Eric Eikrem’s Blog

The business plan has been treated in an endless number of publications. So why do I? Because I believe there is a lack of focus in a lot of what is written about business plans. The important things are often lost in the details. In fact, a business plan can be very brief.

I have seen compelling business plans in the form of a few PowerPoint slides, a couple of scribbled pages, and a brief video. What matters is having all the required ingredients (or a road map for getting them), not the exact form of communication. William A. Sahlman [1]

My starting point is a classic HBS publication that is clear, concise and to the point; “How to Write a Great Business Plan”, by William A. Sahlman [1], a professor of business administration at Harvard Business School. I have focused on the same key elements, namely people, opportunity, context and risk & reward. In addition, I have added a few current and relevant examples of successful business ideas. Also, some considerations to be kept in mind due to the change in general business conditions are included.

Things to Keep In Mind

The business plan, unlike other documentation, is your chance give a fairly detailed account of your business proposal. It should be the story of  the venture – past, present and future. It is your story and there really isn’t any template for that. Moreover, it is as much a  ”note to self” as a prospect for investors – if you need any external investors – and should be a systematic account of the idea and it’s development into a viable business.

In general, entrepreneurs waste to much time on numbers and spend to little time on information that matters. It is difficult or nigh impossible to predict numbers due to all the uncertainties facing a new venture. The numbers that are included – somewhere near the back – should be of the essential kind; those that describe the business model, such as key value drivers (process yield, effects of a chosen distribution model, …), break-even (required level of sales to be profitable, time to positive cash-flow,…), and last – but not least – pricing.

Be candid. Openly identify and discuss challenges facing your venture. Don’t hide or whitewash anything; it will inevitably come back to haunt you later on; if “surprises” pop up constantly, investors, partners, and/or team members will inevitably lose faith.

Be realistic. Entrepreneurs tend to be too optimistic about market size and growth, and sales price, and underestimate costs, in particular costs to access customers.

Be practical. Spell out what you are actually going to do.

A business plan ranks no higher than 2 out of 10 as a predictor of success William A. Sahlman [en-1]

People

Created half to rise and half to fall;
Great lord of all things, yet a prey to all;
Sole judge of truth, in endless error hurled:
The glory, jest, and riddle of the world!
Alexandre Pope, “Know Thyself”

The qualities of the entrepreneurial team is probably the most important predictor of success. Both space and effort should therefore be spent on this, answering the following questions [1]:

• What can you do?  Show what you, the team and your partners can do that is relevant to the idea. Keep in mind that the idea as such doesn’t count that much. Execution skills do.

• Whom do you know? Do you have a network that will help you to carry through, say, get access to key industry players?

• How well are you known? If you are well known in the industry in question, the business proposal will be viewed less as a start-up and more as a continuance of existing business. This is an advantage; most potential investors, partners or team members do not like a venture, because it involves too much uncertainty.

Opportunity

The opportunity has to be both attractive and sustainable:

• Attractive: There is a large market for your product or service, the market is growing fast, or – preferably – both. Current examples include equipment and software for the ITS (Intelligent Transport Systems) and Smart Grid markets. Moreover, the costs to access customers must be considerably lower than the price paid for the product or service, and the cash flow should be favourable; Buy low, sell high, collect early, pay late.

• Sustainable:

  • In order for your venture to be sustainable, you will need to maintain your competitive edge. How are you going to go about doing this? Be clear, concise and practical. Note: One way to keep the edge is to expand (1) the range of products or services, (2) the customer base, and / or (3) the geographical scope. Example: Q-free, a Norwegian company expanding from simple road toll systems to ITS (Intelligent Transport Systems), and from a regional to an international market [no1].

  • The venture must also be sustainable in terms of energy use and environmental impact as such. This is an aspect that is not considered by Sahlman, but the present context makes it necessary; fewer investors and other stakeholders are willing take on the risks involved in ventures that are unsustainable in the medium to long term, such as fish farming (untenable use of natural resources; several kilos of wild fish to make 1 kg of salmon, trout, whatever…) or oil sands (too much pollution). One reason is that analysts are increasing their focus on sustainability.

“The effects of climate change have become clearer, especially on stocks. But the effects on debts are still in the dark. You may compare the climate change with a lottery, but with some predictable suprises.” Eric Boremans, BNP Paribas Investment Partners [no2]

Your customer must be clearly defined: Who are you going to sell your product or service to? That’s you customer. Note that in a long value-chain, identifying your customer among all the players may not be as easy as you think… Pricing scheme; careful consideration. Cash flow: Buy low, sell high, collect early, pay late.

Identify the competition: Carefully analyse current and – potentially – future competitors. If you find that you have no competition, present or future, you either have done something wrong or the idea isn’t an interesting business as such. Look at strengths, weaknesses, and response:

• Who are they currently and who else may enter, that is, are there anyone out there that might be inclined to move into your market? What are their strengths and weaknesses?

• Response:  What will be their response to your entry, how do you respond to that, and so forth. This is similar to playing strategic games; predict several moves ahead.

• Cooperation: Is this a possibility, for instance, do identified competitors have a history of cooperation or of fierce and uncompromising competition? What will it take to make cooperation happen?

Context

A description of the context in which the venture will operate, including:

• Macroeconomics: Important developments on the macro level that will affect the venture. Example: The current economic crisis, and the challenges and opportunities it represents.

• Rules and regulation:  These can have a huge impact and effectually open or close markets. The bigger the area, the bigger the impact. Examples: Changes in international rules regarding fire safety aboard ships or airplanes, which is more often than not a boon for equipment makers. Opening up of the European telecom markets, giving a pletoria of startup virtual operators access to the mobile networks.

• Policies: Current policies that might result in changes in rules and regulations, new tax regimes, …

• Technology: The no.1 enabler (creating new ecosystems around an invention) and disabler (rendering previous solutions obsolete). Applies to both services and products.

Risk and Reward

When you are creating a business plan, the hardest exercise is to make a clear account of the risks that lay ahead and what you can do to mitigate those risks. Again, it is important to be practical and identify what you are going to do if any identified hindrance does materialise.

There are 2 types of diagrams that are particularly useful in communicating with investors and other potential stakeholders, according to Sahlman:

Fig.1, which shows a useful diagram to both visualizing risk and reward; it shows the time to break-even, the money used before break-even, and the potential reward. Your venture would typically have either line (1) or (2), or something in-between. Note: The outcome of many ventures making it through the first 3 years is something like (3), while most start-ups end up with (4).

Fig.2, which shows the range of possible returns and the likelihood of achieving them.

A Few Words About Investors

It is better to secure sales than to go hunting for an investor, if possible, as you do not have endless access to capital. Moreover, that capital is going to cost you. If you decide that capital is needed to get your idea off the ground, consider the kind of investor you are looking for; pro’s don’t fret.

Were I rewriting the article today, I might emphasize the importance of controlling your destiny by being conservative about access to capital. Many great ventures in the Internet era (pre-1999) ended up failing because they assumed they would have continued access to cheap capital. William A. Sahlman [en-2]

References

In English (en):

1. How to Write a Great Business Plan, by William A. Sahlman, Harvard Business Review, July 1997.

2. Updating a Classic: Writing a Great Business Plan, Q&A with W.A.Sahlman, by Sean Silverthorne, October 6, 2008.

En español (es):

1. Claves de un Buen Plan de Negocio, por William A. Sahlman, Estrategía Magazine.

In French (fr):

1. Comment rédiger son « Business Plan », par William A. Sahlman, Dossier thématique n° 46, QualitéOnline.

På norsk (no):

1. Full fart for Q-Free, av Ole-Morten Fadnes, Dagens Næringsliv, 22.oktober, 2009.

2. Spår nedtur for CO2-verstinger, av André Benonisen, Finansavisen, 13.november, 2009.

In Portuguese (pt):

1. Como redigir um projeto de negócio excelente, com todas as informações realmente necessárias, por William A. Sahlman, HSM Management, 9 julho – agosto 1998.

External Links

In English (en):

• Q-free – International supplier of solutions and products for Road User Charging and Traffic Surveillance having applications within electronic toll collection for road financing, congestion charging, truck-tolling, law enforcement and parking/access control.

På norsk (no):

• Q-free – In Wikipedia.