to capture it?
I have to say though, Apple is notoriously good and sucking up every little tiny bit of it for me. The iPhone is so limited that I really would not have paid a dollar more for it given the available feature set. I was similarly disappointed with the API’s in OS X. People who don’t have thoughts about how to extend theses products seem to be willing to pay more. I guess the giant iPod touch that was recently launched will show weather this is true on a large scale.