I often have friends who are going to create a high tech company and they ask if they should start by writing a business plan.
I get asked this often enough, that I’ll post the answer here. The following are just my opinions and they are worth what you paid for them. 🙂
- First time entrepreneurs have the problem of: a) wasting too much time on the wrong things in a creating a business plan, b) not talking enough to customers and other successful entrepreneurs, c) not going deep enough in the few critical areas before they shift into execution mode.
- Create a pitch deck first
- Talk to many target customers ASAP
- Talk to many CEOs who created successful startups in the past about your plans
- Do deep planning in: a) Is your market big enough, b) model a single financial transactions, c) make sure you can sell enough transactions to reach your revenue goals, d) make sure your business model is profitable
- Create 3-year Projected Financials to make sure the math works. Your individual financial transactions, cost structure, and everything else coming to be a big enough business with enough profit margin.
New entrepreneurs can be surprised that 3 months goes by before they can finish a real business plan. The problem is that people who do this are often spending 99% of their time planning in their own head, without talking to other people.
If you wrote a business plan nobody would ever take the time to read it (it would be 40+ pages). The pitch deck is the forum where other people can give you feedback.
Pitch Deck is the big picture:
Creating the pitch deck first, will be the fastest way to find if a problem exists that makes your company inviable — so you can go back to the innovation blackboard.
The pitch deck will give you a full plan at the 100,000 foot level. It will also require you to go deep in areas that are critical:
a) Market Size: Is your market big enough,
b) The Transaction: model a single financial transactions,
c) 3-year Projected Financials: make sure you can sell enough transactions to reach your revenue goals,
d) Make sure your business model is profitable
Talk to Target Customers ASAP:
I recommend finding 10 exact target customers and then getting their feedback (with the pitch deck of course).
Mistake #1: Founders often talk to a friend who works in that industry, and not the exact target customer. For example: the company plans to sell to Directors of Online Marketing of mid-market companies (2,500 to 30,000 employees). The founder’s friend’s friend is a marketing manager in a 10,000 person company. The founder talks to this marketing manager, which is the mistake. The founder should take time to get to the “Director of Online Marketing”. They may get directed to the “Director of Marketing”, but they should spend the time to make sure they talk to the person responsible to the Online side of “Director of Online Marketing”.
People who are exact matches will give different feedback.
Founders naturally ask, “Do you think this idea is good” — which is the wrong question. The response is often “Yes” with an implied “I think it is great that you will create a little something-something to make my life a little easier — but I’m not thinking if I would cut other purchases to actually spend money on this”.
The question should instead by “Would you pay $199/month for this service today? Who makes that purchase decision? Would you buy now, or have to wait for a budget cycle? Are there other things in your budget that you would CUT in order to buy this. Who would need to sign off, to make the purchase final? What features would be required before you would purchase?”
I think every entrepreneur has amazing surprises at this stage.
Some people say to not talk to the customer. They think a customer in the 1890s would say “I want a horse that goes 100mph” instead of “I want a car, which is something that doesn’t exist yet”.
This isn’t a problem:
- Your customers don’t do the innovation. (“I want a car. It doesn’t exist yet, but I know I want it”)
- You focus on validating their needs. “Do you feel you waste too much time in travel?” “Do you not make a trip because the travel time is too long?”
- After you innovate and create the idea, then you can validate it with customers. Remember to focus back on what is their core problem and is it being solved. “If you could travel at 30mph instead of 7mph, would you spend $3,000?”
Talk to formerly successful startup CEOs ASAP:
I highly recommend talking to CEOs who created a company from scratch and had success with it (IPO, acquired, reaching $10m+ in sales, etc.). You often want people who have had to raise $5m+ in capital along the way.
They will give you a large category of feedback that you won’t get elsewhere.
The kind of feedback you will get will often come in this form, “You think you will get data to run your product by method x. I think you won’t get the data you need unless you do a business development deal with company Y. I think they will never do a deal with you because your fundamental value is changing the marketing in direction Z which fundamentally attacks their business model around owning asset A. Let’s talk back and forth about the deeper details in this area”.
Or their feedback may be, “You think you can build this business after raising $3m in capital. I think you couldn’t build this business unless you raise $9m in capital because of these reasons. And the normal funding sources won’t fund you because of reason X. You would probably have to go to source Y for the funding you need.”.
You will get feedback from this group that you just won’t get from customers, non-executives, non-entrepreneurs, etc.
You will have “Founder-itis”: (Your are too close to your business idea)
All entrepreneurs have founders-itis. Their innovation abilities lead them to a break through. They always have to sell the cool-aid to get people to see a market changing to depend on a product that hasn’t existed in the past.
Founders then always start by falling in love with HOW they have solved the problem. Their passion is often now 90% on HOW they solve the problem and not WHAT problem is solved.
This can lead to:
a) They are solving something that isn’t very important to the buyer (who needs to part with their money in order to buy)
b) They get too stuck on HOW they solve the problem. They aren’t open to having the problem solved other ways.
The fix is to…TALK to customers and startup CEOs. Many of them and ASAP.
“Don’t plan, just build it” — is Wrong:
Some people in the startup community say, “Don’t plan at all. Just build and get it into the market”.
I think this is a bad trend (the kind that creates bubbles). I think it can also lead to people 18-months or 2-years later finding out the market is too small, it can’t turn profitable, the customer-acquisition-cost can never be lower than the sales price, or the customers don’t care enough to part with money.
There is a category of company that is the exception: That is an idea so crazy that it can’t be tested until it is in the market. I think TWITTER is an example of this. I can’t think of many companies that fall into this category.
Do your planning in areas that you HATE:
Most entrepreneurs avoid creating certain pitch deck slides (or sections of the business plan), specifically the ones that they hate.
These are the most important to create and validate. This often focuses on the areas that the entrepreneur has not yet mastered in their business career.
For some people, this is corporate finance and 3-year projected financials. For many people in internet companies, understanding how channel is important (separate from marketing and sales) is a challenge.
Plan the Work, then Work the Plan: (Operating plan instead of Business Plan)
People often say,
“Create the plan, and then work the plan”. The goal is to look 10 steps ahead instead of running your business looking 1 step ahead.
The pitch deck should give the long-term view ahead (or it wasn’t done correctly), but only at a high level.
I think entrepreneur’s want to have a light-weight “operation plan” penciled out as they go into execution mode. Many people think of their business plan solves this problem. However, I think it focuses them to spend too much time in the wrong areas, and not focusing on excellent planning for execution (which is their goal here).
Entrepreneur Organization did an informal survey and ~70% of entrepreneurs don’t have a natural ability to view their business clearly in corporate finance terms (balance sheet, cash flow, income statement, operating metrics rolling up to corporate finance objectives, etc.).
Whether people are good at it or not, creating projected financials can flush out fundamental and unfix-able problems early.
I recommend spending $150/hr on a rent-a-CFO for 6 hours if that is what it takes to get 3-year projected financials that validates a rock solid business model (and a plan to operate against). I like running a very lean low-burn rate company for the first year. Spending money here is often worth it (even when trying to pinch every penny).
A Bonus Trick: (the trade show)
This is a trick I wish I would have learned earlier. GO TO TRADESHOWS that include your target competitors and target customers.
- You can get access to more of your exact target customer — talk to them
- You can learn about competitors and details about what they know
- You can find and talk with the rare industry leaders. The people who know nuanced trends on where the industry is going from a fundamental point of view.
I’m a fan of pinching pennies at the early stage of creating a company. But this is often penny-wise, pound foolish to save money here.
Pitch Deck Template:
I’ve seen several pitch deck templates. I highly recommend the Alliance of Angel’s pitch deck template.
I recommend sticking strictly to their format. People often deviate for two reasons:
a) they hate a topic and they cut it out or only partially-cover it, (and this is actually a real problem for their company)
b) They generate a 20 to 30+ slides instead of keeping to a short 10-15 slides. They just aren’t pressured to keep it short (until it becomes a problem later when they show it to other people).
Most people recommend a Pitch Deck over a Business Plan:
Many other people have wrote about this topic and have great detail in related areas:
I’d love to see your opinions in the comments.