What Makes a Good Business Plan: Avoiding the Visionary Position
"Roberta Chicos was elated after meeting with a venture capitalist. . . . "He called me a visionary," she exulted to friend and fellow entrepreneur Rob Rosen. . . . Rosen quickly burst Chico's bubble. "That's a no, Roberta," Rosen explained." J. Rose, "Follow the Money," Fortune Small Business, March 2001, p. 72
As you write your business plan, you will spend much time describing your business, your product and your market. This description will generally answer two questions that dovetail each other:
What are you selling?
Who's going to buy it?
All too often entrepreneurs get stuck on the first question. But, quite frankly, investors are far more interested in the second. To have a neat idea, even a revolutionary idea, is to be a "visionary." Visionaries are great. They get praise, encyclopedia entries, and long obituaries. But they don't get financing.
Serious investors are not philanthropists. They do not give away money so as to advance a cause, or make the world a better place. They are in it for the money. They know that the only way they make money is if your business makes money. And the only way your business makes money is if people buy your product or service. To an investor, what you are selling is not nearly as important as whether people will buy it. Businessmen start with a real market and a real need, and fit their product into that need. Visionaries start with a cool product idea and assume that everyone will love it as much as they do. They live in a "Field of Dreams" world: "If you build it they will come."
Admittedly, for a brief time at the turn of the 21st century it seemed that even the most serious of venture capitalists were dreaming in the same field. But those days are over. In the past year trillions of dollars invested in cool ideas evaporated into the ether as dreams turned to nightmares. As I write this, financiers are so shell-shocked that its hard to get them to spring for a Mocha Frappucino, much less a new business. That won't last forever, but the lessons of investing in visions instead of businesses, so hard learned, will not soon be forgotten. It's B2B time--back to basics.
Fortunately for us, we don't have to invent new rules for the post-internet era. The rules were writ long ago, and are just as true now. Your business plan must sell a business, not a vision. Think what that implies:
1. There is a real market with a real need
2. You have a product or service that meets that need
3. The market is big enough to make your business viable
4. You have a plan for reaching that market
The third point concerns market size and competition, and the fourth tactical marketing strategies. Those will be covered in later articles. Here, I will focus on the first two issues, which are fundamental--are you planning to sell anything that anyone will want to buy? Or, more to our point, How do you write a business plan that will persuade an investor that you are?
Although business plan form-books necessarily break down into discreet sections entitled "The Business," "The Product," and "The Market," those labels really are artificial. A truly persuasive case requires that you talk about all three at the same time, for you can never really separate one from the other. To talk about the business or the product alone is to be a mere visionary; to talk about the market in the abstract is to be pedantic. You have to find a way to talk about all three together and, in each section reinforce the idea that your business sells a product that serves a market.
This is not really as hard as it sounds, although if you are not a skilled writer it may seem daunting. Remember that the reader will have already seen the executive summary, and from that will have a good idea what you are selling and to whom. Your task now is to expand on that idea by giving more details. In each of the three sections, you need to elaborate on the aspect covered by that section, but without ever ignoring the other two components.
Think of the executive summary, and the "business," "product" and "market" sections as all delivering the same message: "The business will deliver a real product to a real market." The four places where that message appears differ only in emphasis. In the executive summary, the message is balanced. In the business section, the emphasis is on the business; in the product section, the emphasis is on the product; in the market section, on the market.
Notice that I have drawn the Business-Product-Market triad in the form of a circle. I did so because that is the way it really is. Accordingly, as with any circular path, you will always cover all the fields no matter where you start. Where you start is actually an important decision in writing the plan, and should be a function of your business and your audience. Think about what best communicates the business's underlying rationale. Is it "My business will sell a real product to a real market"? Or is your business better described as "This real market needs this real product that my business will sell? Or, "This is a real product that my business will sell to this real market"? Those of you that know some math will see that there are nine possible ways of combining business-product-market. Which combination you choose will define the fundamental message of the entire plan, so choose wisely.
Finally, don't be a slave to the form books. Most of them suggest putting the product section first. If your audience is a venture capitalist who already knows the market and its needs as well as you do, that may make sense. In that case, it makes sense also to phrase the plan's fundamental message as "This is a real product that my business will sell to this real market." However, if for whatever reason you have chosen to phrase your message, "This real market needs this real product that my business will sell," it may make more sense to put your market section first, your product section next and your business section third. These decisions are all part of the creative process of writing a good plan.