Six Essential Core Elements of Business Plan
Unless you have failed once and burned through all the money, you are considered a "startup newbie". Real startup is a "learn by mistake" experience. So no matter how smart you are and how established you are, you are new in "starting a business" if it is your first time. No one is special. Every "successful entrepreneur" endured an episode of quit-job-n-fail-after-three-years. It is not the exception, it is the rule.
Many books are written about how to write a business plan, and there are plenty of advices given. This article is unique because:
(1) it is by someone who actually have failed several times;
(2) it is written from the crux of starting a business, not about playing the "startup theatre" or having brainstorming fun at "startup bootcamp" or winning a "startup competition".
It is importune to note, that a business plan is NOT A PIECE OF PAPER TO PREPARE BEFORE SEEING AN INVESTOR. It is not a document that you beef up or dress up for a sing-n-dance session. Simply put, the first investor of a company is YOU.
A BUSINESS PLAN is a PLAN FOR YOUR BUSINESS.
It is first of all YOUR business. You must own it, and you must have made sacrificed for it.
The business plan must be a business blue print - a business that can sustainably make money, make profit, and stay float, EVEN after you leave. It can not be ambiguous. It cannot be filled with guesstimates, extrapolations, estimates, and wishful thoughts.
The six component that an entrepreneur should think are:
(1) WHO IS YOUR AUDIENCE?
Who is your target population or beneficiary? (They need to be the paying party, not just the party that enjoy free benefits). Describe this carefully, for example McDonalds Restaurants offers breakfast to some early morning risers who have to go to work but not willing to spend too much money, and Starbucks offer expensive coffee to people who live within 1 miles of the restaurant who want to meet with business partners. You cannot describe in general terms "Everyone" or "Girls" or "Men".
(2) WHAT DO YOU OFFER YOUR AUDIENCE?
Describe specifically who you offer to your audience. Do you offer a product that you make, or a service that your crew provide, or a website that provide feedback to customer's input? you must describe the offering specifically. Your offering cannot be "I want to help my audience".
(3) WHO IS YOUR COMPETITION?
If you cann't list a competitor, that means your business is new. New business face an uphill batter of customer acquisition, customer education, and long delay before being able to make money. So if you cannot list competitors and your unique positioning against them, you have no prayer of receiving funding.
(4) WHAT IS THE UNIQUE VALUE (so called Value Proposition)?
A rich man walks into a bar and offers the bar tender a ten dollar bill. The rich man says to the bar tender, "If I give you this ten dollar bill, can you give me one dollar back?" Provided that the ten dollar bill is authentic, you can imagine that the bar tender will happily make the trade. This transaction demonstrate the difference between VALUE, PRICE and COST. In this case, the VALUE is a ten dollar bill. The PRICE is a one dollar bill. The cost is whatever the material cost of the ten-dollar bill, which is very low. In this case, the rich man is said to have made "one dollar of revenue".
You see, in business, you don't make money. You give more money to make some money.
If you want to charge your customer a price of X, you need to give them a value equal to roughly 10X.
No startup entrepreneur should think about how to MAKE MONEY from a customer. They should think about how to provide the customer with an offering that is perceived to be worth 10x, and charge for one.
The trick of a business is figure out how to make something that is PERCEIVED TO BE WORTH 10X and charge for X, whereas the cost is a fraction of X. The second part of a business is to figure out how to ramp up a factory and operation that continuously make something for a fraction of X and charge for X, and return your investors who may have poured in 1 million X in the early days.
The Value Proposition is how much PEOPLE THINK YOUR OFFERING IS WORTH. It has nothing to do with cost or price. It has everything to do with quality, effects, and worksmanship.
(5) HOW DO YOU ACHIEVE THE RESULT YOU PROMISE?
What is your magic? what is your secret sauce? Don't go to a meeting and say "I cann't tell you due to trade secret". If you don't tell your investor the secret sauce, how can they believe you? the only way to protect a secret sauce without disclosing the secret, is to SHOW THE PRODUCT WITH THE SAUCE and MAGIC in it.
After seeing a successful demo, investors want to know, HOW DO YOU PREVENT OTHERS FROM OFFERING THE SAME? and further, if they are satisfied with this, they will ask you, "So can your company sustainably make the project, make actual profit (not revenue), and use the profit to sustain the corporate operations including research?"
(6) WHAT IS THE EVIDENCE AND ARTIFACT?
Don't go to a meeting with an investor with a PPT? go with a demonstration of an artifact, or a mockup. Many investors demand evidence in the form of AN ACTUAL PURCHASING ORDER that they will personally call to verify themselves. If it is a school project, you can bring a 3D printed model and expect to score well, but in the real world, an artifact is an actual manufactured product made in a factor or a complete funding website.
(7) HOW TO RETURN INVESTMENT? (THE BONUE QUESTION)
An investor will not ask you to elaborate on this specifically. The investor knows how to calculate the odds. But it is important that the founder knows how the investors (angels or VC's) do their calculations. There are several important guidelines:
- The investor is not your comrades or co-founder. They are simply money managers who want their money back. They are just like a loan officer in a bank. They want to see that you have quit your job and that you have brought a demo.
- No matter how warm the welcome reception is or how strongly you were recommended, the investors are NOT YOUR FRIENDS. Don't even think for a minute they are. They are business men. You are a business man. It is a business-business talk, not about hope, technology future, or any fuzzy feelings.
- The money managers want money back in multiples (for example, three times) in short span (say 1 year). If they stuck longer with you, consider yourself lucky. But they only want to be in-and-out.
- You cannot expect to bring a fuzzy idea and improve on the idea with investors' help. It will never happen. The investors are not your advisors, nor your counsels or prompters. They want to hear your vision. You cannot wait for them to give you advise.
Without the investor, you won't have money to build up technical knowhow, quality, or entry barriers. In short, the investor help you buy some time ahead of your future competitions.