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January 21, 2006

The Zen of Business Plans

Glasses In my day job, I not only hear a lot of PowerPoint pitches, but I also read a lot of business plans. The PowerPoint pitches explain my Ménière's disease, but the business plans explain my recent need for reading glasses. One of my goals for blogging is to reduce the external factors that are causing the degradation of my body, so this entry's topic is the zen of business plans.

  1. Write for all the right reasons. Most people write business plans to attract investors, and while this is necessary to raise money, most venture capitalists have made a “gut level” go/no go decision during the PowerPoint pitch. Receiving (and possibly reading) the business plan is a mechanical step in due diligence. The more relevant and important reason to write is a business plan, whether you are raising money or not, is to force the management team to solidify the objectives (what), strategies (how), and tactics (when, where, who). Even if you have all the capital in the world, you should still write a business plan. Indeed, especially if you have all the capital in the world because too much capital is worse than too little.
  2. Make it a solo effort. While creation of the business plan should be a group effort involving all the principal players in the company, the actual writing of the business plan--literally sitting down at a computer and pounding out the document--should be a solo effort. And ideally the CEO should do it because she will need to know the plan by heart. Take it from an author, for writing to be cogent and consistent, there needs to be only one author. It's very difficult to cut-copy-and-paste several people's sections and come out with a good plan.
  3. Pitch, then plan. Most people create a business plan, and it's a piece of crap: sixty pages long, fifty-page appendix, full of buzzwords, acronyms, and superficialities like, “All we need is one percent of the market.” Then they create a PowerPoint pitch from it. Is it any wonder why that the plans are lousy when they are based on crappy pitches? The correct sequence is to perfect a pitch (10/20/30), and then write the plan from it. Write this down: A good business plan is an elaboration of a good pitch; a good pitch is not the distillation of good business plan. Why? Because it's much easier to revise a pitch than to revise a plan. Give the pitch a few times, see what works and what doesn't, change the pitch, and then write the plan. Think of your pitch as your outline, and your plan as the full text. How many people write the full text and then write the outline?
  4. Put in the right stuff. Here's what a business plan should address: Executive Summary (1), Problem (1), Solution (1), Business Model (1), Underlying Magic (1), Marketing and Sales (1), Competition (1), Team (1), Projections (1), Status and Timeline (1), and Conclusion (1). Essentially, this is the same list of topics as a PowerPoint pitch. Those numbers in parenthesis are the ideal lengths for each section; note that they add up to eleven. As you'll see in a few paragraphs, the ideal length of a business plan is twenty pages, so I've given you nine pages extra as a fudge factor.
  5. Focus on the executive summary. True or false: The most important part of a business plan is the section about the management team. The answer is False.* The executive summary, all one page of it, is the most important part of a business plan. If it isn't fantastic, eyeball-sucking, and pulse-altering, people won't read beyond it to find out who's on your great team, what's your business model, and why your product is curve jumping, paradigm shifting, and revolutionary. You should spend eighty percent of your effort on writing a great executive summary. Most people spend eighty percent of their effort on crafty a one million cell Excel spreadsheet that no one believes.
  6. Keep it clean. The ideal length of a business plan is twenty pages or less, and this includes the appendix. For every ten pages over twenty pages, you decrease the likelihood that the plan will be read, much less funded, by twenty-five percent. When it comes to business plans, less is more. Many people believe that the purpose of a business plan is to create such shock and awe that investors are begging for wiring instructions; the reality is that the purpose of a a business plan is to get to the next step: continued due diligence with activities such as checking personal and customer references. The tighter the thinking, the shorter the plan; the shorter the plan, the faster it will get read.
  7. Provide a one-page financial projection plus key metrics. Many business plans contain five year projections with a $100 million top line and such minute levels of detail that the budget for pencils is a line item. Everyone knows that you're pulling numbers out of the air that you think are large enough to be interesting, but not so large as to render urine drug-testing unnecessary. Do everyone a favor: Reduce your Excel hallucinations to one page and provide a forecast of the key metrics of your business--for example, the number of paying customers. These key metrics provide insight into your assumptions. For example, if you're assuming that you'll get twenty percent of the Fortune 500 to buy your product in the first year, I would suggest checking into a rehab program.
  8. Catalyze fantasy. Don't include citations of some consulting firm's supposed validation of your market. For example, “Jupiter Research says that the market for avocado-farming software like we make will be $10 billion by 2010.” No one ever believes this “validations” because the entrepreneur who pitched at 9:00 am said this about USB thumb drives; the one at 10:00 am said this about online dog food sales, and the one at 11:00 said this about smart antennas for cell phones. What you want to do is catalyze fantasy: that is, enable the reader to make her own mental calculation that this market is big. “Every Nokia Series 40 and Series 60 owner would buy this--Wow, this is a hot market!”
  9. Write deliberate, act emergent. I borrowed this from my buddy Clayton Christensen. It means that when you write your plan, you act as if you know exactly what you're going to do. You are deliberate. You're probably wrong, but you take your best shot. However, writing deliberate doesn't mean that you adhere to the plan in the face of new information and new opportunities. As you execute the plan, you act emergent--that is, you are flexible and fast moving: changing as you learn more and more about the market. The plan, after all, should not take on a life of its own.

Written at: Atherton, California.

* Note: the question is what is the most important part of the business plan, not what is the most important part of the business itself. The management team is more important than the executive summary to the business, but the discussion of the management team is not the most important part of the business plan because if the executive summary sucks, people won't get to the management team section.

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Comments

I completely agree about the executive summary. It is so crucial to have a executive summary that sells. If not, the rest doesn't even matter.

Solid article, Guy. I especially like the way you categorize your business plans and emphasize the Executive Summary. We have seen dozens of plans and we open directly to the exec summary 99% of the time.

When we help clients write strategic or business plans we strongly emphasis the importance of linking the value they are creating for the customer directly to the operating model. Sound obvious? We rarely see a solid link between a value proposition and the mechanism for delivering that value. The operating model is usually set-up to deliver different components of customer value than the ones being communicated.

www.mybilliondollarfruit-stand.blogspot.com

Very interesting. As Senior Adviser I find it sometimes difficult getting entrepreneurs to understand that they have to write a business plan. Your post will certainly help.

http://www.hk-car-rental.com/

If anyone is looking for a business plan(s) then we can reduce your workload - we have over 2000 at www.business-plans-4-you.com

You could even become an affiliate...

http://www.business-plans-4-you.com/idevaffiliate/index.php

We hope that stops some of you staring at that blank piece of paper - it can be a daunting job!

Actually, "avocado-farming software" will more likely be covered by Gartner. Jupiter focuses on the consumer side of things.

$10 billion market, eh? ;-)

Excellent article - I guess also remember for most people a business plan doesn't need to be a thousand pages long because a) no one will read it and b) by the time you finish it'll be out of date.

Just write what is necessary to describe how you are going to take your journey from today to where you want to be :)

In reference to your second point, whilst I see where you are coming from, it is important to note the value of experienced external business planning specialists who can help create custom business plans and guide a company (especially small companies or start-ups) through the process.

They can ensure a certain degree of quality and help determine how in-depth it needs to be using their experience of creating effective business plans for numerous clients

They can also work with the company updating the business plan every few months as priorities change, new developments occur in the market, new competitors arrive on the scene, etc.


i've started a column called my new life in jesus christ.And it's progressing really well everyday.I just explain everything i do on a day to day basis and go on from there.lothar patten.

The Executive Summary

It may be considered all parts of a business plan are important and to some degree this is the case. However, if the purpose of preparing a business plan is to attract investors or to gain the confidence of others in the future of your business, then it is critical that the reader's attention is gained, and retained, throughout the reading of the document.

The Executive Summary will most probably be the first section of the plan to be read and it should, therefore, be succinct and written in an informed and interesting manner to encourage the reader to read more.

If the reader fails to be attracted by the headline proposition then no incentive will exist to explore further.

i'm writing a comment about how i pay my bills on bicycle.And i've done it for years now,and i'll never own a car again.I prefer to be an environmentalist rather than a gas guzzler.And i love to take long bike rides.lothar patten-trekker.

that was a terrible thing that young man did.And it seems like all of these terrible incidents just don't want to stop happening.And the bible said that these things would happen in the last days.Sin and crime would be on the rise.Lets pray to god for a big healing for these families.Overcome tradjedy wit love.lothar patten-author.

i am now a class room lecturer.And i've spoken to 4 classes over the last year.And i mostly do this with educational purposes in classrooms at universities.And i'm starting to be very good at it.And my pro-life style is getting better all of the time.And you may call me the professor of filmaking and class lecturor.My name is professor lothar patten.

I think the most important point in your list is point 5. The executive summary is defenitely the most important part.

Thank you very much for posting this. It's invaluable advice for those trying to put together a business plan, such as I am at this moment.

i'm trying to make a business blog for my documentary movie,the nice man cometh,which has me meet 9 different people vieing for office of the presidency.And i'm the man who talks to all of them and finds out how they feel about it all.lothar patten.

I with you in many respects agree you are right!

Guy,

What would you think of the idea of writing and discussing your business plan in the face of the world instead of doint it in the secrecy of your kitchen with a couple of selected trusted individuals assembled around a table? This is exactly what we are trying to do within the BarCampBank. In particular, P2PVenture is an emergent project where we want to create a P2P screening and financing platform for startups and small business projects. Furthermore, in the good tradition of barcamps, anyone can freely contribute accessing our sites:
- http://p2pventure.barcampbank.com for the site dedicated to openly creating a p2p financing platform
- http://www.barcampbank.com for the site where our international community of professionals in the banking and finance industry and innovators collaborate to create new business models in every quadrant of the banking and finance industry.

Cheers.

Yes, how many the information. But there are discrepancies. Today I shall a little reflect above read and I shall write next time, that I think, and what opinion at me in this occasion.

I with you in many respects agree you are right!

The business plan part that says "the market is $25B, if we get only 1% of the market we get $250M" is downright insulting to the intelligence of the reader.

I'm an accomplished entrepreneur. Because in my country VC capital is rarely available, I used bootstrapping to start my businesses.

"Underlying Magic" - I think it's pretty clear that you are planning a post on this phrase alone :) Looking forward to it!
I'm curious - how many plans/presentations that you see actually really subscribe to this, and do you chuckle internally thinking "oh, you read my blog!"?

Loving your site, Guy - this is the first time I've taken a look.

A question, possibly a dumb one: where does your customer fit into your business plan? In the problem? The marketing and sales? Everywhere?

OK, so I'm in marketing. The marekting mantra is 'customer at the centre' - even if it's not always achieved, that's the ideal.

As a techie, I'd love to know more about the financial side of things. Anyone have any really good examples of business plans in the manner in which Guy suggests that I/we could take a peek at? Thanks!

great overview for other areas as well...not just a biz plan for well, uh, start-ups. But I can see how one could use this in planning one's life goals. It's a thought.

I think business plans are one of the number one reasons why you should not seek outside funding.

Yes they are required to reach outside funding and if you have to do this please do follow Guy's rules.

But for most small startups I think they are exceptionally bad news. They cause you to lose focus on your business and on the art of making money.

I put together this list of 10 Bootstrappers Anti-Patterns where business plans are number 3 on the list. Click on my name to go to the list.

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