The business plan is one of the documents that issuers must provide to investors in Title III offerings. Here are the ten critical questions a strong business should answer:
First, the company needs to explain what problem it proposes to solve. If you aren’t solving a problem that people are willing to pay you to alleviate, then you probably won’t see much demand for your product or service. Pain comes in many flavors: my computer network keeps crashing; my accounts receivable cycle is too long; existing treatments for a medical condition are ineffective; my tax returns are too hard to prepare. The more acute the problem, the more attractive the market. Some problems are dramatic: thousands die each year from pancreatic cancer. Others are more mundane: there isn’t a decent burger joint within eight miles of this intersection. Businesses and consumers pay good money to make pain go away.
Pain, in this setting, is synonymous with market opportunity. The greater the pain, the more widespread the pain, and the better your product is at alleviating the pain, the greater your market potential. Next, the company must explain how its product or service is going to meet the need created by the problem. This is where the entrepreneur describes his or her offering—not in excessive detail—but focusing on showing how the business will be viewed from its customer’s point of view.
This is what many people call the “revenue model” or “business model.” For most businesses, this is fairly obvious: selling a product or service for some advertised price. Other markets -– particularly those that involve licensing, subscriptions, bundling, and other strategies –- can be more complex. Startups should start simple and add complexity down the road.
This is where the market potential is described. How many people in the target markets are willing to spend money to make their problem go away, and how much they’re willing to spend. This is the “total addressable market” that the company and its competitors are collectively targeting. The company must identify its target customers and demonstrate an understanding of their buying habits and why/how they should buy from the company instead of a competitor. In other words, this is the marketing strategy.
Most investors say that the startup team is more important than the idea itself, because a good team can fix a mediocre idea, but a mediocre team is likely to fail even if they are pursuing a great idea. Therefore, the business plan has to convince the investor that the team has what it takes to turn investors’ money into a successful business.
No matter what, there are always competitors or potential competitors. You need to think about all of the different ways in which consumers are currently dealing with the problem that this company solves. Some will be direct competitors, some indirect, and some will be substitute products (to a parent trying to keep a child calm on an airplane, a coloring book is a substitute for a Game Boy). The business plan needs to describe what makes the product superior, and how the company intends to stay one step ahead of the competition (say, in the form of patents or other sources of competitive advantage).
The “Competition” section of your business plan is your opportunity to showcase your relative strengths against direct competitors, indirect competitors, and substitutes. Besides, having competitors is a good thing. It shows investors that a real market exists.
Investors should look for a track record of achievement, rather than a history of ideas and dreams. – that you’ve been busy building your business over the past instead of just dreaming about your idea.
Investors tend to think in terms of numbers, so the business plan should show the key metrics for the planned business, and how those metrics will compare to industry norms. Some examples include per-unit profitability, revenue per employee, expense per employee, revenue per customer, cumulative units to break-even, and so forth. They should also include benchmark comparisons to other companies in your industry – things like revenues per employee, gross margin per employee, gross margin as a percentage of revenues, and various expense ratios (general and administrative, sales and marketing, research and development, and operations as a percentage of total operating expenses).
Investors are in the business of balancing risks versus rewards. You want to know are what are the risks inherent in the business, and what has been done to mitigate those risks. The key risks of entrepreneurial ventures include:
Finally, the company needs to show investors that it has a concrete plan for executing on the business plan – that it knows what resources it needs at certain points in the future, and the team understands how cash flow works. Ideally, the financial forecast show that the company can achieve profitability reasonably soon after receiving your investment. The company should also have an aggressive but achievable set of specific milestones for turning its idea into reality.
Akira Hirai is the founder and CEO of Cayenne Consulting, LLC, in Anaheim Hills, CA. He has over 20 years of experience in entrepreneurship, management, business planning, financial analysis, software engineering, operations, and decision analysis. Before founding Cayenne Consulting in 2001, Hirai started two Internet companies in Silicon Valley. Previously, he held various management positions…
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