The Business Plan

Introduction

The business plan is the document in which the company's business planning is summarized. Usually, the purpose of the plan is to describe the company and its products, while specifying the company's strategy and vision, as well as its operating, financing, and marketing plans. An additional purpose of the business plan is to serve as a tool for presenting the company to investors. This objective of the business plan attracted much attention for many years, but has lost favor during the "Internet bubble" years. However, it is highly important to understand that a primary reason for the loss of faith in business plans is the fact that business plans that were prepared by entrepreneurs were based on fixed templates and were not given the proper attention by the entrepreneurs. Such poor plans included extensive use of slogans and of unfounded projections. Above all else, they exposed the unprofessionalism of the entrepreneurs of such companies, and in many situations deterred investors, rather than recruiting them.

When a business plan is prepared properly, it can serve as the company's road map, showing the way from its establishment to its goals. In other words, this document is supposed to concisely reflect profound strategic thinking, while referring to both quantitative and qualitative data.

Every venture needs to identify a market with a demand and a solution for such demand. In other words, it must identify the opportunity, the way of realizing it, and the plan for maximizing the company's value. In addition, it must identify the way in which investors will both regain their investment and make as large a profit as possible.

Before preparing the business plan, and as described previously in this chapter, the company and its advisors need to gather and analyze information on the business environment, including the demand for the product, the market potential, customer characteristics, competition, and so on. Technically, it is possible to use software that facilitates the process by offering a format and drafting the plan, but it is important to understand that such software cannot substitute for in-depth investigations of the market demands and financial forecasts of the success of the product. The added value of such software is doubtful, since in many cases it lures the user into the format and slogan trap which, as mentioned above, deters most investors. Worse still, such formats can lead entrepreneurs to make erroneous managerial decisions with respect to the allotment of resources.

Pre-seed companies usually prefer to prepare a summary as a substitute for a full-fledged business plan. Such a summary should, however, refer as fully as possible to the competition on the market and should contain the main components of the complete business plan. In the early stages, particularly in high tech companies, entrepreneurs obviously lack a full picture of the future competitive situation of the market, as they do an understanding of the possibilities of pricing the company's products and services. However, it is always important to try to assess such parameters, since they must be used when investment decisions are to be made.

Business plans are written by startups for internal and external needs, but also by existing companies for the purpose of project financing. The most significant difference between the business plan of a startup and the business plan of an existing company is the fact that an existing and active company already has a setup of products, management and organization, and business results. Forecasts based on existing data and operations can naturally be more accurate. In order to overcome this tricky starting point, a startup is required to perform research and forecasts that will be as thorough as possible. Unfounded optimistic forecasts will drive investors to apply a higher discount rate to the forecasts, and cut the forecasts down in their calculations (see Chapter 9 for a discussion of the use of the discount rate for the purpose of valuation). Furthermore, the use of unfounded forecasts could indicate a lack of professionalism or credibility by the entrepreneurs.

The Structure of a Business Plan

The structure of the business plan is not fixed, but its main points are listed below. Attempts to write a plan according to a fixed format will reduce the value of the plan, since adjustments for the individual needs of each company will always be required. Beyond the internal considerations, one of the guiding considerations is the need to include within the business plan sufficient level of details to allow potential investors and strategic partners to make informed use of the plan for their investment decision. In addition, it is important to specify the assumptions underlying the significant data in the plan and the timeframes for the achievement of targets during the development and market penetration stages.

Executive Summary

The executive summary provides a brief review of the idea. Most executive summaries include the following items:

• General description The business/field of activity, the product and the company

• Business goals A statement of mission and the company's objectives

• Product description A description of the product, the demand for the product, and its advantage over other products

• Business opportunity The target market, the business opportunity, and the business model to benefit from it, including the exit strategy for investors

• The team A brief description of the leading team and its skills

• Current status The development stage, intellectual property protection such as patents, and so on.

• Summary of financial projections Revenue, net profit, cash flow, and projected return in up to the next five years

• Financial resource requirements Previous rounds of investments and what the company aims to raise in the current and planned rounds, as well as the items toward which the budgets will be allocated

Business Plan Headers

• Company profile This provides a description of the company and of its activities from its establishment to the present day.

• Market and competition analysis This is a general description of the market in which the company operates and a detailed description of its competitors. An in-depth analysis of obvious information that is common knowledge (for instance, that the number of computer users is expected to grow in the coming years) should be avoided. It is better, rather, to focus on a detailed analysis of the products or services that exist in the market and/or are expected to compete with the company and its products. The market description will include a description of the size of the market and the trends within it (both technological and financial), the market segmentation, the problems that exist in the market, the main competitors, obstacles to entering the market, and potential customers. This section of the business plan should include the results of detailed primary and secondary research conducted by the company with respect to the demand for its products. In addition, this section usually includes an analysis of the profitability of the industry and of legal and regulatory restrictions imposed in the field.

• Vision and strategy In this part, the company should specify its vision and its strategy for realizing it.

• Product or service description This part focuses on the solution proposed by the company, including a detailed description of the product and the technology, the company's intellectual property, competing products, and why the product is superior to them. The competitive advantage of the product proposed by the company over existing and potential competing products is presented in this part.

• Development plan This part describes the development process, the current development status of each product and service, and the scope of the development team and budget.

• Operating plan This part describes the company's organizational structure, such as the structure of the production setup, the costs of labor and materials, logistics and service, and a plan for acquiring the means of production and computers.

• Marketing plan In this part, the company needs to specify, among other things, its objectives with respect to each segment of the target markets, the existing and planned marketing channels, the pricing of the products for distributors and the structure of their remuneration, the advertising plan, and the incentives to be given to customers.

• Management and ownership This part describes the management team, including brief resumés of the senior management. Management is probably the most material element in the investment decisions made by investors: Investors prefer to invest in a mediocre idea that is implemented by an excellent team rather than invest in an excellent idea that is not backed by the necessary high quality management. The structure of ownership of the company will also be described in this part.

• Financial forecasting The forecasts need to be accompanied by full and detailed statements, and will usually include the projected operating budget (research and development, operations, general and administrative expenses, marketing), projected financial statements, economic analyses (return on equity, return on investment, and so on), and sensitivity analyses (the projected effect of any change in the various parameters on the forecasted business results). It is customary to include in the plan financial forecasts for a period of three to five years, with a quarterly or even monthly specification of the first years of the forecast. Many investors are deterred by assumptions that are not sufficiently supported, and consequently treat the entire plan with reserve. For this reason, many entrepreneurs avoid including detailed forecasts in investment rounds, especially in the early stages. However, even if such forecasts are not included in the plan, it is important that detailed estimates be available to the company and to the investors, upon request, so that decisions with respect to development and investments in various alternative schemes can be made in an informed manner.

• Appendices Here will be found a specification of the expenses, table of comparison to competitors, full executives bios, letters from customers, and so on.

The order in which items are presented in the business plan and the degree to which various issues are emphasized change from one company to another in accordance with its field, innovativeness (for instance, a more detailed explanation of the product, as opposed to an emphasis on the description of the competitors), current status, and so on.