4 reasons not write a 40+ page business plan

When I started helping entrepreneurs plan new companies, I discovered something curious—there was a lot of confusion about what, exactly, a business plan should look like. A business plan was once a lengthy, prose-based document written with word processing software like Microsoft Word, similar to a 40+ page college term paper. Sophisticated entrepreneurs and investors moved away from that format, but the typical entrepreneur on Main Street didn’t get the message.[1] That’s no surprise, since many books on business plans still recommended a term-paper-style business plan. Were the books simply out of date?

To make sure, I decided to ask the experts. I surveyed over 50 people, including venture capitalists (VCs) from leading firms like Kleiner, Perkins, Caufield & Byers, noted angel investors such as the backers of Method and serial entrepreneurs like John Osher, creator of the Crest SpinBrush. The results: 95 percent recommend that startups use a presentation format, not a term-paper-style plan.[2], Here’s why the pitch deck has taken the place of the text document:

1. A term-paper-style business plan takes too long to read. In this age of rampant Attention Deficit Disorder and communications overload, asking someone to read a 40+ page paper is pushing it. Why burden someone whose help you are seeking? And why take the risk that your plan won’t be read at all?
2. A term-paper-style plan takes too long to write and update. Writing 40+ pages of prose takes months. Plus, a business plan isn’t a static document—startups modify their plan continuously. Updating a page or chapter of text can take hours. Updating a bullet point or graphic in a slide presentation takes minutes.
3. Pitching in person is far more persuasive than sending a document for people to read. A deck is made for presentations, while a term paper is about as useful in a pitch as a doorstop. When you deliver a presentation in person, you can see how people are reacting, modify your pitch on the fly, address concerns or confusion immediately, and get feedback.
4. Presentations force startups to set priorities. If you are working with a 40-page  plan, you can drop in every great idea that comes to mind. But when it comes time to explaining your ideas—and to executing those ideas—you’ll have to focus. Culling your ideas down to those worthy of inclusion in a short presentation is a great way to start prioritizing.

Still don’t believe me?  Sequoia Capital is the venture capital firm that backed Google, Yahoo, YouTube, eHarmony, LinkedIn, and PayPal, among many other winners. On their Web site (http://www.sequoiacap.com/ideas), they offer the following advice:  “We like business plans that present a lot of information in as few words as possible …  15-20 slides … is all that’s needed.”  And finally, New York Angels is one of the leading groups of angel investors in the U.S. They’ve invested over $20 million in 65 early-stage, New York-area technology and new media companies. At www.newyorkangels.com you’ll see the following suggestions about the format of business plans:  “Slideshows with under 20 slides are generally most effective … Use the limited time you have for your presentation to emphasize the compelling factors about your investment opportunity and save unnecessary technology details for future meetings…”

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[1] There are exceptions, such as requirements from some lending organizations like banks or the SBA, but they typically lend to companies with at least three years of operating history, not to startups.

[2] Most of the others said they like to see a two- to four-page executive summary.

Steve Brotman interview: Why you need a plan.

Steve Brotman is a Managing Director of Greenhill & Co., and co-founder and co-head of Greenhill SAVP, a fund that invests in early-stage technology and information services companies. Steve currently sits on the board of four companies and the MIT Enterprise Forum’s New York chapter. Steve founded AdOne Classified Network, one of the nation’s leading classified ad Web sites, which was acquired by Hearst, Scripps, and Advance-Newhouse. Steve is a graduate of Duke University and has a joint JD/MBA from Washington University.

UpStart: “In what ways do you think it benefits a startup team to go through the process of developing a business plan?”

Steve Brotman: “A business without a plan is like a boat without a rudder. You’ve got to have a plan! Developing that plan is the critical first step of business creation. It commits you and your team to an explicit strategy and approach. It ensures that your founding team is aligned behind common goals. It defines both what you will do, and what you won’t do. And it establishes priorities, so startups focus time and resources on what’s most critical for their success. Finally, it allows founders to communicate their vision to investors, advisors, employees, vendors and partners. That doesn’t mean the plan can’t or won’t change. So be flexible, and when a major change needs to happen, circle the wagons, and put together a new plan.”

UpStart: “Would you ever invest in a company without a business plan?”

Steve Brotman: “It’s doubtful. In the earliest stages of a company, founders start with the equivalent of an idea on the back of a napkin. But every startup needs help, even if that’s just from the landlord and lawyer. Getting that help demands more than just what’s on the napkin—it requires a business plan. That said, some entrepreneurs go overboard on their plans and projections, and prefer to write about their plans versus doing something about them. That’s not what a plan is about. The goal is uniting your team behind some shared vision and objectives, and how you will likely meet those objectives, and having some document to show parties you’d like to bring on board that will increase the likelihood of your venture’s success.”

Dany Levy interview: A business plan should evolve.

Dany Levy is the founder and Editorial Director of DailyCandy, a daily newsletter with insider advice about style, food, fashion, and fun. Dany started DailyCandy in 2000 with a simple vision: one thing in your inbox telling you what to do that day. In 2008, Comcast acquired DailyCandy for a reported $125 million. Today DailyCandy has over three million subscriptions. Prior to founding DailyCandy, Dany worked for New York Magazine and Lucky, and wrote for The New York Times, Martha Stewart, and Vanity Fair. Dany is a graduate of Brown University.

UpStart:  How did you make use of a business plan at DailyCandy?

Dany Levy: “A business plan should evolve depending on the stage of a business and on the audience it’s written for. I started DailyCandy myself, at my kitchen table, with no employees. At that point, my business plan was just for me. It was a two page document describing what DailyCandy was, to help me clarify and narrow down what the product should be. That plan helped me stay focused, but it also left room for flexibility. I just concentrated on writing great editorial, and spreading the word. A year later, I developed a more comprehensive business plan, as I began to sell advertising and court suitors. Still, I kept it short. I figured investors needed to “get it” after the first few minutes. As the business grew, and I took on institutional investors, I needed more detail, like financial projections and strategies for marketing and sales.”

UpStart:  Did developing a business plan provide any other benefits for you?

Dany Levy: “Yes. Most of all, it helped me learn. That was one of the greatest things about building a business – the steep learning curve. And the business plan made that learning explicit. I got a lot of help with my plan from my CEO, Pete Sheinbaum. At the time, I handled editorial, and he handled business matters. I remember learning to measure the cost of acquiring customers, and the value of those customers. I think at the time one customer was worth somewhere around $10.37. The next time I attended a DailyCandy event, I looked around the room and imagined a price tag on every girl’s head reading ‘$10.37’. Understanding the economics of the DailyCandy business gave me a much broader and deeper sense for what we were doing, and that ultimately paid off far beyond my wildest expectations.”

Bo Peabody interview: Business models

Bo Peabody is co-founder and Managing General Partner of Village Ventures, an early-stage venture capital firm. Previously, Bo founded / co-founded a string of startups, including: Tripod (one of the first social networks, later acquired by Lycos), Waterfront Media, VoodooVox, FullTurn Media, and UplayMe. He’s also an owner of Mezze, Inc, which consists of three award-winning restaurants. Bo wrote a book for entrepreneurs called Lucky or Smart? published by Random House. He is a graduate of Williams College.

UpStart:  What advice do you have for entrepreneurs pitching investors about their business models?

Bo Peabody:  “Entrepreneurs have the counterintuitive task of having to think big and act small. For any business that is going to attract venture investors, a big vision is important. But that’s the easy part. The much harder job is figuring out how to distill that vision into an actionable plan that has clear, incremental levels of success. Entrepreneurship is like a video game…you need to know what the levels are and then reach each one before going on to the next.”

UpStart:  Are there particular business models that you prefer to invest in?

Bo Peabody: “At Village Ventures, we prefer to invest in business models that are tackling mature markets. We’d rather bet on our ability to back the right team that can knock off existing competition than bet on our ability to see around corners. For instance, this is why we invest in vertical publishers in the interactive media space, rather than social media companies.

5 ways to avoid craptastic business writing

At business school, we played a silly game called buzzword bingo. Before a professor arrived, students chipped in a buck in exchange for a bingo card with words like “value-added”, “synergy”, “seemless” and “share of mind”. When a student mentioned your word in class discussions, you circled it on your card. If you got enough words for bingo, you raised your hand, and made a comment incorporating an embarrassing phrase that pays, like “I read this (homework) on the toilet…”. Back then, it was just a juvenile way to amuse ourselves and bug the professors. But the undertone was on-target: Showing people how silly they sound when they use buzzwords.

Overuse of buzzwords are just one example of ways people muck up their business writing. Here are a few tips:

1) Stop following the herd. In “Why Is Business Writing So Awful?” Jason Fried argues that phrases like “full-service solutions provider” and “value-added services” are overused to the point of being generic. “A quick search on Google finds at least 47,000 companies describing themselves as full-service solutions providers…,” explains Fried. “When you write like everyone else and sound like everyone else and act like everyone else, you’re saying, ‘Our products are like everyone else’s, too.’ ”

2) Write for your target readers. Fried cites an example of a company that does this well. Woot.com sells cool stuff cheap. Here’s an excerpt from their FAQ page….. Question: “Will I receive customer support like I’m used to?” Answer: “No… If you buy something you don’t end up liking…. sell it on eBay. It’s likely you’ll make money doing this and save everyone a hassle.” Woot isn’t trying to be all things to all people. They’d rather come off as honest and direct, which their core customers appreciate, at the risk of alienating others.

3) Avoid useless modifiers. Frances Cole Jones, an author and media coach, explains this well. Words like “amazing” and “great” are too vague to be helpful. Others, like “we’re the leader in the market” must be backed up with facts, or they can backfire.

4) Word to your mother. Imagine that your mom will read what you are writing. Would she understand what you mean? If not, simplify and clarify.

5) Size matters. Don’t use ten words if you can use five. Write in short sentences. They are easier to read. Get it?

The 5 components of a (modern) business plan

Forget the 40+ page term-paper style business plan. Here’s what you’ll need instead:

1. Pitch deck. A Powerpoint presentation with about 15 slides, that takes about 20 minutes to pitch. The deck should be minimalist in nature—clean and simple. The slides in your deck will serve as a roadmap for your presentation, but the most important points will come from your mouth, not from words on slides.

2. Financial model. This is a set of financial projections built in Excel and used as a source of charts for your investor presentation. You’ll have time to provide only an overview of your projections in your pitch, but you may forward the entire model to interested investors. The financial projections will include a statement of profit and loss (P&L) projected for five years. You may or may not want to add a balance sheet and a cash flow projection,[1] but either way you’ll determine and demonstrate how much cash you’ll need and when you’ll need it.

3. Elevator Pitch. As you look for advice, investors, business partners, customers, etc., you’ll be networking a lot—both online and offline. You’ll reach out to your close contacts, of course. But you’ll also want them to reach out to their contacts on your behalf, so you’ll need to explain your story in a way that’s easy for them to grasp and pass along to others. The key to making this work is to have a great elevator pitch. To make it great, you must be able to communicate the essence of your venture in a way that’s clear, fast, and compelling.

4. One-page synopsis. Once you find a contact who has heard / read your elevator pitch and expressed interest in learning more about your new business, it’s time to introduce the one-pager. The one-pager is a brief synopsis of your business plan pitch deck. It’s designed with one very specific purpose: to get someone interested in taking a meeting with you (see warning below—don’t send your pitch ahead of time). Don’t try to jam everything from the pitch deck onto one page. Instead, think of it as a teaser—a sales document to whet the appetite of your audience and leave them wanting more.

5. Due diligence documents. This is material that lets an investor learn more about you, your concept, and your progress to-date. There are no standards for what this contains or how it is presented, but it might include things like market research, customer lists, access to prototypes, profiles of your competitors, your financial model, resumes of team members, contracts with customers or suppliers, etc. Sophisticated investors will often provide a due diligence list for you to follow.

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[1] If you your cash cycle is fairly neutral, such as if you get paid immediately upon closing a sale (e.g., by credit card), you may be able to get away with using just a P&L. If on the other hand, you have a gap between when you pay expenses and get paid by customers, you should build a balance sheet and statement of cash flow.

The 5 most important numbers in your business plan, part 3.

Long term financial projections for a startup are pretty much always wrong. After all, if an army of financial analysts can’t predict next quarter’s revenue projections for a company like Apple that’s been around for 30 years, how are you expected to forecast your monthly profits five years out, for a company with no track record?

Still, it’s worth building a financial model that incorporates your best estimates – for yourself, and for partners and investors. In previous posts, we discussed the importance of:

1.) marketing efficiency, and

2). break-even

Here are some other numbers that are particularly useful:

3.) Scale. Have a ballpark prediction for what your annual revenue will be after five years. While you won’t get the number right, you should be able to predict the order of magnitude (e.g. are you shooting for sales of $1 million? $10 million? $100 million?) That will be help investors, partners, and other stakeholders grasp the size of your opportunity and help them to know that if things go well, the rewards will be worth the risks. Also, make sure your scale is reasonable, by looking at comparable companies. How long did it take them to reach a similar size, and how much did it cost them?

4.) Capital requirements. Have a prediction for the timing and amount of investment capital that will be required to get the company through the next five years. Raising capital is difficult and time-consuming, so you should avoid any surprises on this front. Also, understand and demonstrate how you’ll spend your investment dollars. They’ll want to know what you plan to do with their money.

5.) X-factor assumptions. You’ll base your projections on many assumptions. One or two of them, when modified slightly, change your projections dramatically (e.g. the cost of acquiring an average customer or the amount of revenue generated by an average transaction). Also, know which assumptions are common to your industry and make sure your numbers are in line with standards (e.g.those might include markups, or sales per square foot in retail).

The 5 most important numbers in your business plan, part 1.

In order to run a profitable business, you’ve got to get more from each customer than it costs you to attract them. Another term for this is marketing efficiency, which is the relationship between two numbers:  1) The cost of acquiring an average customer, and 2) the lifetime value of an average customer.

If you area planning your business, and haven’t launched yet, set a goal for your marketing efficiency. Once your company is up and running, make marketing efficiency one of the key performance measurements you track on an ongoing basis.

Here’s how to do the math…. Look at the numbers for a set period of time, like six months. What are the total costs of sales and marketing for those months, including marketing expenses, salaries and commissions of marketing staff? How many new customers did you attract in those months? Divide the costs by the number of customers, and you have your customer acquisition cost.

To determine the lifetime value of a customer, start by calculating or estimating how long a relationship with an average customer will last. Then estimate the amount of revenue you’ll generate per customer, over your entire relationship with that customer, and subtract the variable costs of delivering your products or services to an average customer, including the costs of service and support and the cost of employees providing the service and support.

Finally, divide the lifetime value per customer by the cost of acquiring a customer. Shoot for having a lifetime value at least three times greater than your acquisition cost.

How efficient is your marketing?

5 business plan pitch tips that may surprise you

When it comes to pitching business plans to potential investors, a lot of so-called conventional wisdom is simply dead wrong. Here are a few pitch pointers you might find counterintuitive, but you’ll definitely find helpful:

1.) Aim low. If you make outlandish claims, such as touting yourself as the next Google, investors will be more inclined to poke holes in your arguments. And trust me, they will find holes. Instead, sell just hard enough to get investors to nod their heads and think “yes, that seems reasonable.” Be confident, but not cocky.

2.) Be picky. Getting in front of the right investors is at least half the battle. That means people who invest the amount you are asking for, in the industry you’re in, and they invest in companies at your stage of development. Do your homework, and make sure there’s a fit, to avoid wasting everybody’s time.

3.) Less is more. Emphasize one or two points on each slide. No more. These are your friends: White space, photos and charts that make complex ideas simple, bullet points with less than ten words. These are your enemies: Small fonts, confusing graphics, too many words, your company logo repeated 15 times, and consultant speak (e.g. “leverage”, “value-added” and “synergy”). Pitch the headlines, with about 15 slides, in less than 20 minutes. If investors want more detail, they’ll ask for it.

4.) Your deck shouldn’t make sense without you. A good pitch deck is an outline. It reminds you what to say at each step of your presentation, but doesn’t compete with the words you speak. In a great pitch, your eyes should connect with the eyes of your audience about 90% of the time. If all eyes are glued to the slides, you are probably not generating much excitement.

5.) Let investors help you pitch. Great sales people get customers talking, thinking, and wanting more.  The same is true for pitching to investors. Encourage investors to discuss their perspectives and their experiences with related businesses. You’ll learn more, and raise more.

Different business plan strokes for different startup folks

Some startups don’t need business plan presentations. This includes companies that won’t grow beyond one person and won’t ever raise capital. If you fall into this group, do the thinking behind a plan—but keep your output very basic. A few bullet points about each of the topics in a plan should suffice. Forget the fancy graphics and charts.

If you have more than one founder, want to get feedback on your plan, or intend to raise capital, you’ll need a presentation. Still, demands will vary.

Many startups raise capital from friends and family. These investors tend to be fairly easygoing. Chances are good that your wealthy Uncle is investing in your business because he loves you, wants to help you succeed, and thinks you are the greatest nephew this side of the Mississippi. He’s not going to grill you. Still, the more you explain to him, the more informed he’ll be—which means he’ll be able to do more to help you (e.g. make appropriate introductions)—and the better he’ll understand the challenges and risks you’ll face using his money.

Other startups raise capital from angel investors—people who invest their own money on an amateur basis. Angels that invest in many startups or that are part of angel groups or “networks” tend to see many business plans and have high standards. If you are pitching to angels, you’ll need to have a great presentation.

Finally, some startups raise money from VCs. If you are pitching to VCs, you’ll need a comprehensive, investor-grade business plan backed up with detailed research and analysis.