In part one of this post, I discussed the purpose and value of a business plan. I also listed the key questions that should be addressed in the plan.
I also suggested that while your business model is a very important part of your plan, revenue projections or financial statements (income statement, cash flow statement, balance sheet, etc.) are not.
The reason for that is quite simple – they are not important at this stage. It’s not to say that you shouldn’t have detailed knowledge about the market you’re targeting, its size, growth potential, and what share of it can you expect to address and win. I simply think that developing detailed spreadsheets with quarterly P&L projections are a waste of time at this stage.
Why Detailed Financial Forecasts are Useless
Here is why. I’ve seen my fair share (100’s) of three-year (sometimes even five-year) revenue forecasts, with detailed TAM/SAM/SOM analyses, profit and loss projections, and scenario analyses. All of them had the mandatory hockey stick charts and impressive ROIs. All of them, with the exception of two, never came close to meeting their targets. The two exceptions actually exceeded their targets. However, since they were both my businesses I can candidly tell you that it wasn’t because of a detailed financial plan.
In fact, in one of my previous companies, we conducted a detailed study of over 400 new products that we have developed and released to market. In particular, we looked at how many of them met or exceeded their business cases and revenue forecasts. Almost all of those products were targeting mature markets, and many of them were derivatives, or follow-on, to existing products.
And yet, we were surprised to learn that only 10% of them even came close to meeting their business case.
So, to forecast the market adoption and revenue growth of a start-up product, which typically involves new technology, and/or targeting an emerging market, is futile. Nobody knows. Not even the smartest analysts or business gurus, not even experienced VCs.
That’s why I don’t believe you should spend too much time on it. At least not at this stage.
How to Prepare Your Business Plan Documentation
As for the business plan document itself, this too has been an area of much debate and some confusion. Should you write a formal 30-page plan, or is a PowerPoint presentation good enough? I’ve heard and read different opinions from VCs, consultants, and entrepreneurs.
Let me be very clear: I don’t think a 30-page document is a must. Frankly, no one has time to read it these days. You’ll be lucky if they read your executive summary. I’ve actually used a formal business plan document once. That was in the final project of my MBA.
From my experience over the past five years, meeting with and presenting to many VCs, I believe that it’s perfectly acceptable to use a brief (20 minutes) high-level presentation. You can always provide more details upon request later.
The key is to sell them on your unique value proposition, compelling business model, and strong team. If you convince them of those they will be willing and interested to learn more details about your plan. If not, the rest of it doesn’t matter anyway.
At the same time, your planning process should be detailed and thorough. You should document all your analyses, conclusions, and assumptions. You should have a detailed description of your product idea. In addition, you should clearly describe your value proposition, target markets, and customers. Finally, you need to outline your business model, operational plan, revenue model, and the main risks.
Don’t rely on your memory. Record everything.
This material will serve you well in your detailed discussions with potential investors. Moreover, it’s necessary for your internal planning sessions, reviews, etc.
No matter what material and documents you share and present, make sure it’s in a professional manner. This includes the content (no typos please), the format, and the delivery. Any material you produce, even an e-mail, reflects on you and your company. Be sure it presents you in the best light.
The Business Plan as a Communication Tool
Last and definitely not least, your business plan presentation is a great tool for internal communication. Each and every employee should know and understand the key elements of the business.
In particular, every person in your company should know what are the company’s purpose, goals, and strategy. They should have a clear understanding of the operational plan and priorities, and how they contribute to the company’s success.
Internal communication is important in order to achieve alignment, commitment, and great execution. Moreover, it helps increase employees’ motivation, which in turn leads to higher performance.
In Conclusion
So, do you need a business plan? Of course, you do. However, make sure you focus your time and energy on the right elements of the plan. Doing so will gain you a deep knowledge of your market, customers, competition, and your own competencies.
Furthermore, this knowledge will help you to develop a strong value proposition and a compelling business model. That will enable you to raise the funding you so desperately need to make your idea a reality.
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