Friday, June 26, 2020

10 Key Business Plan Elements Not In A Product Spec

Business-plan-elementsAs an advisor to new hardware entrepreneurs, I often hear the myth that a business plan is no longer required to find an investor, if your idea is good enough. You may have heard that venture capitalists in Silicon Valley no longer read business plans. What you don’t realize is these famous investors only deal with entrepreneurs who sold their last company for a $100M dollars or more.

For the rest of us, we need a business plan, as well as a product plan. Some of you may be convinced that your product specification communicates the product message even better than a business plan, so why be redundant? Let me assure you that a business plan and product plan are two different things (I have personally written several of both). You need both to survive.

To be clear, I define a product specification as the technical definition of your product, to be used for development and testing purposes, with a quick business summary for context. A business plan is the outward facing definition of the business you hope to drive with your hardware solution, with a hardware overview in the intro to highlight customer value and competitiveness.

As a hardware engineer, you already know the value, importance, and layout of a spec to keep you focused, but you may not be so familiar with the key elements of a business plan, and the way to use it to support and add credibility to your hardware solution. Thus I offer the following outline for how to organize and present your business plan, with specific examples:

  1. Start with outlining the customer problem, and your solution. Use non-fuzzy terms to quantify customer value. For example, “We just patented a new battery technology that will cut your smartphone charge time and cost in half.” Be sure to include this in your “elevator pitch,” which you must always deliver as a prelude to your technology features.
  2. Description of the business entity you plan to form. The most common business entity used for startups is a Limited Liability Corporation (LLC), which is the cheapest and simplest to manage. If your goal is a large national corporation with more than 100 investors, and multiple classes of stock, you might prefer a C-Corp or S-Corp.

  3. Quantify the market opportunity in business terms. The answer is not “if we build it, they will come.” Investors and advisors want to see recent survey data and projections from industry professionals here, not just your opinion. For example, “Nielsen projects that the market for smart phones will double every year for the next five years.”

  4. Highlight your advantages over three top competitors. Call out your top competitors, highlighting your sustainable competitive advantage, including patents, trade secrets. and trademarks. Don’t denigrate your competitors, but use their limits to highlight your edge.

    For example, rather than saying, “Competitor X has poor reliability,” use the positive approach to list your reliability features, compared to X. If possible, quantify these in non-technical business terms, such as dollars saved or replacement costs over time.

  5. Provide specifics on the customer business model. All startups, including non-profits, need revenue to thrive, such as such as from subscriptions, retail, online, licensing, or services. Positioning your hardware solution as almost free may sound attractive to customers, but it won’t attract investors. They want to see revenue to share in the return.

  6. Document why your team is the best for this challenge. Be sure to highlight any special credentials or relevant experience that you or key members of the team, including advisors or existing investors, may have. Don’t assume titles will convey this information. Professional investors and even customers invest in people, rather than just a product.

  7. Include marketing, sales, and customer rollout plans. Don’t let your passion convince you that word-of-mouth and viral marketing will suffice against well-funded competitors and ever more demanding customers. Set specific targets on the sales channels and marketing initiatives you need, including the use of social media, brand building, franchising, trade shows, affiliates, and distributors. Budget time and dollars for each.

  8. Target income and expense by year, including funding. Here I recommend a 5-year projection of revenues, expenses, and funding requirements. Major milestones along the way should be outlined. Scale your funding requests to the value of your startup today, consisting of assets, contracts, and intellectual property you currently own.

    The best way to do this is to reference actual data from a recent similar startup success. Investors look for high-growth-potential companies who can double revenues yearly, hit break-even in two or three years, and penetrate at least 10 percent of the opportunity you quantified for the first five years, to give them a 10X return on their investment.

  9. Outline a viable exit strategy for you and investors. Investors want to know how and when they might see some return on their investment, since startups require some event to show value. The options here include going public (IPO), merger/acquisition, liquidate, or no exit, just paying off investors. Most investors don’t want long-term commitments.

  10. Summarize all of the above in an executive summary. Since everyone wants a quick overview of the whole plan, you need a tightly written and formatted two-page content summary, using the first paragraph of each of the above sections. This summary if often extracted as marketing collateral, with text and graphics for pitch handouts.

Based on my experience in the investment world, aspiring entrepreneurs seeking an investment with no written business plan are routinely requested to come back later, when “you have more traction.” Every good technologist should start with at least a single page business plan, or construct a “pitch deck” of maybe a dozen PowerPoint slides to cover all the important content.

Most of the business plans I see getting funded today are less than 30 pages in total, even including financial statement attachments. What investors expect, and what you should be looking to provide for your own use, are answers to all the relevant questions a good advisor might ask about your business goals, objectives, structure, and milestones over time.

I personally find that writing down my business plan is a good discipline to incent me to think through all the issues, and do the research on the alternatives available. As a hardware designer, I’m sure you do the same thing as you document your product specifications and pass them on to other members of your team for implementation. In addition, I know from experience that most investors look for written plans to separate what they call “hobbyists” from serious entrepreneurs.

If you have no idea what needs to be included in your business plan, fortunately there are many useful templates available online, books on how to write business plans in every bookstore, and several software applications being marketed to at least partially automate the process. Part of the fun of starting a business is the learning process, and this is an easy place to start.

If all else fails, working on your business plan is a good time to ask for help from a peer entrepreneur, or follow up on a friendly relationship with someone who has been there and done that. In fact, this context is your best opportunity to attract a co-founder who has the business skills and interests that are complementary to your technical strengths.

Keep in mind that multiple studies have found that hardware entrepreneurs who create a good business plan at least double their chances of securing funding and growing a business to change the world. Thus, building the plan is a small investment compared to the potential for being the next “unicorn” or billion dollar company, and leaving your dent in the universe.

Marty Zwilling

*** First published on Predictable Designs on 06/10/2020 ***

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