Conceiving of a Business and Developing a Business Plan to Raise Capital
Are you excited about your business concept and think that it could be very successful? Do you have an invention or new technology, a break-through product or service, or a unique solution that meets a need in your area? Do you have human talent in the form of collaborators who have the skills, energy, enthusiasm and commitment to embark on this initiative with you? Developing a business plan will help you raise capital to launch and operate your business and the process of preparing the plan will also help you think through the challenges and opportunities that you will face.
Right from the start, get ready to think and work hard. Businesses aren’t built on sheer enthusiasm alone. It takes a lot of hard work, time and devotion to launch a business. Thomas Edison once said that invention is 1% inspiration and 99% perspiration. Let me share some guidance that hopefully will help you, as you dedicate all your time and energy to developing your business.
Did you know that each year only 10% of startup companies in the U.S. succeed. The probability of success may not sound promising, but you should not be discouraged. The founders of many of the companies that fail learn from their mistakes and launch new ones. In fact, many of the largest internet companies today were second and third efforts by some of their founders. Also, the startups that do succeed are the origin of the 31.7 million small businesses that contribute close to 44% of U.S. Gross Domestic Product. Every hour of every day in the U.S. there are new businesses coming to market.
Your idea may present a great deal of opportunity for you and your community, satisfy an unserved need and provide employment to you and many others, but you need to learn to avoid the pitfalls that contribute to business failures. A good business plan can be a big help.
Here are the factors that are most important to the success of any start up enterprise and hence must be considered in your business plan.
- Access to Capital
- Government and Nonprofit Funds
- Private Sources of Capital
- Maximizing Your Capital
- A Sound Business Model
- Questions to Consider
- The Business Plan or Description
- Strong Management
- Business Nimbleness, Viability and Sustainability
Access to Capital
Capital is money necessary for purchase of the physical assets needed for the business, to cover a beginning period when revenues are likely to be less than expenditures, and to cover the fact that producing your goods and services will require expenditures first and their sale will produce revenues only later. Capital can come in the form of equity ownership or debt.
a. Government and Nonprofit Funds. In the U.S., some businesses have access to public funds made available from municipalities, states or the federal government. There are a host of other organizations that provide funds that can be tapped by some small businesses in the form of grants (funds that do not have to be repaid), subsidies (tax reductions or special assistance) or loans. Generally, to qualify for these funds, the business needs to meet a need identified by the governmental entity, such as meeting the needs of underserved customers for a product or service or creating well-paying jobs in the region in which the governmental entity operates. In the U.S., a good place to begin identifying these funds is through the Small Business Administration, the federal agency entity charged with assisting and promoting small business growth by informing businesses of funding opportunities and assistance with getting their businesses organized.
Other sources of capital come from nonprofit organizations, in the form of grants or loans, to further one of the missions of the nonprofit entities. Grants and subsidies may seem like free money, but they come with stipulations, such as strict oversight by the governmental or nonprofit entity, and will require detailed reporting on the use of the funds and extensive paperwork.
b. Private Sources of Capital. As you explore sources of financing for starting up, also keep in mind what sources may be available in the future for expansion and growth. Oftentimes, your prospective investors will ask you how much money you personally are prepared to invest in your own business: they may be unwilling to invest if you do not have a significant stake in the startup enterprise.
- First, explore all avenues for raising capital through your network of family and friends. In the U.S., entrepreneurs go to family and friends for their money to get started, as family and friends are the most likely to believe in their ability to make the business idea a reality.
- Once the business is operational, they then seek out loans from banks to support operations and deal with fluctuations in cash flow. They may obtain a line of credit that they draw down when the cash flow is tight and repay when funds from sale come in.
- As the business grows and additional funds are needed to expand it, businesses seek out or may be approached by private equity investors – individuals or groups of individuals that pool their funds to invest in new businesses. These investors will bring their contacts and resources to the business as it expands. They will require a specified rate of return and they may structure the investment as long term loans that carry interest expense, or equity ownership, which means the investors are buying a piece of the company and sharing in the risk of failure and the opportunity for success.
- Finally, when a business has achieved significant scale and it sees opportunity to grow further, it will go to investment banks who will arrange to sell shares in the public markets and thus make it possible for any individual or institution to purchase an interest in the business in the form of shares (equity). We call this “going public”, or having the company owned by many interested members of the general public.
c. Maximizing your Capital. As you consider how to initially finance your business and reduce your capital needs, consider your options: 1) Go It Alone, 2) Partner with Others, or 3) Consider Franchise Opportunities. Having partners who can tap their friends and family for funds or teaming up with a franchise that you can operate may well reduce your capital needs substantially.
Another way in which businesses reduce their initial capital needs is to outsource functions to outside businesses that can perform them at less expense and save the bulk of their initial capital for other needs. For example, Sam Adams beer manufacturer, avoided using most of its startup capital to build a brewery facility, and contracted with other breweries to produce its beer when the facilities of those other brewers were not in use for their own products. Instead, it used most of its initial funds in advertising the beer and developing the brand. This approach allowed it to establish its brand quickly and at substantially less expense than many of its competitors. Once established as a well-known beer brand, it used the revenues to build its own facilities.
A Sound Business Model
By far the most important element of your venture is the “business model" of your enterprise or your “mission”, which is essentially:
- who you are or are going to be,
- what you are going to do,
- how you are going to do it,
- how is it going to meet a need that is not being adequately met (often referred to as the “value proposition”), and
- why you expect to succeed.
The business model needs to be well thought out and compelling enough to elicit strong interest from skeptical investors and help attract a talented and experienced management team and employees.
a. Questions to Consider. As you design your business model, you have to ask yourself the most important questions:
- Why am I embarking on this project?
- What is my value proposition? I should be creating something that would be of particular value to customers.
- Is there market demand for my product or service? I need to prove to myself and to others that my product or service fills a void in the market.
- What do I expect will be my market and how will I reach out to it?
- Am I building a better “engine” than other competitors to which customers will naturally flock?
- Will I compete with others on price? This means that I have to produce for less money and be the low price seller.
- Will I compete on efficacy and performance? This means that I have to deliver a more effective service or product that provides superior benefits to customers than the competition. This is the case when selling to customers who care more about performance and are willing to pay a higher price for it.
- What are the unique selling features of my product or service?
b. The Business Plan or Description. All of these considerations, as well as those in the succeeding sections, have to be discussed in a compelling business plan that you share with prospective investors and the management team you wish to recruit.
Generally, in the U.S., it is standard to develop a ten-year financial plan, as it usually takes at least a year to get started and then more time to generate sufficient revenues to break even. You should develop a multiyear Pro Forma (prospective): 1) income statement, 2) balance sheet and 3) cash flow statement that help you determine your liquidity (capital) needs.
You should develop a plan that includes a scenario analysis. This is the process of identifying and evaluating possible scenarios that could take place in the future and predicting the various feasible results of possible outcomes. You should prepare a:
- A Most Likely Scenario, that is what you expect will happen;
- An Upside Scenario, in case your results substantially exceed your expectations; and
- A Downside Scenario, in case your results turn out to be less successful than you expected.
Your income statement and balance sheet will help you think in granular detail about direct and indirect expenses associated with your business. This will help you to price your product or service to deliver an attractive gross profit margin that will cover all your expenses, which include salaries and other direct and indirect expenses. Aim for a compelling net profit margin if you believe that your target customers have price flexibility. Once you complete your Income Statement and your Balance Sheet you should create a Cash Flow Statement that will help you determine the amount of capital needed to fund your business at its start. To that statement, you need to add any other initial costs you will incur in the process of completing your business plan. You should seek legal advice on how to organize your business and determine the ideal legal structure. These startup costs can be funded from the initial investments.
It is helpful to include a “Failure Strategy” in your business plan. To do so, assume that your business is not succeeding after a year or two and explain how you can cut your losses. Potential investors may take comfort in knowing that you are a realist and have considered ways to minimize losses in the event of failure. If your business fails in your first attempt, this may keep the door open for second financing on a revised business model by the very same investors.
When presenting your business plan to outsiders, include visual guides, such as maps, graphs, and charts to make the materials you are presenting plausible, readable and interesting. Also consider giving interviews to publications and news organizations that would be interested in your business. Publicity is generally free and, if you can control the content of the article and convey your message, is of great value.
c. A Robust Marketing Plan. An important feature of your business plan should be your marketing plan, which should contain a situation analysis and describe a program for marketing your product or service.
In order to develop a situation analysis, you will need to understand the market in which you will operate.
- Who is operating in that market and what are they offering?
- If there are other competitors, how will you present your product? Will you differentiate your product through branding?
- What is your unique selling proposition?
- Are you filling a void in the marketplace where there might be pent up demand for your products or services?
- How are you specifically creating value and where do you fit in among your competitors?
- What share of this market can you realistically attain and over what period of time? Quantify and qualify your market.
The second aspect of your marketing plan will describe how you intend to price your product or services.
- Who are your likely customers, and where are they?
- Why and how do they buy products and services similar to what you intend to offer?
- What they are willing to pay for such products and services?
- How frequently do they make the purchases - once, annually, monthly, weekly, or daily?
The third part of your marketing plan is to describe how you will deliver your products or services.
- Through what channels do you intend to deliver your product or service - Internet, mail, or personal delivery?
- Will you rely on other enterprises’ delivery systems and distribution networks?
- How long will it take to deliver your product or service?
- Is the projected delivery timing competitive and are the delivery systems affordable, viable and sustainable?
The fourth aspect of your marketing plan will describe how you will promote or position your product or service in the market that you have identified.
- Will you be using internet advertising, direct to consumer promotions by mail, mass media channels, local media, word of mouth, and promotional campaigns, or a combination of those?
- Consider free publicity through news networks, provided you can control content and message.
- Is brand recognition important? If so, you will need to calculate the cost of advertising and whether you can build your brand and achieve a critical mass of customers and interest quickly.
- Consider creating competitive customer referral programs (where you give a benefit to customers who refer other customers), or providing loyalty points if services are purchased frequently or on an ongoing basis.
- How can you improve upon what your competition offers those customers?
A fifth aspect of your marketing plan should describe how you have protected or intend to protect the assets of your business, including its intellectual property. If you have developed a new process, product or service (your own unique invention) that works better than anything else available, you will want to seek intellectual property protection through:
- Non-disclosure agreements so that your ideas will not be stolen by others (including those whose funds you solicit) and which are enforceable in most jurisdictions.
- Registering patents and the trademarks, copyrights and symbols you use to differentiate your product with local authorities and the authorities in those jurisdictions to which you intend to export your products.
If your services or products cannot be protected through registering copyrights, trademarks and patents because they are not innovative or unique, then speed to market and ability to grow the business quickly and nimbly to establish your business as a leader in the market become critical elements of your business model. We call this “first mover advantage”, and it will provide you protection in those cases where your intellectual property does not serve to protect your company’s assets or as a barrier to entry by others. If you quickly become the top brand, even if others copy your products, being first may well help you stay dominant in the market.
d. Strong Management. It is critical to have a good, experienced management team. Investors look favorably upon a management team that has had experience in managing similar or related products and services before. Identify the various employee skills and functions your company needs to implement its strategy. Then, try to attract people to work with you who compliment your own skills and have the ability to carry out those other functions.
Generally: 1) Product Development, 2) Marketing, 3) Finance and Accounting, 4) Legal, 5) Human Resources and 6) Operations Management require very different set of skills. Identify those functions most critical to your business and solicit people with those skills. Every successful business is considering its workforce and offering employees opportunities to expand his or her skills by assuming functions with greater responsibility.
A word of advice: always surround yourself with employees you are proud to have as colleagues and you believe are as talented and capable as you are. When hiring people, remember that for a startup enterprise you need thinkers and doers and a great deal of bench strength. Avoid hiring prima donnas and instead look for people who are enthusiastic about working collectively to grow the business and to learn new skills and take on new tasks. You will want to describe the skills and experience of your management team in your business plan, once you have identified them.
Business Nimbleness, Viability and Sustainability
In the introduction we discussed the probabilities of success but did not consider how to keep a business viable over time. In some sense your business plan itself needs to evolve over time. To make a business sustainable, it has to be nimble and you have to keep an eagle eye on the market and changes in the marketplace. Successful businesses continue to grow by developing their original products or services or by creating new supplemental products that compliment or replace the original ones. Consider how your customer’s needs evolve and how market forces change. Do you think Apple would be in business today if it were still selling the Apple 1?
Your sales and marketing departments and your employees providing direct client services to customers should be a primary source of feedback about your customers and whether you are meeting their needs and considering products to meet their wishes. Also, over time, customer demands and interests change, as 1) new products and services are developed by competitors, and 2) technology improves and paves the way for new opportunities and breakthroughs.
You need a sales and marketing group that understands this important function. Your business should develop both formal and informal feedback loops that regularly meet to discuss what customers are asking for, what improvements, enhancements or new products and services are on the horizon to meet those changing needs and demands. Stay on top of your competition. There is room for many competitors, as long as their products or services remain in high demand, evolve over time and don’t become obsolete. Change and adaptability aren’t simply a key to survival but are at the very crux of success.
Good Luck and enjoy your adventure!
- Description of the interaction of small businesses and the federal government in the U.S. and more business planning information.
- For a simple explanation and interactive templates for income statement, balance sheet and cash flow statement go to www freshbooks.com
Elena Delgado received her MBA from Harvard Business School and her undergraduate degree from University of Pennsylvania. After graduation from business school, Ms. Delgado made a career in banking. Her most recent position was founder, President and Chief Executive Officer of Irwin Home Equity Corporation. This was a consumer financing and home equity lending subsidiary of Irwin Financial Corporation, a bank holding company listed on the New York Stock Exchange. Prior to attending business school, she worked for Mobil Oil Corporation, supervising the supply, storage and distribution of petroleum products at various facilities in Long Island, New York. Ms. Delgado is a Cuban-born American.