Writing a Long Business Plan

One of my favorite parts about being in business school was working on business plans. I loved to write me a business plan. It really felt like I was creating something. I got to spend a bunch of time researching and learning, and then committing to paper the fruits of my labor. Better than the researching and the writing was the model building. Going into Excel and building a gigantic model clearly laying out the next five years of the business was something I loved to do. Finally, I could take the model and the business plan, roll it all together into a 60 page tome, and prove to everyone just how smart I was. Fail.

Unfortunately, I wasn’t proving how smart I was. I wasn’t proving that I was a business titan who could craft a business out of nothing. I wasn’t showing the world that you needed to get an MBA to be a successful entrepreneur. What I was showing was that I could waste a bunch of time doing a bunch of work about which no one would ultimately care, and in fact was making little progress in the actual building of the endeavor.

Anyone who tells you that you need to have a long and thoroughly written business plan is either a banker, a consultant, or has never been an entrepreneur. Why a banker? Well, if you do decide to go to a traditional bank for any kind of loan, they are going to want to see very exhaustive information about you and your business. They are not in the risk taking business. They are in the risk mitigation business. In theory, the more information you present to them, the more risk you are mitigating. Venture capitalists are ostensibly in the risk taking business, meaning you can get money from them with far less of a plan, but we’ll talk more on that later. VCs are actually some of the most risk adverse people on the planet, but they will certainly invest in your opportunity without you having to show up with a 60 page plan.

The truth about those long business plans is that you will never read it again. Well, not never, but the likelihood that you will read it again with any level of depth, or use that document as a detailed plan for success is very low. Why? Because in the early stages your business is going to be very fluid. What makes your business successful will not turn out to be what you thought would, and the business you build will be very different from the business you planned.

Another reason to avoid writing a long business plan is because, well, let’s call it what it is. It’s an advanced form of procrastination. You can spend time writing this long document which lays out your value propositions, key target demographics, competitive analysis, financing needs and management team background, or you can actually get started on building the business. You would be surprised how much time you can waste with the work that you can put into one of these documents.

The last thing that I want you to think is that a plan of any kind is a waste of time. You should have a plan. You should know who your competition is. You should understand who your customers are. What you should not do is write a very long document that you will never read again. Much like there is a minimum viable product, which necessitates that you get to market quickly and iterate on design, the same can be true of a plan. Get a minimum viable plan done as quickly as possible, validate it, and use that to start building your business. That minimum viable plan is a PowerPoint presentation that answers the following questions:

1. Who are you?
2. What is the problem you are going to solve?
3. What is your solution?
4. Why will the market accept your solution?
5. What does the competition look like?
6. Who are your customers?
7. What are the details of your product?
8. How will you acquire customers?
9. What is your best approximation for the financials of the business?
10. What are the risks/challenges?
11. What’s the timeline?
12. Bonus: What’s The Exit Plan?

If you take a close look at this list, you will see that it is stage agnostic, meaning you can apply it to the planning for any new product, group, or company.

Every single business plan that I wrote in business school amounted to nothing. Nothing. You never would have thought that would be the outcome given the time, energy, and effort that I put into those business plans. I had a ton of ideas, and wrote several plans, and some of them might have even been good ideas. Unfortunately I spent so much time writing them, and not so much time going about trying to implement them.

Even when I was working in private equity, the length of the presented plan seldom dictated the decision to invest in a company. The first question to which we always needed an answer was about the management team. Then the product. Then the market. Much of the investment decision was based on a completely separate long document, called the investment memo, which was written by the investment team at the firm. This document had much of the content delivered in a long form business plan, but generated through independent research by the investment team. We primarily did this because we never took what the companies said at face value. So if you think about the amount of time that the management teams of all those potential investment opportunities spent writing long form business plans, you can see that it was largely a waste of time.

There is no shortage of books at the book store or online resources which will walk you through all the steps to writing the killer business plan. These books will often times espouse writing tomes of absurd length and depth of content. It’s not necessary, and you will just be wasting valuable time better spent on getting started.

To help give a little more context to this discussion, I want to use the exact slides I used when I was out raising money for the angel round of IMSafer. These slides constituted the entirety of our business plan as of June 2006 when we were raising money, and served as the roadmap for how we were going to spend the next 12 months. It took us 8 days to raise $1.2 million.

For brevity, I have removed some of the slides which served as backup or further explanation on a given topic, but I have not changed one word of the slides as presented to investors. Incidentally, if you think the content is shit, that only further proves my point that investors invest in people first, plans second.

WHO ARE YOU?

The very first question that you are going to need to answer is who is on the team. If you are presenting to investors, they want to know who they are backing. For anyone who has skipped ahead, you will catch that I broke one of my own rules in trying to go it alone (next chapter). The reality was that while I had other “founders” on the team, because of my misunderstanding of what was required to be called a founder, I only represented myself as a founder. The investors want to know about you, your experience and your pedigrees, in that order. It’s more important to have relevant work experience, preferably in similar company stage and with you in a similar role. Don’t be afraid to list failures. They are great learning experiences, and allow you to demonstrate your ability to learn from fluid situations. They will also want to know about any other advisors you have with the company. For privacy reasons, I have blocked out some names.

WHAT IS THE PROBLEM YOU ARE GOING TO SOLVE?

Consider this section of your plan a place to tell a story. You want to grab the attention of your audience, and connect them to the problem that you are going to try and solve. You don’t need specifics about the product at this point, or how you are going to solve it. You just need to make it clear that there is a problem worth solving. After laying out some interesting statistics about the incidence rate of potential illicit contact of children on instant messenger and the number of sexual predators on the Internet, we laid out the problem in plain English. This is done primarily so that we knew which problems we were trying to solve, and, more importantly, which problems we weren’t going to try to solve.

WHAT IS YOUR SOLUTION?

Very early on in the presentation, you need to explain what you are going to be making. If you can’t sum it up in a few sentences, you have to work on your elevator pitch. The description should not only highlight what you are going to be doing, but further help your audience understand why it’s important. Remember, we’re talking about your business plan here, so this will serve as your sign post for future discussions about product features and/or changes you want to make to the plan of record. This one slide, for us, served as the key set of rules by which we designed our product, kept costs low, and prevented feature creep from plaguing the product.

WHY WILL THE MARKET ACCEPT YOUR SOLUTION?

Immediately after you explain what you are going to build, you have to lay a pretty good case for why you should build it. Among the reasons should be a clearly laid out set of reasons as to why the current market offerings are failing to deliver on the promise they propose, or do so in a sub-optimal way. These reasons should evoke rational reactions, like “of course, the current offerings don’t do that,” as well as emotional reactions, like “I hadn’t thought of that, and the current offerings should do that.” These market failings will inform not only your design work for the product that you are trying to build, but will help you better understand your customers. If you are not delivering value to your customers, then you should pack up. Understanding how those customers are being ill-served in the marketplace, and being able to connect with them in a logical and emotional way, is a sure fire way to fail.

WHAT DOES THE COMPETITION LOOK LIKE?

Whether you are presenting to investors or keeping yourself honest, to not understand your competition is to prematurely raise the white flag. By mapping out their core features and functionality of your competition, you will gain clarity on how you do or will stack up. Understanding where they are weak will also help you identify the potential opportunities for improvement on existing products. It’s important to note, however, that just because the competition isn’t doing it doesn’t mean that it should be done.

Incidentally, if you are in the fortunate position of having no competition in your market space, congratulations. In reality, if your answer to the question “who is your competition?” is “no one,” you probably need to revisit that answer.

WHO ARE YOUR CUSTOMERS?

Hopefully you will have a better understanding of who your customers are when you get down to putting together your plan. As you can see from our over simplified graph here, we dug into some US Census data and did what could be called “nothing more than a very cursory analysis of household data.” I actually give us a great big fail for not really understanding our target customer better when I first went out to raise money.

First, what kind of households were we targeting? To suggest that we were going to target any household with children ages 6-17 is crazy. Are those single parent or dual parent homes? Is one parent working, or are they both out of the house with jobs? What about income ranges? Broadband and Internet penetration? Does race and level of education of the parents impact Internet use in the home, and likelihood of children being in potentially dangerous situations online? Is IM more likely to be used by white kids or black kids? Boys or girls? Do parents of boys or girls care more about online safety?

Second, which parent were we selling to? Based on research we did later, we found that in most households, the male is responsible for the technology, but they aren’t generally concerned with the parental control software. Women make that decision. Further, women will do the research and tell their husbands which software to install. It turned out (as we found out much further down the road), our core audience was divorced and single moms in their late 40s and early 50s who were not that technologically savvy.

It should be pretty obvious that we didn’t know what we were doing when it came to understanding and segmenting our customer base. Take advantage of the wealth of free research information which exists on the Internet.

WHAT ARE THE DETAILS OF YOUR PRODUCT?

Presumably, once you sold yourself, or potential investors, on the idea of your product, you are going to have to demonstrate what the product is and that it’s a feasible idea. The first chart above is how we initially talked about what we were going to build. This was not a formal spec, but it certainly set the tone for the scope of the product that we wanted to bring to the market. The amount of information that you need to accurately depict what you want to build is going to vary, but if you can’t do it in a few slides, you might be in a situation where you are being far more ambitious than you ought to be.

Once upon a time you could present your plan with nothing more than words; maybe even a few sketches of your product. Specific to software, but also in general, the availability of tools to create mockups of your product necessitates that you at least build a prototype so that you can gain understanding into the user interaction. Without being able to demonstrate how customers will use your product, you are merely speculating, and it’s very tough to invest in speculation. Further, while mockup demos are fine, and this is also especially true for software, a working product is far more powerful. As you can see, we had our obligatory architecture diagram of what we were going to build, but we also were able to present screen captures of the working product, and, if necessary, show the product during the early investment meetings. If you can’t succinctly scope your product, and show a working (barebones) product, you need to reconsider your decision to put yourself in front of an investor or decision maker (including yourself) seeking investment.

HOW WILL YOU ACQUIRE CUSTOMERS?

Ah, the marketing plan. How are you going to get customers? I am tempted to spend a bunch of time on this topic here, but since it’s a topic for which I dedicate several essays later in the book, I will pass on this for now. The exception I will make in the discussion is to point out that nowhere in these two slides do I even broach the topic of how to measure success, or what my per user acquisition costs would be. Fail. Having a bunch of ideas as to how you might approach the market is fine, but if you don’t know how you are going to measure that, then you have a problem. More importantly, most investors are going to want to see that information. My investors gave me a pass because they knew me, and I had been in a consumer Internet startup before, and they had mostly all seen the financial model which presented my per user costs. Which brings me to…

WHAT IS YOUR BEST APPROXIMATION FOR THE FINANCIALS OF THE BUSINESS?

For any presentation that you are going to make where you are seeking investment of any kind, you had better come prepared with numbers. I present only the base case here, but realistically you are going to need your base case, as well as an upside and downside case. Financial modeling is something on which I am also going to dedicate quite a bit of time later in the book, so I will leave the specifics for there. I do want to point out that it’s important to be cautiously optimistic with your numbers, be realistic, and anything beyond eight quarters out is a guess, and completely useless. For the record, when the diligence began for the sale of the business in November 2007, we had 160K users. Our projections were very close…because we were metrics driven and realistic. More on that later (in another post to come).

WHAT ARE THE RISKS/CHALLENGES?

No new business or project is going to go off without a hitch, and if you are going to be seeking risk capital, you are going to need to lay out the risks of what you are attempting. In this specific instance, I chose to focus on the technical and business risks. I wasn’t too concerned with the competition because the analysis we had done so far on the market indicated that the dominant players were not innovating, and those new entrants who were innovating were marginally improving on existing ideas. There wasn’t anyone doing exactly what we were doing, which begged the question “why not?” The technical risks were the most pressing and obvious.

In this enumeration, you are going to have to know which risks are within your control and which ones are not. There’s an element of luck in everything you do, and knowing which risks are going to require a little more risk than others helps shape how you spend your time. Stack rank your priorities based on impact to the business and which ones are most in your direct control.

The investors also want to know what the risks are to their money. While these may be a reiterated form of what you have already stated as business and technology risks, you have to be a bit more circumspect about your thinking here. Demonstrate that you are thinking about things that could drive the valuation of their investment to zero. You can never show too much care when talking about their money and how you are going to be a good shepherd for it.

WHAT’S THE TIMELINE?

Lastly, you are going to need to lay out a timeline. When will all this stuff get done? How are you going to be measured and held accountable. My view on this, for right or wrong, is that you can really only plan so far out with a high degree of certainty. When presenting to investors, I chose to let them know what the timing looks like through the next likely funding point. In my particular case here, I hadn’t anticipated being able to raise $1.2 million straight away, so the pitch was tailored for a much smaller raise, and I chose, instead, to focus on the time line which got us to launch of the product.

BONUS: WHAT’S THE EXIT PLAN?

Any investor is going to want to know that you have at least thought about how they are going to get their money back. The answers here tend to be the same, so be realistic and don’t overreach. Just show them that you intend to get them their money back.

The moral? Spend the absolute minimum amount of time to appropriately answer the questions laid out above. The data which you collect should be presented in a slide deck and not a long form business plan. If you are successful in raising money, you will seldom refer to a long form document, and the interconnected nature of the document will make editing and maintaining it very difficult. If you aren’t able to raise money, you will waste many precious hours tinkering with this document instead of doing the more important task of building product and proving you can turn the crank and acquire customers. Focus on this core content, and be pithy. My deck was 30 slides, but you really should be done in 15-20. This deck is your set of core principles, product road map, and marketing plan all rolled into one. Most importantly, you are selling yourself and your ability to get the job done. Investors (specifically early stage investors) are investing in people first. Building your team is one of the most critical things on which you must execute and get right.