One approach to writing a business plan is to ask: what questions must
I address in a business plan? Mario Morino, a leading Washington DC
area Venture Capitalist, and organizer of the DC-area Netpreneur program, has
proposed a list of "top-10 questions" every business plan must
address:
- 1. What is the market opportunity or market niche you are targeting?
Investors are interested in understanding the market opportunity your business is going after. Define the opportunity that your product or service is going to address or solve and WHY this is an important matter to the buyer and market. Be as clear and precise as you can with respect to the market sector or niche that you are targeting.
- 2. What is your solution to the market need in your niche?
Along with defining your customers and their needs, you need to be able to
explain in simple business terms how you are going to meet their needs.
Respect the critical distinction between "implementation" and "solution."
A smart investor is far more interested in the solution you'll come up
with, rather than what technology you will use in the process.
Try to describe the solution in one paragraph.
- 3. What is the size of your market niche, and how is it growing?
Investors want an honest appraisal of the current size of the market you
are targeting, and how it will change in the future. This is all
about your informed opinion, and, while you should have the statistics to
back up your predictions, it's your business sense in terms of understanding the markets that will impress an investor and provide credibility for your business.
Mario also stressed the importance of "similarity selling," or finding
comparable companies or business models. This will help
you pass the "reasonableness test" with all of your partners and make it easier for you to demonstrate that yours is a
reasonable business model.
Information about most business sectors is available from security analysts, most of whom can be reached through an investment banker at no cost, and from industry analysts for a fee. Mario encouraged the netpreneurs to use such research.
- 4. What is your economic model? How are you going to make a profit and when?
A sure way to kill a good business idea, Mario said, is to come up with a
bad model for pricing and profit. Your pricing model in terms of the price (i.e. is it within a reasonable range?) and model (i.e. is the pricing structure being used by other firms?) should already be familiar to and accepted by your customers.
Mario said that too few netpreneurs factor in price erosion when talking
about their profit strategy or income projections. Most markets see prices decrease as
competition sets in. It's important to look honestly at your
product and factor in price erosion if it's warranted.
Mario targeted transaction-based fees as one of the more risky pricing models in technology businesses. While they may work in selected cases, there is a natural
tendency to free yourself from the transaction fee. When your customer's or partner's business takes off and transaction volumes grow, a transaction-based price looks untenably expensive,
giving your partner or customer a strong incentive to get rid of you.
- 5. How are you going to reach (sell to) the market you're targeting?
As Mario bluntly stated it, "Success is less about the quality of your
product and more about the effectiveness of your sales channel." The choices of marketing
and sales channels are many: direct sales, telesales, direct response, net-sales,
alternative channels, etc. Each carries hard-won truths about profit
margins, type of customer, and cost of delivery and marketing. You need to
figure out which is most appropriate to your market and honestly project
what your sales and profit will be – not by simply projecting n% of a market, but by understanding the sales performance of the channels you project.
Sales is often not the strong suit of engineers and other technology types,
so find a friend or advisor in sales to pick apart your
ideas and help you develop a sales strategy.
Channel planning is another good place to do "similarity selling," bringing in examples of how other firms and products have fared over various sales channels.
- 6. What's the competition? How will it change and why are you better?
Know your competitors almost as well as you
know your own company. Know how they work and what their customers think
about them. Be ready for some "street fighting," in Mario's terms, and
never underestimate your competitors.
Think hard not just about who your competitors are today, but more
importantly, who they will be tomorrow. If you are successful, you
will naturally attract competitors to your niche.
- 7. What's your differentiation and how do you maintain it?
Be clear about the competencies and distinct advantages of your business.
Avoid generalized claims that amount to promising "motherhood, Chevrolet
and apple pie." For example, netpreneurs will point to their development
team or management calling them "world-class!" Don't just make the claim
that you have a great team – everyone does. Show the accomplishments of your team members,
particularly their experience in the area in which your business focuses.
Anything that differentiates you positively is important to highlight. Maybe it's your
technology, maybe it's your delivery channel, or maybe it's the experience you
have on your team. Make sure you get that point across to your investors and are able to substantiate the claim.
- 8. How are you going to execute – to grow and manage the business?
Investors want a feeling that you are capable of running your business or are open to learning how to do so.
Good execution often starts with pragmatism. Be realistic about your growth potential. A company like Yahoo!, which has experienced remarkable growth, is by far the exception. Smart
investors will disregard grossly inflated projections, so honestly
assess your market potential. A well-substantiated estimate of 35% annual
compounded growth is music to most investors' ears.
Know your own strengths. You don't need to be talented in every area, but bring an open mind to areas where you are less strong. Investors like leaders who are "coachable," and who will accept advice and criticism from their whole team. Again, investors look for people with the vision and "emotional maturity" to carry on long-term.
- 9. What are the risks? What can stop you?
Mario termed this the "what keeps you up at night?" question. For some,
it's the threat of a large competitor taking over the market suddenly. For
others, it's a fear of their own ability to stay focused and execute. Be honest,
without being paranoid or humble.
- 10. Why is your business going to succeed? Why you?
Explain what is driving you to succeed. What is the great strength you bring to this market and this product? Is it your enthusiasm, experience, intelligence, competitiveness or resourcefulness? Do you want your investors, partners and customers to view you as someone who is "going to find the way to succeed?" Succinctly, but assertively, state your relevant competencies. Adopt the constructive arrogance of a Bill Gates – convey a feeling and a sense of success.