Keys for an Effective

Business Plan
Business Planning Workshop
September 27, 2006
Dr. Timothy B. Folta
Associate Professor of Strategy and Entrepreneurship
Director BIOMEDSHIP (Biomedical Entrepreneurship)
Program
http://www.purdue.edu/biomedship/
Instructor, Undergraduate, MBA, & Ph.D. Courses in
Entrepreneurship
Entrepreneurship research published in leading journals
Entrepreneurial survival
Entrepreneurial risk
Entrepreneurial entry
Acquisitions of entrepreneurial firms

Why write a business plan?
According to Dun & Bradstreet study of businesses between 1989-1992:
66% of businesses remain open at least 2 years.
49.6% remain open at least 4 years.
39.5% remain open at least 6 years.
Study of Canadian firms found roughly the same:

Why write a business plan? (cont.)
Cooper, Dunkelberg, and Woo (1988) found that 95% of
entrepreneurs believe that their ventures will most probably succeed
even though over half of all new ventures fail.
Over-optimism of own ability?
Dont perceive risks?

Shane and Delmar (2003) found that entrepreneurs who have
completed business plans or undertaken more business planning
should be:
more likely to survive
further along in product development
further along in organizing the venture

Cooper, A.C., Dunkelberg, W.C., & Woo, C.Y. (1988). Entrepreneurs perceived chances of success. Journal of Business Venturing, 3: 97-108.
Delmar, F. & Shane, S. (2003). Does business planning facilitate the development of new ventures, Strategic Management Journal, 24(12), pp 1165-1185.
Number of Deals
0
1000
2000
3000
4000
5000
6000
1998 1999 2000 2001 2002 2003 2004 YTD
Tale of Two Markets
Source: Venture One
2001-today
Get profitable fast
Wheres the business
model?
Path to profitability
Experienced
veterans
VC controls valuation

1995-2000
Get big fast
Concept funded
Time to IPO
Young Entrepreneurs
Entrepreneurs
controlled valuation

Number of Financing Rounds by Industry - United
States
0
200
400
600
800
1000
1200
2
0
0
0
2
0
0
3
2
0
0
6
N
u
m
b
e
r
Business/Consumer/R
etail Total
Healthcare Total
Information
Technology Total
Number of VC Financing Rounds - United States
0
500
1000
1500
2000
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
N
u
m
b
e
r
Why write a business Plan?
Overcome
subjectivity bias

Increase awareness
of key
challenges
Convince other
stakeholders
Employees
Capital
Providers
Partners
Angel Debt VC
Agenda
I. First some terminology
II. Getting started: Begin with the end in mind
III. Plan outline
IV. Some considerations when writing the plan
V. Dos and Donts
VI. Q & A
First . some terminology
Unique Selling Proposition
Competitive Advantage
Business Model
Unique selling proposition or
Value Proposition
How the product or service benefits the
customer in a unique way
Answers the critical question for each customer:


Whats in it for me?
Examples of Value Propositions

We provide a friendly, comfortable, well-located place offering a
wide range of fresh, customized quality coffees, teas, and other
beverages for the person who enjoys a good experience and a
good beverage.


An easily accessible Internet site that is convenient all of the
time to provide a wide selection of books, CDs, and videos at a
fair price to the busy, computer-literate customer.
competitive advantage
a firms distinctive factors that give it a
superior of favorable position in relation to
its competitors.
A sustainable competitive advantage is
a competitive advantage is maintained
persistently.
Cost
WTP
Cost
WTP
Firm Profit
A firm establishes a competitive
advantage by driving a wedge between
the costs it incurs and the willingness to
pay (WTP)
Cost
WTP
Firm Profit
or
Price
Value
Cost
The Firms Economic
Contribution
3 Broad Types of Choices that
Define a Companys Business
Strategy
The advantage the firm
aims to deliver
The activities
throughout the value
chain that deliver
the intended
advantage
The scope over which
the advantage is
targeted
Positioning
Strategy
Participation
Strategy
Organizational Strategy
The advantage the
firm aims to deliver
Cost
WTP
Firm Profit
Alter WTP
Cost
WTP
Firm Profit
Alter Marginal Cost
Cost
WTP
Firm Profit
Alter WTP
Cost
WTP
Firm Profit
Alter Marginal Cost
Superior Competitive Position
Examples of Sources of Competitive
Advantage
Source Example
Efficiency, low costs Alcoa
Product innovation Intel
Quality, reliability Mercedes
Customer responsiveness Dell
Manufacturing innovation Toyota
The scope over
which the advantage
is targeted
Geography
Demography Product
The activities
throughout the value
chain that deliver
the intended
advantage
Design
Production
Logistics
Sales
Marketing
Human
Resources
Service
business model
A business model is the description of the
business and how it will work in economic terms
that is, how it will make money.
to be persuasive, it must specify how / why each
stakeholder gains from the venture

Getting Started
Begin with the end in mind
Would you tell me please which way I
ought to walk from here?

I dont much care
where said Alice.
Then it doesnt matter which way
to walk, said the Cat.
From Alices ADVENTURES IN WONDERLAND
That depends a good deal on where you
want to get to, said the Cat.
The End
Could refer to the purpose of the plan
Recruiting talent
Gaining confidence in business opportunity
Securing financing
Could refer to the exit
IPO
Sale or Merger
6 things you must have to get VC funding
Compelling business models
Good business plan
Unique technology with clear benefits
Strong Intellectual Property position
BIG markets
Experienced management team
Realistic financial plan

Not necessarily in this order of importance!!
General Venture Capital Fund
L.P.
L.P.
L.P.
L.P.
General Partner
Key Features
* 10 Year Life
* Annual Management Fee - 2.5%
* Profit Share: 80% Limited Partners,
20% General Partners
-2 to 0 years
Raise Funds
0 to 4 years
Locate Deals
Invest
4 to 8 years
Grow
Investments
9-10 years
Liquidate
Investments
Investment Fund Cycle
Capital
99% Limited Partners
1% General Partners
Expertise
1% Limited Partners
99% General Partners
Example
VC
I
1
I
3
I
2
P
1
P
5
P
4
P
3
P
2
Total Amount Invested = $100MM
Total Amount
Harvested = $400MM
Investors get $100 MM back
$300 MM Profit Split
VC gets 20%
Investors get 80%
$50MM $0 $200MM $150MM $0
I = Investors, P = Target ventures
Key Components of the Business Plan
Cover Page
Table of Contents
I. Executive Summary
II. The Company
II. Market Analysis
III. Competitive Analysis
IV. Products and Services
V. Marketing and Sales
VI. Finance
VII. Appendix

1.0 The Executive
Summary
Probably the most important part of the plan.
It is a business plan in miniature should be
able to stand on its own.
Organize in order of importance
No more than 2 pages
Did you know that most business plans
are never read by a VC partner?
II. The Company
A. Company History
B. Mission
C. Legal Business Description
D. Strategy
E. Technology
F. Value Proposition
G. Management
H. Organization, Alliances, and Relationships
I. Intellectual Property Strategy
J. Facilities
Example of Mission Statement: eBay
Mission
Statement
We help people trade practically anything on earth. eBay
was founded with the belief that people are basically good.
We believe that each of our customers, whether a buyer or
a seller, is an individual who deserves to be treated with
respect.
We will continue to enhance the online trading
experience of all collectors, hobbyists, dealers, small
business, unique item seekers, bargain hunters,
opportunistic sellers, and browsers. The growth of the
eBay community comes from meeting and exceeding the
expectations of these special people.
Strategy
Major opportunities
Estimated cost of entry, time frame, and risk
Competitive advantage
Type of advantage
Scope of advantage
Key activities driving advantage
Product / Service A
Product / Service B
Technology
Proprietary Technology
Technology relationships
Human Capital
Other assets: technology, market power, reputation,
customer relationships, scale economies,
scope economies, etc.
The Average Start-up Firm The Established Firm
Why Venture Capitalists
Reject Business Plans
Unacceptable management team 52%
Company not market driven 38%
Time frame too long 33%
Inadequate financing plan 25%
No proprietary position 15%
No experience in industry (VC) 12%
Other pitfalls: too long, opportunity too small, poor
organization, lack of focus

The relationship between prior experience
and performance
In a Purdue study of 2994 entrepreneurs by
Gimeno, Folta, Cooper, and Woo (1997)
Similarity of prior business to current one is one of the
strongest predictors of performance.
Other predictors of performance
Formal education
Management experience
Entrepreneurial experience
Management
I. Leadership team and brief
resumes
II. Ownership, voting, stock options,
and other incentives
III. Outside support
a) Accountant
b) Attorney
c) Consultant
d) Board of directors / advisors
Organization, Alliances and
Relationships
Joint Marketing agreements
Supplier Agreements
Joint Development agreements
III. Market Analysis
A. Market Description
B. Target Market
C. Customer Buying Criteria
D. Distribution Strategy
E. Market Penetration and Sales Volume
Market Description
We expect to compete in the [define niche] of the [define industry].
This market was approximately [$x] at [wholesale or retail] last
[period available], according to [cite resource]. We believe a major
future trend in the industry will be toward [environmentally oriented,
miniaturized, high quality, value oriented] product offerings. Market
research [cite source] suggests that this market will [grow/shrink] to
[$x] by the year [200?]. We expect the niche in which we compete
to [grow/shrink/remain stagnant] during this time. The major forces
affecting this change will be [falling cost of computers, explosion of
home based businesses, tendency for baby boomers to have less
kids-and pamper their pets, whatever]. The are of greatest growth
within the industry will be [x].
[Company] is uniquely positioned to attend to this segment because

Target Market
i. We define our target market as [x], [y], and [z].
Currently the market is shared by [a]
competitors.
ii. Market segments and characteristics of those
segments

Customer Buying criteria
i. Motivation to buy
ii. Primary market research to suggest target
customers want product or service.

Market Penetration and Sales
Volume
For each channel, identify the target volumes
and assumptions over a five year period
Revenue Model: how the firm will
generate revenue
Product sales model
Subscription fee model
Advertising revenue model
Transaction fee revenue model

Sources of revenue growth
Increasing brand recognition
Intellectual property licensing
International expansion
Acquisition of other firms
Price increases
New product offerings
IV. Competitive Analysis
Key competitors
Product, price, market share, location, promotion,
management, financial strength.
Industry analysis
Barriers to entry, intensity of rivalry, buyer power,
supplier power, availability of substitutes.
Distinguishing qualities of company
V. Product and Services
A. Description of how it works. What needs are met.
Photos or drawings.
B. Product line plans
C. R&D
D. Production and delivery
1) Location
2) Build versus buy versus license decisions,
3) Facilities and logistics.
E. Packaging
F. Fulfillment
G. Service and Support
VI. Marketing and Sales
Marketing Plan
Sales Strategy
Distribution Channels and Partners
Sales Cycle
Pricing Strategy
Marketing Communications
Sales Strategy
Selling Methods
Product Positioning
Distribution Channels and Partners
Distributors
Direct Sales
Retailers
Corporate Sales
Sales Cycle
Pricing Strategy
Product A
Product B
Marketing Communications
Trade shows
Advertising
Press Releases
Conferences / Seminars
Internet Promotions
Direct Mail
VII. Financial Plan
Highlights of financial statements
Revenue Sources
Funding requirements
How you intend to use Funds
Required Analysis:
Profit and loss forecast
Cash flow forecast
Balance sheet
Supplemental analysis
Ratio analysis
Break-even analysis
Harvest plan
Some Overall Thoughts on the Financial
Section of the Plan
Financial projections are relatively unimportant
(Sahlman)
Everyone knows theyre inaccurate:



However, they take on more importance if the
fundamentals of the business model are well
established.
VIII. Risks and Milestones
Critical risks: technological, market, execution
Potential mitigation of the risks
Performance milestones
IX. Appendices
Pro-forma financial reports
Assumptions, trends, comparatives
Cash flow statements
Income statements
Balance sheets
Sources and uses of funds
Supplementary financial analysis
Resumes / Management Team Biographies
Testimonials
Patent applications
Description of primary data analysis
Contracts
Promotion literature
Competitive Profiles
Press Clippings
References

For what do you need financial
assumptions?
Sales - when to begin, growth
Start-up costs
fixed and variables expenses
terms on accounts receivable, payable
inventory turnover
terms of financing
initial cash position
timing of key events

How to generate pro-forma
financials?
Sales
forecast
Beginning
balance
sheet
Ending
balance
sheet
Cash flow
statement
Income
statement
Assumptions
The
Cover
Page

VP
The Very Profitable Company
333 West St.
West Lafayette, IN 47906
765-463-2012
Fax (765) 494-9658
Jones@msn.com

Contact: Wayne Jones - CEO

The company was established in 2003

This (2
nd
) version of the plan was completed
September 2004

Plan #2.4

Like Coach Wooden
Pay attention to detail
Some Considerations When Writing
the Business Plan
How long should it be?
Where to start?
Who should write the plan?
What should the plan look like?
Should you have more than one version of the plan?
Should you seek the perspective of outsiders?

The impression continuum
Messy (poor organizational skills)

Too short (glib)

No pictures (lacking creativity)

Too conservative (too bearish)

B&W faded photocopy (lacking marketing
skills)
Over-organized (hiding lack of content)

Too long (unable to get to the point)

Too many pictures (lacking discipline)

Too optimistic (unrealistic, nave)

Full color ad-like production (no self
control, too flashy or focused on
appearances)
the answer: tell the story &
keep it succinct!!!
Dos and Donts of Business Plans
Do tell the story
Make sure the business model resonates throughout the
plan
Make it a page turner
Each section should lead to the next
Each business story must be told in a slightly different
way do not follow a fixed formula
Edit with a sharp knife
Dont make common mistakes
Beat the reader over the head with your point
Too much repetition & irrelevant information
Not enough information
Ignore risks
Ask for less money than is needed
Times Yours!