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