Archive for category Plan
Do you show an understanding of the marketing landscape?
An integral part of the business and marketing plan is to provide a fundamental understanding of the market space. When getting the attention of the investor it is paramount that the entrepreneurs demonstrate that understanding in a concise manner. As an entrepreneur what might you need to show?
- How big is the market?
- Is it a new or mature market? Is it growing, staying steady, or shrinking?
- Who are the major players? This includes the producers and the buyers.
- What products are in the market?
- How is the market segmented?
- What are the outside influencers?
- What barriers exist in the market for new products?
There are many other aspects (which I will address in a later post) in a marketing plan’s overview of the market condition; but these are the fundamentals when first introducing you to potential investors. Later, there is time to do a deep dive but the initial impressions should be that you did your homework and you are someone that is the right person to tackle this market.
Target market needs to grow
Which is a better situation for investors if both markets are at the same size today and the starting share is the same?
- a market that is shrinking
- a market that is growing
This is not a trick question. The answer is ‘b’. A company has to grow quite a bit after it gets investment for the investors to be paid back. Consider an investor that wants to grow his investment by 20 times. In a market that is fixed in size, then the current market share needs to be less than 5%. It is highly unlikely that the company would get 100% of the market, so they would probably need to have a current share of less than 2.5% to allow for growth that would pay back the investor. This does not count the actions of companies that are currently in the same space. Overall, a company with a large share in this type of market (>5%) would not be able to hit the investor’s level of return. With even a small share, a shrinking market would make it even harder for the investor to get there money back.
If the market was growing, then the rate of growth would greatly increase the odds of the investors making money. This translates into a higher likelihood of getting investment.
So, what happens if the market starts out to be growing but turns into a poor market? What are the options?
The first option is to continue as before hoping to gain enough market share and exit before the market collapses. This is very unlikely because an exit plan that pays back an investor requires that an outside entity (or group of people) buy the company hoping for an even higher return. In a shrinking market this could happen if the market would rebound or the technology could be applied to another market that is growing. However, even in those cases, the buyer will try to buy at a lower price because they will feel it is their expertise that brings the most value; they are just avoiding the costs of starting from scratch by buying the existing firm.
The second option is to find another market that is growing. By translating the technology, infrastructure (and team), and other resources into a growing market the company will now be in a situation to gain enough value to provide the investor with the targeted exist plan. Buyers will also see that they can make more money with the company and are more likely to purchase at a premium price.
So, if you find yourself in a market that is shrinking you have a choice. Either cut your future losses and find a buyer now that can expand on your existing ideas or transition your company into another market that is more lucrative. While the second is more desirable, neither option is the absolute correct one as it really depends on the situation.
Hurdle – Bureaucracy in this country too much … go elsewhere
One of the best ways to further explain about Hurdles (see yesterday’s post) is to provide an example.
I was at a meeting today of the Texas-Israel Chamber of Commerce at the University of Texas at Dallas. There were several speakers and a very interesting mix of entrepreneurial companies, investors, and other interested parties.
One of the speakers, Shekar Rao, commented about a key hurdle to medical technology companies: getting the products adopted in the US. The insurance companies are not interested, and doctors, without the interest of the insurance companies and a “code” to pay for the new item, will not adopt it. How does one develop something and keep the company in cash flow. Rao suggested to go first outside the US because one will find doctors in Mexico and Europe that are much more open to new ways to save people’s lives and money. Rao did point out that one does not compromise anything in the life-saving ability of the new item or procedure but use this as proof that it works. Going elsehwere first will allow for the much longer time for something to get adopted in the US and keeps the company in cash flow while at the same time saving people’s lives (and money).
As another example, when discussing with an investor, the answer should be concisely:
The hurdle here was getting the product accepted in spite of a large infrastructure barrier in the US (doctors and insurance companies). The solution is to market in other countries first allowing time for acceptance through the bureaucracy. Using international chambers of commerce you can get contacts and open doors to these other markets.
Visit Texas-Israel Chamber of Commerce to learn more about this particular chamber.
What are the hurdles facing the business?
Do you really understand the hurdles facing the business?
Everyone talks about managing the hurdles of the business. How will you deal with the hurdles? Do you have enough working capital to overcome the hurdles?
The first question should be: do you know what the hurdles are for your business?
There are the day-to-day issues: how do I get this project done, or this product out the door?
There are the every-business issues (what every business faces): How do I handle payroll, how do make a contract, and how do I sell?
Then, there are the business issues unique to your business:
How do I sell enough products to make a profit?
How do I get into my market?
How do I beat my competition?
How do I keep my costs down, and my quality and service level to expectations?
Each business and industry has a unique set of hurdles. Part of the planning process is to understand those hurdles and how to overcome them. You put that in the planning process and discuss it in your business plan. When the investor asks you about those hurdles you are prepared to discuss them.
For example you are a book publishing company. How will you get shelf space in the major bookstore chains like Borders and Barnes & Noble? How will you drive people to buy your books on Amazon? How will you select books and pay authors to create the content so that you have bestsellers?
These are not “everyday” or “every month” type questions that face every business. You should know the big hurdles and be able to discuss how you deal with them. Overcoming the hurdles is also what makes your business unique (or special). The way the business overcomes the hurdle can be its biggest selling point.
Investors want to know if you know the big hurdles, how you will overcome them, and therefore what makes you the more likely candidate for investment than someone else.
What is the state of your business plan?
Does a business plan exist? If so, is it used? Is it updated?
Probably the third most common question I asked an entrepreneur is: Do you have a business plan and how do you use?
(Fyi, the other two questions are: what are you doing, and what is your goal?)
At least two thirds of the answers are that they have a business plan. I usually get blank stares when it comes to how they use it. What do I mean? Should it not be obvious? You fill out some package software, shove the printout in the bottom of your desk/file cabinet/waste basket and then go on your merry way making money.
Not exactly.
Think of a business plan as a set of blueprints. You refer to it often. You check to see if you are on track. If there are differences then you either correct yourself or correct the plan. It is a way to keep yourself vigilant to the goals of your endeavors.
A business plan should be accessible to the strategic partners and elements of it accessible to everyone else in the company. For example, you plan out the budget for renting an office: $4,000 per month. What if they cannot find an office for that low and the best one comes in at $5,000 per month? How does that affect the plan? For some people seeing the company making $100,000 per month that may mean nothing and they can easily afford it. However, the planner might see that at the end of the year they have spent an extra $12,000 which means that another item may not be achievable.
How do you make the business plan accessible to update? Is it all in Word and Excel available on a common hard drive for people to review and comment? Which people? Not everyone, but how about the heads of the company?
Is it in one big document or split up by chapter and subchapter into usable sections that can be updated and modified as the business grows?
How do you use your business plan?
Graphing to find new products
Seth Godin writes today about using graphs to help predict new products. Visit his blog entry Bandwidth-sync correlation that is worth thinking about.
The point is that if you create two axes of qualitative or quantitative aspects of a situation and then place items on that graph where they fall with regards to those two aspects, you can start to see relationships and gaps in the product offering. Furthermore, you can see which products may work better and which may be poor performers.
To create these graphs, you can poll your customers on the two qualities of the products and then place those products where they fall. Ultimately, this is a tool that can be used to create more effective products.
Innovation is Insurance against the Future
Yesterday, I wrote about how innovation is the fourth arena of excellence. The importance to investors is that a highly innovative company is one of the best ways to insure their investment against the changing needs of the marketplace.
For example, examine a company that has a very popular product. An investor puts their money into the company hoping that the company grows over five years and then is purchased for a much higher value. That purchase could be by the public in an IPO or by another company, but that purchase provides the investor with their exit plan.
The company value increases as the company increases its sales and likelihood of future sales. This in turn only happens if the product (and products) continues to sell. If something happens in the marketplace that makes the product unpopular (another product from a competitor) then the company needs to be innovative again and come up with an improved offering (or another offering) that insures the investor will get their money.
One of the barriers to getting that investment is that companies often do not show signs of future innovation but rather an inability to identify growth points. Without these insurances against marketplace changes, the investors are not likely to provide their money.
Just as likely investors will not provide their money, customers will not buy products from young companies because they are unsure of the lasting power. If they know that the company will continue to innovate and provide their customers with future advantages, the potential buyer will more likely take a chance and buy.
Innovation in what gets a startup company created. Too many startups stop at that innovative step…by examining how they innovate and can continue to innovate, startup companies can be more attractive to both potential customers and investors.
Plan for the Up and Down Cycles
Fareed Zakaria writes in the June 22, 2008 issue of Newsweek (“Greed is Good“) about how the economics of capitalism have changed. He brings up two points. The first is that the cycles of prosperity and recession are coming at an ever faster rate. The second is that the reason for these problems is that people are no longer doing the right thing.
The cycles of growth and contraction are a fact of life. The 20th century saw the Great Depression and then post WW-II boom as the very extreme versions of these cycles. Zakaria points out that the cycles are getting shorter. We had a boom in the late 90s followed by a crash in 2001. The next boom was in 2004 followed by the crash in 2008 and 2009 of first derivatives and then housing. The cycles of growth and decline will continue. Companies will succeed and fail. The cycles are getting as short if not shorter than five years.
If five years is the typical projection for a business, then should not a business plan with these cycles in mind? It is difficult to forecast these cycles, and if one could predict them then they could take advantage of them. Instead, you can plan for the contingency. What if things go horribly wrong? What if things go horribly right? The reality is that if things go horribly right you usually continue to do what works, but if things go horribly wrong, then you have a problem: what do you do next? Contingencies need to be planned and expected. Diversification in product and service offerings, capabilities and in execution should be examined before it happens.
My prediction is that contingencies will become more important in business plans in the future. What else could this company do? What do they do when in three years their primary product is no longer successful?
Address it and you can ride the cycles up and down.
List What Makes This Company Unique and Special
In this series of installments I am discussing the executive summary and how to make it stand out. The executive summary should present the compelling reason for the investor to buy into the company.
Have you ever had someone just look you straight in the eye and ask: “Enough telling me about who you are, what you are going to do, and the market size; tell me why is THIS COMPANY and project going to be successful? How am I assured that I will get my money back and more?”
In this section of the executive summary, you should list all the reasons the company will be successful and will pay back the investors. Rather than just write that, the following list of key questions can be answered, and help build a compelling story for the investors:
- What key management experience will be used for this?
- What key management decisions (i.e. focus of the company) will enable this company to be successful?
- How will the budget/cost be managed successful and affect the profitability?
- Where (channels, markets, etc) will the profits come from?
- What is the compelling need of the market? What is the PROOF of this need?
- Who are the customers? Include demographics of the largest segment. How big and what is their purchasing power?
- What makes this company and product unique or special?
- What barriers to entry exist (from outsiders and competitors)?
- Are there other reasons that this project will be successful (i.e. short ROI, short payoff of capital expenditures, key contracts)?
Notice that there are many sections of the business plan incorporated into this one section: marketing, management, sales, operations, finance. These questions pull in the key winning points from each section. When these questions are compiled into a single story, the investor will see that another company making the same or similar product/service will not be as successful. It can be simply stated as a bullet point list with the header: “How We Will Be Successful”. This section delivers the key idea that this company will be the next big winner. More importantly, it addresses how the investors will win with this company in their portfolio.
Leaving out critical items from a Business Plan
Taking another quick break from discussing executive summaries, since something just cropped up that is worth mentioning:
Recently, while reading through a business plan, I discovered that the writer left out the exit plan. Upon asking, he told me they sometimes include it and sometimes take it out, depending on who they were giving it to. In my case, they felt that I would more likely introduce them to an investor rather than invest myself, so they left it out.
My position is that you should never leave that out, or anything else out. The purpose of showing me the plan was to get my evaluation and consideration to show it to an investor. However, I am going to protect my relationship to investors. My credibility is on the line when I ask them to look at a plan that I approve. Without seeing the exit, on how the investor will make money, I cannot believably support the plan.
It wastes the investors time for them to have to ask for it and it could indicate a problem. Furthermore, it may be the first section that investor turns to when they read a plan. Most people when they read a plan first turn to the section they care about most. For some that is the financials.
If you do not discuss it, then we cannot tell if you are hiding something bad, you did not think about it, or you were just leaving it out feeling it was not necessary. Most likely, it is either something bad or you did not think about it. In both cases, an investor would turn it down.
Do not leave things out.