We 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.
- The market is large, growing and open (not that there is no competition but that the competition is beatable)
- The product can address the needs of this market.
- 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.
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)
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.