Business 16 Stanford Department of Continuing Education Class # 1, 9/21/09 What Is A Business Plan, And What Good Is It Anyway?

Housekeeping: Doug Kelly, M.D. General Partner, Alloy Ventures Slides: Business plans due last day of class Partnering on plans encouraged Grades are not; requires BP & final presentation Motivation, Groundrules, Ethics, Politeness, Excuses, & Making Life Easy On Yourselves

Why do start-ups fail? o Poor risk management o Market risk o Technical risk o Competitive risk o Intellectual property risk o Management risk o Distribution risk o Regulatory risk o Financing risk o Liquidity risk o Risk is inversely proportional to value and your ownership.

If you are unwilling do enough research to thoroughly assess and quantitate these risks, and start a company anyway, you are an idiot and you should drop this class right now.

Why are start-ups like helicopters?

Would you pilot a helicopter without taking lessons first? o Of course not. But you have to commit to doing it right. o It takes qualities and skills that you may not have and that you will have to develop. o Everybody is in the same boat here, so dont get too smug.

Qualities and Skills? oThe 2 most important qualities and skills are humility and losing your fear of humiliation. oOnce you admit that there is a lot you dont know, and you are not afraid to ask for help, you can begin the tough work of asking a lot of people questions to help you in your risk assessment. oSatisfactory answers to these questions, organized in a compelling way are called a Business Plan.

Portrait of a failed entrepreneur as a young bonehead o I dont need a business plan o My business is growing/changing too fast to write a plan o It is obviously such a good plan I dont need one o Im afraid if it got into the wrong hands someone would steal my idea o Im just the technical guy; I dont know anything about business. Ill let somebody else do it. o My mom never bought me that book on how to write a business plan at Borders

Excuses of a failed entrepreneur as an old bonehead o Sales just never took off. o We ran out of money because our investors chickened out. o I had a board full of idiots who were always wasting time with meetings and stupid questions. o Somebody else had a patent. o The guy that wrote our plan was way over- optimistic. o It was everybody elses fault.

Other reasons for a business plan o Its more for you than anybody else such as VCs. o It allows you to organize your thoughts. o It allows you to see what you are missing. o It shows others that you have a rational organized process. o It becomes a historical document to let you see what you were thinking at the time. o It is a recruiting tool.

Why a business plan? o It keeps you honest o It is a starting point for a tactical operating plan o It is a document that justifies the existence of a company o It is a critical document that assesses pros and cons o It is a roadmap for strategic focus

Why a business plan? o It is a money-raising document that represents what kind of founder you are o It outlines financial & operational milestones and specifies capital requirements for each

What do I need to write a business plan? o Research, research, research o Honesty, honesty, honesty o Guts, and the aforementioned humility o Determination that if it does not hold together, change the model or kill the plan o Recognition that it is cheaper to kill a marginal idea than to try to make it work

What do I need to write a business plan? o Do your financial homework o Talk to your customers o Talk to your competitors o Realize you can never do enough work on your plan o Remember that it is a living document

Remember: o You need to determine the criteria that qualify you company as a success or a failure. Your potential employees and investors sure will. o If your plan doesnt scream success, KILL IT AND TRY ANOTHER BUSINESS. o Talk to your everybody, customers, competitors. o Realize you can never do enough work on your plan, and that it is a living document. o The better you understand your business and the more external confirmation you have, the higher your odds of success.

What are the parts of a business plan? o Executive summary/use of funds o The problem/the market o The solution (your business proposition) o Market and trends o Competitors o Sales strategy and distribution o Intellectual property (patents, trade secrets, unfair competitive advantage) o Government regulation

What are the parts of a business plan? o Exit/liquidity o People (key employees, advisors) o Financials (Capitalization chart, 5 years of income statements, balance sheets, cash flows) o Appendix

Executive summary o 1 or 2 pages o Summary of business plan with all sections o Your one chance to grab the reader o Avoid hyperbole o The more quantitative you are, the better o Cite your sources o How much you want to raise/use of funds

The problem o Describe what the customers itch is o Current solutions o Current costs/size of market opportunity o Who cares?

The solution o What can you do? o How much does it cost? o Who says it is important? o Discusses specific attributes o Describes the logic behind this solution o Establishes the credibility of your due diligence o Is it a marginal improvement or revolutionary?

The solution o Will competitors get to it if you dont? o What makes your solution unique? o Is it a must have or a nice to have? o Does it allow my customer to do it better/faster/cheaper? o How do you keep from getting pulverized? o What makes you so smart? o Developmental milestones, timelines and costs, uses of cash

The solution o Strategy & tactics

The Market o How big? o How is it divided? o Who owns what? o Who are your customers? o How are they organized? o What are the politics of their organization? o Who are your early adopters?

The Market o What are their motivations? o Why should they buy from a new supplier and not a trusted brand? o What influences their buying decision? o Where is your niche? o Total vs. Addressable vs. other o Growth o Changes due to technology or other reasons

Competitors o Current competition and their future trends. o Future potential competitors. o Competitive response to your success. o Remember, the status quo is a competitor. o If you think you dont have any competitors, you took your mom too seriously when she said you were the smartest kid in the whole world. Think harder. o Charts, showing the competitive landscape and competitive product attributes are useful.

Sales Strategy & Distribution o How am I going to sell, direct or through distributors? o How am I going to price? o Can I support my own sales staff? o Can I access my customers? How much will it cost? Alternatives? o How much profit will I have to give to the channel?

Sales Strategy & Distribution o How much will each salesman have to sell? o How do my competitors salesmen do it? o How are my competitors salesmen organized? o What prevents my distributor from competing with me? o What are their incentives? o What prevents them from selling competitive products?

Intellectual property o Patents o Trade secrets o Know-how o Contract/agreements o Unfair competitive advantage

Government Regulation o FDA, FCC, others

Exit/Liquidity o Going public (ugh). o Selling your company/merging/getting acquired. o Participating in an ongoing revenue stream.

People o Key employees (CEO, CFO, VPs, Sr. technical people, inventors) o Board members/investors o Scientific Advisory Board o Business Advisory Board o Lawyers o Accountants

Financials o Should tell you how much money you need to reach your milestones o Should justify why this is a good business/investment o Should allow you to do sensitivity analysis and ask what if I am a quarter ahead or behind?

Financials o Capitalization chart, 5 years of income statements, balance sheets, cash flows o Should be able to show why each round of financing is a good investment

Appendix o Technical documents o User illusion/customer scenario