CHAPTER FIVE
The Seven Ingredients in a Great Business Plan
WHAT ARE YOU READY TO START—a project or a company? That is the fundamental question you must answer before you start putting together your venture.
A project is an enterprise with limited objectives that reflect a limited understanding of the market or product. Frequently, the customer and the value proposition are not well understood, and the entrepreneurs are iterating (or pivoting) rapidly, seeking a product–market fit. The team members often hope that their efforts will lead to an early sale of the business under attractive financial terms and possibly to career opportunities in the acquiring company.
The type of venture that we describe in this book starts out quite differently. Creativity is an essential element in a successful launch, but if you can’t put in place a financial plan based on the relevant realities, risky as it always is, you are not planning a business but a project—and hoping that unforeseen events will lead your project to success.
If your intention is to start a company, however, there’s an important question you must answer: Is your business idea such that you can build a valuable company? You answer that question by focusing on the key issues we discuss here. We’re not talking about the mechanics of writing a business plan but rather about defining the essence of the new company and articulating why it can succeed. Addressing this question helps you define the issues the proposed new business will face and pinpoint ways to answer these issues in a credible way. Entrepreneurs are often willing to act with knowledge of risks, but the best entrepreneurs are risk mitigators, scrupulously analyzing and acting to maximize the probability of success.
Bart Stuck, a managing director at Signal Lake Ventures, says, “Risks don’t just compound, they damn near exponentiate.”1 Investing in a company that has more than one risk from the pool of team, market, technology, or syndicate is fraught with peril. If the technology is risky, try to make sure the market and team are rock solid. Or, if the market is unproven, try to make sure the team can deliver the technology.
Once you address these issues with careful analysis, you can develop a detailed action plan for starting the business, list the anticipated milestones leading to financial self-sufficiency, and determine the investment needed to reach the milestones. Of course, such a plan is speculative, but if the team cannot formulate one, it’s safe to assume that the proposed venture should be treated as a project and not as a company.
Even a project needs a definition of goals and objectives if outside investments are sought, so there is no escaping the need to anticipate the future in as realistic a manner as possible. Frequently, the financing of projects is so speculative that the founders finance the initial stages themselves or solicit funds from friends and family on the basis of their personal reputation. For the kind of company that is the focus of this book, you need serious investors. (Deciding which investors to approach and how to do it is the subject of chapter 6.)
We are well aware that many books have been written on the subject of creating business plans, but their focus is broad and not on the purpose of this book: building transformational companies.
The business plan of a potentially great company has seven ingredients.
- A clear, simple mission statement articulating in a few paragraphs the major themes of the company.
- A compelling business vision, business model, and go-to-market strategy to address a large and growing market. They describe the ecosystem in which the venture will operate.
- A product or service solution that provides high value and clear differentiation from the competition—either through technology or the business model.
- A quantitative statement of the benefits of the solution to the market.
- A deep understanding and analysis of the competition.
- A financial plan that anticipates risks and timing in reaching key milestones and states how they can be mitigated.
- A value proposition that is a compelling statement of value to the market and the investor. This provides the foundation of your business plan and the reason for its anticipated success.
Often, the seventh ingredient, the value proposition, is discussed separately from a business plan because it is so important, and is almost always developed first. The value proposition is also the basis for the presentation to investors—called the “venture deck.”
Ingredient 1: The Mission Statement
A famous example of a mission statement that launched a great company is in the very short 1968 business plan of Intel (the name is taken from “integrated electronics”). The plan consisted of three paragraphs with the following key points.
The company will engage in research, development and manufacture and sales of integrated electronic structures to fulfill the needs of electronic system manufacturers. This will include thin films, thick films, semiconductor devices and other solid-state components used in hybrid and monolithic integrated structures. A variety of processes will be established, both at a laboratory and production level. These include crystal growth, slicing, lapping, polishing, solid state diffusion, photolithographic masking and etching . . . Products may include diodes, transistors, field effect devices, photosensitive devices, photo emitting devices, integrated circuits and subsystems commonly referred to by the phrase “large scale integration.”2
Founders Robert Noyce and Gordon Moore invested $250,000 each, and they raised $2.5 million from other investors. The rest is history.
How was investor interest raised with this simple business plan? The first and most important reason was the reputation of the two founders. Noyce was one of the inventors of the integrated circuit technology that was the basis of the new company, and both he and Moore had outstanding pedigrees as founders of a successful semiconductor business, Fairchild Semiconductor. The investors could therefore have confidence in the capabilities of the founders and their knowledge of the foundational technology.
The second reason is that the premise of the new business was clear. It was going to focus on an emerging technology with great promise: integrated circuits that combined multiple functions into a single chip. The opportunity unleashed by integrated circuits was compelling. Such a chip would avoid the existing practice of soldering components together on a board. Because the technology was new and the founders well-regarded experts, a great deal of detail was not necessary for such an introductory document. (In fact, Intel’s first important and successful products were memory chips—the best application of integrated circuit technology at the time.)
It’s critical to state the mission of your venture, but how much specificity is needed? It makes a big difference if your venture will be competing in an established industry or basically creating a new market, as Intel did. To illustrate this point, let’s look back at the semiconductor industry.
Intel’s launch in 1968 coincided with the early years of integrated circuits, and the implied (but not stated) value proposition was that the integration of many components on a single chip provided clear value for the electronic equipment industry. The existing industry relied on the messy process of soldering components on a board. It can be assumed that the plan was presented to people who were industry experts, and therefore in depth discussion of the details of the process were not necessary.
Not all ventures can succeed with the kind of brevity of the Intel value proposition, but it stands out with its simplicity and clarity.
Now fast-forward to 2003, when Warburg Pincus invested in another semiconductor start-up, Raza Microelectronics (RMI), headed by Atiq Raza, a highly experienced entrepreneur and executive. By this time, integrated circuits with many applications had become an international industry, with more than $200 billion in annual revenues. RMI became a leader in the area of high-performance multicore microprocessors for the data networking industry; after it reached revenues of about $100 million, it ultimately became part of Broadcom, where its leadership products continue to be widely sold. RMI began as a highly successful start-up in an industry that was maturing, and its original business plan had to reflect a clear value proposition. Here is the mission statement of the original business plan.
The data networking industry is undergoing rapid transition from custom designed chips to general purpose chips that can be programmed by high level software incorporated into those chips. RMI will offer novel chips that promise to not only improve the performance of the systems that incorporate them but reduce their cost as well. The way in which it will be done is by combining multiple microprocessors on a single chip able to communicate and process data together using a proprietary architecture and software. In effect, these chips will incorporate a new processing architecture able to do parallel processing of data in a coordinated manner to greatly speed the ability to process the flow of data packets in networks. There are no equivalent products in the market.3
The purpose of this mission statement is to explain the new company’s reason to exist on the basis of value created for its customers. Note that there is no attempt to complicate the mission by providing details, nor is it assumed that the reader is an expert on chip or data networks. Even so, the value proposition is clearly stated. The details needed for expert evaluation would come later as the plan of the company is fleshed out.
Ingredient 2: The Vision, Business Model, and Go-to-Market Strategy
The second ingredient of your business plan is a set of three elements: the business vision, the business model, and your marketing strategy. Let’s look at each in turn.
The Business Vision
The vision will begin with identification of an initial market to attack, often called the beachhead market. But a compelling business vision goes beyond planning a new company based on a first, superior product. The vision is a long-term view of how the new company will develop and sustain a leading market position.
It is a common error to focus on a superior product or service rather than on the longer-term market position you aspire to. Product-focused business plans tend to provide detailed comparisons between the proposed product and those available on the market, but not a vision of what you hope to accomplish by implementing an ambitious strategic plan to create a dominant market position.
Let’s turn again to the example of RMI. The company was entering the market with a novel chip architecture and enabling software. Its chips were expected to increase the data capacity in communications networks by a factor of 10 under favorable conditions, and RMI was addressing a big market. The RMI business vision stated, “According to IDC and Dell’Oro [two respected market research companies] the network equipment vendors spend about $6.5 billion annually on chips for their equipment.”4
Founder Atiq Raza’s vision was based on RMI’s technological leadership. With its unique technology and design team, RMI was being positioned to carve out a major market position:
RMI’s team of veteran engineers has developed a strong intellectual property library and uses a proprietary silicon design methodology that facilitates fast and accurate product development. The team also includes experts on network system management thus facilitating the product design to meet customer needs.
In fact, Raza and his team had an impressive record of novel chip development in some of the best semiconductor companies in the world. They were passionate about the new architecture, which they believed would change the world of network data processing and greatly increase the performance of the internet through faster and cheaper data communications. The company solved the problem of gaining customers by supporting its chip products with reference network system designs that allowed customers to rapidly build their own products. In fact, as the history of the company shows, RMI met its objectives with products and solutions embedded in equipment produced by some of the largest network equipment manufacturers in the world. The RMI team members were pioneers.
The Business Model
After you develop the vision, the next issue to be addressed is to translate it into a viable business. By “viable” we mean a business that is sufficiently profitable to sustain product R&D and grow by exploiting the targeted market opportunity. The first step in that definition is deciding what kind of business you anticipate. Simple examples are developing and selling software, manufacturing and marketing a product, or providing a service such as distribution, consulting, or data management. Each of these models requires different kinds of resources and investments.
For example, in the case of software companies, the business model that is becoming accepted is not licensing the software to customers but rather delivering its capabilities on a service basis over a period of years, with the software vendor responsible for upgrades and delivery to customer requirements. The commonly used term for such a business model is SaaS (software as a service). This model reduces the cash flow of a company, because revenue is not received up front but over a period of time; however, it does result in a predictable revenue stream.
In SaaS, a software product company is transformed into a service company. Let’s look again at the example of Nova discussed in chapter 3. Nova was a service company providing credit card processing to merchants. But the founders and investors had to decide whether the company would build the IT infrastructure to deliver the service, or use contracted facilities for that. They decided to build a data center and infrastructure, a move that allowed Nova to grow rapidly and profitably. Additional investment was needed, but in hindsight that was the right decision. In the current environment, however, building data centers may no longer be the right decision because of the availability of cloud computing processing facilities provided by Amazon.com and others.
The Go-to-Market Strategy
Contrary to common myth, if you develop a better mousetrap, the world does not beat a path to your door. Customers don’t yet know who you are, and any message of claimed superiority is met with skepticism. You must find (paying) customers via a compelling sales message and convince them to trust you. The reason most ventures fail is not that they don’t have a great market or great products but that they can’t sell them profitably and at a scale that supports the business. In fact, it is not unusual to see successful young companies spend as much as 40 to 50 percent of their revenues on sales and marketing, and 20 percent on product development. It is clear, therefore, that improving the way a company sells is a top priority.
Developing channels to market is a challenge matching that of product development. One without the other means failure. New companies have a hard time penetrating markets where the products are core to their customers’ critical needs and where they must be convinced that their suppliers will survive for many years—a hurdle faced by, for example, new companies trying to enter industries such as telecommunications equipment. What will convince equipment vendors to trust a start-up? The customer pain being addressed must be intense enough to justify the risk of buying from a start-up that convinces them of its integrity and quality of support.
This does not mean that successful entry in such markets is impossible. It only means that you must develop the right strategy to meet the need of customers in the targeted market. Therefore, if you’re targeting customers in specific industries you must have a plan for market entry that is consistent with the way those customers buy products. For example, in the telecommunications service industry, software solutions are generally acquired through system integrators, which provide the professional services and install the software, rather than by direct selling by software manufacturers. This means that a new company must establish distribution relationships with existing and trusted system integrators, such as IBM or Accenture, to reach the market and establish a reference base for its products.
Ingredient 3: The Differentiated Product or Service Solution
When a new venture begins, one of the greatest risks is that it will not be sufficiently differentiated from either existing or potential competitors. Let’s look at how to differentiate your solution.
What Differentiation Is Not
New entrepreneurs tend to harbor false beliefs about differentiation. They think it involves being first, having patents, having celebrity advisers or board members, and having well-known investors.
Being first often only means that you are serving as the experiment as to whether your business concept will succeed. There are two likely outcomes: you will fail, and others will learn from your mistakes; or you will begin to succeed, and others will see your success, copy it, and steamroll your venture.
Having patents, patent disclosures, or filed patents is good. You’re creating a defense against the possibility that others will sue you for infringing. But usually, having these patents is not very valuable in preventing other companies from entering the market. Entrepreneurs frequently feature their patents as competitive shields, believing that patents or filed patents offer a start-up adequate protection on their own. Not so—unless you have allocated likely millions or tens of millions of dollars and are willing to devote years of effort to patent protection and litigation.
Unfortunately, the reality is that the patent system is defective in many ways. One of them is that patents are sometimes granted on the basis of questionable claims of originality. When challenged, such patents can be overturned or further restricted.
Attacking competitors with your patent claims is almost always a bad idea for a start-up. First and foremost it distracts the technical team. And while the patents are undergoing legal review, the start-up trying to litigate can run out of customers and money. In addition, if a big company is the claimed infringer, it probably has big resources to manage such fights while its start-up challengers are counting their dollars. Finally, if you’re defending your patent claims, you will have difficulty getting investors. They are not eager for their funds to be used in a lawsuit.
One example is Level One Communications, a company that had several important patents covering features of its Ethernet network communications chips. The company identified infringers in Taiwan and the United States and began legal actions against them. These activities lasted for years and only solicited countersuits claiming that Level One was infringing their patents. The result was a costly standoff, and the only beneficiaries were the lawyers involved.
However, patents do represent a powerful defensive weapon. When you’re challenged by an opponent, it’s valuable that you’re able to use patents against them. So you should file patents when you have important inventions.
In chapter 6 we address the fallacies about differentiation through the support of celebrity advisers, board members, and high-profile investors.
What Differentiation Is
To create a great company, we always seek an identified major market need or pain point, develop a clear business vision for reaching that market, and identify a differentiated or disruptive technology or business product or service solution. What we mean by “disruptive” is that the solution has the potential to disrupt the existing market. Siri, for example, offered a disruptive technology solution: it allowed users to accomplish tasks on their smartphones via spoken natural language. Using natural language understanding (a field of artificial intelligence) was a breakthrough. It involved not only word-by-word recognition, which was already available in many companies, but also recognition of the intent of the request (such as making a restaurant reservation) with Siri understanding the meaning of the request, figuring out how to answer it, and then providing the answer. There were other approaches in research labs, but this was the first time artificial intelligence was part of a consumer product in the hands of tens of millions of people.
You can also create a disruption by adopting an innovative business model. For example, SaaS was a new business model that disrupted the entire software industry, threatening the legacy players. Salesforce.com became a multibillion-dollar company based on this model. Cloud services—using the computer infrastructure under contract of a large vendor such as Amazon.com—are another example, in this case, a business model that disrupted the data storage and network industry. The availability of such services opened up new venture opportunities in enabling software solutions with minimal IT capital investment.
The point of these discussions is that the only competitive advantage that a start-up can expect to have is delivering a winning product or service, having a differentiated business or technology solution, building effective channels to market, and continuing development to stay ahead of your competition. It is an endless race.
Developing a Market-Ready Product or Service
In a few start-ups, the offered product or service is market ready from the start, so the primary issue in planning is to estimate the time and resources needed to field the first saleable product. Hence, the start-up team needs individuals with experience in product development as opposed to theoretical knowledge only. Entrepreneurs risk their venture on the ability to deliver products in the time frame when financial support is available. You should not start your venture without confidence that the skills are available so that you can manage the risk in going from concept to product.
It’s also important that you have confidence in investing money in marketing. How and when to invest in marketing is a key judgment. The entrepreneurial team can adapt one of two strategies if market conditions allow: either work to develop a final product based on the best estimate of what customers are willing to buy, or identify a small number of potential customers intrigued by the value proposition who are willing to work with you in reaching a final product by a process of iteration—testing successive versions that are known to be imperfect in the anticipation of ending up with a valuable product. This latter option is not always available, but some customers might be interested in such a process because they will be the first to use a product that may turn out to be amazing.
Sizing Up the Competition
Dynamic markets are complex, multidimensional chessboards. Understanding the competitive landscape is hard, but it is even harder to anticipate what is likely to happen as you build the new company. The Siri team was convinced that Siri was a pioneering product—and so it was—but as the story got out (as it inevitably does), competition emerged. All it takes to unleash competitors is for them to learn that something valuable is possible.
Watch out for the big guys. There was a time when entering a market dominated by big companies was deemed to be easy because “big guys are slow to react.” But this has changed. Many of the current technology market leaders were start-ups themselves not long ago, and their entrepreneurial managers are on the lookout for new threats from start-ups. Furthermore, venture capital is available in high-growth sectors, and the appearance of a new company with what looks like a compelling product that is getting market traction is sure to entice competitors. No venture should start with a paper-thin value proposition that can easily be copied by incumbent vendors or other start-ups.
The Importance of Timing
If a company has the right market idea and fails because the timing is wrong, it still fails.
You need to learn to differentiate hype from reality and not bet your future on markets that turn out to be mirages and investment black holes. When we talk about favorable periods for starting ventures that meet our criteria, we want you to be cautious; you must have a solid business plan that builds for the long term. And the management team must have the confidence to navigate through troubled waters. Competition is inevitable.
We discussed breakthrough market opportunities for new ventures in chapter 3. These favorable opportunities do not remain secret, and chances are that a furious pace of entrepreneurial activity is triggered sooner rather than later. We’re talking about solving big market pain, so when you identify a solution there will be a long list of companies, new and old, looking to enter the market. Inevitably, such emerging markets with great potential become defined with a new, catchy name that attracts attention and investment.
Historical examples come to mind. In each case, many new companies entered what was believed to be a huge new market, but they were not prepared financially, nor did they have the right resources to be long-term participants.
In the 1980s, for example, the hot new trend in information technology was client-server architecture, where mainframe computers were replaced by smaller networked machines focused on specific applications. This architecture offered a clear benefit in system flexibility and low cost, and many companies started designing and marketing servers: midsize industrial computers. Many companies were also launched to build personal computers (the clients) that interfaced with these servers. Most of these start-ups didn’t have the necessary resources to be long-term participants, and disappeared, leaving a handful of vendors, such as Hewlett-Packard and Sun Microsystems (since merged with Oracle).
Communications also became a hot investment market as a result of government deregulation in the 1990s. Deregulation set off a wave of investments in start-up equipment and service companies. Most of those disappeared as the industry was consolidated by a few large companies having the resources to compete in a highly capital- and technology-intensive industry.
The story was repeated with the internet’s emergence as a popular medium in the 1990s. Thousands of start-ups failed, because their business models proved that it was very hard to make money on the internet. The survivors were those who had developed profitable business models.
In the early 2000s, there was a surge of public interest in the production of renewable energy sources to reduce the use of fossil fuels for electricity generation. This triggered the emergence of “greentech” companies, which marketed products ranging from solar cells to wind turbines and new agricultural products aimed at producing biomass as a fuel. Undercapitalized in an industry with big capital needs and uncertain government support, most of these new companies have invariably failed.
More recently a public awareness of the “big data” market has emerged, where companies produce software for analyzing large amounts of data for specific objectives. Such analyses can create great value. Hundreds of newly launched companies focus on the specific data needs of industrial sectors such as retailing. However, generating a true broad-based product from such an offering is difficult because of the degree of specialization of the data analysis. It is fair to predict that only a few of these ventures will emerge as big companies. The few winners will have developed business models and value propositions that position them for profitable growth as they address more markets.
The point is that big-market opportunity hype results in many start-ups having weak differentiation in their offerings and, often, financing that is inadequate to build a sustainable market position. Their fate is oblivion, after damaging careers and losing millions of dollars in investor money.
A few new entrants—those that have figured out winning business models and value propositions—can sustain intense competition. But when too many entrants target the same market problem, highly promoted new market opportunities often result in massive failures. It’s true that you should launch your ambitious venture before other ventures begin targeting similar opportunities, but most important is that you have the management and financial resources to build your future. Being first is not enough if you’re not prepared to compete. This means recognizing the opportunities early and executing on them. Otherwise, an early start-up that fails is only a market setter for others to learn from its mistakes.
The companies we discuss in this book as examples of great successes, such as Covad, Nova, Ness Technologies, Level One Communications, Neustar, and RMI, were launched early in these investment waves and were established in their markets before a horde of competitors arrived that addressed the same emerging opportunity.
Ingredient 4: A Quantitative Statement of the Product’s Benefits
All ventures start with a proposed market need or pain point and a product or service concept to serve that market need. Venture capitalists are trained to be highly skeptical of claims of potential market size and customer benefit. The catchphrase they use is, “Give me proof that the dogs will eat the dog food.” Therefore, it’s essential that you specify in detail the customer benefit in buying the product or service.
One of the more difficult kind of ventures to gain funding is one that serves the consumer market. As we said in chapter 3, sometimes in the consumer market it’s difficult to quantify why the consumer would buy your product. (With Siri, we were successful in coming up with that justification—see chapter 1—and that is why we were able to gain investor funding at an early stage.) For example, some consumer ventures are considered to be in the “hits” business, like hits in the movie studios, and successes are unpredictable. Good examples are game companies. As a result, venture capitalists will rarely invest in that kind of consumer venture unless the venture has reached a more mature stage, and already demonstrated that a large number of consumers are using its product or service. So how might these entrepreneurs gain investment when they are seeking their initial round of funding? Family and friends, angel investors, and seed funders (who specialize in early investment) may take the risk if they like the idea. But the next stage of investment will almost certainly require venture capital investment and proven customer traction.
When your venture can clearly quantify the product benefits to the customer, there is great value. You allow the investor to quickly understand the proposed product and see why it will interest customers. For example, in the case of an electronic product such as chips, the proposed product or product family might offer many times the processing power of existing chips that are targeted for replacement. In the case of industrial software, the benefits will derive from advantages such as faster operations or avoidance of errors, leading to major reductions in the operating costs of an enterprise. Ultimately you will translate the benefits into quantitative statements explaining why the customer will buy the product.
Ingredient 5: A Deep Analysis and Understanding of the Competition
Investors will want to see that your team members understand the competitive environment and are prepared to deal with challenges from competitors entering their turf. If there are no direct competitors, there may still be others who provide a product or service that fills some of those needs your new venture is planning to satisfy.
One of the worst, and unfortunately most common, ways that entrepreneurs present competitors to their investors is to prepare a table that shows competitors on the rows, and the features of their product on the columns—just like a Consumer Reports article shows tables comparing different products. Then they fill in the chart by showing how their product offers all or most of the features, and the competitors offer fewer.
Why is this such a poor approach? Because merely having a combination of all the features does not necessarily mean your product will be successful. Maybe the customer cares only about one or two features. Or maybe the chart shows the features but not the value they provide. Or perhaps having too many features is actually a detriment, confusing potential buyers.
What’s a good way to show your competitors to your investors? One common way is to create a graph with each of two important differentiators on each axis. Usually your company is the highest in these two differentiators, appearing in the upper-right quadrant. Then you can fill in your competitors in the other quadrants. You might also indicate movement of the competitors (nothing is static in this world) with arrows, showing the direction they’re taking.
Another excellent way you can show investors your competitors is to demonstrate their product or service (or a simulation of it) next to yours. Then it will be easy to understand the differences and value your product brings.
Claims about having no competitors will be met with extreme skepticism. Even worse, venture capitalists are highly wary of entering territory where no other investor has seen fit to enter. Also, venture capitalists actually like it when there are competitors, who may ultimately become acquirers, providing one exit path for a successful venture.
Ingredient 6: The Financial Plan
The financial plan is the culmination of your business planning. No matter how careful your planning, in practice your financial plan is not likely to match reality; it usually takes longer and costs more to build a viable business than anticipated at the start. Thus your plan will be a living document, changing with circumstance—good or bad. For example, if you change product development, you will change the allocated expenses accordingly, along with other expenses related to marketing, trying to keep total expenses constant.
Many entrepreneurs develop a financial plan as if it were an appendage to their other plans, with its own separate story and logic, all on spreadsheets for profit and loss, cash flow, and balance. They expect that the investors will care only about the bottom line numbers. This is a serious mistake. Experienced investors expect you to have a financial plan that corresponds to each element of the business plan and value proposition, making the financial plan the crystallization of all your strategies and decisions.
As your start-up enlists investors, the credibility of your management team will hinge on its ability to meet expectations within your financial resources. Having a clear vision and plan is, of course, a prerequisite to getting started, but getting to the ultimate objective will most likely require several rounds of investment. These rounds of investment can fund the growth of what has become a profitable business, or they can cover losses—a much less pleasant situation for the venture. Hence, you and your investors need to understand timing risks and the nature and cost of the resources needed to meet milestones. The worst thing you can do is to entice investors with a near-term plan that is too optimistic, only to run out of money before you accomplish the key milestones that you committed to. A start-up that fails to reach its initial milestones can be left bereft of cash and investors, with no means of attracting new capital.
Experienced investors know that financial planning is uncertain, but they want to see a management team that knows how to react to change and address issues rapidly and effectively. Be sure to maintain a close relationship with your investors for their continued support—a subject we address in chapter 6.
Necessary but Not Sufficient
A thoughtful business plan is only a preparation for the future, and not a prophetic document. No matter how careful and thoughtful the business planning, underlying assumptions will often prove wrong, for any number of reasons. For example, you can experience product delays and quality issues, trusted team members can prove unreliable, competition can arise from unexpected sources, and anticipated customers may not materialize. On the other hand, there can be unexpected good fortune, such as product demand being far greater than anticipated or competitors stumbling, leaving a huge market opening.
In any case, serendipity is a fact of life, and a great management team is differentiated from others in its ability to seize opportunities where others see only grief. Great teams create their own good luck.
Ingredient 7: The Value Proposition
Every business must have an underlying value proposition to justify its existence. The business plan is the road map that turns the value proposition into a valuable business.
A value proposition is a set of statements that explain how you will deliver value to customers and how this value will generate revenue from customers, at a cost to the venture that will lead to profitability.
To clarify the concept, let’s compare two examples of proposed value propositions. The first example is to offer a product that has a known market at a lower price than current players. You can think of this as an undifferentiated commodity product that displaces the incumbents by offering a lower price. What makes this a valid value proposition? It could be valid if, in fact, the cost is lower because of new technology or distribution channels or added services (or a combination) and if the model cannot easily be copied by others, therefore making the advantage sustainable. In effect, RDA, a semiconductor start-up in China, built a great business on that basis by selling lower-priced chips to local producers of cell phones and displacing imported chips.
Another example, also in the semiconductor industry, is that of RMI, where the value proposition was based on offering new products that outperformed existing ones by a factor of 10 while being substantially cheaper as a result of combining on a single chip functions that formerly required multiple costly chips. The architecture was proprietary and extendable to other products, and hence this value proposition was the basis of a successful business with a long-term strategy.
You can summarize ingredients 1 through 6 of the business plan to bring a compelling value proposition to life. Value propositions are most compelling and powerful when they are quantified and specific. When you give a venture presentation to an investor, you are describing your value proposition.
An outline of a classic presentation to an investor is as follows. The key points should all be captured within 15 to 20 slides.
- A high-level vision statement, articulating in a few words the simplest and clearest statement of what the company wants to achieve over its lifetime.
- The team, and why it is the right team to execute the plan.
- Market pain points—the current state of the market problem, the vulnerability of the market, and the size of the opportunity. Do you have a deep understanding of the market ecosystem? Can you describe a day in the life of the customer? Give use cases.
- Why now? Describe market trends that make your solution possible.
- Product or service solutions to the market pain points. What is your differentiation? Do you have a breakthrough technology or business model? Do you have a road map of products beyond the first product?
- Quantified benefits of the product or service solution to the market. Are they vitamins or painkillers?
- Go-to-market plan. How long and difficult is it to make a sale?
- Business model—describe your revenue, pricing, and profitability. Do you have a base camp as you’re climbing Mount Everest?
- Analysis and deep understanding of the competition—can you describe or simulate your closest competitor’s solution, compare it to yours, and explain why yours is far superior?
- Risks—do you describe the risks and a plan to mitigate them?
- Investment—do you outline the goals, schedule, and milestones for the investment needed?
- Summary of the financial plan—do you anticipate risks and timing in reaching key milestones and the ways they position the company?
- Demo—do you have a demonstration of your product, or a proof of concept, or a simulation? It is helpful in reducing investor concerns of risk.
Once you have your value proposition and business plan, you’re ready to approach investors. The next chapter will show you how to choose them and how to go about gaining funding.