The investor process accepts the entrepreneur thanks to the business plan. Many investor organizations won’t even agree to an interview without a strategy being provided in advance. And if the objective is to attract investment capital, it must be exceptional.
But far too many businesspeople still hold on to the notion that if they create a better mousetrap, everybody will come rushing to their doors. Although a good mousetrap is crucial, it only goes so far in solving the problem. Meeting the demands of investors and marketers is also crucial. Marketers need proof of consumer interest and a healthy market. Investors are interested in finding out when they can cash out and the accuracy of the financial projections. The writers teach business owners how to create compelling and effective business plans by drawing on their own experiences as well as those of the Massachusetts Institute of Technology Enterprise Forum.
Things you should Remember
Entrepreneurs and corporate managers must have a thorough, well-thought-out company plan to succeed. You will never encounter a writing task that is more difficult than creating a business plan, whether you are beginning a new company, looking for funding for current product lines, or suggesting a new activity in a corporate division.
Only a carefully thought-out and professionally presented plan can attract the necessary funding and support for your concept. It must include a clear and appealing description of the business or prospective endeavor. The plan must describe the company’s or the project’s current condition, current demands, and anticipated future even though its subject is a moving goal. You must logically and persuasively articulate and defend ongoing and changing resource requirements, marketing choices, financial projections, production demands, and people needs.
It is not surprising that managers occasionally neglect the basics given how hard they work to compile, organize, describe, and document so much. The most crucial factor, according to our research, is a true representation of the opinions of three constituencies.
- The market consists of customers, clients, and users of the intended good or service, both current and potential.
- Investors, both in terms of money and other resources.
- The creator, whether an innovator or an entrepreneur.
Too many business plans are only written from the perspective of the producer, the third constituency. They go into considerable detail and use glowing language to highlight the underlying technology or inventiveness of the proposed good or service. They disregard the market and the investor, two key stakeholders who ensure the venture’s financial viability.
Consider the situation of five CEOs who are looking for funding to start their own technical consultancy business. They included a dozen different sorts of specialist engineering services in their business strategy and projected a 20% yearly growth in sales and profits. However, the executives failed to decide which of the suggested twelve services would be the most profitable and which their potential clientele would require. They dismissed the likelihood that the market might demand some services that are not among the dozen specified by failing to properly study these issues.
They also neglected to mention the cost of new shares or the portion made accessible to investors. Dealing with the investor’s point of view was crucial since, at least for new ventures, investors want to see a return of 40% to 60% yearly compounded on their investments.
The 20% predicted growth in sales and profits could not deliver the required return unless the company’s founders sold a sizable portion of their ownership.
In actuality, the executives had only taken into account their viewpoint—including the new company’s offerings, structure, and expected outcomes. Their business strategy lacked the credibility required to attract the requisite investment capital since it failed to persuasively explain why prospective clients would purchase the services or how investors would get an appropriate return (or when and how they could payout).
We’ve organized and watched investor presentations and replies at MIT Enterprise Forum sessions as well as evaluated business plans. We think that marketing and investment factors need to be addressed convincingly in company plans. In this reading, those factors are identified, evaluated, and it is explained how business plans might be designed to address them.
Focus on the Market
Investors prefer companies that are driven by the market versus those that are driven by technology or services. The market, sales, and profit potential of the product are significantly more significant than its aesthetics or technical merits.
By illustrating user advantage, finding market interest, and supporting market claims, you can persuade someone that there is a viable market.
Show How the User Will Benefit.
Even specialists can easily miss this fundamental idea. An entrepreneur at an MIT Enterprise Forum session spent the majority of his 20-minute presentation period praising the advantages of his company’s product, a tool to regulate certain elements of the textile industry’s production process. He wrapped up by making some financial predictions for the next five years.
A partner in a venture capital firm who was the first panelist to respond to the business plan had a very poor opinion of the company’s chances of acquiring investment money since, in his opinion, its market was down.
How long does it take for your product to make up for lower production costs, another speaker questioned? Six months, the presenter replied right away. “That’s the most important thing you’ve said tonight,” the second panelist retorted.
The venture capitalist rapidly changed his mind about his first viewpoint. If a business could demonstrate such a significant user benefit and emphasize it in its sales strategy, he said he would support it in nearly any industry. After all, if the product compensated for the customer’s purchase in six months, it would then essentially “print money.”
The entrepreneur understood that many potential customers consider necessary purchases to be goods and services that pay for themselves in less than a year. It is likely to be a good investment if the payback period is under two years; if it exceeds three years, they do not support the product.
The MIT panel counseled the businessman to rewrite his business plan to highlight the quick return period and downplay the self-serving description of product innovation. The CEO followed the recommendations and revised the plan in plain language. His business has successfully made the switch from being technology-driven to being market-driven, and it is currently doing extremely well.
Discover the Interest in the Market
The user benefit calculation is just the initial action. A businessperson must also provide proof that consumers are interested in the user benefits and like the product or service. The business strategy must provide unmistakably favorable reactions from potential customers to the inquiry, “After hearing our presentation, will you buy? Without them, investments are typically not made.
How can new companies—some of which might only have a concept for a product or service—appropriately assess how the market will respond? A prototype of a system that allows personal computers to handle phone messages was created by one CEO of a modest business. The corporation had run out of cash and was unable to produce and market the goods in large enough quantities, so he needed to show that customers would buy them.
The executives pondered solutions to the issue. Two options were presented by the MIT panel. First, the company’s founders might let a small number of customers test the prototype to get written feedback on it and gauge how interested they would be if it went on sale.
Second, if a small number of potential consumers paid a portion of the cost—say let’s one-third—up advance so that the business could develop it, the founders might give the product to them at a significant price discount. The business could not only determine whether there were potential customers but also show the goods to potential investors in actual installations.
Similar to this, an entrepreneur may give a prototype of a proposed new service at a discount to early clients in exchange for their consent to act as testimonials when promoting the service to others.
Nothing works as effectively for a new product as letters of support and appreciation from a select group of important prospective consumers, together with “reference installations.”
You can prove that you have found a viable market for your product or service by using statements from third parties, such as potential consumers to whom you have displayed the product, first users, sales reps, or distributors.
Even if the product is still simply a prototype, you can still get letters from customers. In exchange for details on its advantages and an agreement to speak with potential customers or investors, you can install it experimentally with a potential user to whom you will sell it at or below cost. You can include letters from trial customers attesting to the value of the product in a separate volume or as an appendix to the business plan.
Register Your Claims
After determining your market interest, you must support your claims about the market, the growth rate of sales, and the profitability of your business with thoroughly examined statistics. Too frequently, business leaders believe things like “Even if we just acquire 1% of such a vast market, we’ll be in a good position” and “If we’re smart, we’ll be able to get approximately 10% of the market.”
Investors are aware that, despite the size of the market, there is no assurance that a new business will succeed. Even if the company bases its assertions on fact—as demonstrated, for instance, by proof of customer interest—if the corporation does not thoroughly obtain and evaluate relevant data, those claims may swiftly fall apart.
One illustration of this risk appeared in a company proposal submitted to the MIT Enterprise Forum. A businessman wanted to offer a service to small companies. He calculated that if he could reach even 1% of the 17 million small businesses in the United States, he could have 170,000 clients. According to the panel, between 11 million and 14 million of these ostensibly modest firms were sole proprietorships or part-time ventures. In reality, there were between 3 million and 6 million full-time small enterprises with employees, which offered a real potential market significantly below the company’s initial projections—and prospects. Similar to this, in a business plan for the sale of specific equipment to apple growers, you need to get statistics from the U.S. Department of Agriculture to determine how many growers could benefit from the equipment. You must ascertain how many growers have farms of that size, that is, how many are minor producers with only an acre or two of apple trees, if your equipment is only relevant to growers with farms of 50 acres or more.
The number of possible clients, the size of their enterprises, and the best size for the provided goods or services must all be specified in a realistic business plan.
Bigger isn’t always better. A $10,000 annual reduction in chemical consumption, for instance, would be significant to a small business but negligible to a Du Pont or a Monsanto.
Such marketing analysis ought to reveal the nature of the sector. Banking and public utilities are among the conservative industries. No matter how outstanding the products and services have shown to be, there are relatively few potential customers, and the industry takes a long time to adopt new products or services. Nevertheless, the majority of the clients are well-known, and even though they may move slowly, they have enough purchasing power to justify the wait.
Franchised weight-loss clinics and computer software companies are examples of exceptionally fast-growing and fast-changing businesses at the other end of the industrial range. In this case, the issue is inverted. While some businesses have attained multi-million dollar sales in a short period, they are nonetheless susceptible to drops of comparable size from rivals. These businesses must continuously innovate to deter potential rivals from entering the market.
You must accurately predict both the rate of product or service acceptance and the rate at which it will likely be sold. You can start putting up a solid sales plan and forecasting your plant and staff needs based on the results of this marketing study.
Conclusion:
Unless you are affluent enough to provide your own capital to finance the enterprise and test out your favorite product or service, the only way to take care of your wants is to satisfy those of the market and the investors.
Of course, before you can persuade investors that the business will prosper, you must deal with other concerns. What exclusive features, for instance, exist in the good or service? How will you implement quality assurance? Have you targeted a certain market with the venture, or are you attempting to do too much? The outcome will be more effective if you respond to this in terms of the market and investors rather than dealing with them in terms of your personal desires.
The businessman outlined his desire to consistently create new items in his industry. The panel acknowledged the noble nature of his goals but unanimously recommended that he align his spending with that of the sector. The speaker disregarded the advise, failed to secure the required funding, and ultimately went out of business.
