Category: Business Planning

Internet Tools for New Ventures

There are a variety of tools readily available on the Internet that aspiring entrepreneurs can use in developing new business ideas. Here are a couple of ideas:
Want to find some cool technology gathering dust on a shelf at a university somewhere? Try out the iBridge site developed by the Kauffman Foundation.

University researchers, industry representatives, and entrepreneurs can use the iBridge website to search for innovations that, until now, have been lost and untapped behind university walls. With more than 700 research projects listed, the iBridge website is fast becoming a place for researchers and technology transfer officers to post research from their universities, as well as the place to go to find research occurring at other institutions. The website is designed to ease the transaction burden on university technology transfer offices, and encourage more open and efficient access to innovations of interest to entrepreneurs and industry representatives alike.

Have an idea for an Internet business, but finding it hard to know what your potential customer is thinking about? Try using one of the tools set up to optimize keyword searches. I heard about this creative use of a free tool on this morning’s Wall Street Journal radio show. These tools are set up to help in Internet marketing by showing what key words are being used most often. (Here and here are a couple of examples).
Assume I was setting up an Internet golf equipment store. By typing in keywords like “putter” or “golf balls”, I can find out what brands are getting the most searches on the Internet. Or assume I am thinking about selling laptop cases on the Internet. I see that in the month of December 1724 searched for laptop cases with the word “pink” in their search, while only 77 included the word purple. That gives me a clue on what color to carry in my inventory.
These tools can help me see the potential size of the market, what brands and related products are most popular in searches, and even what colors and features I should carry. It is a great tool to first get a feel for how much Internet traffic is possible and to learn more specifically what these potential customers are thinking about.
These tools are set up for web search optimization, but they can also be used to get the pulse of the market. For simple searches like this, most of these sites are free to use. While active web marketers are very familiar with these tools, they can be very helpful for any entrepreneur wanting to get more data about their potential market. If I can figure out how to use them with my limited technical skills and general fear of technology, anyone can!

Listen to the Market

I have had some interesting discussions with a entrepreneurs the last few days about what I call “business plan paralysis.” Never make the mistake of being a slave to what you have written in your business plan. Just because you present a specific business model in your plan, it is no guarantee that it will actually look anything like what you thought it would once it gets going. You may need to adjust your features or services, change your pricing, change your distribution strategies, alter your staffing plans, widen or narrow your target market, or even make significant changes to your product or service. While the plan may give you a path to launch your business, the market will tell you how to proceed from there.
Successful entrepreneurs are not necessarily that good at crafting the initial business plan. What they are good at is listening to the market and listening to their customers. They will tell you what your business should really look like if you’ll just listen.
Don’t be arrogant and stubborn about your vision. Let it evolve and develop according to the feedback you get from the market.
Don’t assume that you’ll look like a failure or a fool to your customers for having to adjust the direction of your business. The market will be happy that you are better meeting their needs. They will be glad you listened.
Don’t worry about what investors might think about your need to adapt to market information. Keep them informed every step of the way. They will be impressed with your management skills and support you as long as what you are doing will make the business stronger. They want you to make money — not to follow the plan as it was originally written. They expect you to listen to the market and adapt.
In most cases the original opportunity for your business came about due to changes in the market. So continue to listen to the market and it will tell you where to take your business over time.
Change is the one constant in today’s economy.
Stay nimble. Stay flexible. Continue to adapt. And listen!

The Power of the Marketing Plan

A marketing plan is so much more than simply a list of promotional tactics to be used to sell your product. While how you plan to promote your business is important, the marketing plan should explain all of the strategies you will use to build relationships with your customers.
Marketing plans consist of what is commonly called the “4 P’s”: Product, Pricing, Promotion and Place (distribution). When building your marketing plan you should address how each of these will improve your chances of attracting customers to your business.
We look at product because we need the customer to tell us what they really want from us. We may have developed our own thinking about this, but what we think does not really matter. I work with many artists through my position here at Belmont — musicians and visual artists are common in our program. I tell these artists that if they want people to pay for their art or their music that they will need to adjust their skills and gifts to meet the needs and wants of the market. But, that lesson is not just for artists. It is for all entrepreneurs. We have a notion of what we think the market wants when we open our doors, but in almost all cases the market begins to immediately give us feedback that tells us what they truly want. What they want may force us to make a minor adjustment in what we offer, or it may take a major rethinking of our business concept. If we are not ready to adjust to the feedback from the market, our chances of success fall dramatically.
Pricing is the next key part of the marketing plan. What we understand what the market wants in our product, we now have to price it at a level that the market is willing to pay. Most often an entrepreneur will set the price relative to the market. The most common mistake I see is pricing the product or service too low. Price is part of what communicates quality to the market. If you price lower than everyone else, that may send a message of inferior quality to all of those potential customers. I refer to this as “apologizing to the market.”
Place tells how we get the product or service from us to the customer. Will we use distributors, retail outlets, our own retail stores, the Internet, door to door sales, kiosks, or some other means to get the product into their hands?
And finally there is promotion, which tells how best to communicate our product, its price and how they can get it, to the market.
Now here is a final step in market planning that many overlook. There is another part of the business plan that should tell the same story as our marketing plan — our revenue forecasts. Revenue forecasts should never be made by guessing or simply plugging in some numbers that look reasonable. Rather, the revenue forecast should, in numbers, tell the same story as the marketing plan. Why? Consider the simple formula for Revenues:
Revenues = Price X Quantity
If we do a good job in our marketing plan, and use real information we derive from real customers (or potential customers), it should help explain our assumptions for those two seemingly simple variables — price and quantity. A well developed marketing plan will tell us why we think we can charge a certain price. It will also help us explain why and how we intend to sell a certain number of units by giving the customer what they want (product), how we will get it to them in a manner that will make it easiest for them to buy it (place), and how we know they will be aware of all of this information (promotion).

To Write a Business Plan, or Not to Write a Business Plan

Why do we write business plans? What purpose do they serve?
Guy Kawasaki had a post yesterday on a recent study by Bill Bygrave from Babson suggesting that business plans are highly overrated. And to a large degree, I agree. (Guy as a link to a Word Document version of this study at his post about this study).
Now before all of my students throw up their hands in joy over this statement, I need to explain further. For while I think too many entrepreneurs spend way too much time on their business plans, many of these same entrepreneurs do not spend enough time on actual business planning.
Let’s look carefully at Prof. Bygrave’s summary of his conclusions from this study:

The analysis revealed that there was no difference between the performance of new businesses launched with or without written business plans. The findings suggest that unless a would-be entrepreneur needs to raise substantial startup capital from institutional investors or business angels, there is no compelling reason to write a detailed business plan before opening a new business.

That is only true if would-be entrepreneurs have done all of the homework that goes into writing a sound business plan. I know for a fact that the population Bygrave surveys in this study (alumni of Babson) get very good training in new venture analysis and planning. So his subjects all should know how to use these tools in preparation to launch their ventures. It really doesn’t matter if they actually go the final step and write it down in a formal business plan.
Business plans are a way to document sound analysis and good planning of your new venture. Whether you actually write this document is to a large degree irrelevant. What does matter is that you go through the process of evaluating the market for the venture, analying the potential profit margin it can produce, and reflect honestly on your personal readiness to make it happen. So it is the process of planning, not the actual plan, that really matters.
So why do I have my students write a plan at the end of their studies? It is basically a final exam in their last class with us to show that they understand how to analyze and plan their new venture. Too many people think that a business plan is the beginning, middle and end of starting a new venture. The business plan is simply a reflection of a sound process — it is not the actual process.
In reality, investors like venture capitalists use it in the same way. They want evidence of sound analysis and planning, and the business plan is a way to capture the work an entrepreneur has done in these critical steps.
Guy Kawasaki has it right in his conclusion about this study:

However, don’t draw the wrong conclusion from this study: “Analysis, planning, vision, and communication are unnecessary.” This isn’t true. What is true is that a business plan should not take on a life of its own. It is a tool — one of many that may help you get funded (or, more accurately, hinder you from getting funded if you don’t have one) and may help you get your team working as a team. But it is not an end in itself.

So to all of my students this semester — get back to work on your business planning!
(Thanks to Bruce Schierstedt for passing this along).

Vision is More than Product and Market

An entrepreneur’s vision should communicate what her business can become. It paints a clear and compelling picture for employees, investors, suppliers, and other stakeholders of what they are buying into at a time when the business has little or nothing to show. But to be complete, this vision should describe more than the product the business will make and market it will serve. It should also paint a picture of how the entrepreneur intends to conduct herself as she starts and grows her business.
The entrepreneur’s values should also be reflected in her vision for the business. How will she conduct herself as she starts and builds her business? How does she want to treat her employees? How does she want those employees to treat the customer? What are the principles that will shape how her employees act in her business?
The values she brings to her business should be the same values that guide her life outside her business. This is what creates true integrity in her life. Each action in her business will shape her character. The opportunities she pursues, who she chooses to do business with, who she hires, how she treats each stakeholder of her business, all develop her character just as much as her actions in her family and in her community.
So her vision will not only guide her business strategically, but also guide the development of its culture. And it will also help shape who she becomes as a person.

Worst Case Scenarios and a River in Egypt

A common practice in writing business plans is to offer three scenarios: most-likely, best case and worst case.
When I see worst cases presented in most business plans, they are almost always not the worst case scenario. They are most often a less optimistic variation of what the entrepreneur thinks will actually happen. The real worst case should be this: if things don’t go as planned and the deal fails, what is the outcome for investors and lenders?
Entrepreneurs seem to operate under the assumption that if they don’t plan for failure, it can’t happen. If they don’t ever address the real worst case, investors and lenders won’t think about it.
I get push back on thinking and planning for worst case from my students. “Don’t you think my idea is any good?” That is not the issue here. Even good ideas can fail, as most opportunities come from a dynamic, changing environment.
All of this came to mind after a conversation yesterday with my father. We were talking about a potential deal, and he made the statement that he wants “protection” in a deal. That was an interesting word to me. After all, we aren’t a bank that can get a personal guarantee on debt. Any investment would be at risk.
But, he meant something else. He simply looks at every deal and imagines what it will look like if it goes bad. What can he hope to take away from it? He thinks this way because his generation saw the ultimate worst case — they lived through the depression. It is not that he is risk averse as a result — to the contrary. Rather, he is always soberly realistic that deals go bad, and we should understand where that will leave everyone involved. That is a perspective that we seem to be losing in our society.
Failure is real, and it can happen to even the best among us. So plan for it. Just in case it does happen, and hopefully the odds of that are slim if you have done your homework, you will be ready to move on to the next opportunity. You will have created a deal in which you have actually planned the worst case and have created a business where the worst case is not the end of the world for you — just for that deal.
And just so you don’t go in the wrong direction with this, your outcome in the worst case should not be to declare bankruptcy for the deal. That is a reputational scar you do not want in your background as an entrepreneur if you can avoid it. To plan for bankruptcy is in my opinion, unethical. Once in a while it unavoidable, but that should not be the predetermined plan.
Don’t be in denial about the worst case. Understand it. Plan for it. Make it an outcome you can move on from.

Top 10 Small Busines Myths

From time to time I have written about myths that I see when dealing with aspiring entrepreneurs. Entrepreneur.com has put together their own Top 10 list of Small business Myths that are worth a read for anyone thinking about starting a business.
Several of their myths dealing with financing issues:
Myth No. 1: “The government has grants for startups.”
Generally this is not true. There are a few instances where local governments set up programs for disadvantaged people looking to use free enterprise to improve their lives, but they are not that common.
Myth No. 2: “The SBA loans money directly to small businesses.”
Another financing myth busted. You still must go to a bank. Some banks work with the SBA program to get small business loans guaranteed by the SBA.
Myth No. 3: “Venture capitalists loan money to startups.”
VCs fund less than 0.5% of entrepreneurial ventures, and of those, only rarely do they fund a start-up.
Myth No. 5: “I’ll be able to write everything off.”
Actually you can, but you will face interest and penalties from the IRS, so I don’t recommend it either.
Myth No 6: “I can pay myself whatever I want.”
Again, you can, but you’ll be out of business in a few weeks. You can only pay yourself what is left after everything else gets paid. You are last in line if you want to make your business work.
Myth No. 8: “I should be profitable after six months, because I’m an expert at what I do.”
The article states that most businesses take 2-3 years to make a profit. That is also kind of a myth. I have owned businesses that make profit within a few months, and I have had some that took years. It all depends on the business model and the market. That is why a plan is so important to help you understand what you are getting into. Which brings us to another of their myths:
Myth No. 10: “If I’m not getting funding, I don’t need a business plan.”
See my comments above…
They also have a couple of marketing myths:
Myth No. 7: “If I create a website, I’ll get traffic (or the more popular ‘If I build it, they will come.’)”
Myth No. 9: “I don’t need a marketing plan or marketing materials. This product/service sells itself.”
I tell entrepreneurs that they should be prepared to spend 80% of their time selling and marketing early on. Nothing sells itself and no website creates its own traffic.
Finally, one of their myths deals with lifestyle:
Myth No. 4: “I’ll have more time to do what I want.”
You should assume you’ll have some long hours early on. But, if time is important, make sure to build that into your business plans. Plan for slower growth or less ambitious goals if you want to structure time for other things. Also understand that some businesses just demand more of our time by their very nature. For example, if you want to start a restaurant, plan on very few days off, long hours, and no vacations for a LONG time. Know what you are getting into before you start any business and make sure it fits your non-financial and lifestyle goals.
Make sure to go the the Entrepreneur.com article, as it has some great links to more information on all of these topics.

The Danger of Short-cuts in Writing Business Plans

They are available all over. Tools to help write a business plans can be found in books, software programs, and on-line sites. While many of them have some good features to them, for many entrepreneurs these aids become a short-cut.
I can usually spot a plan that has been written using one of the latest software tools or books. Several things stand out:
– They have a predetermined structure, so all plans written using these tools looks the same. I can spot plans using some of the more popular software a mile away.
– They tend to have fairly weak transitions and flow from section to section.
– They have sections that make no sense for some businesses, but people leave them in and try to write something. For example, a section on distribution often makes very little sense for a service business, but it is in the software and it ends up in their plan any way.
– Most importantly, the financial statements are often inconsistent (at best) with the written part of the plan. This is a fatal red flag for most financial backers, including bankers and investors.
Experienced business plan readers do not read the plan in the order it is presented. Typically, they read the plan in this order:
– Skim over the Executive Summary to see if it is even in the ball park for plans they consider.
– Look at the Team to see who is proposing to do the deal.
– The marketing plan is next. And as they read it they are looking back at your income statement to see if the marketing plan explains your revenue forecasts. This is the backbone of any business plan. Think of it this way. The marketing plan and revenue forecasts should tell the same story in two different languages: one in English and the other in the language of business.
– The next step is to look at the operating plan and compare it to the expense forecasts to see if it is consistent, realistic, and complete.
– If they are still interested, they will then look at the financing plan/proposal to see if they like the deal structure.
Remember that they may throw it in the trash at any point in this evaluation. The typical VC, for example, gets hundreds of plans each year. Only a small number get any significant consideration and only a small handful will get funded.
When you develop your plan, work on it in the order that they will evaluate it (other than the Executive Summary, which you write last). Start with market research of the industry, competitive environment and potential customers. Use that to develop a strong and compelling marketing plan. Then forecast your revenues based on the marketing plan. Take your time. This is probably the hardest step of writing a plan if you do it correctly. Revenues are simply price times quantity, but those are two of the most uncertain issues you will face. Do you homework to show that you are making reasonable assumptions.
Then work on the operating plan and expenses. This is usually easier for most of us. However, don’t worry about getting it right down to the last dollar. Too often we waste time on these sections. We feel safer here, so seem to want to work on that which we feel most comfortable with. Be accurate and complete, but never overly obsessive with every last detail.
When you finally put it all together you will put it in the traditional outline that most of the books and software suggest, as that is a fairly commonly expected standard format. But, when you write it free-style as I am suggesting, you have the best chance of ending up with a powerful story that holds together for even the most experienced business plan reader.
Save the money you would have spent on one of those books or software packages and treat yourself to dinner when you finish writing the plan the correct way.

Revenue Forecasting, Continued

Pelle at Stake Ventures posted a comment at my site and has a post at his site about my recent post on revenue forecasting.
Here is part of what he posted at his site:

The article makes the classic mistake of thinking all start-ups follow the same industrial kind of model with VC’s and business plans etc. I think it is not at all relevant to web based start-ups. Where this is probably relevant are the kind of start-ups where you do need a huge upfront investment.
As all internet start-ups and sooner or later realize these revenue forecasts that you do are nothing more than a waste of time.

Here is my response:

First, you have assumed that I am talking about business plans for the outside world. In that case, you and Guy [Kawasaki] are probably right, as investors and bankers are probably not going to believe your numbers anyway. A VC friend likes to tell folks that he has one person on his staff whose only job is to rip apart the numbers in a plan that they like and reconstruct them with their own assumptions.
However, I am talking much more about planning for the entrepreneur than a plan for the investor.
By spending the time to develop forecasts that tie into the marketing plan, at the very minimum you have now identify the key assumptions that are tied to the big unknowns that create uncertainty in your forecasts.
You now know what you need to track carefully as your business grows. The assumptions become not only what you use to forecast, but become the barometers you use to assess where your new business is really going and why.
This way your forecasts, just like your plan, becomes a fluid and evolves as you learn, as your business grows, and as things change. You imply that I view a forecast as some sort of a contract. Nothing could be further from the truth. I want you to adjust your forecast with each month of experience, with each mistake you make, and with every brilliant decision you make along the way.
When you look at your plan and see how different your business actually looks after you’ve operated a year than it did in the original plan does not mean you should never plan. It means that your plan and your forecasts are a starting point based on the knowledge you have now and that you have learned and used that learning to get better.
When we fail to forecast we are simply setting ourselves up for a game of blind man’s bluff. That is too expensive a game and too risky for me.

I like Pelle’s site and plan to visit it more often. Great post and a fun discussion!

Short-cut to Trouble

Accurate revenue forecasting is one of the single most important steps an entrepreneur takes in planning for a new venture. And yet, we find that most entrepreneurs do not spend enough time determining how much revenue will come in their front doors. Although underestimating expenses is a common mistake in business planning, missing the mark on revenues can be catastrophic.
If sales fall way short of expectations, the business can fail due to lack of adequate cash flow. And if sales wildly exceed expectations, the business is not prepared for demand and customers will abandon the new start-up due to inability to meet their needs with products or services in a timely manner.
Some estimates indicate that entrepreneurs spend only about 20% of their time forecasting on revenues and 80% of their time on expenses, when they should spend most of their time trying to gain an accurate forecast of revenues.
Specifically accurate revenue forecasting is important for a number of critical reasons:
– Bank financing and equity investment are based in part of these forecasts. If the entrepreneurs misses the mark and as a result needs more cash than they first thought, this will cause a significant loss of confidence on the part of the banker or investor.
– Inventory assumptions are based on this forecast. Inaccurate revenue assumptions can lead to either too much or too little inventory. Both are potentially fatal errors for a start-up.
– Staffing decisions are also made in anticipation of future sales. If the forecasts are wrong, the business is either over or under staffed.
– Revenue forecasts will determine how much space is needed for the business. Again, too much or too little space are both detrimental to the new venture.
Revenue forecasting can be overwhelming for the entrepreneur. Some say they feel like they are looking into a crystal ball, and it is too cloudy to see the future. So rather than do the work to improve these forecasts, entrepreneurs take short-cuts. They simply plug in numbers into revenues that have no real basis in fact. Often they put in numbers that seem to give them the profits they hope to achieve. Expenses are easier to estimate as we can do fairly simple research to get these numbers. So we spend time getting good expense forecasts and then plug in revenues that make things look right.
There is a time tested approach to revenue forecasting that can significantly improve the odds that they will be more accurate. Revenues are a simply formula:
Revenues = Price X Number of Units Sold
A well developed marketing plan should be able to give you these numbers. Pricing is one of the questions that are answered in the marketing plan, so that will give you half the equation. Knowing what our customers want, how many customers we can likely expect, and how much of what we have to sell they will want will tell us the rest. That is why a good plan helps us to “Think Like the Customer.” If we know how the customer thinks, that helps us determine how to position our product.
Knowing more about the overall market, including size and competition, can help us to begin to estimate demand. The promotion plan will tell us how we will reach these customers to tell them about our new business.
Experts on reading business plans, such as investors and bankers, usually do not read a business plan in the order it is written. They will often read the marketing plan and then go back to the revenue forecast to see if it numerically represents what is said in words in the marketing plan. That is the backbone of any good business plan. If the revenue forecast does not make sense based on the marketing plan, the investor or banker will usually read no further.