[Guest post by Sanjay Anandaram, entrepreneur-turned-investor and a passionate advocate of entrepreneurship in India.]
Often times I meet entrepreneurs who submit a great looking business plan with all kinds of fancy colour pie-charts and trend lines. It is evident that a great deal of time and energy has been spent in creating the plan. The plan contains enormous amount of secondary data about the market, the performance of Indian and U.S. companies in the similar/allied space, their valuations and the like. But precious little in the business plan about the business that’s currently seeking funding!
On the other hand, I also meet entrepreneurs who submit a non-colour 10 page stapled-together document without any fancy pie-charts and trend lines. Even more of them simply send in a presentation which essentially talks in simple language of the following:
- What is the problem that is being solved and who is experiencing it
- How is the problem being currently solved and the problems with the current solutions
- How will the company deliver a strong competitive solution and why will it win
- How will the business make money
- The people behind the venture
Of course, there is some data on the market. But the focus is on the business that’s seeking funding. The plan is meant to be a guiding light for the company. It is meant for the investors and the management. It is intended for employees and potential partners. It is not supposed to be a showcase for cut-and-paste marketing data.
The point here is that a plan is not an end in itself. A business plan captures, distills and details the knowledge, strategic and operational matters of the business. Each functional aspect of the company should be covered – sales, marketing, operations, development, human resources, finance.
A clear articulation of the strategy and the tactics for each of the functional areas demonstrates clarity of thought and purpose.
The plan is something the key management team signs off on and is used as a management and measurement tool. Else, various functions will tend to exhibit random Brownian motion i.e. will operate in a knee jerk manner, in fits and starts and with no real end goal in sight. And as we all know, the total displacement is zero in Brownian motion even while a lot of distance is traveled!
A plan is a guiding light. A plan is not something that is done once a year to develop a fancy report. And then forgotten. In fact, a plan is a very live document undergoing constant change and revision. In the early days of the startup, it is not unusual to find large gaps between the numbers in the plan and the actual performance.
The reasons for the deviations need to be analysed and fedback to create a revised plan. It is a continuous process. For example, the pricing assumptions may undergo a change based on experience and market situations. So also, various cost assumptions. The business model may be refined.
Revenue assumptions may need to be restated. Remember, we are talking of a startup here that’s struggling to find its place in the sun and carve out a unique position. It is losing money and has to find customers. Quickly. The strategic and the operational or tactical at times merge and the plan should reflect it.
The plan should be a management tool. And should therefore be measurable. Abstractions and generic statements (“we will create value for our customers”) have no place in the plan. There should be details about how the service or product will be developed, priced, delivered, supported, financed.
The resulting financials must be captured. Projections for the next few months must be made. Feedback from operations must be used to refine strategy, refine the medium term goals, and sharply focus on the immediate near term milestones. In short, the business plan and the operating plan should be the same!
What do you think?
[The article first appeared in FE. Reproduced with author's permission]
Sanjay, My first business plan faced exactly this situation. Tons of data on the industry. It had a lot on the actual idea, but it kinda got lost in the maze, due to excessive information.
I think the next one has been kept really simple, no fancy data on industrynumbers. The topline and bottomline are derived out of a bottom up approach. How many visitors, how many conversions expected, average value expected etc.
This is better in comparison to a top down approach which assumes industry value and a certain share of category within a certain period of time.
Now it looks more realistic to me. But what does one do, if we don’t have a finance mind on the team. We have no idea of how much debt vs equity, Roadmap to an IPO / acquisition etc. Brownian motion is highly possible
Business model and bottomline can be determined but the aspects above are tricky if you haven’t specialised in it.
Wonder if a plan void of this will still be looked at by Investors positively, because the way our team was looking at it – this competency can be something the investor brings on board
Hi Ishwar,
Could you please share a template or advise from where we can get a format. Know what to write but was looking for a better format to express myself in better way that could make sense. I am looking for angel investors btw.
Thanks
Ishwar, thanks for reading & for your observations. You don’t need a finance person to figure out how much money you need to achieve milestones that you’ve set for yourself . You need business savvy. If you have truly done a bottoms-up analysis about what it takes to build your offering, to sell, to acquire, support, and retain a customer, and if you factor in cycle times required to hire, build, sell etc, you can get a pretty good picture of what is required. And that’s what investors are looking for – do you know your business?
Sanjay – Most of startups do not have a revenue figure in mind. Infact, if you look at startups like youtube, flickr – they didnt have a revenue model.
How does one take account of that?
Success parameter could be no. of users over a period of time, but VCs will typically lask – how will you make money
How does one handle that?
I look fwd to your comments.
Thanks Sanjay, the basics of financing can certainly be undertaken without a finance person on the team.
I was more worried about whether investors would look for depth of understanding like Equity / Debt, Understanding of financial ratios etc. Your answer certainly puts that to rest.
Additionally the point about cycle times is extremely interesting. Certainly a takeaway for me
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