Building the Business Plan
When you’re a new entrepreneur with an idea for the world’s next greatest invention, it’s difficult to take your mind off of the amazing thing you’re building. Look at the new technology! It has six different indicator lights! The display is so bright and crisp! It’s powered by the blockchain! And so on and so forth.
The real question you should be asking is whether or not someone will actually purchase the thing because it solves a major problem in the customer’s life. Perhaps that customer has a distinct lack of indicator lights in his or her life, but the vast majority of your potential customers will not care one bit about the underlying technology of your product. People buy products and seek out service providers because they have problems that cannot be solved without them. Determining that your potential customers have the problem you think they do is your job through the Customer Discovery process.
Most of you reading this Substack are at least familiar with the Customer Discovery process, if not seasoned experts. (If not, stay tuned — I’m going to cover background research in my next post.) It’s the underlying data you gather to determine whether or not you have a potentially viable business on your hands, or just an expensive hobby. Once you’ve validated the problem among a sample of potential customers, it’s time to get to work building your initial business plan: the Business Model Canvas (or the Lean Canvas or another similar product, if you prefer.)
The Business Model Canvas is your starting point in your journey to eventually create a full-length business plan; one that you can use to raise capital. Think of the Business Model Canvas as your rough draft or basic outline – the fine details aren’t important right now. You just want to get something down on paper or a computer screen that you can use in further tests and customer interviews as you build your prototype, or Minimum Viable Product. The Customer Discovery process, the Business Model Canvas, and the Minimum Viable Product aren’t just a “one and done” operation: they form a feedback loop. All three should go through some iteration over the course of your journey from fledging startup to scalable business. Eight to twelve loops is not uncommon prior to reaching Product-Market Fit.
If you haven’t fully examined the Business Model Canvas, check it out:
Those nine boxes are all different areas you should be testing as you build your startup. Value Proposition and Customer Segments tend to be where most of the work is done – if any of the boxes are the “most important,” those two would probably tie for first place. However, your revenue model may need adjustment, you might want to build redundancy into your Key Partners in case of situations like the pandemic in 2020, and the way you reach your customers could change with the sudden creation of a new communications platform. The world and your customers’ attitudes will change from day to day, and it’s up to you to keep up or be left behind.
If your startup is one of the few that develops a continuous and repeatable process to generate revenue, congratulations! You’re no longer a startup: you’re now a fully formed business! You want to start scaling this repeatable process, so you are thinking of raising some capital. Your team discusses two of the major routes to raise money: institutional investors like venture capital firms or taking out a loan from your local bank. Either way, you’re going to need something a bit more detailed than a Business Model Canvas. It’s time to start writing a long-form business plan.
One question I hear often from new business owners is what to put in the business plan. The great thing is that you already have an outline on your most recent Business Model Canvas. You know who your customers are, you have a clear pathway to bring customers in and keep them around, and your revenue and cost structure have started to come together. At this point, you should have some financial information at your disposal and some trends that you can use to project revenue into the future. Now, it’s time to distill all of this information into something that will convince a bank to write you a check.
The major sections of the full-length business plan that I suggest you include are:
An executive summary: your entire business plan in 3 pages. This is the teaser that draws in potential investors. Write this portion of the plan last.
Company description: A summary of who you are and what you do. What market(s) do you serve? Who is your customer? This is a good place to discuss a bit of history of the company and the market you serve.
Market analysis: A discussion of everything related to the market segment(s) you serve. Discuss your industry and the types of customers who are in this industry. Your Total Addressable Market, Serviceable Addressable Market, and Target Market should be discussed here. Make sure you include dollar values for all three markets.
Competitive analysis: Every business has competitors, even if they aren’t direct competitors. Discuss five to seven closest competitors and cover their strengths and weaknesses in comparison to your business.
Management team: The experience of your team can sometimes be the difference between receiving funding and not. Discuss the background of each major player in your company’s C-suite and vice president/director levels.
Products and/or Services: This is the meat of the proposal. What does your business do to make money? How much money do you make from each of the products or services that you offer? Are the products or services that you offer one-time sales or recurring subscriptions? You can discuss the product features and technology, but don’t go too far into the weeds here – much like your customers, the investors reading this document may not be incredibly technical.
Marketing and sales strategy: How do you get customers, how do you keep customers, and how do you grow your customer base? Discuss every aspect of your sales funnel in this section of the document, including the amount you spend on marketing and sales currently.
Operations plan: How does the rest of the business operate? Where do you source your materials? Who are your partners? How much of the value chain do you control? What are your plans for growth and expansion? Use this section to impress potential investors through a rock-solid understanding of your business.
Financial projections: Numbers matter, especially when asking for capital. Investors want to see where your money is currently being spent, and how much money you are able to bring in each year. They want to be able to see whether or not your business is viable enough for investment or a loan. In this section, include things like your startup costs, sales forecasts, operating budget, break-even analysis, balance sheets, and any other relevant information including prior investments or loans that are still on your books.
Your ask: What do you need? Most people write a business plan because they need capital to scale. Some businesses also look for other help, including access to manufacturing or warehouse space, or are searching for board membership or mentorship from key investors. Be realistic in your ask.
Just like your Business Model Canvas, treat your longer business plan as a living document. It will change as your business evolves, especially if your customer segment changes, you introduce a new product or service line, or if your business acquires a competitor. If you are raising institutional money from venture capitalists or private equity, you will also need to generate a slide deck based on these same sections. Any appendices at the end of your narrative business plan should be included in your data room when presenting your business to institutional investors.
Don’t be surprised if your long form business plan tops 100 pages. There’s a lot of information that needs to be included, and your potential investors or lenders will want to see that your ideas are fully formed and rock solid. Due to the amount of time you will spend writing this document, make sure you give yourself at least a couple of weeks to get it done prior to any meeting. Also, it never hurts to have a mentor or business partner proofread the document and offer suggestions.
Your business plan is a summary of your entire operation. A well-written plan can unlock many doors for you and your business. Take it seriously, but don’t sweat it: you’ve been building the document since day one!