How to Write a Good Business Plan: Tips from a Harvard Business School Educator

The book "Entrepreneurship and Startups" consists of 10 of the most useful and in-demand materials from Harvard Business Review - the world's leading business magazine. With the permission of Alpina Publisher, we publish an article by William Zalman, professor and lecturer at Harvard Business School in Boston.

Few areas of entrepreneurship receive as much attention as starting new projects, with the development of a business plan being of particular interest. There are countless books and articles devoted to this topic. More and more business plan competitions are held every year in the United States and other countries. Undergraduate and graduate programs devote entire courses to this subject. Looking at such a hype, you might think that only color charts separate any entrepreneur from grandiose success. on glossy paper, many detailed tables and a financial forecast for the next decade, broken down by months.

It is difficult to think of anything further from the truth. In my experience of working with hundreds of startups, the importance of a business plan to the success of a new business can be estimated at no more than 2 points on a scale of 1 to 10. Moreover, it also happens that the more carefully the document is worked out, the higher the likelihood that the business, let's face it, will burn out.

What is wrong with most business plans? The answer is relatively simple. Those who compile them are too addicted to numbers and pay little attention to information that is really important for smart investors.

Any seasoned investor knows that financial projections for a new venture—especially detailed, monthly, more than a year long projections—are nothing more than fantasies. A new venture inevitably faces too many unknowns to predict its earnings, let alone profits. In addition, few, if any, entrepreneurs correctly estimate how much capital and time it will take to achieve their goals. As a rule, they are overly optimistic in their forecasts. Investors, aware of their tendency to overstate business plans, always make allowances for this. Such maneuvers create a vicious circle, and no one benefits from this.

Don't get me wrong: of course, business plans must contain some numbers. But they need to be cited when describing a business model, which shows that the entrepreneurial team has analyzed the key factors for success and failure of the business. In industry, this could be productivity; in publishing, subscription renewals; in software development, the impact of different distribution channels. Within this model, one should also consider the issue of profitability: at what level of sales will the business begin to make a profit? And, more importantly, when will cash flow turn positive? Without a doubt, these questions deserve a couple of pages in any business plan. Somewhere near the end.

What should you pay attention to first of all? What does a good business plan include?

If you want to speak the same language with investors and make sure you ask yourself the right questions before how to start on the difficult path of an entrepreneur, I recommend that you build your business plan based on the concept that I will describe Further. It doesn't contain any of the "success formula" that some business guides and software products talk about. However, there is nothing too difficult to understand in it. The concept allows you to give a systematic assessment of four interrelated factors that are of key importance for each new business.

• People. The men and women who create and operate this business, and the employees of third parties organizations providing key services or necessary resources for him - lawyers, accountants, suppliers.
• Possibilities. The characteristic of the enterprise itself is what it will sell and to whom, whether the business will develop and how quickly, what are the economic aspects of its activities, what obstacles stand in the way of success.
• Circumstances. Overall context analysis: regulatory environment, interest rates, demographic trends, inflation, etc., that is, factors that are subject to change and at the same time do not depend on entrepreneur.
• Risks and rewards. Assessing anything that could go wrong, discussing how the entrepreneurial team might react to it.

This concept is based on the assumption that successful companies have characteristics that are easy to recognize but difficult to shape. They have experienced, energetic leaders at all organizational levels. These leaders have skills that are directly related to the opportunities they seek. Ideally, they have a history of successful collaboration in the past. Such companies have a sustainable business model, they can gain a competitive advantage and protect it. Each of them has its own options for growth and expansion of the scope of activities.

The business of these companies can be benefited in several ways - either through profit from sales, or through its reduction or liquidation. For them, circumstances are favorable in terms of legislation and the macroeconomic situation. The risks are understood and studied, ways to mitigate adverse factors have been worked out. In short, a business is successful when all four factors are fully taken into account. However, in reality, everything turns out, as a rule, by no means so smoothly.

People

When I get my next business plan, I always read the summary section first. Not because the staff is the most important part of the new enterprise, but because without a well-chosen team, everything else becomes meaningless.

I read the resumes of project participants, keeping in mind a list of questions for them. […]

• What do they know, who do they know, how well do they know themselves?
• Where are the founders from?
• Where did they receive their education?
• Where and for whom did they work?
• What have they already achieved professionally and personally?
• What is their reputation in the business community?
• Do they have work experience that is directly related to the opportunities they are seeking?
• What knowledge, skills and abilities do they have?
• How realistic are they about the new business's chances of success and the challenges it might face?
• Who else should be on the team?
• Are they ready to attract highly qualified specialists?
• How will they react to obstacles?
• Will they have the strength to make a difficult but necessary choice?
• How committed are they to this enterprise?
• What is their motivation?

Answers to questions about what and whom they know speak about their knowledge and experience. How well do team members know the main players in the industry, the dynamics of its development? Investors, not surprisingly, appreciate managers who have already worked in this area for some time. The business plan should objectively reflect each team member's knowledge of the new venture's products, manufacturing processes, and the market itself, competitors, and customers. In addition, it is recommended to indicate whether the project participants worked together before - they worked, and not just talked or lived in the same room while studying in college.

Investors favorably perceive an already well-known team also because in practice, startups often do not arouse enthusiasm, since they are difficult to predict.

But if the new company is run by those who are already well known to suppliers, customers and staff, the situation changes. The company itself may be brand new, but it is led by familiar faces, and this makes working with a startup more predictable.

Finally, the part of the business plan that deals with the human element needs to be especially carefully worked out, simply because it is the one that competent investors pay attention to. A typical professional venture company receives about 2,000 business plans a year. All of them are full of enticing ideas about new products and services that will change the world and bring in billions - at least that's what their creators think. However, the fact remains that most venture investors think that ideas are not the main thing, the point is not in them, but in their implementation. Legendary venture capitalist Arthur Rock, who helped build companies like Apple, Intel, and Teledyne, said, “I invest in people, not ideas.” He also noted: “If you find the right specialists, then if they make a mistake in choosing one product, they will switch to another, so what’s the point of putting the product first?”

Those who create a business plan should keep this in mind when developing their proposal. Information about people must be exhaustive. If their experience and skills are not convincing enough, the entrepreneurial team should seriously consider the feasibility of this project.

Possibilities

When it comes to opportunities, a good business plan starts with two questions. Is the market for a new product or service large enough, growing fast, or both? What is the current state of the industry - how favorable is its structure, can it become one? Entrepreneurs and investors are interested in large or fast growing markets mainly because growing market is usually easier than competing with existing competitors for a share of a developed or stagnant market.

In fact, savvy investors do their best to recognize promising high-growth markets at an early stage of their development: this is where you can make big profits.

In addition, many will not invest in a company that will not be able to reach a serious level of annual income (about $50 million) within five years.

As far as industry structure is concerned, investors are, of course, looking for markets that would allow businesses to make money, and this is by no means as easy as it seems. For example, in the late 1970s, the computer disk business seemed very promising. These were new and impressive technologies. Dozens of companies entered the fray, backed by an army of professional investors. However, after 20 years, this direction has lost its attractiveness for both businessmen and investors. Disk drive manufacturers must develop products that meet the anticipated needs of original equipment manufacturers and end users. It is very difficult to sell a product first. Customers tend to be significantly larger than most of their suppliers. There are many competitors with similar high quality offerings. At the same time, the service life of the product is short, and the continuous investment in technology is high. The industry itself is undergoing significant changes in terms of technology and customer needs. Tough competition leads to lower prices and, consequently, a drop in income. In short, the disk drive industry is simply not good for making big money because of the unfavorable industry structure.

But the sphere of information services, on the contrary, is a real paradise for entrepreneurs. Companies such as Bloomberg Financial Markets and First Call Corporation, which provide data to the financial world, actually have all the competitive advantages. First of all, they can collect or create their own content, which is needed by thousands of money managers and stock analysts around the world. Although developing such a service and attracting early adopters is often costly, once launched, these companies can deliver content to customers quite cheaply. In addition, customers pay for services in advance, which has a good effect on cash flow. In general, the structure of the information services industry is not just attractive - it is great. Against the backdrop of Bloomberg and First Call, the profits of the disk storage business look rather pitiful.

Thus, first of all, entrepreneurs must make sure that they are being introduced into a large and / or a growing industry with a favorable structure, and secondly, clearly describe this in your business plan.

If the industry does not look very impressive, then it should be clear from the business plan how the enterprise will succeed in make enough profit to satisfy investors (potential employees, suppliers - in general, everyone stakeholders).

After considering the scope of the new venture, the business plan should describe in detail how the company will create and bring to market its product or service. At the same time, you can also focus on a number of questions.

• Who are the clients of the new venture?
• How does the consumer decide to buy this product or service?
• To what extent is this product or service necessary for the consumer?
• How will the price of a product or service be set?
• How will the enterprise be able to reach all identified customer segments?
• How much does it cost (in terms of time and resources) to acquire a customer?
• How much does it cost to produce and deliver a product or service?
• How much does customer service cost?
• How easy is it to retain a customer?

Very often the answers to these questions reveal fatal flaws in the planned business. For example, I've seen entrepreneurs with great products find that finding buyers who are willing and able to buy what they're going to sell is a huge expense. Affordable reach to consumers is key to business, but many entrepreneurs take the same approach as the hero of the film "Field of Dreams": the main thing is to build, and everyone will come themselves. But the strategy that works in the movies doesn't make much sense in real life.

Questions about how consumers will react to new products or services are not always easy to answer. The market is changeable and unpredictable (could you imagine that someone would buy mains operated air fresheners?). An entrepreneur friend of mine decided to start an e-mail newsletter service. With this idea, he turned to one of the venture investors, but he rejected his proposal, saying: “They won’t eat such dog food.” Later, when this entrepreneur's company went public, he sent this investor a package—an empty dog ​​food can and a copy of his offer, without any comment. If it were easy to predict what people would buy, looking for profitable opportunities would be pointless.

Similarly, it is not easy to guess how much people will be willing to pay for something, but the business plan must take this into account. Sometimes dogs will only agree to eat dog food for less than the advertised price. Investors are always looking for value-for-customer pricing opportunities. It is possible in markets where the cost of producing a product is low, but consumers are willing to pay a lot for it. No one is eager to invest in a company with low margins. However, you can make money on cheap products, even on consumer goods.

The business plan should clearly show that the pricing scheme in the new project is carefully thought out.

Among the issues related to the possibilities of a new venture, special attention is paid to direct income, as well as the costs of production and marketing of the product. In general, this is fine, but a proposal that includes an assessment of the business model in terms of the necessary investments would be more reasonable. In order for investors to assess the cash flow of a new venture, the following questions need to be considered.

• When should an enterprise purchase resources (raw materials) and hire personnel?
• When do you need to pay for these purchases?
• How long does it take to acquire a client?
• How quickly does the company receive payment from the client?
• How much investment in capital equipment is required for every dollar of sales?

Investors, of course, are interested in a business whose management will be able to purchase materials for low price, sell the product high, get paid as soon as possible, and pay as much as possible Later. The business plan should clearly show how the new venture will approach this ideal. Even if the answer is “not very”, and usually it is, it will reflect the real state of affairs, which can be discussed.

There are a number of other points that need to be addressed in the Opportunity section of the business plan. First, it must show and explain how the range of possibilities can be expanded—in other words, how way the new venture is able to increase the range of products or services, customer base or geographic coverage. Companies can often develop additional products to create new revenue streams. For example, Inc. expanded its product line to include seminars, books and videos on entrepreneurship. Similarly, Intuit, following the success of its Quicken personal finance program, developed software for systems electronic payments, accounting and tax reporting for small businesses, and began to offer printed content for individual clients and online information services are just some of its highly profitable related products. products.

Often business plans contain detailed descriptions of the prospects for growth and development of a new project, but also it is also necessary to elaborate on how to avoid the pitfalls associated with these perspectives.

One of them has already been mentioned (selecting an industry with an unfavorable structure), but there are others. In the realm of invention, for example, dangers lurk at every turn. Over the past 15 years, I have met dozens of people who have proposed improved versions of certain products ranging from air travel pillows to automated parking systems cars. However, only a few of the companies that implemented these ideas have been successful. I don't fully understand why. Perhaps the inventors refuse to spend the necessary funds or properly share the remuneration with the commercial divisions of the company. Sometimes inventors get so carried away with their ideas that they forget about the customer. Whatever the reason, businesses in this area have an amazing ability to fail.

Another trap that business planners, and entrepreneurs in general, need to watch out for is arbitrage deals. Such transactions are concluded in order to benefit from price imbalances in the market. For example, MCI Communications Corporation was created to provide long distance services at a lower cost than AT&T. Another type of arbitrage involves the purchase of several small enterprises at a wholesale price, combining them into more a large company and listing at a retail price - and all this without the need to create additional value in process.

Using arbitrage mechanisms is an efficient and potentially profitable way to enter a business. However, in the end, all the opportunities associated with speculative arbitrage operations disappear. The only question is when this will happen. The main goal of such enterprises is to use the profits from arbitrage to build a more reliable business model, and business plans should explain when and how this will be implemented.

Any business plan should cover such an aspect as competition in detail and comprehensively, but some do not, and this is a clear omission. First of all, the business plan should answer the following questions about competition.

• What competitors does the new enterprise have?
• What resources do they control? What are their strengths and weaknesses?
• How will they react to the decision of a new venture to enter this business?
• How can a new enterprise respond to the opposition of its competitors?
• Who else can notice and use the same opportunity?
• Is it possible to cooperate with potential or existing competitors by creating alliances?

Business is like chess: in order to succeed, you need to think several moves ahead. A business plan that describes how to become an invincible leader or dominate a market is, by definition, written by naive people. This applies not only to the competition part, but to everything related to the opportunities discussed. All opportunities are associated with both development prospects and vulnerabilities. A good business plan does not hide them. On the contrary, it demonstrates that the entrepreneurial team has an excellent idea of ​​what the business may have in the future, including positive and negative factors.

Circumstances

Opportunities arise in certain circumstances. On the one hand, it is the macroeconomic environment, which is characterized by the level of economic activity, inflation, exchange rates and interest rates. On the other hand, a wide range of legislative norms and regulations governing the use of opportunities and the procedure for disposing resources. Examples include tax policy or capital raising rules for private companies and joint-stock companies. There are also factors (for example, related to technology) that define the limits of what a business or its competitors can achieve.

Circumstances often have a dramatic effect on every aspect of a business, from identifying opportunities to generating revenue.

Sometimes changes in some factors associated with specific conditions create additional opportunities. For example, during the reorganization of the aviation industry in the late 1970s, more than 100 new companies were opened. Financial circumstances were also favorable and this allowed new companies such as People Express, enter the public capital market even before the start of its activities.

Conversely, there are times when, due to circumstances, it is difficult to start a new business. The economic downturn in the early 1990s was accompanied by difficult financing conditions for new companies: venture capital investments were small, as was the amount of capital raised on exchanges markets. Paradoxically, these relatively harsh conditions, which made it difficult for new entrants to enter the market, led to very high investment returns in the late 1990s, as capital markets regained turns.

Sometimes a change in circumstances makes an unattractive business attractive, and vice versa. Consider the case of a packaging company that was doing so badly that it was about to shut down. However, after the Tylenol capsule poisoning incident, which resulted in several deaths, the company's financials skyrocketed as its packaging had an effective anti-aging mechanism. autopsy. In contrast, the US tax reforms of 1986 created chaos in the real estate industry, destroying virtually all positive incentives to invest. After the introduction of new rules, many previously successful operations were discontinued.

Every business plan must reflect certain facts related to the circumstances.

First, entrepreneurs must be familiar with the conditions in which a new venture is created and understand how this can help or hinder their project. Second, and more importantly, they must show that they are aware of the inevitable changes in these circumstances and explain how such changes may affect the business. In addition, the business plan should describe what management can (and will) do in the event of an unfavorable change in the situation. Finally, it is necessary to provide ways of positively influencing the circumstances, if any. For example, executives may be able to use lobbying to influence regulations or industry standards.

Risks and rewards

A statement that the circumstances in which the entity operates are subject to change, leads directly to the fourth part of my proposed concept: a discussion of risks and how to regulation. I came to the conclusion that a good business plan is a snapshot of an event in the future. Taking a photo of an unknown person is already an achievement, but the best business plans go beyond that, they are more like a video about the future. These business plans show people, opportunities, and circumstances from different perspectives and present a believable, coherent story of what's to come. They unfold before us a picture with options for actions and reactions to them.

In other words, a good business plan is a dynamic story about people, opportunities, and circumstances.

All three factors (and their relationships) are likely to gradually change as the company grows from a start-up to a sustainable business. For this reason, a business plan that deserves attention should focus on the dynamic aspects of enterprise development.

Of course, it is not easy to predict the future. However, it is possible to give potential investors an idea of ​​the risks inherent in a new project, as well as the rewards they may receive. […]

There is a common myth that entrepreneurs like to take risks. In fact, all sane people seek to avoid risk. As Harvard Business School professor and venture capitalist Howard Stevenson says, true entrepreneurs want to get all the rewards and pass the risks to others. The best business is such a mailbox for bank checks. However, the risk is inevitable. What does this mean for a business plan?

The plan must counter the potential risks associated with people, opportunities and circumstances. What happens if one of the owners of the new business leaves it? If a competitor reacts more harshly than expected? And if there is a revolution in Namibia - a key source of raw materials? What will the management of the enterprise do in these cases?

These are difficult questions for an entrepreneur, especially when looking for capital. But those who put them and give reasonable answers to them, a better deal awaits. A new venture can be highly leveraged and therefore highly sensitive to interest rates. The business plan would benefit greatly if it stated that management intends to hedge risks through futures financial market by buying a contract that will bring profit when interest rates rise. This approach is tantamount to insuring investors (which makes sense in relation to the business itself).

Finally, one important aspect of risk/reward management relates to performance. Venture capitalists often ask if a company is suitable for an IPO, that is, if it can enter the open capital market in the future. Some businesses are inherently unsuitable for this because public offerings disclose information that could harm their competitiveness. positions (for example, profitability data may encourage more competitors to enter the same market, or cause consumer outrage or suppliers). In addition, a number of projects (for example, for the release of a certain product) do not involve the creation of an independent company.

In this regard, the business plan should pay attention to the completion of the project. How will an investor withdraw money from a business, provided that it is at least minimally successful?

Professional investors are primarily interested in companies with a wide range of exit options. They prefer businesses that make an effort to maintain and increase these options. For example, such companies do not enter into rash alliances with large corporations that can later buy them. Investors are much more comfortable with risk if they discuss the project completion process in advance. There is an old expression: “If you don’t know where you are going, then any road will lead you there.” When developing smart entrepreneurial strategies, it's best to know where you might be and have a map to get you there. Such a map should definitely be included in the business plan - everyone knows that traveling is much less risky if you know where you are going.

Deal and what's next

Once the business plan is written, the main goal, of course, is closing the deal. This is a topic for a separate article, but still I would like to say a few words about it.

When I talk to young (and not so young) entrepreneurs who are looking for funding for their ventures, I see how obsessed they are with the terms of the deal they have to close. Their explicit goal is to minimize the dilution of capital they will inevitably face when raising debt. But behind it is hidden another, implicit - they are looking for passive investors who will not interfere in business development. It seems that venture capitalists are considered the worst of all investors, because they require control and a large share of the profits. It makes no more sense than detailed financial projections. When raising capital, it is often more important who finances you than on what terms it is done. New ventures, as I have noted, are inherently risky; if something can go wrong, it will certainly happen. In this case, non-professional investors panic, get angry and often refuse to provide additional funds to the company.

Sophisticated investors, on the other hand, roll up their sleeves and help sort things out. Often they have extensive experience in this area: they are well versed in business processes; understand how to develop a competent strategy and a strong tactical plan; they know how to recruit employees, build a system of remuneration and motivation. They also know the intricacies of taking a company public, while most entrepreneurs experience this event only once in their lives. Such professional know-how is worth paying for.

There is an old expression that is very relevant to business finance - "outsmart yourself." Often, those who enter into such transactions are creative, creating all sorts of payout and option schemes. This usually backfires. In my experience, deals should meet the following six characteristics:

• they are simple;
• they are just;
• they are based on trust, not on legal obligations;
• their terms cannot be misunderstood (otherwise one or both parties may begin to act destructively);
• a stack of paper with a document confirming the transaction does not exceed 6 mm in thickness.

But even these six simple rules do not take into account an important point. The transaction should not be secured by a document that discusses the disposal of the lump sum. On the contrary, entrepreneurs should consider acquiring capital as a dynamic process—figuring out how much money they need and when.

How to do it? The trick is to treat the new case as a series of experiments. Before running the whole show, start with a small snippet. Organize a focus group to test the product, create a prototype and see how it works, implement the service at the regional or local level. This exercise reveals the real economics of growing a business and can help you determine how much money your new venture really needs and at what stages. Entrepreneurs must raise and investors must invest enough to fund each major experiment. Of course, experiments can be expensive and risky, but I have seen how they prevent catastrophes and help to achieve success, therefore I consider them a prerequisite for concluding a winning deals.

Try not to let your business plan become a burden

One of the shortcomings of business plan writers is arrogance. In the modern economy, there are not many ideas that can be called truly original. Moreover, the amount of capital in the market is always more than is necessary for the implementation of emerging ideas, and over time, these ideas become more and more relevant.

A business plan should not be a stone around the neck of an entrepreneurial team that drags it down.

On the contrary, it is a call to action, a confirmation of management's responsibility for correcting deficiencies - proactively and in real time. Risk is inevitable and cannot be avoided. With the help of risk management, you can direct the enterprise towards reward and avoid danger.

The business plan should reflect the ability to manage the entire business process, from identifying opportunities to distributing results. It is not about separating the unsuspecting investor from his money by hiding from him the weaknesses of the project, because then the only one who will be fooled will be the entrepreneur.

We live in the golden age of entrepreneurship. Although the companies in Fortune 500 list, over the past 20 years have lost 5 million jobs, the economy as a whole has replenished by almost 30 million. Many of these jobs have been created by companies such as Cisco Systems, Genentech, and Microsoft. Each of these companies started with a business plan. Is that why they succeeded? It is impossible to say for sure, but there is no doubt that it is important to write a business plan in such a way that it comprehensively and objectively took into account the components of success - people, opportunities, circumstances and risks/reward. In the absence of a crystal ball that predicts the future, a business plan based on reliable information and its analysis is simply irreplaceable.

The book "Entrepreneurship and Startups" brings together advice and recommendations from experts in the field of management. In it, you'll learn how to build a lean startup, hire an entrepreneurial manager, and tackle other pressing challenges that any entrepreneur should know.

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