Business plans aren't just for fundraising. They're also an essential tool for entrepreneurs to work through the strengths and weaknesses of their businesses.
One of the first tasks when starting a business is writing a business plan. There's a common perception that business plans are only useful for fundraising. But there is another essential purpose: to organize your thoughts and clarify your plan.
For future business owners, a plan "helps crystalize the thesis behind the startup and explains it concisely to potential investors," Thomas Kristensen, private equity investment manager at LGT.
The process of writing a business plan forces you to review the strengths and weaknesses of your business. Before you present your business to potential investors or partners, it's vital to work through details of your vision. A business plan helps you do that. The exercise of writing the plan helps both outsiders and you to understand how your business works, where it's going, and how it will deal with challenges as they arise.
Jason Escamilla, chief executive of San Francisco-based ImpactInvestor, likens writing a business plan to doing homework.
"If you haven't done this, then you really are on shaky ground," he said. If you walk into a meeting and get asked a question that a basic business plan would cover and you don't have an answer, "you've shot yourself in the foot. I see it all the time. They should have done their homework."
Investors acknowledge that having a written business plan is less critical for seasoned entrepreneurs who have a firm grasp on the parts of a business plan. "But if you're all the new to entrepreneurship [and don't have a plan], then you're in a boat without a paddle," Escamilla said.
There are a few essential components to a business plan. Typically, it should cover market opportunity, the product or service the company is bringing to market, your strategy for selling the product or service, organizational requirements, and financing needs.
"I look for clarity of market opportunity or need. I want to see that the founders understand their market intimately and have the mental flexibility to adapt to changing market conditions," Kristensen said.
Business plans also call for financial projections. Investors say they are accustomed to seeing overly rosy projections, but they also look at costs. Escamilla says he looks for the unit economics of a business with a clear breakdown of customer acquisition costs. As a rule of thumb, Escamilla, who focuses on the tech sector, says he looks for a one to three ratio of customer acquisition cost to the lifetime value of the customer.
Similarly, Kirstensen says he looks for fixed versus variable costs as well as changes to the cost structure as the business grows. For startups looking to raise a round of capital, it's essential that entrepreneurs understand how far the money will get them.
Investors who have reviewed thousands of business plans say there are some common mistakes. Escamilla said he often sees entrepreneurs who should have done more homework or who are too secretive about their idea.
"When you're too secretive about an idea, you're not going to get as much free advice or as much turnaround time to iterate or polish" your initial concept, he said about why it's worth it to open up.
Another common misstep is overly rosy forecasts that overestimate revenue and underestimate costs. To be sure, entrepreneurs need to be optimistic about their startups, but they also need to be realistic, with a good understanding of the challenges and risks.
Because even the best-laid plans can go awry, business plans are, at best, a work in progress. Investors say that even though business plans cover important ground, they also look for qualities that are not necessarily in business plans.
If they have a purpose, and it's not working, they're going to keep finding a way to make it work.
Simon Squibb, angel investor and serial entrepreneur.
Simon Squibb, an angel investor and serial entrepreneur who has started 18 companies, says he looks for flexibility and purpose above all.
"When I'm investing in businesses, I'm really looking at the person and whether or not they can move quickly enough and pivot their business to make it work. If a year from now, the business isn't worth billions yet and they're starting to wane. If there isn't a purpose in the plan, they don't keep going. But if they have a purpose, and it's not working, they're going to keep finding a way to make it work," he said.
A purpose is often a one-liner that explains why the founder is starting the company. It's sometimes in a business plan, but more often than not, it's missing.
"An entrepreneur with a strong purpose is excited about what they are doing. That keeps them going. I see a lot about what they are doing and how they will do it, but not enough why," Squibb said.
Business plan templates may include slightly different categories. Though the categories may change slightly depending on the type of business (e.g. small business or tech startup), stage of development, and your target audience, the main ingredients stay more or less the same.
This section should include a mission statement that explains the focus of your business, a short description of your products or services, and an overview of your plans.
Here, you can include a more detailed description of your company's purpose and history. Explain your products or services and focus on the problems that your business solves and how your customer benefits. Be specific about your customer base, whether it's individuals, organizations, or businesses. If you have plans involving intellectual property, such as a patent or copyright, or is engaged in research and development, describe that in detail.
Organization and management
Include basic information about your company's registered name, physical location, legal structure, and overview of your company's organizational structure. Include profiles of the management team, owners, board of directors, and advisors such as accountants and attorneys.
Market analysis and research
This section needs to demonstrate that you understand the industry that your startup operates in. It should include a sketch of the customer segments you are targeting, including the size and demographics of each group. Lastly, include a detailed evaluation of your competitors and how your business stands apart.
Strategy and financial projections
Here, you explain your marketing plan and sales strategy. Lay out your plan for how you will attract and retain customers and how you will ramp up the business. Include business risks and how they can be mitigated. No one can predict the future, but laying out various ways to mitigate risk shows that you've thought about different scenarios and created backup plans.
You also need to provide the financial story of your business with a financial plan and projections. If your business is already established, you should include income statements, balance sheets, cash flow statements and capital expenditure budgets.