San Diego, California USA - Introduction:
A business plan is a map to an objective, not a menu from which one picks and chooses. It is essentially a promise by the owners and managers of an enterprise of how funds will be spent by the managers, if they are successful in raising the necessary funds and the results which will be achieved.
A business plan is a reflection of the thinking, based upon study and research the entrepreneur(s) have done to satisfy themselves the business idea they wish to pursue is sound and the funds being sought will be sufficient to, at least, achieve a specific level of development as described to and accepted by the capital providers. The business plan should make clear and differentiate between statements of; fact, surmise, opinion and hope.
Only a few entrepreneurs enjoy planning or doing business plans. It is generally felt by those having entrepreneurial tendencies that a business plan is confining and that they innately have the ability to constructively address any impediment to the achievement of their goals. Unfortunately, for them, this is not always the case. The development of and responses to a ©what if© list is a necessary and useful means of planning for the unexpected. Murphy’s Law of "what can go wrong, will go wrong" is all too applicable to business start ups.
Also the prospective investor needs to understand a great deal about the proposed business and business idea in order to make more than an emotion and personality based investment decision. In a meeting between the entrepreneur and the prospective investor a discussion focused on the ©what if© list can be most revealing as to the entrepreneurs’ understanding of business generally and the challenges of the idea reflected in the business plan and such a dialogue can be a constructive learning experience for both parties.
One of the primary purposes of preparing the business plan is to gain an audience with a professional capital provider. Most professional investors will require the submission of a business plan before agreeing to an initial meeting. The business plan is also a form of merit badge and initial ability display. If an entrepreneur cannot prepare or have prepared a worthwhile business plan then it is unlikely he or she will be able to be successful in getting a business funded or to the point of early stage operations.
Although the genesis of the idea for this writing was to help the organizers, coaches and participants in business plan competitions the reality is that it is a writing which will help all those making presentations to those from whom approval is sought, which can be in a range of forms, including investment, as broadly defined.
Business plan competitions are constructive events which simulate a process as well as, in some cases, being real, in that a businesses actually emerges, having the potential for wealth creation or loss generation, pleasure or pain.
The business plan, to succeed, must fairly, logically and persuasively present the case for accepting the risk of investment. The profit potential must be presented as well as the areas of risk which do and will confront the managers of the enterprise. The investor uses both the business plan and the presentation of the business plan to assess the maturity and judgment of those who seek to capture the use of his or her funds, for their and his or her profit (but not usually involving an equal sharing of financial risk).
Professional investment decision making is and must be an exercise in comparing alternative investment opportunities. There are no absolutes in professional investment decision making, regardless of the type of investment. An investment opportunity is only better or worse than other available opportunities. The measure of better or worse is a weighing of risk and reward - and the business plan should be the initial device through which the case of greater reward potential is presented.
However, when all is said and done, there are no losers in a business plan competition or even real quest for funding, as there is so much to be learned simply through having participated in the process. The dogged determination and persistence of the true entrepreneur should, in time, result in a better prepared entrepreneur and an improved business proposal.
The role of academics and coaches in business plan contests:
Unless an academic has had first-hand, personal business experience in the; founding, managing and perhaps terminating of a business he or she is disadvantaged in the teaching of entrepreneurship. The inviting of business owners and executives to classes to share their knowledge and experience is constructive, especially if the invitees are coached on the specific aspects of their experience which are relevant to the current needs of the students.
In business plan competitions the arranging for each team to be coached by a local business owner can be constructive for the teams and satisfying for the coach. The coaches have the real life experience many academics will lack and can be helped by the academic in conveying their knowledge to the students team members.
Areas of team knowledge and focus for effective business plan competitions:
Accounting, for the purpose of projecting overhead at varying levels of revenue and therefore profit and loss statements.
Law, to be assured the business idea and proposed basis for raising capital is legal and to know the requirements for necessary licenses and permits. Also for contracting guidance as relating to customers, suppliers, employees and executive managers. The capital structure selected and means of distributing equity in the venture will also require attorney input.
Selection of team members and assignment of roles and functions.
Executive compensation plans and equity distribution reflecting that executive functions are of different importance to the venture as well as reflecting extraordinary success or failure in performance.
Comparative cost and benefits of various means of distribution of the contemplated product or service.
Capital required to achieve a level of operations sufficient for the business to be cash flow positive.
Possible exits as the provider of capital is likely to need to know when the funds provided may be recaptured.
Business idea selection:
The decision as to which business idea and which group of students to enter into a business plan contest is an investment decision. The academic making the decision is, in effect, saying, "If I became convinced of the validity of the conclusions presented in the business plan, I would invest some of my real money in the company being contemplated - and believe that others, who have alternative investment opportunities, would also invest". If that is not what is being thought by the academic, then the basis for team selection should be clearly set forth so all involved know what is expected and how the competition will be judged.
This, of course, raises the question of whether the academic is sufficiently trained or experienced to be able to make a valid decision as to investing in early stage, private companies. Also the academic, perhaps through the medium of team coaches, will have to be prepared to assist students in making subsequent management decisions, as professional investors do, in order to protect and enhance the funds invested.
Is the idea unique and if so can the intellectual property be protected? There is a tendency in business plan competitions for there only to be presented new business ideas or business based upon new products or services. I believe this to be a basic flaw in the business plan competition process. Only focusing on new products or services is limiting and unfortunate in that there is much to be learned and gained from the decision making exercise relating to buying and operating existing businesses. Ray Kroc, the purchaser of the McDonald’s fast food restaurant, did not invent either hamburgers or hamburger stands. Fortunes have been made by simply doing something commercially better and perhaps with more energy and innovation than it had been done previously. On balance, I suspect that more commercial innovators have made more money individually and in the aggregate than inventors.
Who is responsible for creating the concept for the business? Who is going to be the CEO? Is the person having the original idea the person best suited to exploit the idea? Will the team representing the idea be comprised of only students taking the same courses or will they have an ability and be encouraged to recruit those not involved in their class or even school? Is being asked to join or joining a team a popularity exercise or do the members have specific interests and talents justifying their positions? Will their proposed individual compensation and financial interest in the business reflect their knowledge, experience and predicted contribution?
How are the relative interests in the proposed business being determined? Do the students have similar vested interests and proposed compensation? Are the shares acquired or awarded recoverable by the enterprise in the event the individual leaves the team earlier than an agreed time, voluntarily or otherwise?
Will the team generating the idea or selected to enter the competition have the ability and resources to adequately research the competitive terrain? Should the team request or retain the services of non-students to help in the process of research as well as perhaps in other capacities? Isn’t this what happens in real life?
Must all of the entrepreneurship class students participate on a team or only those both equipped and motivated? Should some of the class members who are not on a team play the role of prospective investors? There is as much to be learned in studying business plans from the perspective of investing as there is in preparing the business plans.
Does the academic advisor or coach believe that sufficient funds are being sought to assure completion of the stated objective? Bottom line, would the academic or coach invest his own funds in the business described in the plan and/or students being thrust into competition?
Team selection and assignments:
As a judge in business plan competitions I have frequently wondered how the business plan teams were formed. Clearly, it would be unrealistic for the academic to stipulate a fixed number of participants for each team. Indeed, an assignment of any entrepreneurial activity is, in of itself, artificial. Unfortunately, I somehow doubt the normal business plan team assignment process is like the choosing of an athletic team where there are more of those wishing to play than there are available spaces and where only those perceived to be best are selected and assigned to positions. One of the, perhaps unavoidable, problems with creating winners in business plan competitions is that it appears that all who want to play on the teams are allowed to do so. Also the lead entrepreneur or CEO should ideally gain the real life experience of not only selection and recruitment of members but also of negotiating appropriate equity holdings and compensation terms.
There is also the artificiality of teams being for the most part only comprised of those taking the entrepreneurship course at the same time. I believe teams would be strengthened if the CEO, and running a successful early stage company is not typically a committee managed exercise, recruited those having relevant experience to fill, perhaps subject to financing, key positions. The students wishing to participate could sign on as apprentices to the experienced players.
Approaches to business plan structure:
Most business plans look pretty much alike. The interested students and academics have all read many of the same books on business plan preparation and are aware of the several CD-ROM delivered template programs (BizPlan Builder, etc.). This is unfortunate as opportunity differentiation is necessary, especially when the capital providers, judges being the proxies therefore, receive multiple plans daily - and have great difficulty glancing through, let alone reading or even remembering the essence of the individual plans.
Of course, there is a vast difference in business plan competitions which involve personal presentations as judges end up placing a lot of weight on their assessment of the individuals as opposed to the business plan per se. Theoretically, a business plan could be a winner and highly attractive to a capital provider without the participation of the plan author or proposed associates. The plan could be the exposure of really great idea and a well researched and presented map of how to reach the described goals, with the capital provider having his own ideas of who to use in the management of the company and development of the idea. This is a real life problem as frequently those having the best of ideas are not themselves the best people to develop and exploit the ideas.
This is not to recommend that plans become artsy craftsy or be printed on colored stock. It is to suggest that plans recognize who the customer is for which they are being prepared. The ultimate customer being the prospective investor (subscription agreement and check signatory).
The investor wants the best of all worlds, high return and low risk. One of the greatest areas of risk is the lack of management experience. Therefore, attracting experienced advisors and executives is a high priority for the entrepreneur. As management is such an important factor, I recommend highlighting the background of the managers in the early part of the business plan. If experienced managers and/or advisors are prepared to commit to investing some of their own funds in the project it will favorably impress investors and the judges.
Similarly, as high reward potential is the draw for the investor, the ultimate scope of the market for the product or services offered should be discussed up front. Therefore the plan should; define success highlighting the magnitude of the market intended to be served, describe and defend the expected profit structure and showcase the management. All the rest of the business plan is merely supportive of these up front elements.
Importance of financial statements:
Projections are projections and developing them is a necessary exercise. To the extent possible, the entrepreneur should identify those elements of the projections which are predictably fixed and which are subject to the achievement of revenues. Therefore, the focus the plan has to be on the validity of the assumptions used in making the revenue projections as almost all else follows.
Importance of Boards of Advisors and Directors:
Boards of Advisors and Directors are very different and both are important considerations in the judging of business plans. Are the Directors and/or Advisors making personal investments in the company? Are they prepared to assure the capital provider of anything? How are they being compensated? What is their term? What are the relationships between the entrepreneurs and the Directors? Are the Directors aware that one of their primary responsibilities is to change the responsibilities of managers, and perhaps even the managers, if warranted by the company not achieving the projected results? Will the Advisors indicate they have read the business plan and found it to be ©reasonable©?
Approaches to print presentation:
©Less is more© from the perspective of those receiving many business plans on a regular basis. No business plan is likely to prompt a ©buy© decision, though many will result in a ©no buy© decision. The information contained in a business plan should be sufficient to interest the reader in meeting the entrepreneurs and to generally support the assertions and projections contained in the plan. The plan does not have to contain vast amounts of data and what is believed to be conclusive evidence. Such supporting data can be offered as an appendix for those interested in validating the projections. It is the due diligence process which is intended to uncover information which will adversely impact the achievement of the predictions made in the plan as well as to review the data leading to the conclusions presented in the plan.
Plans should be in simple spiral binders and printed on one side of the page. Tabs and 3-ring binders are not necessary. Fancy and expensive graphics may be as off putting as attracting. Experienced business plan readers are conscious of the expenses incurred in creating business plans and seek the essence of the idea and justification of the predicted results, not pretty picture books.
Approaches to the valuation of the opportunity:
There are two schools of thought as to whether the entrepreneur should present a proposed deal and capitalization. Ultimately, the capital provider will probably dictate the terms of a transaction, though there may be some level of negotiation possible. The advantage of an entrepreneur proposing a deal and capital structure is that in doing so it may indicate something about the entrepreneur’s; experience, realism and sense of market. If the entrepreneur’s ideas as to valuation appear to the investor to be out of the bounds of reason it is unlikely the investor will choose to have a meeting or invest a lot of time and energy in reviewing the opportunity.
The most important aspect in the valuation of an opportunity is the identification of valid comparable transactions involving similar companies or at least companies focused in similar fields of activity. It is constructive for the entrepreneur, as a part of the development of a plan, to display whatever relevant market activity there has been as well as information regarding the financing of competitive or comparable companies.
Oral presentation - Making the pitch:
The ability to make effective presentations, verbal, as well as through visual means, is an important aspect of entrepreneurship education. However, it must be recognized that some people are better at verbal and personal presentations than others and the conceiver of the idea or CEO of a company may not be the best presenter available to the company for making a presentation. Practice improves and may make ©good©, but not necessarily perfect. Therefore, it is possible the CEO’s presentation will have to be scripted and orchestrated so that he or she plays more of an introductory role. The CFO is frequently, in operating companies, the person responsible for making presentations to funding sources and it is certainly acceptable for this to be the case in business plan competitions as well.
Use of professional presenters:
Although perhaps logical for an entrepreneur to retain the services of a professional presenter it is still not done in either business plan competitions or presentations to prospective investors.
However, it is not necessary that each of the senior executives of the company have a speaking role in a presentation and nor must the CEO be the only or even primary presenter, especially if one of the other executives has a better ability to present.
The purpose of a presentation is to communicate the concept and details of a business. This may best be accomplished by using the most effective communicator available to the company. The judges and investors can be invited to dialog with each of the executives and especially the CEO in an interview process in order to form an opinion of the individuals.
Dress - individual, team, casual or business-like:
Academics and team members must recognize that in presenting to judges the experience is to be thought of as were the judges busy, dispassionate, self-interested, professional investors. They are not friends or educators whose careers are focused on assisting their students. They are representative of those who measure value on the basis of likely, risk adjusted, Return On Investment.
There is a tendency to think of teams presenting business plans as an athletic exercise such as a gymnast team going to an athletic event.
Are the wearing of identical polo shirts, perhaps bearing the company’s name and logo, really the way a company’s executives seeking capital would dress in going to the office of a venture capitalist or investment banker?
In similar vein, although dressing down or casually, in chinos and open neck shirts, is becoming de standard in some Internet and other technology oriented companies, especially in California, is this a manner of showing respect to those having the ability to fund a company needing financing? One has to believe that thoughtful people dress to appeal to those they are meeting and not always on the basis of that which is most comfortable. Were the wearer’s comfort the primary determinative of dress many of us would wear shorts and sandals or a caftan most of the time.
There are also some teams which believe it cute or appropriate for them to wear similar, if not identical, suits and ties, sort of company uniforms. As career costumes are seldom seen except for counter personnel in car rental or airlines this is not a realistic portrayal of how they will dress when really at or in business. Prospective investors want to be respected. They also want to learn as much about key members of a management team as they can in the shortest period of time. Observing how they dress is one way of accomplishing the objective. The concern is how the executives of the company will dress when meeting their clients and customers. Will they increase their effectiveness by showing respect in the way they dress is the issue.
Proposed compensation of entrepreneurs:
Entrepreneur and executive compensation in early stage, investor financed, companies is a tricky issue. Those financing businesses are very aware that they are providing the funds with which salaries are being paid. They are also aware that most investments are dependent on the recruiting and retention of satisfactory personnel. However, the investor is also aware of the fact of the carried interest, usually taking the form of shares and/or options, allowed the entrepreneur(s) is a significant compensation element.
Entrepreneurs should know the compensation scales paid by competing or relevant companies and frame their own requirements in relation to that paid by the other companies. They should also take into consideration the characteristics of the other companies in terms of maturity, size, revenue levels and growth, profit margins, etc. in establishing their salary requests and requirements.
Once in a while an entrepreneur will propose foregoing a salary as a demonstration of commitment. This is not as effective a tactic with experienced prospective investors as is hoped. The seasoned investor recognizes that in judging the likelihood of projections being achieved and the business continuing that someone will have to be hired to replace the entrepreneur in the event of the entrepreneur’s inability to continue. Also "Things that are free oft cost too much" is an apt description of what can happen when an entrepreneur possess more enthusiasm and passion than ability - and therefore has to be replaced.
Non-Disclosure and Confidentiality Agreements:
Entrepreneurs, unlike inventors, are usually willing to disclose and describe their business ideas to prospective investors quite freely. The entrepreneur wants those who can help him to know about the value of the planned enterprise. Professional investors and experienced, or well advised, Angel investors are frequently loathe to accept liability by executing Non-Disclosure Agreements (NDA). These capital providers are in the business of reviewing new ideas as presented by a range of entrepreneurs. The concern of the capital providers is that they will, at some point in the future, provide capital for a project which may appear to the original presenting entrepreneur as it being similar to that which he had presented and which was rejected. Were the capital provider to have executed a NDA liability could result even though all the capital provider had done was react positively to a proposal by another subsequent entrepreneur having an idea similar to that presented previously.
Also, in some states, attorneys representing capital seeking entrepreneurs advise the entrepreneurs to mark everything ©Confidential© and to obtain a NDA’s as an indicia the delivery of the business plan is not a public offering of securities. There are also business plans which arrive unsolicited and bearing legends that in accepting the plan the recipient agrees to treat the plan in confidence, etc. I trash unsolicited plans having such notices without reading them. It is up to the entrepreneur seeking funding to research and know the integrity of the entities to which plans are being submitted.
It is my experience that most professional capital providers would rather pass on learning about an opportunity than expose themselves to liability. It is also my experience that most entrepreneurs will simply give a professional investor a copy of the plan without their having signed any agreement.
Role of the academics, coaches and judges:
The entrepreneurship education academic’s job is to expose, organize and convey data useful to the student in the creation and management of a business. The academic is in a position of having had the experience to know what has and has not worked in previous competitions and should be able to describe and critique these prior efforts to the current crop of business plan participants. Academics will learn a great deal by monitoring the ©performance© of competing teams, not just their own.
It is really the coach of the individual business plan team who is in the position of making the greatest specific contribution to the success of the team. It is the coach who had “been there and done that” and who can provide the team with the necessary realties of business. The coaching of a team will require time and commitment on the part of the coach but will be highly rewarding for the coach.
Judges participate in business plan competitions because they want to help the competing teams. In most cases, as they have not been given appropriate guidance and judging materials, the result is a too frequently a presenter personality dependent, popularity reflection rather than an analysis of the validity of the idea itself. Presenting teams should assume the judges have not done more than to scan the submitted plans, though in some cases dedicated judges really do try to analyze the submitted documents. It must be made clear at the outset of the program if the judging will be based upon the presentation or the plan. Are the judges to assume the presenters will be the executives of the company or could the presenters be simply licensors of the idea to more experienced managers?
Importance of endorsements and recommendations:
References regarding the individuals slated to become officers of the enterprise are useful as would be endorsements of the idea for the plan from knowledgeable sources.
Investment in project by entrepreneurs:
Many capital providers take comfort in the fact that managers and entrepreneurs, having a non-cash paid for carried interest, are prepared to also invest their own hard cash on the same terms as the capital provider is being offered. There are several approaches which may be used. Entrepreneurs can also invest in the company through the issuance of personal notes. The calling of the notes can be conditioned on certain projected events occurring or not occurring. Entrepreneur managers can also have a portion of their compensation escrowed pending the achievement of agreed events and then paid in either cash or shares of the company.
Commitment of entrepreneurs and presenters - The need for passion:
Passion for achieving a result, proving something, is frequently more important than lots of other factors. One of the primary reasons a capital provider typically feels they must meet personally with an entrepreneur at an early stage of considering investment is to assess the level of passion and therefore sacrifice the entrepreneur is prepared to invest in the enterprise. Academics and coaches might consider guiding and assisting the entrepreneur team members on appropriate and effective means of displaying their confidence in and passion for the project.
Evolution of business plan based upon ongoing input:
The process of fund raising is a learning process and the aware entrepreneur will learn from each question and answer dialogue following a presentation. It is not unreasonable for the business plan to reflect the continuing input of those having been pitched, especially if they are in the business of making relevant assessments of opportunities. A business plan is a living document and should be adjusted frequently to reflect added data.
Characteristics of previous competition winners:
Entrepreneur students must be aware of the characteristics of winners and non-winners of previous competitions. The current team members should make an attempt to meet with the prior year’s team members for guidance as to what the prior team felt they did right and wrong in terms of competing.
Lessons learned and benefits of not winning:
Rejection is never easy to accept though the reflected view of experienced judges can be extremely valuable in the sparing of greater loss than just the ego of the participating team members. It should be remembered that in most cases of outstandingly successful entrepreneurs that it was not their first venture which brought them the fame and fortune for which they are presently known.
Maximizing the benefits of winning, at various levels:
The participation in business plan competitions, especially if an award is received, is good input for the resumes of the participants as well as favorably impressing prospective investors. Those involved should proudly let their friends and associates know of the competition and the values being received and why they are and will be better prepared to achieve financial success as business owners.
Conclusions:
Successful entrepreneurial activity is good for both those directly involved and for the community at large. The exercise of learning how to plan and being forced to plan and, as a part of the process, preparing business plans, is constructive, even recognizing entrepreneurs usually dislike doing so, being more doing focused. Competition is also constructive as life can be a zero sum game. The training to be and expectation of being a winner is exciting and a useful means of channeling the true entrepreneur’s passionate need to succeed. It’s all good, even when the competitions are not as successful as they might be with more time and greater resources made available, it’s still all good.
- 30 - © Arthur Lipper 2005. All rights reserved.
[Editor's Note: Arthur Lipper was formerly the Editor-In-Chief and Publisher of Venture, the magazine for entrepreneurs.]
Contact: Arthur Lipper
Author/Correspondent's Profile: Arthur Lipper III, Chairman, British Far East Holdings Ltd.
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