How to Write a Business Plan I: Overview

How do you write a business plan? What are the ingredients that are required for a successful business plan? Here is the first article to guide you in writing a good business plan.

“Writing a business plan forces you into disciplined thinking if you do an intellectually honest job. An idea may sound great in your own mind, but when you put down the details and numbers, it may fall apart.”
– Eugene Kleiner, venture capitalist

A business plan is a tool that enables you to develop your business idea systematically until it is fully translated into a business. It requires more business knowledge compared to an executive summary or an elevator pitch. Fundamentally, it contains the details of the business opportunity that you claim to be present in the market. In a business plan, it is not just the idea that makes the mark, but also the numbers you need to convince your investor whether it is worth the investment.

There are two universal truths to a good business plan. The first universal truth is: whatever content you write and claim in the document, the first version you start out with will be totally different from what you end up with. It simply means that you have to be dynamic and be ready to adapt to changes and to how your clients and collaborators view your business plan. That comes to my second universal truth, the business plan must hold true to the original ideals and principles of the founders, but what changes are the details of how it is implemented. Dogma is the root of all evil for business ideas. The changes may frustrate you but they are meant for your own good. If you respond respectfully and with some thinking about the critical and helpful comments from the people in the industry, you can refine your plan to a form preferred by an investor. Sometimes, experts can make mistakes, and you have to remember that they are usually right about 90% of the time. The real difference for you as an entrepreneur, is to see that remaining 10% which they cannot fathom. Even when your business eventually starts with version X of your business plan, you will still continue to make changes to it as your company engages the market.

The structure of a business plan

1. Executive Summary: The overview and summary of the business plan. Please refer to [1] for more details. It must be short and never exceed more than 2 pages.
2. Technology/Product/Business Idea: What is the problem that your technology, product or business solution is trying to address? There must be some background to how there exist a market opportunity. For example, you can cite that governments may be planning to put a significant of their GDP to boost the prospects of that industry.
3. Management Team and Advisory Board: Who is on the team? Who are the advisors or grey hair behind the team? A good team is made up of individuals who have different skills that complement each other. They also set the roles and responsibilities which they want to play. In the business plan, the CVs of the team (usually 3/4 of a page) are placed in the appendices.
4. Markets: This is the part which you explain how your company meet the needs of the customers. It also provides the market segmentation analysis of that industry which you are planning to target. You must convince the investor on how you plan to approach which segment of the market, for example, you may want to target women between 18 to 30 for a particular type of utility clubbing wear you have in mind.
5. Business Strategy and Route to Market: The most important part of the business plan is in this section. Here is where you need to work out the business model for your company, the strategy to enter the market, the pricing model for your product and service and how you set to engineer the different channels into a successful corporation. You will also clarify your sales and branding, logistics operations and distribution channels.
6. Timelines and Milestones: You need to create a realistic timeline usually about three years, from how you take the initial investment and finally cross the valley of death into a positive revenue company.
7. Risks, Barriers to Entry and Competition: You cannot convince your investor unless you let them know who you are pitting your startup against. You will need to suggest solutions that will help to minimize these risks and mitigate against the barriers of entry. This is the part of the business plan which you need to be really truthful to yourself: do you have a plan to prepare against all the problems which will crop up in your business?
8. Finanicals: This is the page of numbers. You calculate the valuation, gross profit margins, and all the financial ratios (return of investment – ROI, internal rate of return – IRR, price/earnings – P/E) that will support your business venture. Believe it or not, investors don’t look at this section untiil the third or fourth round of negotiations.
9. Exit Strategy: Are you going to sell this company in three years time? Are you going to take it to IPO? How do you ensure that the company is sustainable and growing after your reign?

Once you have the formal structure, here are some tips to how we view a good business plan.

Good business plans are….

• Effective: It should resolve the doubts of every investors, whether they are merchant and investment bankers, venture capitalists or business angels.
• Structured: It has a clear and simple structure that allow the reader to search for the relevant information which they need.
• Comprehensible: It must be clearly written and uses precise wording, no jargon and no waffle. Of course, the important thing is to minimize the number of technical jargon for technology related plans, for example, biotech, nanotech and IT adopts a lot of such words, for example, microarrays, VLSI, RFID and workflows.
• Brief: The rule of thumb is to have a business plan below 30 pages, and that includes appendices. Usually, the strategy is to write a 40 pages with all the content, and subsequently create one with 30 pages and another 15 pages (which is the investor-ready plan that specifically ask for financials and business strategy information).
• User-friendly: Well, the preferred font is Times New Roman or Arial, and with at least one to one and a half spacing. Do use margins (left and right) about 2.5 cm.
• Attractive: It must contain simple figures and tables that the reader

Once you have the overview what a good business plan look like, you can start working on one. In the next few parts of the series, we will examine each and every single part of the business plan that will provide some guidance for the entrepreneur in the future. For more tips, refer to the references [2] and [3].

References:
[1] BL, Why and how do you write an Executive Summary?
[2] New Venture, Holland, “Starting up: Achieving success with professional business planning”, McKinsey and Company.
[3] William A. Sahlman, “How to Write a Great Business Plan”, Harvard Business Review, July-August 1997.