The first step to launching a startup is creating a business plan. Whether it's used to pitch investors or just as a roadmap, the best plans are flexible and have weighed all the inherent risks. They're also conservative and passionate at the same time.
For advice on how to create a strong business plan, we spoke to Steve Wunker, a managing director at New Market Advisors, a consulting firm with clients ranging from international giants like Siemens and Johnson & Johnson to recent start-ups. Below is a slightly edited version of our conversation:
What is the most important part of a business plan?
Finances. Not the revenue, because that is a work of fiction, but the expenses. You really have to have a clear sense of what is an unavoidable cost versus what is a variable cost. The number one danger for small businesses is running out of cash. So when you think about expenses, think not just about when they’re inferred but when the cash is going to have to come out of the bank.
The second answer to that may be a little less standard, which is that the risks are a key part of the business plan. Your initial iteration of the business shouldn’t attempt to be the business in miniature; rather it should focus on what are the key risks or uncertainties and reduce those as thoroughly, quickly, and cheaply as possible. That will give you and your financial backers the confidence to invest in feeling out the business.
What's the biggest challenge for entrepreneurs?
An entrepreneur has to wear two very different hats. A person needs to be inspired by their business and needs to be a passionate believer in it because if they’re not, then their employees and their investors won’t be. That is usually not the challenge. The challenge for the entrepreneur is the reverse. It's being a skeptic, which they need to do at the same time as being the passionate believer. They need to really take a very cold eye to the drivers of the business and think thoroughly about everything that might go wrong. Entrepreneurs have a very tough time doing that. They have to be passionate otherwise they wouldn’t be starting up their idea. They wouldn’t get their employees or their investors on board.
How do you make sure you have a cold eye when writing a business plan?
It helps to find cynical people to share your ideas with. You also want to approach the risk section usually on a different day than when you’re doing the rest of the plan. You want to wear a different hat. You want to be in a different mood and really think about all that could go wrong. But then put it down and come back to it again on a third day and be able to see it for what it is. It is a balanced view. It doesn’t mean you shouldn’t do the business, but it means that you’ve really thought about everything that might go wrong and how you can mitigate the risks.
What's the first step small business should take when starting to write the plan?
They should start with who is the target customer, and what jobs are they trying to get done in their lives that you’re helping with. Not what are you selling, that can come later. But think about it from the customer’s standpoint. Not in terms of a traditional product or service, silos, or definitions but rather what is the person trying to get done, how might you help with that, and what is the full range of competition which might extend well beyond the category as you traditionally define it.
What's the intended audience for a business plan?
It depends what you need the plan for. If you’re trying to raise money then you’re going to need that for investors and to some extent the plan is a sales document. It’s got to be a balanced sales document, otherwise investors aren’t going to look at it creditably.
In other cases you are the audience. You can mobilize funds where it doesn't take a whole lot of funds to get the business started. The plan is more to make sure that you have thought carefully about the target market, the full range of competition and why you have an advantage—all the business risks, the drivers to success, how much money this is going to take, and how big or small an opportunity this will ultimately be.
How important is it to understand your competition?
It’s critically important. You need to look at it not from the perspective of you as the entrepreneur, but from a customer’s perspective. By doing that you look across categories and look at the world as a customer does. If your idea is to open up a video arcade, your customers are not video arcade providers. They play miniature golf and go to movie theaters and go go-cart racing. It's these sorts of alternatives that a customer might embrace to get a certain job done, or in this case to fill a Saturday afternoon.
How many years into the future should a business plan project?
If you look out more than three years for most businesses, you’re writing a work of fiction. Clearly if you’re creating a biotech firm then you need to look out further. But most businesses operate on a faster cycle than that and in the world of small business three years could be a very long trip.
What should a small business avoid in its business plan?
Don’t spend too much time on your revenue estimates, John Grisham could write those. They all look the same. They all have hockey stick projections, a slow build, and than rapid growth. I think that is the biggest one. Far too many entrepreneurs start with the projections. All you need to prove on the revenue side is that this is big enough to be interesting. How big? You have no idea. So if you’re going to do a revenue projection, do a 'what-you-have-to-believe' analysis. If your threshold for making the business happen is that it has to bring in a million dollars in revenue, for instance, then ask yourself what you would have to believe about pricing and market penetration and other factors, to get you to a million dollars of revenue. Don't try to estimate that it’s going to be $1.2 million in that six months because you don’t know.
How can small businesses be innovative in developing a business plan?
They often have the ability to get closer to the customers than a big company. If you define a customer’s problem very rigorously, then innovative answers are pretty easy to come by. Most entrepreneurs start with the answer, not with the problem, and they ignore innovation opportunities that way.
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