Write a Great Business Plan Presented by Jurek Sikorski Entrepreneur in Residence at LBS Independent Business Adviser Mentor Friday, 6 December 2013 Coming up... The keys to sustaining competitive advantage What needs to be in the business plan to make it compelling? What does a great business plan look like? Guidelines for writing a great business plan What to do to get ‘investment ready’ Where to go for help in preparing a business plan Exercise Write a great business plan ‘ Give me a lever long enough and a fulcrum on which to place it and I’ll move the world ’ Write a great business plan The perfect business plan does not exist… Business plans... rarely survive the first market test Business plans fall down on having scant information about the market and lack evidence that the customer will buy the product and miss what needs to be included... Financial projections are always wrong ‘Start-ups are NOT smaller versions of large companies’ Write a great business plan Why are business plans written? To help you understand an opportunity... and what it will take to exploit it To recruit prospective partners and team members/employees To monitor progress and keep you on track following start-up... To rejuvenate and re-focus a Business plans will business... change and should To raise funds for the business be regularly reviewed… Write a great business plan When to write a business plan? Writing a business plan before you have carried out a proper and full assessment of the opportunity is a wasted exercise What comes first is not the business plan but the assessment... - Avoids impending disaster… - Kick starts the business planning process - Collects real data The most thorough assessment is that afforded by the seven domain analysis Write a great business plan The seven domain analysis… helps you answer the important question: Will or won’t this business succeed? The analysis highlights markets are different from industries both micro and macro considerations are necessary key to assessing the team goes beyond the CV to understand vision, ability to execute and connectedness  Are the market and industry attractive  Does idea offer compelling benefits  Can the team deliver Write a great business plan The keys to sustaining a competitive advantage An initial advantage is sustainable when: 1. There is strong intellectual property – patents, trade secrets and IP 2. There are superior organisational processes, capabilities and resources 3. The business model is economically viable – can generate... and not run out of cash 1. 2. 3. 4. Revenue is adequate Customer acquisition and retention costs… are viable Contribution margin is sufficient Operating cash is favourable Write a great business plan – keys to sustaining a competitive advantage How Humira achieved sustainable advantage Delivered strong product advantages and patent protection • Adalimumab, third TNF alpha inhibitor to be approved by the FDA; marketed by Abbvie • Discovered through a collaboration between BASF and Cambridge Antibody Technology with sales of $9bn in 2012 • Abbive has global reach and in market customer support capabilities • Patent protected - first patent application filed in 1996 continues until 2016 • Strong product advantages - rapid onset of action, s/c administration and simple dosing regimen Write a great business plan How eBay achieved sustainable advantage Established an economically viable model • An American multi national internet C2C company… • In 2012 generated $14bn in revenue from various fees and commissions - investment has been/is very modest • Customer acquisition costs are low - customers arrive by word of mouth, no shortage of people who wanted to sell and spends little on advertising • Contribution margin is high - cost of goods is low since customers own goods and transactions are paperless • Cash cycle is very favourable - sellers pay an insertion fee with range of additional fees up front and there are no receivables and no inventory Became cash flow positive almost from day 1 Write a great business plan How EMI lost the initial advantage... Failed to build the necessary organisational capabilities • In 1973 EMI launched its patented Computerised Axial Tomography (CAT) scanner • EMI rapidly won 75% share of the global market for scanners • Competitors including GE responded robustly with similar CAT scanners without infringing the EMI patents • GE launched its product in 1976 and leveraged significant expertise in manufacturing and in-market capabilities… • EMI plagued by production problems, a law suit and mounting losses was forced into a merger with Thorn Electrical that eventually sold the CAT rights to GE Within 6 years of launching the CAT scanner EMI had gone from market leader… to exiting the business Write a great business plan Does Pizza Rossa have a sustainable advantage? Exercise Based on your reading of the Executive Summary... What is Pizza Rossa’s sustainable advantage? Work in pairs and take 10 minutes Feedback to the group Write a great business plan A framework for compiling content to write a great business plan Team Opportunity • The team starting and running the new venture, suppliers… and channel partners • A profile of the business, the product it will sell and the market it will sell to, the competition it will face and how it will deliver the product Context Risk/Reward • The big picture describing the political, economic, social-cultural, technological, legal and environmental forces impacting the business • Assessment of what can go wrong and how the team can respond and address effectively The framework describes the attributes of a successful business… Write a great business plan - framework Team – Who are these people? The ten ‘team’ related questions every business plan should answer           Where have the team members been educated/worked and for whom? What have they accomplished – professionally and personally? How well do they know the products, customers and competition? What skills, knowledge, experience do they have that is relevant to the opportunity? Have they worked together before? How realistic are they about the venture’s chances of success? Who else needs to be on the team? Do they know the risks? How will they respond to manage these? Do they have the mettle to make the tough decisions? How committed are they to this venture and what are their motivations Investors look for a team that is known… ‘When writing a business plan feature people prominently and talk about them exhaustively’ Write a great business plan - framework Opportunity – of a lifetime or is it? The ten questions about the opportunity every business plan should answer           Who is the customer? How many customers are there for your product/service? How does the customer make decisions about buying your product/service? In what ways is the product/service better than the competition? How will your product/service be priced? Questions about competitors: - Who are the competitors? How will the product be sold and delivered? - What are their S&Ws What IP does the product have? - How will they respond? What has to be done to retain the customer? - How does the venture reply? How much does it cost to acquire a customer? - What scope for collaboration? How much does it cost to produce your product/service? What are the cash flow implications of pursuing an opportunity? Address ‘how the business will expand its range of products and services, customer base and geographical scope?’… Write a great business plan - framework Opportunities exist in a Context Context is the range of external forces - from the political, economic, social-cultural and technological to the environmental and legal such as the regulations that govern manufacture and sale of products Context can have a tremendous impact on every aspect of the entrepreneurship process – the context can make it easy or difficult to start (and fund) a company Every business plan should explain the context... and what management might do if context becomes unfavourable Write a great business plan - framework Context – does it help or hamper? The 10 questions you need to answer about how the macro environmental forces impact your business           How does the current economic climate impact your business? What are the legal regulations that govern the sale of your product/service? What is the government strategy for your industry? Does your product/service require a product licence or CE mark? What are the technological advances that help/hinder your business? What future changes are anticipated in your industry that will affect your business? How can the management influence the context e.g. lobbying via trade association? How does the business impact its environment and what should the business be doing How socially responsible is the business/should the business be? What funding is available to your industry and potentially your business? Write a great business plan - framework Risk and Reward Time to positive cash flow 15% Probability Potential Reward Risk is unavoidable ‘the plan must unflinchingly confront the risks ahead in terms of the team, opportunity and context’… What class of investment? -100% 15% 45% 90% Annual Rate of Return Write a great business plan - framework Risk and Reward – how are these managed? The 10 questions asked by the investors           What are the main risks facing the business? How will you deal with a new competitor (‘GE entrant’)? What happens when your partner leaves? The business plan should What happens is you are unable to secure a patent? candidly talk about the end of What is the breakeven if sales grow at half the rate? the process… and address the question ‘how will the investor Why would J&J not develop a better device? get money out of the business, What will you do if your break even is delayed? assuming the business is What happens if your costs rise by 25%? successful?’ What is the return I can expect after 5 years? What is the exit strategy? Write a great business plan - framework Collecting that information helps you build your business model... Rapid Lateral Flow Immunochromatographic Technology Key Partners Key Activities Local Distributors Manufacture and supply of test Hospitals and clinics Commercial reagent suppliers Porous paper supplier Customer Relationships Customer Segments Rapid tests (<30 mins) Sales team Africa and other TID endemic regions Marketing and selling of tests Accurate (>99%) Technical support Recruitment and training of distributors No equipment required Doctors, nurses and nonskilled ancillary staff – need an accurate test Key Resources Low cost (~£1/test) Education events Channels Working capital Enable early treatment Local distributors/NGOs Scientific/commercial staff – develop and market tests Simple 3 step operation Wholesalers Patented technology WHO Investors - VCs Facility landlord Value Proposition Knowledge and expertise Cost Structure Field clinics, homes and clinical laboratories – need a simple test Local Ministry of Health – test has to be affordable Revenue Streams Cost of sales (<25p/test) Facility (£25k pa) Price set at between £0.50p - £0.60p /test FOB Salaries (£250k pa) Marketing (£100k pa) Revenue £1m rising to over £25m by year 5 Business Model Generation: Alexander Osterwalder & YvesPigneur 2010 Gross Margin: min. 50% Customer Development What does a great business plan look like? Executive Summary Management Team Company/Product Description Market Analysis Industry Analysis • Short overview of the business plan (max. two pages) • Provides reader with everything he/she needs to know • Features a brief profile of each member of the team • Includes duties, experience and whether work’d together before • Details history, mission, ownership, products and partnerships • Presents current status and milestones achieved • Describes the target market and how products meet needs • Reviews the PESTLE trends and how these impact customers • Features a description in terms of size, growth, revenues • Includes details of competitors and industry trends Marketing Plan • Sets out how to market and sell the products/services • Defines the price, promotion mix, sales process and distribution Operating Plan • Outlines how the business will be run and products produced • Describes front stage (customer facing) and back stage activities Product Development Plan Financials, Funding and Risk Analysis • Describes stage of product development, IP and timelines • Details challenges and current risks and partnerships • Presents financial projections viz. cash flow with assumptions • Details funds sought, IRR, exit options and risk management Guidelines for writing a business plan Structure • Follow a conventional structure… • Investors want a plan where they can easily find critical information • Avoid software packages and external writers Content • Provide clear information on important TOCR aspects of the business; limit to 20-30 pages • Have plan reviewed for spelling, grammar and completeness… Style • Look professional but not give impression a lot of money has been spent on it • Avoid getting carried away with design elements Write a great business plan – guidelines for writing a business plan What are the red flags? Team that is not committed to the plan Absence of hard evidence and poorly cited business Defining the market too broadly Overly aggressive or unsupported financial forecasts Sloppiness in any area Write a great business plan – Guidelines for writing a business plan What do investors look for... Team Full time management team (of at least two people); worked Expertise (and experience in the sector) Commitment (a vested interest in the success of the business... time and finance) People they like and trust and who are receptive to their input Determination and a bias for action Low starting salaries (at the start until business is profitable) Honesty (no surprises) Business Deal High Return (IRR of >50% pa) Proven concept with preference for sales Realistic financial projections High growth potential (business is scalable) IP (knowhow, patent(s), designs) secured in the business Risk profile and management Business in a sector in which investor has experience Investment ready Exit route Tax Relief (when investing in a business that qualifies for (S)EIS relief) Realistic valuation (an unrealistic valuation is a common deal-killer) Matches investment criteria Fair investment terms Simple shareholder structure ‘Business plans are rejected because founders fail to demonstrate these requirements’ Writing a great business plan – what investors look for Business plan has to demonstrate the venture is ‘investment ready’ To be ‘investment ready’ you need to: give a total commitment to the venture have a compelling and persuasive value proposition be looking for fast growth/scale rapidly have a proven need for your product or service... demonstrate deep knowledge of your market and industry understand the investment process... know your financials and what investors look for be able to present your business credibly have an experienced team be ready to invest yourself Writing a great business plan – investment ready Presenting the business plan to investors First meeting is generally short (usually no more than an hour) no Investor will ask for/expect a presentation 20-30 minutes followed by questions Expect the investor to be very critical but don’t be discouraged In the first meeting investors typically focus on whether a real opportunity exists and whether the team- Use PowerPoint can pull off the venture - Limit to 12 slides If the investor is interested the founders will be asked back to meet with partners - Speak plainly … - Check you have answered the questions - Define next steps Write a great business plan to attract private funding –presenting to investors Where to go in preparing a business plan – Further reading ‘Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers’ by Alexander Osterwalder and Yves Pigneur (2010) ‘FT Essential Guide to Writing a Business Plan: How to Win Backing to Start Up or Grow Your Business’ by Vaughan Evans (2011) ‘Why the Lean Start-up changes everything’ by Steve Blank HBR May 2013 ‘The New Business Road Test’ by John Mullins (2010) ‘How to Write a Great Business Plan’ by William Sahlman HBR Jul-Aug 1997 ‘Entrepreneurship: Successfully Launching New Ventures’ by Barringer & Ireland (2010) Chapter 4 Writing a Business Plan Check out the British Library Business and IP ‘How to Research your Market’ by Eze Vidra (2013) Centre http://www.vccafe.com/2013/05/12/lean-market-research-for-startups/ Write a great business plan – where to go for help in preparing a business plan Jurek Sikorski Email: [email protected] Mob: 07889 720735 LinkedIn: http://uk.linkedin.com/in/jureksikorski