Last year, after graduating from Duke University with an M.D. and an MBA, Daniel Burnett completed his residency, got his license to practice medicine, and then did something very 1998: He wrote a business plan for a high-tech company and went to Silicon Valley. Never mind that following the dot-com bust more than 8 million Americans remained unemployed. And never mind that the rate of 65 IPOs per quarter in the late '90s had dwindled to a grand total of one in the third quarter of 2002, the fewest since 1980. Nah, Burnett had a big idea: a low-frequency electromagnetic device to treat arthritis pain.
Upon arriving in the Valley, he did something very 2003, something that run-and-gun start-up jockeys would have scoffed at in '98: Instead of knocking on investors' doors, he focused his attention on improving the business plan for his company, TheraNova. He produced a thorough, simply written document. He entered it in business-plan competitions and won $45,000, plus office space for a year in an incubator. Next he applied to the Food and Drug Administration for permission to start clinical trials, which it granted -- a credential that he promptly inserted into the plan. Now he could start banging on doors.
During the dot-com boom, such careful attention to his written plan might have left Burnett in the dust; today it's essential. "There's still a ton of money out there," says Dave Lavinsky, president of Growthink, a Venice, California-based venture capital counseling, research, and I-banking group. Sure, Growthink recently documented the falloff in venture capital investing from $150 billion in 2000 to $45 billion in 2001, but that $45 billion is still the third-highest amount of VC financing in a single year. And VCs were holding roughly $85 billion of uninvested money -- called "overhang" -- at the end of last year, waiting for the right investment to come along, according to John Taylor, vice president of research for the National Venture Capital Association, whose members include about 90 percent of the industry. What are they waiting for? Entrepreneurs who have already started and grown companies or who have corporate experience, for one thing. Patents. Customers. Attainable revenue models. Some investors even demand -- the horror! -- actual revenues. And they want to read about it in a well-written, well-reasoned business plan.
Writing such a plan is both an art and a science. The plan is a concise explanation of the business packaged as a pitch for money. It's got to be a compelling story with drama (a demonstrated need), hope (how your product can fill that need), heroes (the management team), and a happy ending (return on investment). And the whole thing should come in a tidy document that runs between 15 and 30 pages. What follows is a guide to writing a plan in the face of the economic realities of 2003, presented in the format of an actual document and full of advice from investors, authors, business professors, and entrepreneurs.
Investors today view the process of writing a business plan as necessary to help the entrepreneur -- not just the investor -- determine whether the venture has hope. "The plan is not just the document, it's the process," says Wendell Dunn, a business professor with an expertise in entrepreneurship at Darden. "General Eisenhower put it best when he said, 'Plans are useless, but planning is indispensable.' "
Executive Summary: Play the highlight reel for 'em.
The first item in the table of contents is the executive summary, a cross between Cliffs Notes and a detective novel. It's not a lofty introduction, a sterile preface, or a scientific abstract. This is your elevator speech on paper. It's sometimes the only section potential investors will read. It's the section you'll write first -- and then completely rewrite after you've finished the rest of the plan.
"It's the first filter. If you don't pass that, I don't read the rest," says Suzanne King, a partner at New Enterprise Associates, a Menlo Park, California-based venture capital firm that manages $5 billion. Of the 10,000 business plans the firm receives each year, between 20 and 35 get funded. The ones that rise to the top have one thing in common: opening sections that lay out the key points -- the idea, the customer, how to sell it, how it'll make money, the management team, and the payback -- in a scintillating, you-don't-want-to-miss-this-opportunity way. That means not bogging it down with the boring details (the intricacies of your ear-hair-waxing technology, say, or the history of the spittoon industry). "You don't want to be verbose," says King. "I read one executive summary that was 10 pages long, filled with long words and trying to sound intelligent. At the end, I told the author, 'I still don't know what you do.' I was mad. He wasted my time."
The executive summary should be no longer than three pages -- even one is fine. Begin with a succinct explanation of the business. Move quickly to the growing niche market you'll serve -- a niche that's thirsty for a new service. Then explain why your company is the tall glass of water that market craves. If you have any contracts with customers -- the strongest selling point a young business can have -- offer a taste here. Throw in a simple, snazzy chart if it can summarize why the business will be successful. As for numbers, pick no more than two impressive stats -- your revenues (if you have any), the size of your niche market, or realistic first-year sales projections -- to insert in the first few paragraphs.
Otherwise, when in doubt, leave it out. "Overly extended executive summaries start becoming part of the plan if they include too much detail," says Fred Wainwright, executive director of the Foster Center for Private Equity at Dartmouth's Tuck School. "They start off with the market size or why it's a good idea and then start droning on and on, until they're into engineering specifics."
Company Summary: Tell a sexy story.
The most important point to understand about the company summary is that investors will probably skip it. Even though it provides important fundamentals -- what the company does, when it was formed, its legal and ownership structures, the location of its offices -- after the executive summary many VCs flip straight to the management-team section to see who's running the thing. There is one way to keep investors reading sequentially, however: If you already have customers (you mentioned them in the executive summary, right?), shout about them near the top of this section. "The single most important thing that catches an investor's eye today is a customer who is buying the product," says Gregg Fairbrothers, executive director of Dartmouth College's Entrepreneurial Network. That's not lost on Dwight Aspinwall, who is in the midst of raising $750,000 for White Mountain Stove, a New Hampshire company with a prototype travel mug that heats itself. In the first paragraph of his company summary he notes preliminary commitments from Eastern Mountain Sports, one of the nation's largest outdoor equipment retailers.
Without customers to boast about, the best you can hope for is that a potential investor will glance at this section while she's pondering her final decision, to see what she's missed. List the company's milestones: products launched, partnerships hatched, customer contracts nailed down, and revenue goals reached. After the history, provide a statistical rundown of where the company is today: number of employees, most recent sales figures, and projections for the coming year. Don't shy from comparing your trajectory with other successful companies that use similar business models. "It's like screenwriters doing pitches," says Tuck's Wainwright. " 'I have the Romeo and Juliet of 2000.' You remind producers of the hit, and you add a twist."
Product: Keep the geeky details current.
Buzzwords from the Internet boom are out. Anyone heard uttering phrases like peer-to-peer, virtual environments, and protein chemistry will be laughed out of most offices. Though it's important to speak the language of the day, the reliance on jargon is "characteristic of periods of intensive technology entrepreneurship" but quickly becomes obsolete, says University of Maryland business professor David Kirsch, who has created a Web-based repository for dot-com business plans called businessplanarchive.org. "When I call up some of these plans, the sentences describing what the company does are almost unintelligible now."
For example: "If you say, 'We have a leading-edge chip, CMOS technology on a silicon substrate, which is treated for exceptional thermal conductivity,' some people will not understand what you're talking about," says Donald Spero, director of the Dingman Center for Entrepreneurship at the University of Maryland's business school. "But if you say, 'We can build a chip faster, cheaper, and with more capability that uses less power,' everyone knows."
Predrag Sukovic, a Ph.D. student in biomedical engineering at the University of Michigan, grappled with the jargon issue while writing the business plan for his company, Xoran Technologies, in 2000. Xoran has developed a small, inexpensive CAT scanner that could be used on-site in a doctor's office (replacing the $1 million–plus units that require an entire room). To avoid dense scientific prose, Sukovic used a technique any 9-year-old might have suggested: pictures. By making liberal use of diagrams, photographs, and prototype designs in his 26-page business plan, he made sure every potential investor could picture exactly what the product would look like, as well as the images it could produce. The popular Business Plan Pro software program has even incorporated plug-in graphics and charts to its business plan formats.
Some entrepreneurs, however, put so much detail about proprietary technology into the plan that they ask investors to sign a nondisclosure agreement, often assuming (erroneously) that this adds an air of NASA-like secrecy and excitement. It doesn't. In fact, it can be a turnoff. "As a blanket rule, we will not sign a company's NDA. We'd go out of business in a second if we ever disclosed information we shouldn't," says Scott Frederick, of Valhalla Partners, a venture firm in McLean, Virginia. "If your ability to win is undermined by what you put in your business plan, you're in trouble."
Market Analysis: Put your business in context.
Sonny Vu's biotech start-up, AgaMatrix, in Cambridge, Massachusetts, had several possible markets in which to target software that improves "biosensors," devices that detect biochemical elements. Vu had to figure out which market was the most lucrative. "There is this classic entrepreneurial pitch: What is the gut-wrenching problem crying out to be solved?" says Vu.
Once you've identified your market, don't pretend there's no competition. According to How to Really Create a Successful Business Plan by David Gumpert, Ben & Jerry's 1982 business plan praised potential rival Haagen-Dazs for having demonstrated that it was feasible to ship ice cream nationwide from a single plant. Acknowledging the existing market shows that you are grounded in reality and that you're up for a challenge. Dismissing it shows arrogance or, worse, ignorance. "First-time entrepreneurs get worried that they need to show that they're different," says Valhalla's Frederick. "But there's a risk to excluding successful companies from your competitive analysis. If you have no competition, that calls into question what you're trying to do."
Strategy and Implementation Summary: When it comes to making and selling, be realistic.
So far, you've defined your product, identified your customer, and assessed the competition. Now, the nitty-gritty. How do you plan to produce your product, package it, price it, brand it, advertise it, spin it, and generally get it into the hands of everyone in your market? For every claim you make elsewhere in the plan, and for every forecast and projection of your company's success, there should be at least a sentence in this section that explains how. When describing how your company will grow, avoid the scenario of rapid, hyperactive expansion. It shows naivete. "Are you projecting you're going to open up 10 offices in two years?" says Wainwright. "An investor can look at that and say, 'Hmm. I've opened up offices before. You can't do more than three in a year.' "
One of the signs that times have changed since the recent hire- as-fast-as-you-can days is that entrepreneurs are being told to add new staff gradually to keep the burn rate down. In outlining your implementation strategy, spell out which processes you will take care of in-house and which you will outsource. "You may not want to hire sales and marketing people," says Dilip Gadkar, founder of eRestrictedStock, Inc., a New York City start-up that helps companies report insider trades to the SEC. Gadkar notes in his business plan that he intended to focus on joint ventures to market his product.
Management Team: Trot out the stars.
As we mentioned, many investors will flip right to the management team section after skimming the opening pages. Think of VCs as the types who skip to the end of a thriller to see whodunit before they figure out what was done. "The reason they flip ahead is that most professional investors would gladly take a 10-on-a-scale-of-10 management team with an 8 opportunity as opposed to the other way around," says Al Lewis, a business professor at the University of California, Riverside. "A number-8 management team can screw up a number-10 opportunity."
Save the three-page CV for the appendix. In the body of the plan, give a succinct one- or two-paragraph bio including all relevant experience for each of the key players -- founders, department heads, employees with impressive corporate pedigrees. When it comes to the board of directors and the advisory board, don't just name drop. Discuss how each person's credentials and experiences will help the company. And "Has gray hair and was on CNBC once" are not credentials.
Be sure to point out any gaps in experience on the management team. A gap's a gap, and it's better for you to bring it up before a potential investor does. Sukovic learned this lesson the hard way while writing his business plan for the on-site CAT scanner. "We heard back from investors that our management team wasn't all that strong because we were students," he says. In a later draft, Sukovic wrote that Xoran was in the process of recruiting an experienced executive.
Financial Plan: How to talk -- er, write -- turkey.
The most important thing -- scratch that -- the only thing an investor ultimately cares about before giving you money is how and when she's going to get it back. The financial section is where you attach dollar figures to the plans for marketing, production, and sales. Elaborate on key assumptions, like market penetration rates and operating margins, in more detail than even the hardest-ass of hard-ass accounting professors would require. Detail past and future cash flow statements, income statements, and balance sheets as if you were presenting evidence to the SEC.
The big question, of course, is how much money to go for. Make sure you'll have enough to sustain you until a second round, but be careful of aiming higher for safety's sake. "You can't say, 'We really need $100,000 but we asked for $150,000 as a starting point for negotiations,' " says Steven Weinstein, founder of Contentual Content Investors, a boutique investment firm in New York City that specializes in companies offering proprietary content on a subscription basis. There's no formula, just this advice from Weinstein: "You need to go in and be prepared to defend what you asked for."
One type of investing that's on the rise is "milestone investing," according to Taylor, a VP at the National Venture Capital Association. Under this plan, a VC will pledge, say, $20 million to a company, but it's payable in installments. You get $5 million up front, and the rest comes when the company hits certain pre-established milestones -- FDA approval, patents, revenue goals, etc.
In addition to knowing when they'll see returns, investors want to know the way out, otherwise known as the exit strategy. "Even seed stage investors want to know how they're going to exit within 18 to 24 months," says Weinstein. If you've devised more than one possible path to liquidity, present them all. Just don't get jumpy talking about an IPO if it's not realistic for your firm. In most cases today, acquisitions are the way to wealth.
How much wealth do they want, exactly? One venture capitalist says that while a 40 percent return -- VCs typically give their investors a return of between 20 and 25 percent before paying themselves -- became standard a few years ago, no one's getting that at the moment.
Conclusion: Keep it clean.
In the end, your business plan can't make a mediocre idea great, and it won't persuade a venture capitalist to skip due diligence and write a check on the spot. What it can do is reveal whether your approach to business is sloppy or thorough. To ensure that you fall into the latter category, ask at least five editors to read your plan. Get a couple of sticklers to watch for typos; employ a friend with good common sense to scan for holes in your logic; pay an experienced entrepreneur to give it a read; and if you know any lawyers, it wouldn't hurt to have them check it over, too. Be open to suggestions, and prepare to write multiple drafts. VCs aren't known for failing to catch mistakes.
Such careful editing might help you avoid a glitch like the one Ken Goldberg, director of the Center for Entrepreneurship at National University in La Jolla, California, caught in a business plan written by an entrepreneur who was developing a Mexican fast-food chain. "The guy was phenomenal," says Goldberg. "He knew the average cost of rental, the costs of utilities and equipment. We did a cost analysis of it. He listed $3,000 profit on a given month." But the young would-be restaurateur forgot one thing: "He wasn't going to pay himself."