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 Were the books simply out of date?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.”

Frances Cole Jones interview: Making persuasive pitches

Frances Cole Jones is the founder of Cole Media Management, a consultancy that prepares clients for television and print interviews, IPO road shows, and investor pitches. She’s also the author of How to Wow: Proven Strategies for Selling Your (Brilliant) Self in Any Situation, and The Wow Factor: The 33 Things You Must (and Must Not) Do to Guarantee Your Edge in Today’s Business World. Jones has prepared clients for appearances on Oprah, Good Morning America, The Today Show, ESPN, Larry King Live, The Discovery Channel, Access Hollywood, E! Entertainment, CNN, and BBC News.

UpStart:  “You’ve advised hundreds of clients on how to make effective presentations. What’s the most common mistake you see?”

Frances Cole Jones:  “Reading off of their slides. In my dream world I don’t want anything on a client’s slide coming out of their mouth. We’ve all been reading since we were about six years old—being read to drives us mad. Slides are meant to enhance talking points, not replace them.”

UpStart: “Are there any quick fixes you recommend that can have a big impact?”

Frances Cole Jones:  “55 percent of your impact comes from what your body is doing while you are speaking. Only seven percent comes from the words we say. So body language is critical. Keep your hands where people can see them. We trust you when we can see your hands; we don’t trust you when we can’t. Also, remember the power of storytelling. When you tell a story, filler words like ‘um’ and ‘uh’ magically disappear. Speak from your own experience, and ask yourself why your audience should care.”

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.

Mo Koyfman interview: Startup teams

Moshe “Mo” Koyfman is a principal at venture capital firm Spark Capital, where he leads investments in Web services such as www.aviary.com. Prior to joining Spark, Mo spent six years at IAC, most recently as Chief Operating Officer of Connected Ventures, parent of CollegeHumor.com, Vimeo.com and BustedTees.com. Mo is a graduate of The Wharton School and The College of Arts & Sciences at The University of Pennsylvania.

UpStart: “What do you look for in a startup team?”

Mo Koyfman: “A great team is the first thing I look for in an investment opportunity. Successful businesses are built by extremely talented people and that’s where my investigation begins. I specifically like to see great co-founders, as there seems to be a unique chemistry that develops with the right mix of leadership at the helm. If technology is an integral part of the product, I also like to see at least one of the founders with a strong technical background. It’s certainly ideal if they’ve had prior success, but not a prerequisite. And it’s important that they’re still hungry, no matter how successful they’ve been previously. I also look for a balance between tenacity and passion on the one hand and a willingness to listen and learn on the other, as many mistakes will be made and the company will undoubtedly have to hear their users / customers and pivot over time.”

UpStart:  “What do you like to hear from a team when they present their business plan?”

Mo Koyfman: “First, I like a business plan to be clear, informative and brief. If your PowerPoint is more than 20 pages, you haven’t done a good enough job of crystallizing your plan. In the team section of the plan, I like to know how the team came up with the idea. I tend to prefer ideas hatched from real needs, as opposed to ideas developed in top-down brainstorm sessions. I also like to know how the team knows each other, to get a sense for their shared vision, and to understand how their skills are complementary. I also prefer when teams come with a built product rather than just a plan—particularly for Internet service companies, where it’s become easier and cheaper to build basic products right out of the gate. I like to see a team scrappy enough to have built a prototype themselves, with the least amount of money possible.”

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).

5 things to look for in a startup idea, for bootstrappers

What types of ideas are best suited to bootstrapping? (We’ll get to “how to bootstrap” in a separate post). Here are a few things to look for:

1. Low startup costs. Look for ideas you can launch without writing big checks. For example, it tends to cost less to start a company that sells services than one that sells products. Want to sell a line of baby food? You’ll need to create product formulations that meet FDA standards, and design packaging that stands out on store shelves. Also, you may have to produce more than you want at first, to meet supplier minimums and be prepared for customer reorders. Want to start a consulting firm? You can probably get started with a simple website and business cards.

2. Low marketing costs. If possible, find companies that reach customers without the need for large marketing budgets. For example, one of my clients has a $3 million revenue business and has never spent a penny on marketing. She sells hospitality services that cost over $100,000 per year. The universe of potential clients is fairly small, so she networks her way in the door, gives a sales pitch in person, and (sometimes) walks away with a big fat contract.

3. Proven demand. Forget “if we build it, they will come”. Instead, make sure you can sell it before you build it. There are a few ways to do that. The best way is to get customers to commit to making purchases in advance. Alternatively, you can work closely with one large customer when developing your product or service, so you can build their needs into your design. Can’t do that? Copy something that’s already selling.

4. Simple operations. Pursue ideas that don’t require large teams, wide varieties of products, or other factors that make operations difficult. Instead, find businesses where you sell one type of product or service to one type of customer, at least at the start.

5. Quick break-even. Seek opportunities that will let you get a product or service to market quickly, get cash flowing in the door, and reach profitability within a few months. Beware of ideas that require critical mass, before you can start generating revenue, like advertising supported websites or marketplaces. Also, watch out for startup ideas that entail long, unpredictable development cycles, or high levels of overhead.

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.

Sell, don’t tell: 5 ways to improve your business plan pitch.

1.) Understand your audience. One of the first rules of selling is that you’ve got to know where your customers are coming from. If pitching to investors, find out how much they typically invest, what they’ve invested in before (e.g. stage, industry) and how those investments have worked out. Probe to determine their turn-ons and turn-offs, and tailor your pitch accordingly.

2.) Share your story. Explain how you came up with the idea. Take your audience through the process that led you to your “aha” moment, and you’ll increase the chance they’ll catch the fever.

3.) Appeal to both reason and emotion. In the early part of your pitch, focus on tight logic. Explain why the environment is attractive (e.g. big, growing market, trends in your favor), who the customers are, what they need but can’t get today, and why your product or service will satisfy those customer needs. Then, switch gears for a moment. Step away from your slides, and bring your product to life. Ramp up the energy level in the room. Show your audience a quick demo, profile a customer before and after they use your product, or share a short video with music.

4.) Be humble. It’s great to be confident about your idea. But don’t forget humility. Be honest about the risks involved, the theories yet to be proven, and the hurdles to be overcome. Show that you are aware of what lies ahead, including a degree of uncertainty. More “here’s a key challenge, and how we’ll approach it”, and less “we’ve got all the answers”. You’ll be more likely to have audience members pulling for you to succeed, instead of trying to find fault.

5.) Ask for the sale. If you are raising capital, avoid ending your pitch with a fizzle. Don’t just say thanks for your time. Ask if they’d like to invest. Request introductions for advice, capital, or customers. Remember your ABCs – always be closing.

Got other advice on how to make sure you’re selling, not just telling?

How to approach angel investors

Once you’re truly ready to raise an angel round, craft a plan for who you’ll go after, and in what order. Keep in mind the whole process typically takes three to six months. Here are some pointers:

Fans of yours. Start by approaching people in your inner circle, including friends, former colleagues, and family members. If you’ve established their trust over the course or a long term, in-depth relationship, and if they have ample liquid assets, they’ll be the easiest people to get on-board. Get them to write checks, but tell them you won’t spend any of their money until you hit a pre-determined minimum amount. For example, if you are raising $500,000, set a minimum at $300,000. That way the first investors won’t have to worry that you’ll burn through their money, fail to raise more, and get yourself halfway pregnant.

Fans of your space. As you begin to network beyond people you know, find angels who are industry insiders – people who share your insights into the market. They’re already believers in the opportunity, so you’ll just have to convince them you’ve got the right team and approach. Entrepreneurs who have build and sold companies in related fields are also particularly attractive, because they understand both the market and the startup process. Best of all, these people aren’t just check-writers – they are “smart money” investors who can help you build your business, by advising you on strategy, and making introductions to potential suppliers, customers, distribution partners, employees, etc. To find these people, you’ll have to do a lot of networking. Angelsoft.net can help. So can venture capitalists, who tend to have great contacts in areas related to their investment focus.

Known lead. Once you’ve raised at least 15 – 25 percent of your round, it’s time to go after the big-kahuna:  A person who is widely recognized as one of the foremost experts in your field, willing to put their money and reputation on the line. This could be the CEO of a company in an area related to yours, a high-profile professor of entrepreneurship, a venture capitalist investing their personal funds on the side, someone in a leadership position at an angel network, or a super-angel like Ron Conway who has made investments in over 75 startups. This person’s involvement will put a stamp of approval on both your startup, and the deal you are pitching (no more questions about valuation after this person invests).

Angel networks. Angel networks, like New York Angels, the Band of Angels, or Common Angels, are getting more and more sophisticated in the way they assess and negotiate investment opportunities. They are tough nuts to crack, but you’ll vastly improve your chances if you have a good amount of your round raised, and a known lead involved. The beauty of the angel networks is that when you pitch them, you’ll get in front of a dozen or more people, each with a big checkbook. If you get one to bite, you’ll likely get others, and you may even be able to close your entire round.

Fillers. If you are just a bit short of closing your round, don’t give up. You’ve already done the toughest part, so get the round completed (or even over-subscribed, meaning you raise more than your target). At this point, broaden your reach to include trust-funders, investment bankers, hedge fund moguls, and others with ample means.

What tactics have helped you raise angel capital? Please share comments…