The Business Planner

Start Ups to Continue to Struggle to Find Funding in 2010 - A Well-Crafted Business Plan is Key

2010-01-05T11:38:00.000-08:00

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The economic downturn has dimmed many entrepreneurs' hopes of opening a small business, as sources of funding have dwindled or dried up completely. And while many hope 2010 will be better, the outlook continues to be bleak.

The majority of entrepreneurs use personal savings or contributions from family or friends to fund their ventures, but personal wealth, often connected to the value of stock portfolios or homes, hasn't bounced back.

Meanwhile, banks—under scrutiny by regulators—are continuing to strengthen capital reserves, making it difficult even for entrepreneurs with track records and years of experience to qualify for loans. And professional investors, stung by the financial meltdown, are meting out fewer capital infusions.

Kenneth MacKinnon moved to Los Angeles over two years ago with plans to start a tapas wine bar, but despite a high credit rating and collateral, including a home, the Scotland native says he has been unable to secure the $300,000 he needs from banks or private investors.

"The money supply has been shut off," says Mr. MacKinnon, who had run a successful seafood eatery for 15 years in the U.K. that he sold in 2007 before moving to the U.S.

Funding from angel investors, or high-net-worth individuals who provide capital to young companies, fell 30% to $9.1 billion in the first half of 2009 compared with the same period a year earlier. That figure is expected to remain flat for 2010, according to Jeffrey Sohl, director of University of New Hampshire's Center for Venture Research, which tracks the data.

What is encouraging, Mr. Sohl says, is the number of deals has ticked up slightly. While angels are investing less—$370,000 per deal in 2009, versus $530,000 in 2008—about 24,500 ventures received funding during the first half of 2009, compared with 23,100 the year earlier.

"They are still doing the deals, but the deals are much cheaper now," he says.

Venture capitalists, too, are continuing to invest, but typically in later-stage companies already in their portfolios rather than new prospects, says Mr. Sohl. The average deal size declined to $5.7 million in the first half of 2009, compared with $7.4 million to $7.8 million between 2005 and 2008.

As for Small Business Administration-guaranteed loans or conventional bank loans, the best thing about 2010 is that it won't be 2009, says Bob Coleman, publisher of "The Coleman Report," a La Canada, Calif., trade publication for SBA lenders. "We're better off than where we were 12 months ago, but we are nowhere near where we were two years ago," he says.

The SBA approved less than 45,000 loans for the 12 months ended Sept. 30, down 36% from a year earlier. Total volume for its flagship 7(a) loan was $9.3 billion, off year-ago levels by $3.4 billion.

Stimulus-related measures, however, contributed to an uptick in SBA lending in recent months. Mr. Coleman expects that trend to continue for 2010.

But SBA loans make up only about 1% of overall small-business lending, Mr. Coleman estimates. That figure may grow to 5% to 10% in 2010 as the government provides more incentives for financial institutions, especially community banks, to provide financing to small businesses, he says.

Still, getting the money may be a challenge. "Whether it's an SBA loan or a conventional loan, you really have to be perceived as the 'cream,'" Mr. Coleman says. Start-up entrepreneurs in particular will have to show they have a significant amount of their own savings in the venture, plus solid cash-flow projections, he says.

Maria Coyne, executive vice president and head of SBA lending at KeyBank in Clevand, agrees that start-up entrepreneurs will have to have a solid plan and assets. "They've got to get a good hunk of skin in the game, too," she says.

Babson College in Wellesley, Mass., estimates that entrepreneurs need on average $65,000 to start a business, two-thirds of which comes from personal savings and the rest from "informal" investors such as relatives and friends.

Although the stock market is starting to recover, housing values remain weak. Two years ago, relatives were more willing to invest because "they might have seen they had a couple hundred thousand dollars in equity in their house," says Babson entrepreneurship professor Andrew Zacharakis. "Today, that's a scarier proposition."

Lack of access to capital will also likely hamper entrepreneurs interested in buying a franchise, says Matt Shay, president of the International Franchise Association in Washington. The group estimates 2% growth in franchises for 2010 to over 901,000 establishments. That's better than zero growth in 2009, but off the average 5.6% growth per year from 2001 to 2005.

In the past, potential franchisees could finance a purchase if they could put 15% to 20% down. Now, banks require large down payments of between 40% and 50%, Mr. Shay says.

Babson's Prof. Zacharakis says he's seeing companies doing more with less, including asking friends and family to work for free. "Instead of capital infusions, there might be a lot more exchanges of services or trading favors," he says.

In Los Angeles, Mr. MacKinnon says he's considering taking on partners so he can open his long-planned bar. Instead of starting from scratch, he might invest in a failed restaurant.

University of New Hampshire's Mr. Sohl says he believes "we're done with the downdraft," though he remains cautious for 2010. "People aren't ready to bet the farm," he says.

Life on Severance: Comfort, Then Crisis

2009-11-12T12:48:00.000-08:00

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SILVER SPRING, Md. -- Paul Joegriner hasn't worked since March 2008, when he was laid off from his $200,000-a-year job as chief executive officer of a small bank. But you wouldn't know it by appearances.

His wife, Marzena, shuttles their two young children to private school every morning. The family recently vacationed in Virginia Beach, Va., and likes to dine on Porterhouse steaks. Since losing his job, Mr. Joegriner, 44 years old, has had several offers. He's turned each down in hopes of landing a position comparable to what he held before.

he family's lifestyle over the past year and a half has been propped up by a $200,000 severance package and another $100,000 in savings -- funds the family has burned through rapidly. By Mr. Joegriner's own calculations, the family will be out of money in six months if he doesn't find work.

"It will be D-Day," he says. "But on the outside, no one has any idea that we're in trouble."

Mr. Joegriner is a member of what might be called the severance economy -- unemployed Americans who use severance pay and savings to maintain their lifestyles. Many lost their jobs in 2007 and 2008, and thought they'd soon find work. Now, they're getting desperate. Last week, lawmakers passed a bill extending unemployment benefits up to 20 weeks. Unemployment benefits, which typically last about 26 weeks, were expected to run out for 1.3 million people by the end of the year, according to the National Employment Law Project.

All of this is happening as the long-term jobless rate hits its highest point on record. More than a third of those who are out of work have been looking for more than six months, making this category of unemployed the biggest since the Bureau of Labor Statistics began tracking it in 1948.

Overall, companies have been eliminating or trimming severance packages. For those who do receive severance, the median pay allotted is 12.5 weeks' salary, down from 21.8 weeks a decade ago, according to outplacement firm Challenger, Gray & Christmas.

But this downturn has brought heavy layoffs to the financial and auto industries, two places where generous exit packages remain more common. The dramatic changes in such sectors mean that many of the eliminated jobs will never come back. Some workers may suffer a permanent hit to their standard of living.

Those affected often have trouble accepting their diminished prospects. Hefty severance packages, while intended as a safety net, can lull the unemployed into a false sense of security. Some people continue spending as before.

"There is an end date when that severance is going to run out," says Ellen Turf, chief executive of the National Association of Personal Financial Advisors. "At that point, the only life preserver is unemployment or getting another job....It's an awful situation."

When Michelle Patterson was laid off as an executive director of marketing for a publishing company in January, she figured she could subsist comfortably, at least for a while, on the $20,000 she had reserved from her savings and severance combined. She continued to eat out regularly and made daily Starbucks runs.

"It made me feel like I was still at work," says the 41-year-old resident of Newark, N.J. She spent as much as $250 a week on networking meals and drinks with contacts. Some days, she scheduled up to four coffee meetings a day, picking up the tab most of the time. She also spent $30 a month for pedicures and $150 on her hair.

The reckoning came in August, when she examined her finances. Her condo had been on the market for six months but she'd yet to receive a single offer. Her severance and savings were nearly gone.

She finally cut her spending. She doesn't dine out anymore. Gone are the fancy salon visits; Ms. Patterson sips Starbucks just once a week. She downgraded her cable TV to basic channels, saving $8 a month.

Ms. Patterson sometimes wishes she had cut her spending earlier. But the money spent networking and socializing, she says, has "helped [me] keep sane." Like many of the long-term unemployed, she surfs sites like Monster.com and is a "serial résumé sender" -- emailing at least 10 résumés a day. Still, "I keep running into dead ends," she says.

Coming to terms with the new job math hasn't been easy. Ms. Patterson's old salary was $140,000 a year. Now she is targeting jobs paying about half that. She recently turned down a per-diem arrangement earning $250 a week, or a mere $13,000 a year, selling education software.

After working for more than a decade in New York ad shops, Chuck Hipsher moved to Detroit in 2005. He took a position at the Campbell-Ewald agency, where he helped launch the Chevrolet Silverado campaign. Raised riding in the back of his grandfather's Chevy pickup in Iowa, Mr. Hipsher, 50, says he was "elated" at the opportunity.

He met his wife at the ad agency, and the two had a $40,000 wedding. Kelly Hipsher, 32, was laid off in October 2007 and found out she was pregnant in February 2008. A week later, Mr. Hipsher's pink slip followed. Two months after that, the out-of-work couple moved to Greenville, S.C., to be closer to family and get a fresh start. Together, they had received about $60,000 in severance. "Now we have $600 to our name," says Mr. Hipsher.

Although their rent was cheaper, Mr. Hipsher says the family continued to spend like before. They moved with three cars -- two BMWs and a Chevy Silverado. They continued to buy cases of $36-a-bottle wine. They spent $250 a month on a cleaning lady, and Mr. Hipsher dropped $50 a week on flowers for his wife. The couple still dined out regularly.

"We were stupid," he says. "You become accustomed to a certain lifestyle. When your world changes and things dictate that you change, you're pretty stubborn to give things up."

He sold the BMWs and voluntarily turned in his beloved Silverado to avoid the repo man. "It was heartbreaking," he says. He replaced the fancy wheels with a Chrysler minivan.

Before the layoffs, the Hipshers had no debt. Today, they owe about $70,000 -- including money borrowed from family members and $31,000 in credit-card debt. To hold off the collection companies that call daily, Mr. Hipsher says he is doing his best but is also considering filing for personal bankruptcy.

After a stint selling new and used BMWs on a lot in Greenville, Mr. Hipsher recently began consulting for free for a small marketing firm, "to stay busy."

In September, a Web solutions company hired him as a marketing director. Between salary and commission, he thought he could match half his old income. But so far, he says he's only received about $1,220. Tight for cash recently, he pawned his wife's $12,000 wedding ring for a $2,000 loan. He has until Dec. 28 to pay back the principal, plus $500 in interest -- or else he forfeits the ring.

Looking back, he kicks himself for failing to enforce financial discipline right after losing his job in Detroit. "That precious nest egg is gone," he says.

Mr. Joegriner began his career in banking more than 20 years ago, starting out as a part-time teller in Chevy Chase, Md. Even though he was still in college, his goal was to be a CEO. He took night classes to enhance his knowledge of banking.

Mr. Joegriner says he never craved a lavish lifestyle. When the first of their two children was born in 2000, his wife left her $50,000-year-job as a paralegal.The family settled in Silver Spring rather than pricier communities nearby. Instead of tailored suits for $1,000, he bought off-the-rack styles for $300. Mr. Joegriner purchased a Mercedes five years ago, but at auction.

After losing his job, Mr. Joegriner expected to land on his feet within six months, he says. In that time, he turned down three job offers to be a chief financial officer, either because he didn't like the salary or the description of duties, and thought he could do better. One was nearby; the others would have required the family to move out of state. All paid somewhat less than he had previously earned.

While he says he's "not a bean counter," Mr. Joegriner now has mixed emotions about turning down the jobs. He estimates he has sent out about 3,000 copies of his résumé thus far. His severance package included the services of an outplacement firm, but he didn't find it helpful. "Unemployed people networking with other unemployed people has little value," he says.

After years of being a chief executive and hiring people, it's been a tough adjustment. Recently, he began shooting off his résumé for mid- and senior-level positions "just to try and land something." No replies.

Mr. Joegriner's mornings now start with a coffee run to the nearby 7-Eleven six days a week. While pouring his regular brew and a cup to take home to his wife, he calculates that by recycling the cups, he receives a 32-cent discount per $1.37 serving. That's a savings of $3.84 a week, he reckons -- even though this small "luxury" for the two of them still costs a total of about $655 a year.

Next, he typically spends a couple of hours doing home repairs. Since his layoff, he's installed a retaining wall, put under-cabinet lights in the kitchen and tiled a kitchen backsplash for a friend. "It's my Zen," he says. He's holding off outfitting a bathroom sink with a marble countertop.

By late morning, he launches into job-hunt mode. While trolling job Web sites, Mr. Joegriner toggles to a multicolored, multitabulated Excel spreadsheet that calculates the household budget, as well as the "burn rate" through the family's dwindling savings.

Mr. Joegriner goes grocery shopping in the afternoon. Armed with coupons collected in a shoebox above the fridge, he strides down the aisles, striking out items from his wife's list with a black pen as he goes. His brow furrows reading the fine print on a cereal coupon his wife handed him. "It says $1.50 off cereal," he says. "But that's only if you buy three. So, really, it's only 50 cents off."

He pushes his grocery cart on a Friday afternoon through the full parking lot. "Sometimes I look at all this and think, 'Are we the only ones struggling?' You look around and see all these cars, it's like there's no recession."

Cutting expenses for their children, Ian and Skye, has been particularly tough, the couple says. Piano lessons are no more and birthday parties are small and held at home. Next year, private-school tuition, which costs $13,000 for the two children, will get the ax.

Mr. Joegriner doesn't use the word "unemployed" in front of his children, ages 9 and 6, preferring to say that he's a consultant and that income is patchy. Rough times have even moved him to contemplate seasonal employment this winter, "a stopgap job," while he continues his executive job search. "Maybe something at night stocking shelves," he says. "That way people wouldn't have to see me."

Mrs. Joegriner recently began looking for work as a paralegal. But finding an employer who can accommodate her schedule with the children, she says, has been difficult.

The Joegriner's four-bedroom residence is currently worth less than their $460,000 mortgage, but they're still making monthly payments of $2,400.

The couple is also saddled with two former residences -- which they once considered investment properties. While both are income-producing, low rents and declining real-estate values mean that they barely break even. At this point, any sale would likely result in a loss.

Originally committed to staying in the Washington, D.C., area, Mr. Joegriner expanded his search. In September, the family flew to tiny Gillette, Wyo., where Mr. Joegriner was in the final interview stages for a CEO position at a credit union. The salary was $60,000 less than what he earned before, and uprooting his family from Maryland would be difficult. But they all seemed excited about a possible move.

A few days later, Mr. Joegriner received an offer and a contract. Despite the earlier enthusiasm, doubts began to surface. "What if we went all the way out there and they laid me off?" After fruitless negotiations, he turned down the job. The reason: The position didn't include a guarantee of severance pay. Says Mr. Joegriner: "I just couldn't take the risk."

iPhone Apps Take Root as Cottage Industry

2009-11-12T12:46:00.000-08:00

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Even as Other Bay Area Industries Cut Back, Hundreds of Start-Ups Sprouted to Develop Programs for Apple's Device

By YUKARI IWATANI KANE and RYAN KNUTSON

There is a hint of that old boomtown feeling again in the Bay Area -- this time in living rooms and garages and cubicles where a cottage industry is unfolding around the iPhone app.

Despite the recession, hundreds of start-ups have sprung up in the area since Apple Inc. launched the iPhone two years ago and opened up the device so third-party developers could create games and other software applications for it. "This is our dot-com boom," said Samir Shah, 26 years old, a co-founder of Mountain View-based Snapture Labs LLC, which makes a $1.99 camera app that has been one of the top-ranked photography apps since September.

Mr. Shah and two other Snapture co-founders graduated from Carnegie Mellon University in Pittsburgh in 2007 and moved to Silicon Valley shortly after. They work on their iPhone business in their free time from one of their apartments, but said they hope to eventually turn it into a full-time business.

Apple, which has sold more than 30 million iPhones and 20 million iPod touches, boasts more than 100,000 apps on its App Store, through which people can download games, entertainment and utility applications. Most are free -- and make money from ads -- or cost less than a dollar. Developers get 70% of any revenue they make from app sales, with the remaining 30% going to Apple. That is a better proposition than app development for other mobile phones has been in the past. Rivals now offer similar revenue-share models.

As a result, many Silicon Valley techies have been lured to the iPhone app start-up scene. According to Mobclix Inc., which operates the iPhone's largest ad-exchange network -- a marketplace to connect advertisers and app developers -- 41% of its 4,000 app developers are in Northern California. The region with the second-largest number of app developers is New York-New Jersey, with 14%.

"A large concentration of people who are doing [iPhone apps] are Internet entrepreneurs...and a lot of Internet entrepreneurs are in the Valley," said Matt Murphy, who oversees the $100 million iFund, a venture-capital fund run by Kleiner Perkins Caufield & Byers that backs iPhone app developers.

The popularity of the iPhone App Store had led its competitors to provide similar offerings. Research In Motion Ltd., Google Inc. and Palm Inc. have opened similar stores and have been trying to woo app developers with promises of better support. Though the costs of developing applications for all the devices are prohibitive to many of the smaller developers, some companies, like Flixster, a San Francisco-based movie sharing social network, have created apps for all of them.

The new cottage industry is thriving even as other businesses in the area cut back in the recession. Ngmoco Inc., the San Francisco game app company founded in June 2008 by a former Electronic Arts Inc. executive, landed $10 million in a financing round in March. Since its inception, it has grown from four founders to more than 25 employees. Ngmoco has 11 apps in Apple's App Store and is preparing more for release in coming months.

Meanwhile, EA, one of the biggest publishers in the videogame industry, said this week that it would cut 17% of its work force in its second round of restructuring in the past year as it vowed to focus on a smaller number of games. The company is also investing in new kinds of online games, including apps for the iPhone and other mobile devices.

Many iPhone developers have helped inject fizz back into the start-up scene by holding conferences and get-togethers. In August, a nonprofit called iPhone DevCamp had an event attended by 600 people to network and share ideas. A group called the Silicon Valley iPhone Developers' Meetup gathers once a month in Palo Alto to trade project ideas.

Silicon Valley's universities are also coaxing the iPhone app boom along. In September 2008, Stanford University began offering an iPhone app-building course taught by Apple's engineers. It also posts the course online free. Roughly 130 students have taken the course since last fall, and more than one million people have downloaded the lectures, said Julie Zelenski, a Stanford lecturer in computer science.

Edward Marks, founder of iPhone app start-up Inedible Software LLC, is one student who took the Stanford course and then set up his company in Palo Alto in June upon graduation. The 23-year-old said he briefly considered moving to Hawaii but realized everyone he wanted to do business with was in the Bay Area. "We just realized that this was basically the center of the iPhone world," he said.

Some local techies are finding the iPhone app opportunity so attractive that they left jobs at more secure tech firms to jump into the scene. Sam Yam, 25, one of the founders of AdWhirl, a Palo Alto ad network company for iPhone apps, says he left a job at Mountain View service company Loopt Inc. in February to start the company, which helps manage ad placement in iPhone apps.

Five months after creating AdWhirl Inc., it got $1 million in venture funding. Mr. Yam says the four-person company was profitable "even after paying fairly generous salaries." In late August, San Mateo-based mobile-advertising company AdMob Inc. agreed to acquire AdWhirl for an undisclosed sum. On Monday, Google Inc. announced its plans to acquire AdMob for $750 million. Mr. Yam is planning his next venture, which he says will have an iPhone component.

With Venture Capital Scarce, Entrepreneurs Find Alternative Mean

2009-10-15T13:11:00.001-07:00

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Need Funding? Better Get Creative

With Venture Capital Scarce, Entrepreneurs Find Alternative Means

By EMILY MALTBY

Sean Conway needed to raise funds for his start-up, Notehall.com, an online marketplace for college students to buy and sell class notes. But a year into the venture he was broke and investors weren't willing to infuse the company with a capital boost.

Mr. Conway's grandfather contributed $17,000 for marketing and operations, which allowed the company to hit nearly 8,000 users at Mr. Conway's alma mater, the University of Arizona, by January 2009. But the angels and venture capitalists remained skeptical.

"I had invested my life savings and I knew there was no turning back," says Mr. Conway, a 2007 graduate.

So last March he submitted his idea to DreamIt Ventures, a sort of entrepreneurial boot camp in Philadelphia—funded by four economic development organizations—that provides office space and mentoring to fledgling business owners, and helps set them up with potential investors. Notehall.com, one of 10 ventures chosen to participate in the three-month summer program, walked away with about $500,000 in investments.

Amid a stark climate for venture capital, small-business owners are finding more creative ways to get funding. Some are turning to boot-camp-style programs like DreamIt Ventures, Y Combinator in Mountain View, Calif., or TechStars in Boulder, Colo. Others have found success appealing for funds via television, or even hitting up friends and relatives for cash.

Venture capital deals have been steadily declining since 2007 and are hovering at levels not seen since the mid-1990s, according to data from PricewaterhouseCoopers and the National Venture Capital Association. The amount of funding in the second quarter dropped more than 50% from the year earlier period, landing at 612 investments worth $3.7 billion.

Yet entrepreneurial activity can remain vibrant even in downturns. A June study by the Ewing Marion Kauffman Foundation, a Kansas City group that promotes entrepreneurship, found that periods of unemployment trigger individuals to launch their own ventures instead of applying to corporate jobs. These days, like Mr. Conway, they are needing to find alternative paths to reach investors.

After his success with DreamIt Ventures, Mr. Conway applied to be a contestant on ABC's Shark Tank, a television show that gives entrepreneurs a chance to pitch to investors and vie for their money. Through the show, which aired Notehall.com's episode last week, Mr. Conway landed the company an additional $90,000 after agreeing to give up a 25% equity stake. "The last two weeks have been crazy," says Mr. Conway, who says he hopes for the company to reach 30 colleges by the end of the year."Everyone is emailing, wanting to partner with us."

Marc Fienberg, head of Story Films Inc., a production company in Los Angeles, also found his enterprise wasn't garnering much respect from the venture capital community. So he tapped some acquaintances from his days at Northwestern's Kellogg School of Management and proceeded to network for about three years.

"I quickly realized that to do this, I'd have to reach outside my comfort zone," he says. "There was no room to be shy or humble."

In total, Mr. Fienberg says he pitched to hundreds of contacts, many of whom scoffed at the idea and told him he was wasting his time. But eventually he found 17 people—made up primarily of Kellogg alumni—who were interested. He flew to meet each in person.

From 2007 to 2009, Mr. Fienberg says he secured between $1 million and $5 million. His company's first film, "Play the Game," recently landed in theaters and has grossed about $500,000 in box office sales.

In this economy, entrepreneurs need to work even harder and put more effort into thinking outside the box, says Bo Fishback, vice president of entrepreneurship at the Kauffman Foundation."Smarter entrepreneurs are looking to put more sweat equity into the company, not magic $100 bills."

Mr. Fishback is seeing a trend of more innovators competing online at NineSigma.com and InnoCentive.com. Large companies post challenges on these sites and award money to the winning inventor or problem solver.

Small projects from large companies can be lucrative. That's what William Volk found out after he joined a start-up called MyNuMo LLC, a company that produces games for smart phones. In 2008, he reached out to a venture capital firm that had invested in a company where Mr. Volk had previously worked. "I thought for sure we would get it because I had a track record," says Mr. Volk. But he wound up losing to a competitor seeking capital from the same firm.

Given his background in programming, an undeterred Mr. Volk contacted several companies to see if they'd be interested in a custom smart-phone program. "We were using those smaller projects to keep us going," he said. The projects financed the research and development for MyNuMo's game applications, which are now available online and as mobile-phone applications.

Revenue is expected to hit $1.5 million this year. "We managed to create a higher number of titles than our well-funded competitors," Mr. Volk says.

Do You Really Need a Business Plan?

2009-10-11T22:20:00.001-07:00

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Do You Really Need a Business Plan?

The experts aren't so sure--but entrepreneurs like the founders of Roaring lion energy drink say it's a must. here's how to know if writing a business plan is for you.

By Mark Henricks | Entrepreneur Magazine - December 2008

URL: http://www.entrepreneur.com/magazine/entrepreneur/2008/december/198618.html

Starting a business was the last thing on Sean Hackney's mind when he sat down to write a business plan. Hoping to persuade a soft drink company to hire him, Hackney scripted a plan for taking on his former employer, Red Bull North America Inc. But when he showed it to his corporate attorney father and former Red Bull managing director, "they said, 'Don't send this to Coke or Pepsi. Start the business, and we'll start it with you,'" he recalls.

That was in 2000. Today, the 40-year-old is co-founder and co-owner of Roaring Lion Energy Drink, a $6.2 million company in Sun Valley, California. "We've grown the business from a $62,000 investment to the No. 2 energy drink in bars and nightclubs," Hackney says. The company has 32 employees, and Hackney's erstwhile sounding boards are now his investors and co-managers. The business plan he wrote has been through numerous revisions, and today, a regularly updated marketing plan guides the company. Writing the plan, Hackney says, was "absolutely" worthwhile. "I had a lot of stuff in my head that needed [to be] put on paper."

Clemson University entrepreneurship professor William B. Gartner believes business plans are essential. And the SBA notes on its website: "The importance of a comprehensive, thoughtful business plan cannot be over-emphasized." But lately, questions have arisen.

In 2006, William Bygrave, a professor emeritus at Babson College and longtime entrepreneurship researcher, studied several years' worth of Babson graduates to find out how much better those who started businesses with a formal, written plan did than those who didn't. "We can't find any difference," he admits. In other words, Bygrave and his team found that entrepreneurs who began with formal plans had no greater success than those who started without them.

For or Against
That's hardly the final word, however. Gartner also set out to study the idea. "Going into the study, I was very skeptical about the value of business plans," Gartner says. But after he and his colleagues looked at data from the Panal Study of Entrepreneurial Dynamics, a national generalizable survey of more than 800 people in the process of starting businesses, he found that writing a plan greatly increased the chances that a person would actually go into business. "You're two and a half times more likely to get into business," he points out. "That's powerful."

Gartner's earlier concerns about the necessity of business plans, he says, were that they were "all talk. Our research shows that business plans are all about walking the walk. People who write business plans also do more stuff." And doing more stuff, such as researching markets and preparing projections, increases the chances an entrepreneur will follow through.

For his part, Bygrave doesn't think his research says business plans are a waste of time. "We're saying that writing a business plan ahead of time, before you open your doors for business, does not appear to help the performance of the business subsequently," he explains.

So what would Bygrave like to see instead of a business plan? Attempts to sell the product to actual customers, even if it doesn't exist yet. "Have you talked to a customer?" he asks. "If not, I don't want to talk to you about the business."

Bygrave still thinks plans help, however. Forty percent of Babson students who have taken the college's business plan writing course go on to start businesses after graduation, twice the rate of those who didn't study plan writing. "Even if they don't write a plan," Bygrave says, "they've had to think about how opportunity recognition fits with marketing, building the right team, making financial projections and so on."

And a wide gulf separates having a formal written plan and having no plan at all. "Every business has to start with a plan," says Bygrave, whether it's a mental construction never committed to paper or a more advanced description jotted down on the back of an envelope.

The Money Factor
Skeptics and fans of business plans agree on one point: Securing funding almost always requires a formal plan. Companies funded by friends and family may not need a plan, Bygrave says, but if you go to venture capitalists, commercial banks, government-backed lenders and most angel investors, you will need a business plan.

That viewpoint gets no traction from Daniel Stewart, co-founder of Port Richey, Florida-based Envala. Stewart and his partner funded the small-business software provider, yet Stew-art still put together a business plan complete with financial projections. "We didn't need to because we're our own invest-ors," says Stewart, 38,"but to be a responsible entrepreneur, you have to see things as they are."

A primary purpose of the plan was to evaluate the feasibility of their proposal to sell online automation software to small businesses. So they created three sets of financial forecasts: a rosy picture, a more reasonable one and a disaster scenario. They also placed extra emphasis on describing the corporate culture mission. "We exist to increase satisfaction, productivity and profitability of small businesses," Stewart says. "It was important for us to establish that [early on] when everything is uncertain."

Planning Trends
Plans today no longer need the 20 to 40 pages prescribed by classic planners. "The shorter [it is], the better chance [it has] of being read," says Bygrave, who recommends devoting no more than five pages to income, cash flow and balance sheets. "And don't have any numbers in [there] you can't explain instantaneously."

As tools such as spreadsheets and plan writing software have grown in importance, some critics say business plans have become overstuffed with complex financials that are often backed up by little more than guesswork. "[These tools have] made it easier to produce a business plan," says Bygrave. "But they've produced page after page of financials that basically came out of thin air." As a result, investors today want fewer and better-documented financials.

"No one's impressed by spreadsheets," agrees Gartner. "[It's] the action behind the spreadsheets." By that, he means investors want to see that an entrepreneur has actually examined the market for a product or service, identified potential customers, assembled a capable team, devised a business model and more.

While investors want to see action, they don't want to work for it. A plan today is more likely to be a modest deck of slick, colorful presentation slides than a thick stack of white paper. Digital slides are easier to distribute to a dispersed audience via e-mail and to present to large groups on an overhead projector.

But limit your presentation to no more slides than you would in a paper plan, meaning 20 or fewer. And don't cram a lot of information on a single slide. "Just put highlights," says Bygrave. "[No] more than six or eight lines on a slide."

Planning for the Future
Whether plans today are long, short, elaborate or simple, they still contain the same basic elements they always have. Typically, most have an executive summary, a marketing plan, a management team description and financials (income, cash-flow and balance sheet projections).

The recent studies are hard to ignore because they're based on reasonable samples and were performed by reputable researchers. But business plans show no sign of going extinct. Business plan competitions and college-level business plan courses are more abundant than ever. "Why do people write business plans?" Bygrave asks. "They've been trained to write business plans, so they do. Another cause is that investors or strategic partners insist on it."

Hackney's experience writing the plan for Roaring Lion convinced him of both the benefits and limitations of business planning. Simply writing a plan helped push him to start a business when he had no intention of doing so. But the plan wasn't nearly as effective when it came to identifying and quantifying the risks and opportunities his company would face.

One problem arose when it became apparent he had overestimated the business's revenue potential by about 500 percent. His company's annual sales are nothing to sneeze at, but they are far less than Hackney expected in his plan.

Among other missteps, he underestimated the actual selling price of the company's products. The economic appeal to customers is still strong, but it's not as strong as he'd hoped. Perhaps most important, his plan didn't recognize the amount of financial capital it would require to grow the company, which has made it difficult for him to reach those early sales forecasts.

Like many entrepreneurs, Hackney learned to write a business plan from a book. That, plus feedback and many hashing-out sessions with his soon-to-be investors and partners, produced a plan that was accurate in its basic aim: to describe a business model that would allow him to build a successful enterprise.

Today, Hackney says he'd definitely write a business plan if he started another business. But he'd be much more conservative with his financial projections and de-emphasize the use of them. "I'd make it much shorter," he adds. "I'd deliver the core principles of what the business is founded on in such a way that the purpose would be finding money."

How to Win a Business Plan Competition

2009-10-06T17:34:00.000-07:00

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These days, business plan competitions yield prizes worth more than ever.

The Wharton Business Plan Competition, for example, awards $20,000 in cash and $10,000 in legal services to its top entrant. Harvard Business School’s traditional trackcompetition awards $25,000 in cash and $25,000 in business services to its winner. M.I.T.’s Clean Energy Prize includes $200,000 in cash. And Rice University offers a whopping $225,000 prize to its first-place winner, including $125,000 in equity investment, $20,000 in cash and more than $80,000 in services.

Still, it’s really not about the money, says Cliff Holekamp, a senior lecturer in entrepreneurship at Washington University’s Olin Business School, which hosts multiple competitions, including the recently introduced Social Entrepreneurship and Innovation Competition, a do-good variation with a $150,000 prize pool. “The value of participation,” says Mr. Holekamp, “is not found in funding but in a process that brings you mentorship, support, structure and access to the resources and people that will help perfect your business model.”

As impressive as the cash awards sound, Saad Khan, who has served as a competition judge and is an investor with CMEA Capital in Mountain View, Calif., says the amounts are “fairly small in the context of starting a business.” A better reason to compete, he says, is “to get feedback in real time and to get noticed by alumni who have done well, local VCs and other investors in that community.”

There are even worthy competitions that offer no prize money. In 2006, for example, Ryan MacCauley won the Launch Award at the University of North Carolina’s Kenan-Flagler Business School with a plan for the Class Watch, a company he now runs with his brothers John and Kevin. “What wasn’t going to help us quit our day jobs and launch was a $20,000 check,” says Mr. MacCauley, “but winning gave us confidence.”

It also helped them secure a deal with an angel investor. The Class Watch, which sells customizable, college commemorative timepieces, began generating revenue in the second quarter of 2008 and hopes to hit $3 million in sales within a year.

Pick the Right Competition

Since their advent in 1984, when the University of Texas at Austin held its first “Moot Corp,” business plan competitions have proliferated within academia and beyond. More than 50 American colleges and universities host them. So do corporations, nonprofits and government economic development offices.

Hosts include Wal-Mart, Amazon.com, the states of Michigan and Nevada, the cities of Anaheim, Calif., and Pittsburgh, the Brooklyn Public Library, China’s government-controlled television network CCTV2, and Al Gore, in partnership with the Indian Institute of Foreign Trade.

Some remain invitational but most have loosened their eligibility terms to foster interdisciplinary, international and intercollegiate collaboration (in other words, you don’t have to attend most business schools to enter their competitions).

Competition within the competitions can be fierce, however. And that’s why Cindy Boyd, who is chief executive of the Houston-based consultancy Sentigy and a frequent judge at competitions hosted by Rice University and the Entrepreneurs’ Organization, recommends that would-be entrants conduct extensive online research via the Web sites of the host organizations. Even more important, she suggests contacting past participants — judges, winners, and losers — to ask what worked and what didn’t.

Don’t submit an application, says Ms. Boyd, unless the advice you get sounds do-able for your team.

Give Yourself Time to Prepare

After selecting an appropriate competition, George Abe, a faculty director at U.C.L.A.’s Anderson School, says most teams should take at least a year to hone their business plans. “The earlier the prep begins,” says Mr. Abe, who has seven years of judging experience, “the better the plan is. You can get away with three months minimum if you have a product or service crystal clear in your mind. But you cannot be figuring out a market and competitive story in 60 days.”

Business plan competitions require an initial submission, sometimes called the “intent to compete” entry. Normally, it consists of a two-to-three-page executive summary explaining all elements of the business: product, market, competition, finances and operations. If it isn’t well written and succinct, a team won’t make it through the door.

“Students spend too much time describing the hammer and not enough time talking about the nails,” Mr. Abe says. “They have to be able to explain their product or service quickly so a judge not knowledgeable in the field can basically get it. What every judge knows is how to question students about markets, competition and finances. Those are the nails.” The bottom line: you need more than a cool idea; you have to show how the idea will make money.

Judges are often impressed by serious market research: the results of customer surveys, for example, or of pilot sales programs. That may have been what gave a team from the London Business School the edge in Columbia Business School’s first Odyssey competition this year.

The team’s plan, says a team spokesman, Vivek Makhija, was for “a renewable energy company using a combination of original and licensed technology to offer power generation at a micro level to households in India.” As yet unnamed, the company worked with an alumni mentor who is deeply involved in market research to develop comprehensive reports on rural Indian consumers’ access to and use of electricity.

Make Sure Your Teammates Know Their Roles

NIR Diagnostics wanted to commercialize technology that can prevent amputations and fatalities caused by chronic wounds. These sores may appear to be healing on the surface even though they’re actually deteriorating and infected underneath.

Clearly defined roles were essential, according to the team leader, Armen Karamanian, the interim chief executive. “We came together around common goals and complimentary skill sets,” Mr. Karamanian says. “We didn’t want to wind up with a great, life-saving idea — and lawsuits over this, that or money.” Have an honest discussion over what your team wants to accomplish beyond the academic exercise, such as how you want to start the business and who will do what, he suggests.

NIR Diagnostics won the 2009 Wharton Business Plan Competition and believes it can miniaturize, manufacture and sell by 2012 a device (based on technology created at Drexel University) that bounces lasers through layers of a chronic wound to give doctors a more complete reading of its healing progress.

The company, recently renamed Lumina Diagnostics, is now seeking a $15 million investment over several years to gain F.D.A. approvals and refine its technology.

Unique Ways Entrepreneurs Are Raising Money

2009-08-11T16:36:00.001-07:00

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The credit crunch has undoubtedly put the squeeze on small businesses. Bankruptcies within this group hit 7,514 in May, up 40% from a year ago, according to Automated Access to Court Electronic Records, an Oklahoma City bankruptcy data and management company. Despite those numbers, there are plenty of entrepreneurs who refuse to throw in the towel. Instead they're coming up with creative ways to keep their companies afloat.

When Brooklyn coffee shop owner, Debi Ryan, was faced with the possibility of shutting her doors, she appealed to her neighbors, asking them to become mini venture capitalists and invest in her business. As a result, she just hosted a grand re-opening. Instead of taking a loan or seeking venture capital funding, entrepreneur Paula Conway managed to pay for the launch of her travel web site with money she made selling — of all things — cupcakes.

Taking such unconventional routes to raise cash has become a necessity for many small-business owners as traditional sources of funding (i.e., venture capital and bank loans) have dried up, says Peter S. Cohan, president of Peter S. Cohan & Associates, a management consulting and venture-capital firm in Marlborough, Mass. In the first quarter of 2009, venture-capital firms raised 40% fewer funds (a total of $4.3 billion) than a year ago, according to Arlington, Va.-based trade group National Venture Capital Association. "The businesses that are going to survive are getting creative about raising as much money as they can," says Cohan.

Here are five businesses that are doing just that:

Turning neighbors into investors

Vox Pop, a café and bookstore in Brooklyn, N.Y., now has 144 new investors — and they all live in the neighborhood.

In January, Vox Pop's CEO, Debi Ryan, received notice that the Department of Health would pull the store's license to serve food and beverages unless it paid fines tallying $33,000 — an amount that would force the shop to fold. The fines, which resulted from such infractions as baristas drinking coffee behind the counter and not having a manager on duty at certain times, originated in 2007 but soon escalated when the store failed to pay them, says Ryan, who took over the shop just two weeks before the Health Department issued its notice.

Instead of giving up, Ryan turned to the local community for help. Two town hall meetings and almost three months later, Vox Pop raised $64,000 from local investors. "It's great," says Ryan who celebrated the store's grand re-opening in May. "Now they can say 'That's my coffee shop' and mean it."

Launching a business on the side

Paula Conway only needed $3,000 to launch her Westport, Conn.-based travel information web site ConwayConfidential. While she didn't have enough cash on hand to pay for the site, she did happen to have plenty of sugar, flour and icing.

Rather than ask friends and family to hand her some cash, Conway sold them cupcakes — and the side business swiftly grew. "It just sort of happened," she says. "Knowing that I needed money for the site, I started to wonder: Would they pay for them?" She says family, friends and neighbors were glad to hand over a dollar or more per cupcake. She even managed to cater a few parties with her cupcake creations. Within six months, Conway met her financial goal.

Appealing to customers' charitable sides

Brighter Planet, a Middlebury, Vt., company that sells emissions reduction credits to individuals and organizations looking to offset their carbon footprints, hopes encouraging customers to shop will help it raise cash — and save the planet.

Through a partnership with Bank of America, Brighter Planet offers its members Visa-branded credit and debit cards. The company receives 2.1% of every dollar cardholders spend using their affinity cards. Since 2006, the company has raised roughly $350,000. While much of those funds have gone toward investments in alternative-energy projects and carbon-offset purchases, the company also uses a portion of the proceeds to support the business, says Patti Prairie, the company's CEO. (The company outlines how it spends revenues generated from the cards in the cardmember agreement.) "Instead of getting miles, we're helping people invest in clean energy," she says.

Selling ad space one pixel at a time

When Dushyant Bhatia co-founded Blogertizeworld.com (formerly the site was known as Blogertize.in), an online portal that allows users to search blogs, he decided to try his luck at a unique fundraising strategy that he had seen on a marketing web site called the Million Dollar Homepage. The idea: Raise cash by selling blocks of ad space on Blogertizeworld.com's web page called "pixel blocks."

The entrepreneur, who is based in Mumbai, India, decided to pitch the idea to the community the site was serving — bloggers. He asked them to buy a three-year block of space on the site for $15 to $150. So far, the site has raised $55,000 from the block sales. Bhatia says he plans to reinvest about 70% of the proceeds into the creation of an online shopping portal, an ad exchange network and quizzing and contest portals.

Turning contest winnings into start-up capital

When software developer, Aaron Foss, and oncology nurse, Keri Mahoney, were trying to raise money for their medical software company, Smart Medical Solutions, which operates SmartChemo.com, they broke out the video camera and created a commercial. The production had nothing to do with the company's software, which helps oncologists track and administer patients' treatments, but instead featured the two "playing" Red Stripe beer bottles to the tune of Bob Marley's "One Love." The two then submitted the commercial to the beer company's "Be a Red Stripe Ambassador" contest.

The beer bottle-playing paid off. Foss and Mahoney won the grand prize: a one-week vacation to Jamaica for nine people. But rather than take the trip, which was valued at $40,000, they asked Red Stripe for cash. The company agreed and gave the burgeoning business owners a check for $20,000. "We like to think that Bob Marley is our angel investor," says Foss.

www.writebusinesscapital.com

Venture capital rebounds in second quarter

2009-08-11T16:33:00.000-07:00

Venture capital investments leapt 32 percent in the second quarter to hit $5.27 billion, up from $4 billion in the first three months of the year, the lowest level in a decade, according to Dow Jones VentureSource.

The quarter was still well below the $8.33 billion level recorded in the second quarter of 2008. The rebound comes amid a shift in dynamics to fewer smaller deals.

The quarter also was the first in which investments in health care outpaced those in information technology. The health care sector received $2.23 billion in investments in the quarter compared to IT which attracted $1.88 billion.

"Investors are diversifying their portfolios away from traditional investment areas like biopharmaceuticals and software toward segments like medical devices and information services while also pulling back on how much they are willing to invest in each deal," said Jessica Canning, director of global research for Dow Jones VentureSource.

Many major hardware electronics categories were down in the second quarter from the first three months of the year. Investments in communications slipped from $296 million to $258 million, computing fell from $237 million to $184 million and semiconductors slid from $170 million to $156 million.

www.writebusinesscapital.com

Venture-Backed Start-Ups Seek Stimulus

2009-08-11T16:32:00.000-07:00

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Venture capitalists are increasingly focused on a fresh funding source: Washington, D.C.

Venture-capital investors see Washington's economic stimulus program as a potential financial boost for the hard-hit technology firms and other start-ups they own. Of particular interest is more than $60 billion earmarked for four sectors widely invested in by venture-capital firms: environmentally clean technology, rural Internet broadband, cyber security and health-care information technology.

In addition to slack demand for their products amid a recession, small start-ups are finding it difficult to secure the cash infusions many need to stay in business during their early years. Stimulus funds could address such challenges by creating markets for their products and giving them cash injections. For some start-ups, venture investors say, money from the Obama administration could be the difference between survival and failure.

Not long after the $787 billion stimulus package was unveiled earlier this year, Tom Scholl, a partner at venture firm Novak Biddle Venture Partners in Bethesda, Md., directed one start-up company he invested in to draw up its own "stimulus plan" -- a blueprint for getting a piece of the funding.

Mr. Scholl then canvassed Washington law firms for information on how to apply for funds. He also suggested that executives of the firm, wireless start-up DigitalBridge Communications Corp. in Ashburn, Va., prepare dummy applications for quick filing to the government."We wanted DigitalBridge to be first in line" for stimulus cash, Mr. Scholl says. "Washington has become a new bank."

Venture capitalists like Mr. Scholl, who put money into young companies and help nurture them with the aim of profiting later when the firms go public or are sold, are turning to Washington to boost the prospects for their investments, not unlike ailing banks and auto makers.

Many venture-capital firms are hiring law firms and attending seminars to help their start-ups snare a slice of the stimulus pie. Some venture capitalists are investigating how the stimulus program might open new investment areas.

An embrace of bureaucratic Washington is a change for the venture industry, which has traditionally prided itself on keeping the government at arm's length. Venture-capital firms have previously tapped government opportunities, notably when the departments of Homeland Security and Defense showed a burst of enthusiasm for security technology following the September 2001 terrorist attacks. Otherwise, many venture-backed companies preferred to limit government funding to research grants and Small Business Administration loans.

Now, though, government funds might be critical as venture capitalists risk running out of cash to pump into their stable of start-ups. Venture firms raised just $2.4 billion in the first quarter, down 64% from $6.6 billion a year earlier, according to research firm VentureSource.

Stimulus dollars "can be the difference between a young company making it through this time or not," says Chuck McDermott, a general partner at RockPort Capital Partners, which has offices in Menlo Park, Calif., and Boston.In March, one RockPort investment, solar-panel maker Solyndra Inc., received a $535 million loan guarantee from the Department of Energy. While the guarantee wasn't connected to the stimulus, the support it gave to the start-up helped boost its financial profile and underscored the influence of official backing.

For Miox Corp., the prospects of stimulus money prompted it to adjust strategy. The Albuquerque, N.M., maker of water systems had been trying to drum up business in the private sector. But after learning that stimulus money would flow to public water infrastructure, several of Miox's venture investors encouraged the company to seek government-backed water projects.

"The stimulus caused us to pause and put more focus back on the public sector, especially since the private sector is more reticent to invest," says Carlos Perea, Miox's chief executive. He forecasts the stimulus package will lead to a tripling of spending on public water infrastructure to $3.9 billion over the next six to 24 months.

Kim Sanchez Real, a venture capitalist at Flywheel Ventures and an investor in Miox, says stimulus dollars could allow the company to secure new investment without diluting the equity held by investors like her firm.

So far, Miox's refocus hasn't paid off. Many states and municipalities are still waiting to receive stimulus money, Mr. Perea says. Miox, which is unprofitable, has raised $35 million in venture capital.

Venture backers of four-year-old DigitalBridge say its business of providing wireless networks to smaller towns fits with the stimulus package's goal to extend rural broadband networks. DigitalBridge is in the process of applying for $40 million to $50 million of stimulus money that would be used to deploy wireless networks in localities with fewer than 5,000 residents, says Chairman Bill Wallace.

Partly because of expectations DigitalBridge will get stimulus funds, Mr. Wallace says, more venture capitalists are now competing to invest in the company, which has independently raised $40 million and remains unprofitable. DigitalBridge hopes to close on pledges for $8 million to $10 million in venture financing by late July.

An economic downturn is a great time to start a business

2009-08-11T16:26:00.000-07:00

An economic downturn is a great time to start a business.

It sounds paradoxical, but think about it. Costs are lower, and more talent is available, thanks to layoffs. Prospective clients are more likely to try a new supplier who can help them cut costs or increase their competitiveness. Established players, too, are focused on cutting costs instead of increasing market share.

All of this helps clear the way for the next venture with the better mousetrap—but only if the entrepreneur can write a clear and convincing business plan. Anything less is heading straight for the bin. Because, let’s face it, the intended recipients of such business plans—investors and lenders, family and friends, anyone with capital to invest in the project—are all much more wary of risk now in these turbulent times.

Truth be told, most business plans fail to make much impression on potential investors. Most aren’t even read in full. Their shortcomings tend to be obvious even in a two-page executive summary, largely because they are written before enough real work has been done to create a solid foundation.

I set out to understand why most business plans don’t deliver. Drawing on the hundreds of plans and pitches that I’ve seen over many years of working with entrepreneurs and early-stage ventures, I searched for common patterns in plans that gained no traction. The result? Five oh-so-common varieties of plans that go quickly into the trash without further consideration.

To help budding entrepreneurs avoid these traps, I also identified the three key elements that go into a successful business plan: a logical statement of a problem and its solution; a battery of cold, hard evidence; and candor about the risks, gaps and other assumptions that might be proved wrong.

In what follows, I will expose the deal-killers found in the five most commonly rejected types of business plans, and share tips for creating plans that should get you invited back for a second meeting and, if all goes well, raise some capital and attract some initial customers.

HERE I AM, NEVER MIND THE PROBLEM

In this kind of plan, the writer is smitten with the elegance of his or her technology. The plan begins not with the identification of a customer problem to resolve, but with a detailed explanation of how the technology works, why it is cutting-edge or state-of-the-art, and how it is better, faster and cheaper than current solutions.

Such a plan is typically readable only by those already in-the-know in its particular technical realm. Even worse, seasoned investors know that the better technology does not always win. Remember Betamax?

A Me-First plan sends a clear signal that the writer’s priorities are misplaced. What matters more than great technology or a great idea is the problem or pain that the new solution or technology resolves.

There is a better way. A good business plan starts with a clearly defined problem—something that’s really troubling or compelling—supported by evidence from marketing research, testimonials, letters of intent, or whatever, that the pain is real.

If you can convince your readers that this problem is real, they’ll be hooked, at least for a while, as they read on to see whether you’ve found a solution that can resolve the pain. If the pain isn’t real, stop writing. There’s no need for a solution.

Next, identify exactly which customer group has that pain, even if the initial target market is a small one. Investors know that, if a sustainable beachhead can be established in an initial target market, success in a niche market can serve as a platform for taking the solution to other market segments as the business grows.

Consider Nike Inc., the leading maker of athletic footwear. Founders Phil Knight and Bill Bowerman, a distance runner and a track coach, respectively, addressed the quite literal pain of distance runners’ sprained ankles, shin splints and other injuries caused by the miles and miles of training on rough country paths in running shoes that just weren’t up to the task.

The new waffle soles of latex rubber that Nike came up with addressed runners’ pains head-on. The first shoes targeted elite distance runners, hardly a large market. But once distance runners started winning Olympic medals wearing Nike shoes, other runners—and sports—followed.

A COKE FOR EVERY KID IN CHINA

This gambit rests its case on a plethora of secondary data to show how large and fast-growing a market is. The plan then makes a heroic leap and assumes that the new venture will grab X percent of that market—it could be 1%, 10%, 30% or whatever. “Surely,” the plan argues, “with the large number of customers in our market, we’ll easily get enough. We only need a small fraction to have a very nice business.”

Plans like this reveal that the writer isn’t sure what the initial target market is. It’s much easier to win a large share of a carefully targeted but narrow market—think Nike again—than it is to win a small share of a very large market.

Further, penetrating a new market requires customers who are aware of the new product, and distribution systems that allow them to buy it. Coke-for-Every-Kid plans gloss over these details. They ignore the difficult work—not to mention the expense—of crafting a strategy to gain market awareness, persuade customers, and set up distribution.

This kind of plan also often signals that the writer is reluctant to get out from behind his or her Internet connection and actually talk to prospective customers. Talking to customers is harder work, but brings all kinds of benefits and insights, not only to the business plan, but also to the business itself. Such conversations can reveal what customers really want—and help tailor the offering to meet those needs.

You can probably find secondary data that support such things as the size of your market and trends that suggest your market will or won’t grow. All such evidence should be cited, with its source, to show that the data are reliable and credible, and that you are, too. But that’s just the start. You’ll need primary data, too, from interviews you carry out or a survey you conduct, to demonstrate the likelihood that customers will buy what you have to offer.

Conduct some experiments, even a market test. The more hypotheses you can test before writing your business plan, the more convincing you’ll be. One caveat, though: If you wait for all of the evidence before you get started—analysis paralysis—the opportunity may well be lost, as someone else may beat you to market.

Every assertion in your plan should be backed up by evidence. If it’s not, take it out, or stop writing while you gather the evidence you need.

JUST LOOK AT OUR (PAPER) PROFITS

Of our five fundamentally flawed business plans, this one is perhaps the most difficult to spot.

The archetype is the failed Internet business Pets.com, which offered pet supplies via the Internet. Simply put, the economics of delivering large, heavy bags of dog food one at a time could not compete with the economics of putting pallet-loads of the same bags of dog food on supermarket or discount-store shelves and letting the customers do the delivery.

Such business plans often contain detailed spreadsheets showing why the numbers would work. That’s why these kinds of plans are difficult to spot—the numbers look like they work. As one entrepreneur told me, “With a couple of beers and an Excel spreadsheet, you can make a lot of money in no time,” or so it will seem. While consumers certainly liked the idea of having Fido’s dog food delivered, they were not prepared to pay a price that would enable the economics to work.

Savvy investors not only tear apart the spreadsheets but ask fundamental questions. Does the revenue model depend on making a large number of small transactions (think Amazon.com) or a small number of large ones (automobile manufacturing)? Do its profit margins depend on high gross margins to cover high product-development costs (think Microsoft), or lower margins to cover slimmer operating costs (Costco)? Is a large investment in development or other fixed assets required (a manufacturing facility, for example)? Is the working capital cycle favorable or unfavorable (do you expect to be paid in advance), or will you have to carry inventory and receivables that can tie up scarce cash (manufacturing and distribution businesses)? Some combinations of these factors are clearly attractive. Others are obviously flawed from the start.

OUR TEAM WALKS ON WATER

Investors won’t be snowed by top-tier diplomas or past employment with a leading company. Investors care first about the main challenges of the industry in question, and whether the proposed team has hands-on experience tackling those challenges.

Every industry has critical success factors—typically two or three—that, when addressed effectively, are likely to bring success even if less-important challenges aren’t handled well. Location, for instance, is a critical success factor in much of retailing.

A business plan that identifies its critical success factors and shows how the team’s expertise and experience are suited to addressing them is much more likely to attract capital—or at least a second look.

Here’s where candor helps, as well.

Surprisingly, plans that point out the lack of a key skill or capability in the management team can fare quite well, by acknowledging the missing link and encouraging the prospective investor to fill that slot with a qualified person whom he or she favors.

Plans that succeed in attracting capital often include one or more members of a team who have failed in a prior venture. When that failure is accompanied by lessons learned, it’s often viewed, as one investor told me, as “an education on someone else’s nickel.”

For business plans that work, please refer to www.writebusinesscapital.com

Investment Entries Matter, But Exits Also Matter!

2009-04-15T11:30:00.000-07:00

Investing in a company should be approached the same way in which one approaches a home purchase. Certainly, discovering the correct home (company investment) that sits in the right neighborhood (market), with the right view (path to growth) and proximity to shops and restaurants (partnerships and customers) is important but of equal importance is saleability (marketability). Just as one does not want to be stuck in a home that he/she has outgrown, similarly, there comes a time an investor wishes to free up his/her capital and move it around.

In the private capital world, when valuing a company, an investor places value not only on the current business cash flows, projections and growth but also assigns value to the exit value or "terminal value". Terminal value can be derived from either the perpetuity growth formula which utilizes a stable level of cash flows growing into perpetuity, which is discounted at the appropriate discount rate and also by using an exit multiple, usually EBITDA (earnings before interest, taxes and depreciation and amortization).

Exit considerations and strategy are not limited to valuation and financials - - in order to add value to an investment's potential exit power one must consider qualitative attributes such as: "What is the investment's defensibility profile look like now and expected to look like into the future? How does this company compete currently and in the future? Is there any uncertainty in terms of supplier or vendor agreements, expiring patents and/or potential legislative risks? What will the industry look like in the future? Is there obsolescence in any of the company's products or services?"

In the world of high technology, determining exit value is even more important. Because of the uncertainty that already exists in year 1 for a start up company, the risk of a successful exit by year 5 becomes even more pronounced.

At WriteBusinessCapital, we have been analyzing and performing valuation analyses to all companies across all industries for more than a decade. We take a mathematical, analytical and empirical approach to valuing your business in its current state, in the future and at exit.

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The Effective Business Plan

2009-03-30T16:00:00.000-07:00

Clear and effective business positioning is critical in a competitive market and capital-constrained economy. Entrepreneurs, lenders and investors are realizing that a good product or idea alone does not lead to a successful business or investment. In this day and age, a company's value proposition must be positioned correctly and conveyed accurately.

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