The Competitive Landscape
It is a myth that entrepreneurs, and businesses in general, no longer need a business plan to raise money. There is a dialogue line from some VC’s and Angel investors – particularly in Silicon Valley – that signals businesses, and wannabe businesses, that they only need a term sheet and a slide deck. With only these things the world will be your oyster. However, the reality is a bit different! Of course, there are technology companies receiving funding today with no business plan. But if they do “hit the lottery” – a very rare occurrence – they may find that what they have left of their company is a small pittance of ownership. How will a business plan help in retaining ownership?
Most often the people starting companies – with or without good business plans – will fail within two years. Following are some data points for a reality check:
2 Year Failure Rates of Types of Business Starts
- 85% of venture backed businesses fail in two years
- 65% of garage founded businesses fail in two years
- 35% of franchise business owners (franchisees) fail in two years
To put a somewhat finer point on it: 85% of the best and brightest with lots of available cash fail in two years. 65% of two person companies with an idea fail in two years. And 65% of franchise businesses with only adequate financing, a somewhat generic business plan, good advice and mentoring, a little bit of hard work beat them all.
Businesses fail for a wide variety of reasons, but these reasons can be grouped into some handy buckets:
- Bad structures
- Bad advice
- Bad ideas
- Bad execution
If you want to read a few excellent studies about why businesses fail, one good source are the Startup Genome Reports – available here: http://blog.startupcompass.co/.
There are a lot of things that can go wrong in a new or established business, and surely some things will go wrong. If you have a business plan however, these somewhat predictable “wrong turns” may not be catastrophic. Underlying the issues, whether or not you have a business plan, is the need to identify what your underlying business model is, what assumptions you have made in establishing your business model, and how will you know if these assumptions do or do not work.
Surviving long enough to pivot – make the required changes to tune your business model – requires that none of the bad assumptions, of your 1,000s of assumptions, get so deeply engrained that they kill you before you even know it. Most businesses have all the answers and often these answers are correct – for the questions which were actually asked. The problem is that these businesses did not know what the right questions were in the first place. Often, their “advisors” didn’t know either. So these businesses go on their merry way until they crash and burn. Boom!
Why Is A Business Plan So Important?
“I was told I don’t need a business plan to raise money anymore”.
A business plan is important so that you can logically lay out the following major success components:
- What you need to do to prosecute your business
- Identify the key assumptions you are relying on to drive your business
- Set up good metrics – benchmarks – to see if those assumptions are holding true to form
- Establish a structure for your company to operate within so that as you identify weak or faulty assumptions you can make metered changes and make sure the results actually improve. Further, that the changes don’t break something else that you don’t see until it’s too late.
The Key Elements of a Business Plan
Recently, we were approached by a client that has been presented with a very rapid growth opportunity. Unlike many, this company is not a startup, and has been around in excess of 10 years. And like many, they have never had a business plan. They have beaten the odds, they have been running a good small business for more than 10 years. Why did they need a business plan? Well, they needed an investor to fund this very large opportunity, one approached them, but conditioned their look-see on the existence of a business plan.
We went into action. Step one was to gather all the information the company had, its corporate documents, sales history, contracts, org charts, policies and procedures, IP documentation, financial statements, marketing materials, etc. Next we read all this material to become familiar with the fundamentals of the business. We interviewed the founder and senior management to understand the business and personal goals, we looked at prior financing transactions, the board of directors, how the board and management operated. How they shared the responsibility of day to day operations. And a whole lot more…
They had never had a business plan – they didn’t need one! But of course, they really did.
We began to find a lot of seemingly “little” things that had been irritating and draining the business. Of course, each little thing had an explanation. But collectively they began to tell a story of where the gears in the business model did not align. In some cases they were grinding the teeth off, in some they were working against each other, in the other cases the gears spun alone and did not meet.
We then wrote the client’s first business plan, identified the assumptions, key drivers and metrics, developed the integrated business financial model and redesigned the way they actually related to and thought about their business. In the end, they no longer “didn’t need a business plan,” they wanted a business plan to help them make day-to-day decisions more effectively and allow them to run their business more easily.
In order for your business to thrive, you need to know how to look at your business, and observe how its components interact with each other, with your competition and the changes in the markets over time. You need to have a model and a method to observe change, identify invalid assumptions and be able to make the changes in a controlled way so that one change doesn’t end up breaking something else in your business.
A Good Business Plan Will More Than Pay For Itself
If you end up in that small percentage of businesses that start, survive more than two years and reach the rarified air of multimillion dollar liquidity, how will a business plan help you? If you have a good business plan, you will:
- Know how much money you really need to raise, and when
- Know your critical control points
- Have good metrics and measures
- Be able to build achievable goals into your business plan.
Having a good business plans means you are much more likely to achieve most if not all of your goals. You will be able to better negotiate your various financings – series “A”, “B”, or “C” – and you will know how to place the financing in order for you to succeed. When you succeed with your business plan you are much less likely to be put into a “cram-down” situation – where the investors reduce your valuation and dilute your holdings. Fundamentally a good business plan will allow you to retain more ownership.
Boomcycle offers a two day deconstruction, specifically to drill all the way down into your business, whether or not you have a business plan so that we can identify all the areas where you are relying on assumptions, well-defined, ill-defined or more typically not defined at all.