Writing an effective business plan

452530679_f991bbd742_m.jpgWe have all heard how important a good business plan is to an entrepreneurial startup. The very act of writing one can improve your business concept, since it makes you think through the key issues. And, critically for many ventures, you have little chance of external funding without an effective business plan.

So, what makes an effective business plan? I asked this question to Martin Hosking – chairman of Aconex and RedBubble, and a man who has seen more than his fair share of business plans from both sides of the table.

 ———-

Q. Martin, you’re a successful entrepreneur, early stage investor and a lecturer in entrepreneurial finance. How many business plans have you seen, and how good are they on average?

A. I’d estimate I have seen about 1000 business plans, as I also judge in the business plan competitions at Melbourne Business School and Swinburne. But very few of the plans cover the information which is most critical to investors.

Q. What do you look for in a business plan? What information do you expect to see, and what is most important to you as an investor?

A. I look for a business plan to clearly demonstrate three things.

  1. The market is large, growing and open (not that there is no competition but that the competition is beatable)
  2. The product can address the needs of this market.
  3. The team can deliver (i.e. it has the track record, organisation, skills to make it happen).

There are far more good ideas out there than good executions. Most plans worry too much about the idea and too little about the execution. 

Q. How do you decide whether to proceed or not? What does an opportunity worth investing in look like?

A. Following on from the above, I decide to invest when I am convinced the three key issues have been addressed. Then for me it comes down to whether I like and trust the team. I will not invest in a company no matter how good the idea if I don’t believe the team’s ethics are beyond question. Seed investments are too long term and too illiquid to be worth undertaking if you question the ethics of the people you are working with.
 
And finally I won’t invest outside my areas of expertise or where I think there are others with much more expertise. Eg I wont invest in biotech because if they are coming to me it means they can’t get money from people who know a lot more about this subject than I do. And if they wont invest why would I?
 
Q. How long does it take you to decide whether to decline an opportunity or to investigate further?

A. The first cut is literally a few minutes (20 at most). This is where I decide if I am going to walk away. 95% of plans fail at this stage. For example, I was offered the chance to invest in online video. I simply felt it would be far too complicated to do due diligence on this opportunity for it to be really worth looking at.
 
For the remaining 5% it can take many, many months to decide whether to proceed. That said, I can make quick decisions with plans and people I know well. For example, I made an investment in a social network startup with someone I have known for 10 years after hearing the plan and about a week of thinking. I knew he would not have even put it to me if it wasn’t half good.
 
Q. What are the major mistakes, problems, or misconceptions you see with business plans?

A. The major mistake is that they offer too little reason to believe the plan. For example:

  • No evidence that the market really exists (eg industry surveys, good analogies)
  • No evidence that the product is really distinctive (eg focus group feedback, feedback from actual or potential customers)
  • No evidence that the team can really make it happen (ie real detail about what they are going to do and when)
Plans tend to be long on vision and short on the specifics that matter.
 

Q. How important are the financial projections? What advice would you give entrepreneurs on this?

A. Financial projections are simply the basis for stress testing the ideas. They are almost always wrong and over optimistic. The excessive optimism generally shows poor experience and understanding of the market and how to build a business. Underestimating costs and the need for more capital follows from this.

Image credit:
suitcase by fabiogiolito

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