Who Needs A Business Plan?By Steven Rogers, Founder and Principal, Redstones LLC
How many times have you heard the CEO of a technology start-up say they have such a unique idea that it is obviously going to be a major seller. And then follow that with a comment about a detailed business plan not being necessary as the potential for this technology needs no explanation.
A business plan is not required to describe the technology. A business plan is required to explain to potential investors how you, the CEO, will make them rich. How will you take this unique technology, turn it into a product, manufacture it, market it, sell it and return a decent amount of money back to the investor in 5 to 10 years. How will you do all this while others (your competition) are trying to prevent you from succeeding?
At this point the CEO explains there is no competition, that’s what makes this such a great technology, no one else can do this.
Venture Capitalists (VCs) and Angels invest primarily in the people who will run the business. The product is secondary. For a start-up to be successful in raising equity it must put forward a convincing argument about how the leadership team will make the investors rich. Putting a credible business plan together is half the battle.
It follows then that the core of the business plan must be the financials and not the technology. Doing due diligence around a technology is easy. There are countless experts in any given field that will give an opinion on the viability of a technology. Lawyers will protect IP and perform freedom to operate searches and the demonstration of a working concept model gets that off the table. But there is no way to predict the way a market will react several years from now.
I can calculate the motions of heavenly bodies, but not the madness of people.
— Sir Isaac Newton, English Physicist and Mathematician
When a new product hits the market it doesn’t create a new pool of money to be used to purchase that product. The new product must take revenue from existing products – the competition. Purchasers have to stick to a limited budget and when a new product is introduced it must be paid for from a budget that was already allocated to something else.
So a business plan is all about how the leadership team will approach a market that is some time in the future with a strategy that addresses evolving budget limitations and competitors chasing the same money.
The business plan must convince investors that the leaders understand what it takes to be successful, even if that means hiring their own replacement. A five year pro forma income statement is usually at the core of a good business plan. It inevitably turns up near the end, as everything prior to it is justification for what it contains. As a minimum it must contain revenues, cost of sales, gross margin, operating expenses, earnings before taxes and capital spending. More detail is always useful provided it doesn’t get too complex and spoil the impact.
This is where the technologist panics. Financial terms are scary and confusing; the abbreviations make it look like a different language. But it’s only seven terms to understand and the investor needs to know how well you understand the impact of these terms on your business.
In a garage somewhere an entrepreneur is forging a bullet with your company's name on it.
— Gary Hamel, US Influential Business Thinker, Consultant, Management Educator and
Author of What Matters Most
Arm waving and talking about the technology will not satisfy a serious investor, it will turn them off. As VCs and Angels receive hundreds of ideas a month they will move on to the next business plan, they don’t have the time to coach a CEO and give him or her a second chance.