new venture creation - chapter 8

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8 Chapter Eight

The Business Plan

Why Do a Business Plan?

To embark on a perilous start-up journey without some serious planning defies good sense. Creating a business plan is a great way for you and your current and/or prospective partners to learn about the busi-ness and to gain critical insights into each other’s style, strengths and weaknesses, and how you will work together. A plan does the following:

It will document the “five anchors” noted earlier, including key issues such as the opportunity, the buyer and user, the market and competition, the economics and financial characteristics of the business, and the likely entry strategy.

It communicates to and helps persuade stake-holders, financial backers, team members, key new hires, directors, brain trust prospects, and strategic partners.

It will provide a roadmap for accountability around company performance.

Developing the Business Plan

The business plan itself is the culmination of a usually lengthy, arduous, creative, and iterative process we explored in Chapters 5 and 6. The plan will carefully articulate the merits, requirements, risks, and poten-tial rewards of the opportunity and how it will be seized. The business plan for a high-potential venture reveals the business’s ability to:

Create or add significant value to a customer or end user.

Solve a significant problem, or meet a signifi-cant want or need for which someone will pay a premium.

Have robust market, margin, and moneymaking characteristics: large enough ($501 million),

high growth (20-plus percent), high margins (401 percent), strong and early free cash flow (recurring revenue, low assets, and working capital), high profit potential (10 to 15 percent after tax), and attractive realizable returns for investors (25 to 30 percent IRR).

Fit well with the founder(s) and management team at the time, in the marketplace, and with the risk–reward balance.

Scale with an eye toward sustainability.

The plan becomes the point of departure for pro-spective investors to begin their due diligence to ascertain various potential risks of the venture: tech-nology risks, market risks, management risks, com-petitive and strategic risks, and financial risks. Even if you do not intend to raise outside capital, this homework is vital. The collisions between founders and investors that occur during meetings, discus-sions, and investigations reveal a great deal to all parties and begin to set the mood for their relation-ship and negotiations. Getting to know each other much more closely is a crucial part of the evaluation process.

The Plan Is Obsolete at the Printer

The authors have argued for three decades that the plan is obsolete the instant it emerges from the printer. In today’s fast-paced climate, it is obsolete before it goes into the printer! The pace of techno-logical and information-age change, and the dyna-mism of the global marketplace, shorten the already brief life expectancy of any business plan. It is nearly impossible to find a year-old venture today that is identical in strategy, market focus, products or services, and team as the original business plan described. The business plan should be thought of as a work in progress. Though it must be completed if you are

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246 Part II The Opportunity

trying to raise outside capital, attract key advisors, directors, team members, or the like, it can never be finished. Like a cross-country flight plan, many unex-pected changes can occur along the way.

The Plan Is Not the Business

Developing the business plan is one of the best ways to define the blueprint, strategy, and needed re-sources for a new venture. This document focuses and communicates the founder’s vision. The vast ma-jority of INC. ’s 500 fastest-growing companies had business plans at the outset. Without a business plan, it is exceedingly difficult to raise capital from infor-mal or formal investors. Too often first-time entrepreneurs jump to a sim-plistic conclusion: All that is needed is a fat, polished, and enticing business plan and the business will auto-matically be successful. They confuse the plan with building the business. Some helpful tips in preparing a business plan are summarized in Exhibit 8.1.

Some Tips from the Trenches

The most valuable lessons in preparing a business plan and raising venture capital come from entrepre-neurs who have already succeeded in their own endeavors. Tom Huseby 1 is founder and head of SeaPoint Ventures outside Seattle, a venture capital

firm allied with Venrock Venture Capital, Oak Ven-ture Partners, and Sevin -Rosen Venture Partners. An engineering graduate of Columbia University and a Stanford MBA, Huseby spent 18 years with Raychem Corporation of California, first working in sales, then developing and managing new businesses, and even-tually running Raychem’s international business. Tom is a remarkable entrepreneur who has raised more than $80 million of venture capital as CEO of two telecommunications start-up companies in the 1990s that subsequently became publicly traded compa-nies: Innova Corporation (NASDAQ: INNV) and Metawave Corporation (NASDAQ: MWAV). Con-sider the following wisdom Tom gleaned from his own experience on both sides of the negotiating ta-ble: entrepreneur/CEO and venture capitalist.

RE: Venture Capitalists There are a lot of venture capitalists. Once you

meet one you could end up meeting all 700-plus of them.

Getting a no from venture capitalists is as hard as getting a yes; qualify your targets and force others to say no.

Be vague when describing other potential venture capitalists.

Don’t ever meet with an associate or junior member twice without also meeting with a partner in that venture capital firm.

Going beyond Green

Everyone is going green. Every day brings a new announcement of a company embracing environmental issues. Those ahead of the pack have grasped that the environment is a growing source of strategic opportunity for companies. A revolution is under way in business as forward-thinking companies gain competitive advantage by reorienting products and processes to take environmental issues into account.

We are hard-pressed to point to an industry or manufacturer able to ignore the trends. Company brand names and stock prices are increasingly influenced by environmental records. Growing numbers of firms working in areas as diverse as building construction, furnishings, food, energy, transportation, and materials design—to name a few—are bringing new green designs to market. But green gestures will not be enough if the competition understands a deeper dimension to the issues and builds its strategy accordingly.

Businesses now experience increased global regulatory pressure, demand for heightened transparency, and growing public concern about the environment and health. Government procurement and business buyers increasingly use environmental criteria in purchasing. Markets in and taxes on carbon emissions now factor into corporate strategy. Companies also face environmental performance pressures from the investment sector, including stockholder petitions and unprecedented growth in screened investment funds that rank corporate behavior on environmental issues. These forces have created a much more complex and challenging business climate, as well as numerous opportunities for proactive and creative new ventures.

Source: Adapted from Going beyond “Green”: Business Strategy at the Headwaters , prospectus, A. Larson and K. P. O’Brien, March 2007.

1 The authors are extremely grateful to Tom Huseby , a longtime friend, fellow fly fisherman, and wilderness explorer, for sharing his extraordinary wit and insights over the years in classes at Babson College, Harvard Business School, and with the Kauffman Fellows Program, and for his contribution here.

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Chapter 8 The Business Plan 247

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RE: The Plan Stress your business concept in the executive

summary. The numbers don’t matter; but the economics

of the business do. Prepare several copies of published articles,

contracts, market studies, purchase orders, and the like.

Prepare very detailed résumés and reference lists of key players in the venture.

If you can’t do the details, make sure you hire someone who can.

RE: The Deal Make sure your current investors are as desper-

ate as you are. Create a market for your venture. Never say no to an offer price. Use a lawyer who is experienced at closing

venture deals.

Don’t stop selling until the money is in the bank.

Make it a challenge. Be honest.

RE: The Fund-Raising Process It is more difficult than you expect. Anticipate the worst and be persistent through

the process despite setbacks.

This is particularly valuable advice for any entrepre-neur seeking outside capital and planning to deal with investors. 2

How to Determine If Investors Can Add Value

The right investors add a great deal of value to the venture through experience, wisdom, and networks, and entrepreneurs can use the fund raising process to both learn about the kind of value each investor

EXHIBIT 8.1

Do’s and Don’ts for Preparing a Business Plan

Do

Involve all of the management team in the preparation of the business plan. Make the plan logical, comprehensive, readable, and as short as possible. Demonstrate commitment to the venture by investing a significant amount of time and some money in preparing the plan. Articulate what the critical risks and assumptions are and how and why these are tolerable. Disclose and discuss any current or potential problems in the venture. Identify several alternative sources of financing. Spell out the proposed deal—how much for what ownership share—and how investors will win. Be creative in gaining the attention and interest of potential investors. Remember that the plan is not the business and that an ounce of can-do implementation is worth two pounds of planning. Accept orders and customers that will generate a positive cash flow, even if it means you have to postpone writing the plan. Know your targeted investor groups (e.g., venture capitalist, angel investor, bank, or leasing company) and what they really want and what they dislike, and tailor your plan accordingly. Let realistic market and sales projections drive the assumptions underlying the financial spreadsheets, rather than the reverse.

Don’t

Have unnamed, mysterious people on the management team (e.g., a “Mr. G” who is currently a financial vice president with another firm and who will join you later). Make ambiguous, vague, or unsubstantiated statements, such as estimating sales on the basis of what the team would like to produce. Describe technical products or manufacturing processes using jargon or in a way that only an expert can understand, because this limits the usefulness of the plan. Spend money on developing fancy brochures, elaborate PowerPoint and Flash presentations, and other “sizzle”; instead show the “steak.” Waste time writing a plan when you could be closing sales and collecting cash. Assume you have a done deal when you have a handshake or verbal commitment but no money in the bank. (The deal is done when the check clears!)

2 See also W. A. Sahlman , “How to Write a Great Business Plan,” Harvard Business Review, July–August 1997, pp. 98–108, for an excellent article about business plans.


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Second, by planning and writing out a list of required resources, both financial and involved parties, the founders can get a realistic sense of how the venture is proposed to work and can better an-ticipate where problems may occur.

Segmenting and Integrating Information

An effective way to organize information is to seg-ment what you know into sections, such as the target market, the industry, the competition, the financial plan, and so on, and then integrate the information into a business plan. This process works best if sections are discrete and the information within them digestible. The or-der in which sections are developed can vary, and different sections can be developed simultaneously. For example, because the heart and soul of a plan lie in the analysis of the market opportunity, com-petition, and resultant competitive strategy, it is a good idea to start with these sections and integrate information along the way. However, the financial and operations aspects of the venture will be driven by the rate of growth and the magnitude of the market and revenue plans, so these can be devel-oped later. The information is then further integrated into the business plan. The executive summary is pre-pared last.

Establishing Action Steps

The following steps outline the process by which a business plan is written. These action steps are pre-sented in the Business Plan Guide exercise at the end of this chapter.

Segmenting information. An overall plan for the project needs to be devised to include who is responsible for each section as well as impor-tant draft deadlines.

Creating an overall schedule. Create a more specific list of tasks; identify priorities and who is responsible for them. Determine when they will be started and completed.

Creating an action calendar. Tasks on the do list then need to be placed on a calendar and re-evaluated to be sure the overall schedule works, and everyone understands due dates.

Doing the work and writing the plan. The nec-essary work needs to be done and the plan writ-ten. The plan needs to be reviewed by an objective outsider, such as an entrepreneurially minded executive who has significant profit and

can add and to make their plan more attractive to investors. Ask the investor once they’ve seen your plan: What have we missed? Where are we vulnera-ble? How would you knock us off? How would you modify our strategy? What would you do differently? What do you believe has to happen to make this highly successful? Two powerful forces are unleashed in this pro-cess. First, as a founder, you will begin to discern just how smart, knowledgeable, and creative the inves-tors are about the proposed business. Do they have creative ideas, insights, and alternative ways of think-ing about the opportunity and strategy that you and your team may not have thought of? The second powerful force is the message implicitly sent to the investors when you make genuine queries and listen, rather than become argumentative and defensive: We have given this our best shot. We are highly com-mitted to our concept and believe we have the right strategy, but our minds are open. We listen; we learn; we adapt and change when the evidence and ideas are compelling. Investors are much more likely to conclude that you are a founder and a team that they can work with.

The Dehydrated Business Plan

A dehydrated business plan usually runs from 4 to 10 pages. It covers key points, such as those sug-gested for the executive summary in the business planning guide that follows. Essentially, such a plan documents the analysis of and information about the heart of the business opportunity, competitive advan-tages the company will enjoy, and creative insights that an entrepreneur often has. A dehydrated plan is not intended to be used ex-clusively in the process of raising or borrowing money; it can be a valuable compass to keep you on track. Consider it a map of the main battleground ahead, but remember that it will not provide the nec-essary details and tactical plans necessary to conduct the battle.

Who Develops the Business Plan?

Consideration often is given to hiring an outside pro-fessional to prepare the business plan so the manage-ment team can use its time to obtain financing and start the business. There are two reasons it is not a good idea to hire outside professionals. First, writing the business plan allows the founders to understand and consider their venture on a more intimate and concise level, while providing opportunities to pinpoint and con-sider what they are truly trying to do, and for whom.



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is a great difference between screening an opportu-nity and developing a business plan. There are two important differences in the way these issues need to be addressed. First, a business plan can have two uses: (1) inducing someone to part with $500,000 to $10 million or more, and (2) guiding the policies and actions of the firm over a number of years. Therefore, strategies and statements need to be well thought out, unambiguous, and capable of being supported. Another difference is that more detail is needed. This means the team needs to spend more time gather-ing detailed data, interpreting them, and presenting them clearly. For example, for the purpose of screening an opportunity, it may be all right to note (if you cannot do any better) that the target market for a product is in the $30 million to $60 million range and the market is growing over 10 percent per year. For planning an actual launch, this level of detail is not sufficient. The size range would need to be more accurately measured

loss responsibility or a venture capitalist who would not be a potential investor. No matter how good the lead entrepreneur and his or her team are in planning, there will be issues that they will overlook and certain aspects of the presentation that are inadequate or less than clear. A good reviewer also can act as a sound-ing board in the process of developing alterna-tive solutions to problems and answers to questions investors are likely to ask.

Preparing a Business Plan

A Complete Business Plan

It may seem to an entrepreneur who has completed the exercises in Chapter 6, and who has spent hours informally thinking and planning, that jotting down a few things is all that needs to be done. However, there

A Final Checklist*

This list will help you allocate your time and maintain your focus! These points will also be important as you prepare for an

oral presentation of your business plan.

Make Your Point Quickly and Give Hierarchy to Your Data—The Details Matter! ✓ Hook the readers, especially in the executive summary, by having a compelling opportunity where you can:

Identify a need or opportunity in a large and growing market. Conceptualize a business that will fill that need or take advantage of that opportunity. Demonstrate that you have the know-how and the team to effectively build a profitable and sustainable business (or identify how you will create such a team).

✓ Prioritize the points you are making into three categories: Essential—without this the plan makes no sense. Good to know—directly supports and gives context to your essential points. Interesting—provides a higher level of understanding of market dynamics, industry, and so on but may not relate di-rectly to the nuts and bolts of your business plan. Interesting information should be relegated to the appendix so it doesn’t get in the way of the reader.

✓ Articulate the size of your market: who are your customers, why they will purchase your product or service, how much they will buy at what price.

✓ Include evidence of customers— this will increase your credibility. ✓ Discuss the competition, and why the customer will buy your product or service versus the alternatives. ✓ Articulate your marketing strategy. How will customers become aware of your product and service, and how will you

communicate the benefits? ✓ Be specific when discussing your team. Articulate what relevant experience each brings to the business. If you can’t

identify key managers, you should outline the type of experience you want and a plan for recruiting that person. ✓ Edit for the details—clarity and typos—a sloppy presentation says a lot!

* The authors are grateful to Greg White of Chicago Venture Partners, who developed this list, and to longtime friend and entrepreneur Frederic Alper for sharing this with us. They use this approach in their work with the Denali Initiative, a national program that teaches entrepreneurship to leaders of non-profit organizations from many parts of the country, and use New Venture Creation in its curriculum.


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as those reading or using the plan would have little con-fidence in this critical number. And saying the target market is growing at over 10 percent is too vague; does that mean the market grew at the stated rate between last year and the year before, or does it mean that the market grew on average by this amount over the past three years? The actual growth rate needs to be known and stated. Whether the rate will or will not remain the same, and why, must also be explained.

Exhibit 8.2 is a sample table of contents for a busi-ness plan. The information shown is included in most effective business plans and is a good framework to follow. Organizing the material into sections makes dealing with the information more manageable. Also, while the amount of detail and the order of presenta-tion may vary for a particular venture according to its circumstances, most effective business plans contain this information in some form.

EXHIBIT 8.2

Business Plan Table of Contents

I. EXECUTIVE SUMMARY Description of the Business Concept and the Business

Opportunity and Strategy. Target Market and Projections. Competitive Advantages. The Team. The Offering. II. THE INDUSTRY AND THE COMPANY AND ITS PRODUCT(S)

OR SERVICE(S) The Industry. The Company and the Concept. The Product(s) or Service(s). Entry and Growth Strategy. III. MARKET RESEARCH AND ANALYSIS Customers. Market Size and Trends. Competition and Competitive Edges. Estimated Market Share and Sales. Ongoing Market Evaluation. IV. THE ECONOMICS OF THE BUSINESS Gross and Operating Margins. Profit Potential and Durability. Fixed, Variable, and Semivariable Costs. Months to Breakeven. Months to Reach Positive Cash Flow. V. MARKETING PLAN Overall Marketing Strategy. Pricing. Sales Tactics. Service and Warranty Policies. Advertising and Promotion. Distribution. VI. DESIGN AND DEVELOPMENT PLANS Development Status and Tasks. Difficulties and Risks. Product Improvement and New Products. Costs. Proprietary Issues.

VII. MANUFACTURING AND OPERATIONS PLAN Operating Cycle. Geographical Location. Facilities and Improvements. Strategy and Plans. Regulatory and Legal Issues. VIII. MANAGEMENT TEAM Organization. Key Management Personnel. Management Compensation and Ownership. Other Investors. Employment and Other Agreements and Stock Option and Bonus Plans. Board of Directors. Other Shareholders, Rights, and Restrictions. Supporting Professional Advisors and Services. IX. SUSTAINABILITY AND IMPACT Issues of Sustainability of the Venture. Impact on the Environment. Impact on the Community and Nation. X. OVERALL SCHEDULE XI. CRITICAL RISKS, PROBLEMS, AND ASSUMPTIONS XII. THE FINANCIAL PLAN Actual Income Statements and Balance Sheets. Pro Forma Income Statements. Pro Forma Balance Sheets. Pro Forma Cash Flow Analysis. Break-Even Chart and Calculation. Cost Control. Highlights. XIII. PROPOSED COMPANY OFFERING Desired Financing. Offering. Capitalization. Use of Funds. Investor’s Return. XIV. APPENDIXES



Chapter Summary

The business plan is more of a process and work in progress than an end in itself.

Given today’s change of pace in all areas affecting an enterprise, the plan is obsolete the moment it emerges from the printer.

The business plan is a blueprint that helps those in-volved convert ideas into opportunities, articulate and manage risks and rewards, and set a realistic time schedule.

The numbers in a business plan don’t matter, but the economics of the business model matter enormously.

The plan is not the business. Preparing and presenting the plan to prospective

investors is one of the best ways for the team to have a trial marriage, to learn about the venture strategy, and to determine which investors can add the great-est value.

Study Questions

1. What is a business plan, for whom is it prepared, and why?

2. What should a complete business plan include? 3. Who should prepare the business plan? 4. How is the plan used by potential investors, and what

are the four anchors they are attempting to validate? 5. What is a dehydrated business plan, and when and

why can it be an effective tool?

6. Explain the expression, “The numbers in the plan don’t matter.”

7. How can entrepreneurs use the business plan process to identify the best team members, directors, and value-added investors?

8. Prepare an outline of a business plan tailored to the specific venture you have in mind.

Internet Resources for Chapter 8

http://www.sba.gov/starting_business Features a “Business Plan Road Map of Success” tutorial.

http://www.businessplans.org Helpful resources c/o Business Resource Software.

MIND STRETCHERS

Have You Considered?

1. You have sell-sell-sell mind-set myopia, but it has to be tempered with listening, inquiry, and learning. Can you think of a time when you have oversold? What did you learn from that experience?

2. Under what conditions and circumstances is it not to your advantage to prepare a business plan?

3. Identify three businesses that exceed $10 million in sales, are profitable, and did not have a business plan at launch. Why, and what did you learn from this?

4. Some of the most valuable critiques and inputs on your venture will come from outside your team. Who else should review your plan? Who knows the indus-try/market/technology/competitors?

5. A good friend offers you a look at a business plan. You are a director of a company that is a potential competitor of the venture proposed in the plan. What would you do?

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Exercise 1

An Exercise and Framework

This Business Plan Guide follows the order of presentation outlined in Exhibit 8.2. Based on a guide originally devel-oped at Venture Founders Corporation by Leonard E. Smol-len and the late Brian Haslett, and on more than 30 years of observing and working with entrepreneurs and actually preparing and evaluating hundreds of plans, it is intended to make this challenging task easier. There is no single best way to write a business plan; the task will evolve in a way that suits you and your situation. While there are many ways to approach the preparation for and writing of a business plan, it is recommended that you begin with the market research and analysis sections. In writing your plan, you should remember that although one of the important functions of a business plan is to influ-ence investors, rather than preparing a fancy presentation, you and your team need to prove to yourselves and others that your opportunity is worth pursuing and to construct the means by which you will do it. Gathering information, mak-ing hard decisions, and developing plans come first. The Business Plan Guide shows how to present informa-tion succinctly and in a format acceptable to investors. Al-though it is useful to keep in mind who your audience is and that information not clearly presented will most likely not be used, it also is important not to be concerned just with format. The Business Plan Guide indicates specific issues and shows you what needs to be included in a business plan and why. You may feel as though you have seen much of this be-fore. You should. The guide is based on the analytical

framework described in the book and builds upon the Ven-ture Opportunity Screening Exercises in Chapter 6. If you have not completed the Opportunity Screening Exercises, it is helpful to do so before proceeding. The Business Plan Guide will allow you to draw on data and analysis devel-oped in the Venture Opportunity Screening Exercises as you prepare your business plan. As you proceed through the Business Plan Guide, re-member that statements need to be supported with data whenever possible. Note also that it is sometimes easier to present data in graphic, visual form. Include the source of all data, the methods and/or assumptions used, and the credentials of people doing research. If data on which a statement is based are available elsewhere in the plan, be sure to reference where. Remember that the Business Plan Guide is just that—a guide. It is intended to be applicable to a wide range of product and service businesses. Certain critical issues are unique to any industry or market. In the chemical industry, for example, some special issues of significance currently exist, such as increasingly strict regulations at all levels of government concerning the use of chemical products and the operation of processes, diminishing viability of the high capital cost, special-purpose chemical processing plants serving a narrow market, and long delivery times of processing equipment. In the electronics industry, the special issues may be the future availability and price of new kinds of large-scale integrated circuits. Common sense should rule in applying the guide to your specific venture.

The Business Plan Guide



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The Guide

Name:

Venture:

Date:

STEP 1Segment Information into Key Sections.Establish priorities for each section, including individual responsibilities and due dates for drafts and the final version. When you segment your information, it is vital to keep in mind that the plan needs to be logically integrated and that information should be consistent. Because the market opportunity section is the heart and soul of the plan, it may be the most difficult section to write; but it is best to assign it a high priority and to begin working there first. Remember to include such tasks as printing in the list.

Date CompletedSection Person(s) Date to First Draft or Final Versionor Task Priority Responsible Begin Due Date Due Date


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STEP 2List Tasks That Need to Be Completed.Devise an overall schedule for preparing the plan by assigning priorities, persons responsible, and due dates to each task necessary to complete the plan. It is helpful to break larger items (fieldwork to gather customer and competitor intelligence, trade show visits, etc.) into small, more manageable components, (such as phone calls required before a trip can be taken) and to include the components as a task. Be as specific as possible.

Task Priority Person Responsible Date to Begin Date of Completion



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STEP 3Combine the List of Segments and the List of Tasks to Create a Calendar.In combining your lists, consider if anything has been omitted and whether you have been realistic in what people can do, when they can do it, what needs to be done, and so forth. To create your calendar, place an X in the week when the task is to be started and an X in the week it is to be completed and then connect the Xs. When you have placed all tasks on the calendar, look carefully again for conflicts or lack of realism. In particular, evaluate whether team members are overscheduled.

Week

Task 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15


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the only section read, and you may never get the chance to make a presentation or discuss your business in person. Leave plenty of time to prepare the summary. (Success-ful public speakers have been known to spend an hour of preparation for each minute of their speech.) The executive summary usually contains a paragraph or two covering each of the following:

A. Description of the business concept and the business. Describe the business concept for the business you are or will be in. Be sure the description of your con-cept explains how your product or service will funda-mentally change the way customers currently do certain things. For example, Arthur Rock, the lead in-vestor in Apple Computer and Intel, has stated that he focuses on concepts that will change the way people live and/or work. You need to identify when the com-pany was formed, what it will do, what is special or proprietary about its product, service, or technology, and so forth. Include summary information about any proprietary technology, trade secrets, or unique capa-bilities that give you an edge in the marketplace. If the company has existed for a few years, a brief sum-mary of its size and progress is in order. Try to make your description use 25 or fewer words, and briefly describe the specific product or service.

B. The opportunity and strategy. Summarize what the opportunity is, why it is compelling, and the entry strategy planned to exploit it. Clearly state the main point or benefit you are addressing. This information may be presented as an outline of the key facts, con-ditions, competitors’ vulnerabilities (“sleepiness,” slug-gishness, poor service, etc.), industry trends (is it fragmented or emerging?), and other evidence and logic that define the opportunity. Note plans for growth and expansion beyond the entry products or services and into other market segments (such as in-ternational markets) as appropriate.

C. The target market and projections. Identify and briefly explain the industry and market, who the primary customer groups are, how the product(s) or service(s) will be positioned, and how you plan to reach and service these groups. Include information about the structure of the market, the size and growth rate for the market segments or niches you are seeking, your unit and dollar sales estimates, your anticipated mar-ket share, the payback period for your customers, and your pricing strategy (including price versus perfor mance/value/benefits considerations).

D. The competitive advantages. Indicate the significant competitive edges you enjoy or can create as a result of your innovative product, service, and strategy; ad-vantages in lead time or barriers to entry; competi-tors’ weaknesses and vulnerabilities; and other industry conditions.

E. The team. Summarize the relevant knowledge, experi-ence, know-how, and skills of the lead entrepreneur and any team members, noting previous accomplish-ments, especially those involving profit and loss re-sponsibility and general management and people

STEP 4A Framework to Develop and Write a Business Plan.As has been discussed, the framework here follows the order of presentation of the table of contents shown in Exhibit 8.2. While preparing your own plan, you will most likely want to consider sections in a different order from the one presented in this exhibit. (Also, when you integrate your sections into your final plan, you may choose to pres-ent material somewhat differently.)

Cover

The cover page includes the name of the company, its ad-dress, its telephone number, the date, and the securities offered. Usually the name, address, telephone number, and the date are centered at the top of the page and the securi-ties offered are listed at the bottom. Also suggested on the cover page at the bottom is the following text:

This business plan has been submitted on a confi dential basis solely for the benefi t of selected, highly qualifi ed investors in connection with the private placement of the above securities and is not for use by any other persons. Neither may it be reproduced, stored, or copied in any form. By accepting delivery of this plan, the recipient agrees to return this copy to the corporation at the address listed above if the recipient does not undertake to subscribe to the offering. Do not copy, fax, reproduce, or distribute without permission.

Table of Contents

Included in the table of contents is a list of the sections, subsections, and any appendixes, and the pages on which they can be found. (See Exhibit 8.2.)

I. Executive Summary The first section in the body of the business plan is usually an executive summary. The summary is usually short and concise (one or two pages). The summary articulates what the opportunity con-ditions are and why they exist, who will execute the oppor-tunity and why they are capable of doing so, and how the firm will gain entry and market penetration—it answers the questions we asked in Chapter 5: “For what reason does this venture exist and for whom?” Essentially the summary for your venture needs to mirror the criteria shown in Exhibit 5.8 and the Venture Opportu-nity Screening Exercises in Chapter 6. This is your chance to clearly articulate how your business is durable and timely, and how it will create or add value to the buyer or end user. The summary is usually prepared after the other sections of the business plan are completed. As the other sections are drafted, it is helpful to note one or two key sentences and some key facts and numbers from each. The summary is important for those ventures trying to raise or borrow money. Many investors, bankers, manag-ers, and other readers use the summary to determine quickly whether they find the venture of interest. Therefore, unless the summary is appealing and compelling, it may be



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current and future efforts to prevent a recurrence of these difficulties and to improve your company’s performance.

C. The product(s) or service(s).

Describe in some detail each product or service to be sold.

Discuss the application of the product or service and describe the primary end use as well as any significant secondary applications. Articulate how you will solve a problem, relieve pain, or provide a benefit or needed service.

Describe the service or product delivery system.

Emphasize any unique features of the product or service and how these will create or add signifi-cant value; also, highlight any differences between what is currently on the market and what you will offer that will account for your market penetration. Be sure to describe how value will be added and the payback period to the customer—that is, dis-cuss how many months it will take for the customer to cover the initial purchase price of the product or service as a result of its time, cost, or productivity improvements.

Include a description of any possible drawbacks (including problems with obsolescence) of the prod-uct or service.

Define the present state of development of the prod-uct or service and how much time and money will be required to fully develop, test, and introduce the product or service. Provide a summary of the func-tional specifications and photographs, if available, of the product.

Discuss any head start you might have that would enable you to achieve a favored or entrenched position in the industry.

Describe any features of the product or service that give it an “unfair” advantage over the competition. Describe any patents, trade secrets, or other propri-etary features of the product or service.

Discuss any opportunities for the expansion of the product line or the development of related products or services. (Emphasize opportunities and explain how you will take advantage of them.)

D. Entry and growth strategy.

Indicate key success variables in your marketing plan (e.g., an innovative product, timing advantage, or marketing approach) and your pricing, channel(s) of distribution, advertising, and promotion plans.

Summarize how fast you intend to grow and to what size during the first five years and your plans for growth beyond your initial product or service.

Show how the entry and growth strategy is derived from the opportunity and value-added or other

management experience. Include significant informa-tion, such as the size of a division, project, or prior business with which the lead entrepreneur or a team member was the driving force.

F. The offering. Briefly indicate the dollar amount of equity and/or debt financing needed, how much of the company you are prepared to offer for that financing, what principal use will be made of the capital, and how the investor, lender, or strategic partner will achieve its desired rate of return. Remember, your targeted resource provider has a well-defined appe-tite, and you must understand the “Circle of Venture Capital Ecstasy” (Exhibit 5.1).

II. The Industry and the Company and Its Product(s) or Service(s) A major area of consid-eration is the company, its concept for its product(s) and ser-vice(s), and its interface with the industry in which it will be competing. This is the context into which the marketing infor-mation, for example, fits. Information needs to include a description of the industry, a description of the concept, a description of your company, and a description of the product(s) or service(s) you will offer, the proprietary position of these product(s) or service(s), their potential advantages, and entry and growth strategy for the product(s) or service(s).

A. The industry.

Present the current status and prospects for the in-dustry in which the proposed business will operate. Be sure to consider industry structure.

Discuss briefly market size, growth trends, and competitors.

Discuss any new products or developments, new markets and customers, new requirements, new entrants and exits, and any other national or eco-nomic trends and factors that could affect the venture’s business positively or negatively.

Discuss the environmental profile of the industry. Consider energy requirements, supply chain fac-tors, waste generation, and recycling capabilities. Outline any new green technologies or trends that may have an impact on this opportunity.

B. The company and the concept.

Describe generally the concept of the business, what business your company is in or intends to enter, what product(s) or service(s) it will offer, and who are or will be its principal customers.

By way of background, give the date your venture was incorporated and describe the identification and development of its products and the involvement of the company’s principals in that development.

If your company has been in business for several years and is seeking expansion financing, review its history and cite its prior sales and profit per-formance. If your company has had setbacks or losses in prior years, discuss these and emphasize


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Indicate how fast you believe your product or ser-vice will be accepted in the market.

If you have an existing business, list your principal current customers and discuss the trends in your sales to them.

B. Market size and trends.

Show for five years the size of the current total mar-ket and the share you will have, by market segment, and/or region, and/or country, for the product or service you will offer, in units, dollars, and potential profitability.

Describe also the potential annual growth for at least three years of the total market for your product(s) or service(s) for each major customer group, region, or country, as appropriate.

Discuss the major factors affecting market growth (e.g., industry trends, socioeconomic trends, gov-ernment policy, environmental impacts, and popu-lation shifts) and review previous trends in the market. Any differences between past and pro-jected annual growth rates need to be explained.

C. Competition and competitive edges.

Make a realistic assessment of the strengths and weaknesses of competitors. Assess the substitute and/or alternative products and services and list the companies that supply them, both domestic and for-eign, as appropriate.

Compare competing and substitute products or ser-vices on the basis of market share, quality, price, performance, delivery, timing, service, warranties, and other pertinent features.

Compare the fundamental value that is added or created by your product or service, in terms of economic benefits to the customer and to your competitors.

Discuss the current advantages and disadvantages of these products and services and say why they are not meeting customer needs.

Indicate any knowledge of competitors’ actions that could lead you to new or improved products and an advantageous position. For example, discuss whether competitors are simply sluggish or nonre-sponsive or are asleep at the switch.

Identify the strengths and weaknesses of the com-peting companies and determine and discuss each competitor’s market share, sales, distribution meth-ods, and production capabilities.

Review the financial position, resources, costs, and profitability of the competition and their profit trends. Note that you can utilize Robert Morris As-sociates data for comparison.

competitive advantages, such as the weakness of competitors.

Discuss the overall environmental and social sus-tainability of your growth plan. Consider the effect on the community if the growth strategy involves offshore manufacturing or outsourced labor.

III. Market Research and Analysis Informa-tion in this section needs to support the assertion that the venture can capture a substantial market in a growing industry and stand up to competition. Because of the impor-tance of market analysis and the critical dependence of other parts of the plan on this information, you are advised to prepare this section of the business plan before any other. Take enough time to do this section very well and to check alternative sources of market data. This section of the business plan is one of the most diffi-cult to prepare, yet it is one of the most important. Other sections of the business plan depend on the market research and analysis presented here. For example, the predicted sales levels directly influence such factors as the size of the manufacturing operation, the marketing plan, and the amount of debt and equity capital you will require. Most entrepreneurs seem to have great difficulty preparing and presenting market research and analyses that show that their ventures’ sales estimates are sound and attainable.

A. Customers. Discuss who the customers for the product(s) or

service(s) are or will be. Note that potential custom-ers need to be classified by relatively homoge-neous groups having common, identifiable characteristics (e.g., by major market segment). For example, an automotive part might be sold to man-ufacturers and to parts distributors supplying the re-placement market, so the discussion needs to reflect two market segments.

Show who and where the major purchasers for the product(s) or service(s) are in each market segment. Include national regions and foreign countries, as appropriate.

Indicate whether customers are easily reached and receptive, how customers buy (wholesale, through manufacturers’ representatives, etc.), where in their organizations buying decisions are made, and how long decisions take. Describe customers’ purchasing processes, including the bases on which they make purchase decisions (e.g., price, quality, timing, deliv-ery, training, service, personal contacts, or political pressures) and why they might change current pur-chasing decisions.

List any orders, contracts, or letters of commitment that you have in hand. These are the most powerful data you can provide. List also any potential cus-tomers who have expressed an interest in the product(s) or service(s) and indicate why. Also list any potential customers who have shown no inter-est in the proposed product or service, and explain why they are not interested and explain what you will do to overcome negative customer reaction.



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cycle of the business, the value chain, and so forth need to make sense in terms of the opportunity and strategies planned.

A. Gross and operating margins.

Describe the magnitude of the gross margins (i.e., selling price less variable costs) and the operating margins for each of the product(s) and/or service(s) you are selling in the market niche(s) you plan to attack. Include results of your contribution analysis.

B. Profit potential and durability.

Describe the magnitude and expected durability of the profit stream the business will generate—before and after taxes—and reference appropriate indus-try benchmarks, other competitive intelligence, or your own relevant experience.

Address the issue of how perishable or durable the profit stream appears to be. Provide reasons why your profit stream is perishable or durable, such as barriers to entry you can create, your technological and market lead time, and environmental sustain-ability, which in some cases can be a driver for cost reduction.

C. Fixed, variable, and semivariable costs.

Provide a detailed summary of fixed, variable, and semivariable costs, in dollars and as percentages of total cost as appropriate, for the product or ser-vice you offer and the volume of purchases and sales upon which these are based.

Show relevant industry benchmarks.

D. Months to breakeven.

Given your entry strategy, marketing plan, and pro-posed financing, show how long it will take to reach a unit break-even sales level.

Note any significant stepwise changes in your breakeven that will occur as you grow and add substantial capacity.

E. Months to reach positive cash flow.

Given the above strategy and assumptions, show when the venture will attain a positive cash flow.

Show if and when you will run out of cash. Note where the detailed assumptions can be found.

Note any significant stepwise changes in cash flow that will occur as you grow and add capacity.

V. Marketing Plan The marketing plan describes how the sales projections will be attained. The marketing plan needs to detail the overall marketing strategy that will exploit the opportunity and your competitive advantages. Include a discussion of sales and service policies; pricing, distribution, promotion, and advertising strategies; and

Indicate who are the service, pricing, performance, cost, and quality leaders. Discuss why any compa-nies have entered or dropped out of the market in recent years.

Discuss the three or four key competitors and why customers buy from them, and determine and dis-cuss why customers leave them. Relate this to the basis for the purchase decision examined in IIIA.

From what you know about the competitors’ opera-tions, explain why you think they are vulnerable and you can capture a share of their business. Dis-cuss what makes you think it will be easy or diffi-cult to compete with them. Discuss, in particular, your competitive advantages gained through such “unfair” advantage as patents.

D. Estimated market share and sales.

Summarize what it is about your product(s) or service(s) that will make it salable in the face of current and potential competition. Mention, espe-cially, the fundamental value added or created by the product(s) or service(s).

Identify any major customers (including interna-tional customers) who are willing to make, or who have already made, purchase commitments. Indi-cate the extent of those commitments, and why they were made. Discuss which customers could be ma-jor purchasers in future years and why.

Based on your assessment of the advantages of your product or service, the market size and trends, customers, competition and their products, and the trends of sales in prior years, estimate the share of the market and the sales in units and dollars that you will acquire in each of the next three years. Remember to show assumptions used.

Show how the growth of the company sales in units and its estimated market share are related to the growth of the industry, the customers, and the strengths and weaknesses of competitors. Remem-ber, the assumptions used to estimate market share and sales need to be clearly stated.

If yours is an existing business, also indicate the total market, your market share, and sales for two prior years.

E. Ongoing market evaluation.

Explain how you will continue to evaluate your target markets; assess customer needs and service; guide product improvement, pricing, and new product programs; plan for expansions of your pro-duction facility; and guide product/service pricing.

IV. The Economics of the Business The eco-nomic and financial characteristics, including the apparent magnitude and durability of margins and profits gener-ated, need to support the fundamental attractiveness of the opportunity. The underlying operating and cash conversion


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added via effectiveness in manufacturing and distri-bution, lower labor costs, lower material costs, lower overhead, or other cost component).

Discuss your pricing policy, including a discussion of the relationship of price, market share, and profits.

C. Sales tactics.

Describe the methods (e.g., own sales force, sales representatives, ready-made manufacturers’ sales organizations, direct mail, or distributors) that will be used to make sales and distribute the product or service and both the initial plans and longer-range plans for a sales force. Include a discussion of any special requirements (e.g., refrigeration).

Discuss the value chain and the resulting margins to be given to retailers, distributors, wholesalers, and salespeople and any special policies regard-ing discounts, exclusive distribution rights, and so on given to distributors or sales representatives, and compare these to those given by your competi-tion. (See the Venture Opportunity Screening Guide Exercises.)

Describe how distributors or sales representatives, if they are used, will be selected, when they will start to represent you, the areas they will cover and the head count of dealers and representatives by month, and the expected sales to be made by each.

If a direct sales force is to be used, indicate how it will be structured and at what rate (a head count) it will be built up; indicate if it is to replace a dealer or representative organization and, if so, when and how.

If direct mail, magazine, newspaper, or other me-dia, telemarketing, or catalog sales are to be used, indicate the specific channels or vehicles, costs (per 1,000), expected response rates, and so on. Dis-cuss how these will be built up.

Show the sales expected per salesperson per year and what commission, incentive, and/or salary they are slated to receive, and compare these fig-ures to the average for your industry.

Present a selling schedule and a sales budget that includes all marketing promotion and service costs.

D. Service and warranty policies.

If your company will offer a product that will re-quire service, warranties, or training, indicate the importance of these to the customers’ purchasing decisions and discuss your method of handling ser-vice problems.

Describe the kind and term of any warranties to be offered, whether service will be handled by com-pany service people, agencies, dealers and distrib-utors, or returns to the factory.

sales projections. The marketing plan needs to describe what is to be done, how it will be done, when it will be done, and who will do it.

A. Overall marketing strategy.

Describe the specific marketing philosophy and strategy of the company, given the value chain and channels of distribution in the market niche(s) you are pursuing. Include, for example, a discussion of the kinds of customer groups that you already have orders from or that will be targeted for initial inten-sive selling effort and those targeted for later sell-ing efforts; how specific potential customers in these groups will be identified and how they will be contacted; what features of the product or ser-vice, such as service, quality, price, delivery, war-ranty, or training, will be emphasized to generate sales; if any innovative or unusual marketing con-cepts will enhance customer acceptance, such as leasing where only sales were previously attempted; and so forth.

Indicate whether the product(s) or service(s) will ini-tially be introduced internationally, nationally, or re-gionally; explain why; and if appropriate, indicate any plans for extending sales later.

Discuss any seasonal trends that underlie the cash conversion cycle in the industry and what can be done to promote sales out of season.

Describe any plans to obtain government contracts as a means of supporting product development costs and overhead.

B. Pricing.

Discuss pricing strategy, including the prices to be charged for your product and service, and com-pare your pricing policy with those of your major competitors, including a brief discussion of payback (in months) to the customer.

Discuss the gross profit margin between manufactur-ing and ultimate sales costs, and indicate whether this margin is large enough to allow for distribution and sales, warranty, training, service, amortization of development and equipment costs, price competi-tion, and so forth, and still allow a profit.

Explain how the price you set will enable you to (1) get the product or service accepted, (2) main-tain and increase your market share in the face of competition, and (3) produce profits.

Justify your pricing strategy and differences be-tween your prices and those for competitive or sub-stitute products or services in terms of economic payback to the customer and value added through newness, quality, warranty, timing, performance, service, cost savings, efficiency, and the like.

If your product is to be priced lower than those of the competition, explain how you will do this and maintain profitability (e.g., through greater value



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Describe briefly the competence or expertise that your company has or will require to complete this development.

List any customers or end users who are participat-ing in the development, design, and/or testing of the product or service. Indicate results to date or when results are expected.

B. Difficulties and risks.

Identify any major anticipated design and devel-opment problems and define approaches to their solution.

Discuss the possible effect on the cost of design and development, on the time to market introduc-tion, and so forth, of such problems.

C. Product improvement and new products.

In addition to describing the development of the initial products, discuss any ongoing design and development work that is planned to keep the product(s) or service(s) that can be sold to the same group of customers. Discuss customers who have participated in these efforts and their reactions, and include any evidence that you may have.

With regard to ongoing product development, out-line any compliance issues relating to new, pend-ing, or potential environmental legislation.

D. Costs.

Present and discuss the design and development budget, including costs of labor, materials, consult-ing fees, and so on.

Discuss the impact on cash flow projections of un-derestimating this budget, including the impact of a 15 percent to 30 percent contingency.

E. Proprietary issues.

Describe any patent, trademark, copyright, or intel-lectual property rights you own or are seeking.

Describe any contractual rights or agreements that give you exclusivity or proprietary rights.

Discuss the impact of any unresolved issues or ex-isting or possible actions pending, such as disputed rights of ownership, relating to proprietary rights on timing and on any competitive edge you have assumed.

VII. Manufacturing and Operations Plan The manufacturing and operations plan needs to include such factors as plant location, the type of facilities needed, space requirements, capital equipment requirements, and labor force (both full- and part-time) requirements. For a manufacturing business, the manufacturing and operations plan needs to include policies on inventory control, pur-chasing, production control, and which parts of the product will be purchased and which operations will be performed by your workforce (called make-or-buy decisions). A service

Indicate the proposed charge for service calls and whether service will be a profitable or break-even operation.

Compare your service, warranty, and customer training policies and practices to those of your prin-cipal competitors.

E. Advertising and promotion.

Describe the approaches the company will use to bring its product or service to the attention of pro-spective purchasers.

For original equipment manufacturers and for man-ufacturers of industrial products, indicate the plans for trade show participation, trade magazine ad-vertisements, direct mailings, the preparation of product sheets and promotional literature, and use of advertising agencies.

For consumer products, indicate what kind of ad-vertising and promotional campaign will introduce the product, including sales aids to dealers, trade shows, and so forth.

Present a schedule and approximate costs of pro-motion and advertising (direct mail, telemarketing, catalogs, etc.), and discuss how these costs will be incurred.

F. Distribution.

Describe the methods and channels of distribution you will employ. Discuss the availability and capac-ity of these channels.

Indicate the sensitivity of shipping cost as a per-centage of the selling price.

Note any special issues or problems that need to be resolved or present potential vulnerabilities.

If international sales are involved, note how these sales will be handled, including distribution, ship-ping, insurance, credit, and collections.

VI. Design and Development Plans The na-ture and extent of any design and development work and the time and money required before a product or service is marketable need to be considered in detail. (Note that de-sign and development costs are often underestimated.) De-sign and development might be the engineering work necessary to convert a laboratory prototype to a finished product; the design of special tooling; the work of an indus-trial designer to make a product more attractive and sal-able; or the identification and organization of employees, equipment, and special techniques, such as equipment, new computer software, and skills required for computer-ized credit checking, to implement a service business.

A. Development status and tasks.

Describe the current status of each product or ser-vice and explain what remains to be done to make it marketable.


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D. Strategy and plans.

Describe the manufacturing processes involved in production of your product(s) and any decisions with respect to subcontracting of component parts, rather than complete in-house manufacture.

Justify your proposed make-or-buy policy in terms of inventory financing, available labor skills, and other nontechnical questions, as well as produc-tion, cost, and capability issues.

Discuss who potential subcontractors and/or sup-pliers are likely to be and any information about, or any surveys that have been made of, these sub-contractors and suppliers.

Present a production plan that shows cost/volume/ inventory level information at various sales levels of operation with breakdowns of applicable material, labor, purchased components, and fac-tory overhead.

Describe your approach to quality control, produc-tion control, and inventory control; explain what quality control and inspection procedures the com-pany will use to minimize service problems and associated customer dissatisfaction.

E. Regulatory and legal issues.

Discuss any relevant state, federal, or foreign regu-latory requirements unique to your product, process, or service such as licenses, zoning permits, health permits, and environmental approvals necessary to begin operation.

Note any pending regulatory changes that can af-fect the nature of your opportunity and its timing.

Discuss any legal or contractual obligations that are pertinent as well.

VIII. Management Team This section of the busi-ness plan includes a description of the functions that will need to be filled, a description of the key management personnel and their primary duties, an outline of the organi-zational structure for the venture, a description of the board of directors, a description of the ownership position of any other investors, and so forth. You need to present indica-tions of commitment, such as the willingness of team mem-bers to initially accept modest salaries, and of the existence of the proper balance of technical, managerial, and busi-ness skills and experience in doing what is proposed.

A. Organization.

Present the key management roles in the company and the individuals who will fill each position. (If the company is established and of sufficient size, an organization chart needs to be appended.)

If it is not possible to fill each executive role with a full-time person without adding excessive overhead, indicate how these functions will be performed (e.g., using part-time specialists or consultants to

business may require particular attention to location (prox-imity to customers is generally a must), minimizing over-head, and obtaining competitive productivity from a labor force.

A. Operating cycle.

Describe the lead/lag times that characterize the fundamental operating cycle in your business. (Include a graph similar to the one found in the Venture Opportunity Screening Exercises.)

Explain how any seasonal production loads will be handled without severe dislocation (e.g., by building to inventory or using part-time help in peak periods).

B. Geographical location.

Describe the planned geographical location of the business. Include any location analysis, and so on, that you have done.

Discuss any advantages or disadvantages of the site location in terms of labor (including labor avail-ability, whether workers are unionized, wage rates, and outsourcing), closeness to customers and/or suppliers, access to transportation, state and local taxes and laws (including zoning and environmen-tal impact regulations), access to utilities (energy use and sustainability), and so forth.

C. Facilities and improvements.

For an existing business, describe the facilities, in-cluding plant and office space, storage and land areas, special tooling, machinery, and other capi-tal equipment currently used to conduct the compa-ny’s business, and discuss whether these facilities are adequate and in compliance with health, safety, and environmental regulations. Discuss any economies of scale.

For a start-up, describe how and when the neces-sary facilities to start production will be acquired.

Discuss whether equipment and space will be leased or acquired (new or used) and indicate the costs and timing of such actions and how much of the proposed financing will be devoted to plant and equipment.

Explain future equipment needs in the next three years.

For start-ups expecting to outsource manufacturing, indicate the location and size of the firm, and dis-cuss the advantages, risks, and monitoring regime.

Discuss how and when, in the next three years, plant space and equipment will be expanded and capaci-ties required by future sales projections and any plans to improve or add existing plant space. Discuss any environmental impacts related to those expan-sion requirements. If there are any plans to move the facility, outsource labor, or move production over-seas, discuss the impact on the local community. Indicate the timing and cost of such acquisitions.



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F. Board of directors.

Discuss the company’s philosophy about the size and composition of the board.

Identify any proposed board members and include a one- or two-sentence statement of each member’s background that shows what he or she can bring to the company.

G. Other shareholders, rights, and restrictions.

Indicate any other shareholders in your company and any rights, restrictions, or obligations, such as notes or guarantees, associated with these. (If they have all been accounted for previously, simply note that there are no others.)

H. Supporting professional advisors and services.

Indicate the supporting services that will be required.

Indicate the names and affiliations of the legal, accounting, advertising, consulting, and banking advisors selected for your venture and the services each will provide.

IX. Sustainability and Impact This section should address the social, economic, and environmental sustainability of your business model. Because customers (and investors) are increasingly interested in supporting companies that are proactive with regard to these issues, building a sustainable, socially responsible venture from the start can have competitive as well as economic advantages.

Outline any environmental issues related to your business with regard to resources, waste genera-tion, and legislative compliance.

Discuss the nature of any opportunities for green impact, such as carbon reduction, recycling, and any green technologies or production capabilities that could enhance sustainability.

Describe the nature of subcontractors and suppliers you plan to do business with.

Describe any sustainability advantages you have or can develop, and how these might relate to building customer loyalty and community support for your product(s) or service(s).

Summarize the employment opportunities that your business is likely to create, and describe any plans for outsourcing or using offshore labor and how that might impact the community and your labor pool.

Examine the potential environmental impact of your business as it grows.

X. Overall Schedule A schedule that shows the timing and interrelationship of the major events necessary to launch the venture and realize its objectives is an essen-tial part of a business plan. The underlying cash conversion and operating cycle of the business will provide key inputs

perform some functions), who will perform them, and when they will be replaced by a full-time staff member.

If any key individuals will not be on board at the start of the venture, indicate when they will join the company.

Discuss any current or past situations where key management people have worked together that could indicate how their skills complement each other and result in an effective management team.

B. Key management personnel.

For each key person, describe in detail career high-lights, particularly relevant know-how, skills, and track record of accomplishments, that demonstrate his or her ability to perform the assigned role. Include in your description sales and profitability achievements (budget size, number of subordinates, new product introductions, etc.) and other prior entrepreneurial or general management results.

Describe the exact duties and responsibilities of each of the key members of the management team.

Complete résumés for each key management mem-ber need to be included here or as an exhibit and need to stress relevant training, experience, and concrete accomplishments, such as profit and sales improvement, labor management success, manu-facturing or technical achievements, and meeting budgets and schedules.

C. Management compensation and ownership.

State the salary to be paid, the stock ownership planned, and the amount of equity investment (if any) of each key member of the management team.

Compare the compensation of each key member to the salary he or she received at his or her last inde-pendent job.

D. Other investors.

Describe here any other investors in your venture, the number and percentage of outstanding shares they own, when they were acquired, and at what price.

E. Employment and other agreements and stock option and bonus plans.

Describe any existing or contemplated employment or other agreements with key members.

Indicate any restrictions on stock and investing that affect ownership and disposition of stock.

Describe any performance-dependent stock option or bonus plans.

Summarize any incentive stock option or other stock ownership plans anticipated or in effect for key people and employees.


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Be aware that most investors will read the section describ-ing the management team first and then this section. Do not omit this section. If you do, the reader will most likely come to one or more of the following conclusions:

1. You think he or she is incredibly naive or stupid, or both.

2. You hope to pull the wool over his or her eyes.3. You do not have enough objectivity to recognize and

deal with assumptions and problems.

Identifying and discussing the risks in your venture dem-onstrate your skills as a manager and increase the credibil-ity of you and your venture with a venture capital investor or a private investor. Taking the initiative on the identifica-tion and discussion of risks helps you to demonstrate to the investor that you have thought about them and can handle them. Risks then tend not to loom as large black clouds in the investor’s thinking about your venture.

1. Discuss the assumptions and risks implicit in your plan.2. Identify and discuss any major problems and other

risks, such as these: Running out of cash before orders are secured. Potential price cutting by competitors. Any potentially unfavorable industry trends. Design or manufacturing costs in excess of estimates. Sales projections not achieved. An unmet product development schedule. Difficulties or long lead times encountered in the

procurement of parts or raw materials. Difficulties encountered in obtaining needed bank

credit. Larger-than-expected innovation and development

costs. Running out of cash after orders pour in.3. Indicate what assumptions or potential problems and

risks are most critical to the success of the venture, and describe your plans for minimizing the impact of unfavorable developments in each case.

XII. The Financial Plan The financial plan is ba-sic to the evaluation of an investment opportunity and needs to represent your best estimates of financial require-ments. The purpose of the financial plan is to indicate the venture’s potential and to present a timetable for financial viability. It also can serve as an operating plan for financial management using financial benchmarks. In preparing the financial plan, you need to look creatively at your venture and consider alternative ways of launching or financing it. As part of the financial plan, financial exhibits need to be prepared. To estimate cash flow needs, use cash-based, rather than accrual-based, accounting (i.e., use a real-time cash flow analysis of expected receipts and disburse-ments). This analysis needs to cover three years, including current- and prior-year income statements and balance sheets, if applicable; profit and loss forecasts for three years; pro forma income statements and balance sheets;

for the schedule. In addition to being a planning aid, by showing deadlines critical to a venture’s success, a well-presented schedule can be extremely valuable in convinc-ing potential investors that the management team is able to plan for venture growth in a way that recognizes obstacles and minimizes investor risk. Because the time to do things tends to be underestimated in most business plans, it is im-portant to demonstrate that you have correctly estimated these amounts in determining the schedule. Create your schedule as follows:

1. Lay out (use a bar chart) the cash conversion cycle of the business for each product or service expected, the lead and elapsed times from an order to the pur-chase of raw materials, or inventory to shipping and collection.

2. Prepare a month-by-month schedule that shows the timing of product development, market planning, sales programs, production, and operations, and that includes suffi cient detail to show the timing of the primary tasks required to accomplish an activity.

3. Show on the schedule the deadlines or milestones critical to the venture’s success, such as these:

Incorporation of the venture. Completion of design and development. Completion of prototypes. Obtaining sales representatives. Obtaining product display at trade shows. Signing distributors and dealers. Ordering materials in production quantities. Starting production or operation. Receipt of first orders. Delivery on first sale. Receiving the first payment on accounts receivable.4. Show on the schedule the “ramp-up” of the number

of management personnel, the number of production and operations personnel, and plant or equipment and their relation to the development of the business.

5. Discuss in a general way the activities most likely to cause a schedule slippage, what steps will be taken to correct such slippages, and the impact of schedule slippages on the venture’s operation, especially its potential viability and capital needs.

XI. Critical Risks, Problems, and Assump-tions The development of a business has risks and prob-lems, and the business plan invariably contains some implicit assumptions about them. You need to include a de-scription of the risks and the consequences of adverse out-comes relating to your industry, your company and its personnel, your product’s market appeal, and the timing and financing of your startup. Be sure to discuss assump-tions concerning sales projections, customer orders, and so forth. If the venture has anything that could be considered a fatal flaw, discuss why it is not. The discovery of any un-stated negative factors by potential investors can undermine the credibility of the venture and endanger its financing.



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requirements for working capital. Indicate how necessary additional financing is to be obtained, such as through equity financing, bank loans, or short-term lines of credit from banks, on what terms, and how it is to be repaid. Remember that these numbers are based on cash, not accrual, accounting.

Discuss assumptions, such as those made on the timing of collection of receivables, trade discounts given, terms of payments to vendors, planned sal-ary and wage increases, anticipated increases in any operating expenses, seasonality characteristics of the business as they affect inventory require-ments, inventory turnovers per year, capital equip-ment purchases, and so forth. Again, these are real time (i.e., cash), not accruals.

Discuss cash flow sensitivity to a variety of assump-tions about business factors (e.g., possible changes in such crucial assumptions as an increase in the receivable collection period or a sales level lower than that forecast).

E. Break-even chart.

Calculate breakeven and prepare a chart that shows when breakeven will be reached and any stepwise changes in breakeven that may occur.

Discuss the breakeven shown for your venture and whether it will be easy or difficult to attain, includ-ing a discussion of the size of break-even sales volume relative to projected total sales, the size of gross margins and price sensitivity, and how the break-even point might be lowered in case the venture falls short of sales projections.

F. Cost control. Describe how you will obtain informa-tion about report costs and how often, who will be re-sponsible for the control of various cost elements, and how you will take action on budget overruns.

G. Highlights. Highlight the important conclusions, includ-ing the maximum amount and timing of cash required, the amount of debt and equity needed, how fast any debts can be repaid, and so forth.

XIII. Proposed Company Offering The pur-pose of this section of the plan is to indicate the amount of money that is being sought, the nature and amount of the securities offered to investors, a brief description of the uses that will be made of the capital raised, and a summary of how the investor is expected to achieve its targeted rate of return. It is recommended that you read the discussion about financing in Part IV. The terms for financing your company that you propose here are the first steps in the negotiation process with those interested in investing, and it is very possible that your fi-nancing will involve different kinds of securities than origi-nally proposed.

A. Desired financing. Based on your real-time cash flow projections and your estimate of how much money is

and a break-even chart. On the appropriate exhibits, or in an attachment, specify assumptions behind such items as sales levels and growth, collections and payables periods, inven-tory requirements, cash balances, and cost of goods. Your analysis of the operating and cash conversion cycle in the business will enable you to identify these critical assumptions. Pro forma income statements are the plan-for-profit part of financial management and can indicate the potential fi-nancial feasibility of a new venture. Because usually the level of profits, particularly during the start-up years of a venture, will not be sufficient to finance operating asset needs, and because actual cash inflows do not always match the actual cash outflows on a short-term basis, a cash flow forecast indicating these conditions and enabling management to plan cash needs is recommended. Further, pro forma balance sheets are used to detail the assets re-quired to support the projected level of operations and, through liabilities, to show how these assets are to be fi-nanced. The projected balance sheets can indicate if debt-to-equity ratios, working capital, current ratios, inventory turnover, and the like are within the acceptable limits re-quired to justify future financings that are projected for the venture. Finally, a break-even chart showing the level of sales and production that will cover all costs, including those costs that vary with production level and those that do not, is very useful.

A. Actual income statements and balance sheets. For an existing business, prepare income statements and bal-ance sheets for the current year and for the prior two years.

B. Pro forma income statements.

Using sales forecasts and the accompanying pro-duction or operations costs, prepare pro forma income statements for at least the first three years.

Fully discuss assumptions (e.g., the amount allowed for bad debts and discounts, or any assumptions made with respect to sales expenses or general and administrative costs being a fixed percentage of costs or sales) made in preparing the pro forma income statement and document them.

Draw on Section XI of the business plan and high-light any major risks, such as the effect of a 20 per-cent reduction in sales from those projected or the adverse impact of having to climb a learning curve on the level of productivity over time, that could pre-vent the venture’s sales and profit goals from being attained, plus the sensitivity of profits to these risks.

C. Pro forma balance sheets. Prepare pro forma balance sheets semiannually in the first year and at the end of each of the first three years of operation.

D. Pro forma cash flow analysis.

Project cash flows monthly for the first year of oper-ation and quarterly for at least the next two years. Detail the amount and timing of expected cash in-flows and outflows. Determine the need for and timing of additional financing and indicate peak


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required over the next three years to carry out the de-velopment and/or expansion of your business as de-scribed, indicate how much of this capital requirement will be obtained by this offering and how much will be obtained via term loans and lines of credit.

B. Offering.

Describe the type (e.g., common stock, convertible debentures, debt with warrants, debt plus stock), unit price, and total amount of securities to be sold in this offering. If securities are not just common stock, indicate by type, interest, maturity, and con-version conditions.

Show the percentage of the company that the in-vestors of this offering will hold after it is completed or after exercise of any stock conversion or pur-chase rights in the case of convertible debentures or warrants.

Securities sold through a private placement and that therefore are exempt from SEC registration should include the following statement in this part of the plan:

The shares being sold pursuant to this offering are re-stricted securities and may not be resold readily. The prospective investor should recognize that such securi-ties might be restricted as to resale for an indefi nite period of time. Each purchaser will be required to ex-ecute a Nondistribution Agreement satisfactory in form to corporate counsel.

C. Capitalization.

Present in tabular form the current and proposed (postoffering) number of outstanding shares of com-mon stock. Indicate any shares offered by key man-agement people and show the number of shares that they will hold after completion of the proposed financing.

Indicate how many shares of your company’s com-mon stock will remain authorized but unissued after

the offering and how many of these will be re-served for stock options for future key employees.

D. Use of funds. Investors like to know how their money is going to be spent. Provide a brief description of how the capital raised will be used. Summarize as specifi cally as possible what amount will be used for such things as product design and development, capital equipment, marketing, and general working capital needs.

E. Investors’ return. Indicate how your valuation and pro-posed ownership shares will result in the desired rate of return for the investors you have targeted and what the likely harvest or exit mechanism (IPO, outright sale, merger, MBO, etc.) will be.

XIV. Appendixes Include pertinent information here that is too extensive for the body of the business plan but that is necessary (product specs or photos; lists of refer-ences, suppliers of critical components; special location factors, facilities, or technical analyses; reports from consul-tants or technical experts; and copies of any critical regula-tory approval, licenses, etc.).

STEP 5Integrate Sections.Integrate the discrete sections you have created into a co-herent business plan that can be used for the purpose for which it was created.

STEP 6Get Feedback.Once written, it is recommended that you get the plan re-viewed. No matter how good you and your team are, you will most likely overlook issues and treat aspects of your venture in a manner that is less than clear. A good reviewer can give you the benefit of an outside objective evaluation. Your attorney can make sure that there are no misleading statements in your plan and that it contains all the caveats and the like.



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Exercise 2

Finding the right date or partner for life is a daunting chal-lenge. Everyone agrees that certain chemistry can make or break a relationship. This is certainly true in new ventures. Today all the various social networking Web sites and the worldwide connectivity of the Internet have opened up vast new opportunities to identify and build the most important part of the external team—the venture’s brain trust. As you have seen (and will continue to see) in the text, cases, and discussions, ventures rarely succeed in isolation. Invariably there are one or a few external mentors, advisors (who are often also investors), coaches, and sources of great knowl-edge, insights, and contacts the venture desperately needs but does not have. Members of your brain trust must be di-rect and honest and have your best interests at heart. These can be very valuable individuals. Consider the following example. In 1994 Gary Mueller and his brother George, both still in graduate school and in their 20s, were developing a business plan to launch a company they would call Internet Securities, Inc. (www.in-ternetsecurities.com). Begun as a course project, their ven-ture sought to develop a subscription service to provide financial, stock and bond market, economic, and related information—first from Poland and Russia and later from other emerging markets—all delivered over the Internet. The talented, motivated, and very entrepreneurial brothers had some good contacts, but this was their first serious venture, and there were many things they knew they didn’t know. One basic issue was how to package, price, and sell this new service to clients such as investment banks, commercial banks, financial service firms, large account-ing firms, and the like. The core question they asked was this: Who knows more about this than anyone in the world? That is the key question to ask as you begin your search for potential members of your own brain trust. In the case of the Muellers, Professor Timmons knew the founder of what became First Call: Jeff Parker, who had created a new venture in the early 1980s that put the first desktop com-puter (an Apple II) on the desks of bond traders on Wall Street. This highly successful company led to other new ventures and a wealth of knowledge, networks, and experi-ence in this market. Connecting the Muellers with Parker made a number of key results occur. For one thing, Parker agreed to invest $1 million and become chairman of the board. This was a great asset for the company because of the know-how and credibility he brought to the venture. It also meant that the Muellers were able to conserve equity by not having to raise venture capital. A venture capitalist wanted to invest more money, but for a controlling interest of the venture; Parker asked for 25 percent. This seasoned entrepreneur also knew the best people in the business from a sales perspective and was able to recruit his former national sales manager to ISI. This made a huge difference—early on with pricing and selling strategies, and later in achieving early revenue targets.

You can see here the potential and importance of the external brain trust. This exercise will help you to begin to identify and connect with potential brain trust advisors who can become invaluable to your venture’s success.

STEP 1Identify and List the Gaps at This Stage of the Venture.Applying the Timmons Model to your opportunity and po-tential venture has put a zoom lens on each critical aspect of your venture—the opportunity, the resources, and the team (internal and external)—and has revealed important gaps and the extent of the fit in the venture. Remember, many gaps are uncovered by an honest assessment of the confidence you have in the critical assumptions you’ve made in your plan; the weaker your confidence, the greater the need for brain trust support. These missing pieces in the puzzle will point to the facts, people, infor-mation, access, insights, and the like that your venture needs and that no team members currently possess; with-out these pieces, the venture will likely fail; with them, the odds for success rise. Make a list of these critical gaps and needs.

STEP 2Think: Who Knows What We Don’t?This step will draw on your personal networks. With the Inter-net you can articulate carefully what expertise/knowledge/experience you are looking for, and then start asking the people you know, who can eventually lead you to a source. Networking sites such as Facebook, MySpace, and LinkedIn can be especially fruitful search platforms. Match this list of potential brain trust members to the list of critical gaps and needs.

STEP 3Revisit Step 1 as the Venture Develops.During the course, as you work on your business plan, you can apply this method to various aspects of your zoom lens. Dive into the nuances of the opportunity, the team, and the minimal required resources you need to improve the fit by filling the gaps and managing risk and reward. Much will change as your idea evolves into a bona fide opportunity and then into a live venture: attract-ing key team members, valuing the business, raising capi-tal, structuring and negotiating the deal, and other key negotiations with key hires and suppliers. Trying to learn all the things necessary to succeed the first time by doing it all yourself is a high-risk, high-tuition path that will de-light your competitors! Reaching out to connect with peo-ple who can help you the most makes a huge difference—and is clearly one of the most vital entrepreneurial competencies.

The Virtual Brain Trust


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that “you should trust people” rather than assume they are all out to cheat you, lie to you, scam you, or steal from you. It’s certainly true that at least 95 percent of the people you will encounter in your journey can be trusted. Just keep in mind the old adage: Trust everyone, but al-ways cut the deck!

A Cautionary Word: Scammers and Predators

Unfortunately the Internet has its share of scammers and predators. Be vigilant and thorough in checking out potential contacts! Ewing M. Kauffman always advised


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Case

Preparation Questions 1. Discuss the process that Sarah Foster and her

partners have gone through to bring to market their medical device. How might they have avoided some of the pitfalls they have encountered?

2. Examine Newland’s strategy in light of the special circumstances in this industry. What is your recom-mendation for moving the company forward?

3. In light of your strategic plan for Newland Medi-cal, how can Foster achieve a balance between her personal and professional objectives and commitments?

It had all seemed like a perfect plan. With two assertive angel investors guiding her medical device company on what seemed to be an acquisition fast track, Foster and her husband decided that the time was right to start a family. However, by the fall of 2005 (the middle of her first trimester), everything had changed. Foster, cofounder and president of Newland Medical Technologies, was now compelled to seriously recon-sider the course she’d set for her company. In doing so, she was going to have to make some tough choices to strike a balance between motherhood and her profes-sional passions.

Opportunity Recognition

Sarah Foster had been working with hip implant designs for Johnson & Johnson in Massachusetts for two years when the corporate office announced they were moving her division out west to Iowa. Foster loved the work, but she and her husband, a professor at a local college, also loved living in the Boston area. She passed on the offer and instead leveraged her engineering degrees from MIT and Stanford to secure employment close to home (see Exhibit 1 ). Still, the bright engineer never lost sight of her primary career objective:

I had been looking for a medical device opportunity ever since I left Johnson & Johnson. Then a friend of mine—a urologist at the Brigham and Women’s Hospi-tal in Boston—told me how there was a need for better stents 1 in urology, since most of the industry focus has been in cardiac work. He pointed out that even though it was commonly known that the ureter naturally dilates

in the presence of a foreign body, no stent products had taken full advantage of this fact. We felt that gently stim-ulating a wider dilation would improve urine flow and might even help pass kidney stones.

Kidney stones, or ureteral stones, were a debilitating malady that affected nearly 10 percent of the U.S. pop-ulation. The pain of stone disease was most severe when the stone lodged in the ureter and obstructed urine flow. A patient arriving with kidney stones was usually treated as an emergency. The emergency room physi-cian would administer pain medication and almost al-ways consult a urologist. The immediate and near-term treatment had to be safe and effective and keep the patient’s options open for later procedures. By the late 1990s, most urologists were meeting these needs with the “Double-J”—a standard polyure-thane stent inserted into the ureter to relieve pain by al-lowing urine to flow around the stone. With the Double-J, stones often remained in the ureter ; the choice of procedure to remove such stones was related to the size and location of the stone, as well as access to so-phisticated equipment. Patients with stones smaller than 5 mm typically waited in pain a few days or up to several weeks for the stone to pass. Larger stones were broken up using ultra-sound and laser technologies—leaving fragments too small to retrieve but plenty big enough to ensure a pain-ful passing. Basketing was a secondary procedure that was very effective in removing individual stone frag-ments, but it required a skilled surgeon and an extended operating time (see Exhibit 2). In the winter of 1999, Foster and Dr. Grainer be-gan brainstorming a sheath-covered stent that could be deployed in the same manner and with the same materials as the Double-J. Once inside the ureter , the sheath would be removed, and their stent would en-large the passageway with a series of expansion bulbs along its length (see Exhibit 3 ). While their aim was to relieve urine flow to a greater degree than competitive products, during their initial trials on pigs they noticed that as the device was slowly withdrawn from the ureter , stones became trapped in the basket-like bulbs. Direct and atraumatic removal of stones from the ureter had never been done before; now they had their product.

Newland Medical Technologies

This case was prepared by Carl Hedberg under the direction of Professor Stephen Spinelli . © Copyright Babson College, 2005.

1 A medical stent was an expandable wire mesh or polyurethane tube that was inserted into a hollow structure of the body to keep it open or to provide strength. Stents were used on diverse structures such as coronary arteries, other blood vessels, the common bile duct, the esophagus, the trachea, and the ureter —the tract that conducts urine flow from the kidney to the bladder.


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EXHIBIT 1

Résumé: Sarah Choi Foster

Education2002–2004 F.W. OLIN BUSINESS SCHOOL AT BABSON COLLEGE Wellesley, MA M.B.A., May 2003, cum laude, Babson Fellow. • Consulted with Boston Scientifi c, Inc.; competitive analysis and e-commerce initiatives. • Entrepreneurship Intensity Track program, Hatchery company.

1996–1997 STANFORD UNIVERSITY Stanford, CA M.S. degree in Mechanical Engineering, Design, June 1997. Concentration: Mechatronics (Mechanical Electronics) & Design for Manufacturability. • Design projects: 3M-sponsored portable overhead projector, smart tag–playing robot, automated 3-D

foam facsimile machine, automated paper palm-tree maker.

1992–1996 MASSACHUSETTS INSTITUTE OF TECHNOLOGY Cambridge, MA B.S. degree in Mechanical Engineering, May 1996. Minor in Music. • UTAP Full Scholarship.

Experience2003–present NEWLAND MEDICAL TECHNOLOGIES, INC. Boston, MA President and Founder • Raised $600K to bring an FDA-approved patented product to market. • Built team; currently running the business.

2002 PERCEPTION ROBOTICS, INC. Waltham, MA Kauffman Intern, Product Manager Intern • Analyzed potential e-commerce partners for an interactive retail software system. • Helped develop new product value proposition for Web cameras.

1999–2002 THE GILLETTE COMPANY Boston, MA Design Engineer, Shaving and Technology Lab • Managed design process and testing of high-volume plastic packaging for various toiletries. • Designed Economy Gel antiperspirant container from market requirement to mold production.

1998–1999 JOHNSON & JOHNSON PROFESSIONAL, INC. Raynham, MA Project Engineer, Hip R&D • Served as lead engineer to design hip implant products; two patents granted, three pending. • Launched the Bipolar and Calcar Hip instrumentation systems, developed with customers. • Worked with team of Japanese surgeons to design custom implants for Asian population. • Analyzed structural integrity of various hip prostheses by Finite Element Analysis.

1997–1998 DEFENSE INTELLIGENCE AGENCY / PENTAGON Washington, DC Analyst, Strategic Industries Branch • Researched new technological developments in foreign countries, briefed division heads. • Wrote articles in specialty fi eld for internal publication to decision makers.

1995 MISSILE & SPACE INTELLIGENCE CENTER Huntsville, AL Intern, Surface to Air Missile Division • Researched modifi cations to a foreign missile and resulting impact on U.S. defense strategies. • Served as co-liaison to White Sands Testing Range and Sandia National Lab for testing.

Other: Unigraphics, ProENGINEER, SolidWorks ANSYS, C, working knowledge of Korean and German. Interests include symphony playing, triathlons, downhill skiing, cycling, and woodworking.


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Throughout 2000 and into 2001, Foster took charge of the effort as Grainer returned to his full-time practice. She raised money from friends and family to secure a patent on the unique-application stent . At the same time, she continued to examine various aspects of the oppor-tunity in order to assemble the business plan she would need to attract professional investors.

Target Market

Foster determined that the target market included kidney stones that received primary ureteroscopy and extracor-poreal shock-wave lithotripsy (ESWL) therapy (the two most common procedures), as well as stenting to relieve urine flow. The price of ESWL machines ranged from $500,000 to $1.5 million, a prohibitive cost to all but the largest medical centers. Although these prices were coming down, there were only 400 units in the United

The SRS

To emphasize what they now saw as the primary attri-bute, Foster and Grainer named their device the Stone Removal Stent (SRS). A new series of animal trials led to the following procedure outline:

1. The ureter was located within the bladder using a cystoscope , and a guide wire was inserted up the ureter .

2. The SRS was slipped over the guide wire and pushed into place.

3. The sheath around the SRS was removed to open the baskets.

4. In one to two days, the SRS caused the ureter to passively dilate and enlarge the passageway.

5. The SRS was slowly withdrawn, whereby stones were either trapped in the baskets, fell into the bas-kets upon removal, or were merely swept alongside.

EXHIBIT 3

The SRS: Insertion and Expanded Forms

Ureteroscopy• Stone in lower ureter• Scope often requires dilation first• Laser lithotripsy very expensive• Basketing• Definitive removal• Labor intensive/ specialized• High equipment costs

ESWL (Shockwave)• Stone in upper ureter or kidney• Least invasive• Equipment expensive (only 7% of hospitals have them)• Shattered fragments created must be passed

Kidney

Collectingsystem

Ureter

Bladder

EXHIBIT 2

Anatomy and Stone Removal Procedures

spi29104_ch08_245-276.indd 1 18/10/11 1:04 PM user-f466spi29104_ch08_245-276.indd Page 271 18/10/11 1:04 PM user-f466 Volume/207/es/MH01495/spi29104_disk1of1/0078029104/spi29104_pagefilesVolume/207/es/MH01495/spi29104_disk1of1/0078029104/spi29104_pagefile

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urologists in the United States, with most treating stones. A typical urologist cared for a large patient population, averaging 140 stone patients per year. In the Internet age, patients were becoming more educated about options and could therefore be strong influencers. Patient concerns included relieving immedi-ate pain, avoiding invasive procedures, and the defini-tive removal of the stone. Kidney stone patients were most often Caucasians between the ages of 20 and 40. Eighty percent were likely to have a recurrence.

Attracting the Competition

The main competitors were those who had a leading market share in basket retrieval and ureteral stent devices (see Exhibit 5 ). Stents like the Double-J were simple de-vices, produced by many manufacturers, and were not purchased on the basis of any technological superiority. Revenue leader Boston Scientific had made many acquisitions. This suggested to Foster that their internal R&D structure did not provide the company with suffi-cient numbers of new innovations. Unit leader ACMI was undergoing a restructuring and a change of leader-ship that seemed indicative of a lull in new innovations. Neither company had a presence in the ESWL market. Makers of the ESWL machines and laser lithotripsers were also suppliers of ESWL accessories such as water bags and fluids. Foster reasoned that large sellers like Dornier MedTech and Siemens Medical Systems might have an early-stage interest in a product like the SRS because it worked in conjunction with ESWL. In a sense, though, every stent competitor in the space was a poten-tial distributor—or a research and development partner or parent. Major players in the industry, with their estab-lished and credible sales and marketing capabilities,

States, about 7 percent of all hospitals. Over $2 billion was spent every year on treating kidney stones. The average per patient annual expenditure was in the range of $7,000, excluding pharmaceuticals. Foster found that in the early 2000s there were ap-proximately 260,000 primary and secondary proce-dures each year in the United States. Because the SRS had proven effective in capturing smaller stones that were currently left painfully untreated, she added in 75 percent of those for a total U.S. market of 800,000 target procedures ( see Exhibit 4). At a price of $250 each, the SRS represented a $200 million opportunity.

Customers

The two main customers for this stent would be urologists and medical centers. The urologist determined the proce-dure and decided which device would be used. The ac-tual buyer would be the hospital, where purchasing administrators kept an eagle eye on the costs and were often strongly influenced by reimbursement procedure policies set by the Center for Medicare and by Medicaid Services. One method hospitals used to cut costs was to order aggregated packages of devices and services from highly diversified suppliers such as Johnson & Johnson. Urologists were well educated, risk averse, and gen-erally not keen on trying brand new devices and proce-dures. A physician’s chief concerns would include patient comfort and safety, risk, and reimbursement. A decision to try an innovative device was most often prompted by a visit from a trusted sales representative. In making that decision, the urologist would be most in-fluenced by endorsements from academically respected colleagues and from sound technical data from clinical studies. In 2001 there were just over 7,100 licensed

EXHIBIT 4

Procedure Market Tree

Open/percutaneous(6%)

Total 800,000 procedures

X $250 = $200M

2ndprocedure

ESWL(83%)

Baskets/graspers

Not treated(75%)

Procedure(25%)

5–8 mm stones(80%) 20,000

Larger stones(100%) 200,000

930,000 stonepatients whosee doctor

(50% of allstone sufferers)

220,000 primary current procedures280,000 total current procedures

In addition: 200,000 ureteral stents used annually

3–5 mm stones(75%) 540,000


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To do it the right way, I was going to need some practi-cal business education. In the fall of 2002, I was ac-cepted into the MBA program at the F.W. Olin Graduate School of Business [at Babson College in Wellesley, Massachusetts]. I then switched jobs, to a position with a well-defined, short-range end point.

Patent work—mostly legal—took nearly a year and drained a third of the capital she had raised. After com-pleting some additional R&D work on the stent , Foster applied for Food and Drug Administration (FDA) ap-proval. Given her past experience with Johnson & John-son, and some good advice from an expert at Babson College, no one was surprised when the SRS sailed through the usually tough FDA process in just under three months. Foster recalled the strategy:

Professor Boulnois 2 had come up with the idea of taking a two-tiered approach. First we got the SRS approved as a basic drainage stent —no problem there. When we filed our follow-on application with a different indication—stone removal—we got lucky because we had the same reviewer for both applications. She saw that it was the identical device that she had just approved, with a new indication, and because of that, we received that next approval in less than 30 days. And because stents are

could significantly affect the speed of adoption of new devices. Unlike most ventures, the strategy would not be to go up against top competitors, and investors would have little interest in closely monitoring the usual metrics such as sales revenues, gross margins, and projected net in-come. The objective would be to establish a following among the best medical practitioners in the world—even if that meant giving away the stents for free. Foster felt that once the SRS had proven market demand, the company would then have an excellent chance of being acquired.

Start-Up

Working part-time, Foster completed the business plan in the late summer of 2001. Because an acquisition harvest could not be accurately timed or priced, finan-cial projections for the company she had named New-land Medical Technologies followed a standard scenario of steady growth (see Exhibit 6). By the spring of the following year, she had raised just over $600,000 in seed capital from friends, family, Grainer, and her own savings. When she began to discuss assembling a cohe-sive venture team, Foster was surprised to learn that Grainer had been assuming all along that she would serve as president and CEO. While she was very ex-cited about the opportunity, she also knew what she didn’t know:

EXHIBIT 5

Competitor Profi les

Location Employees Revenues Products Price Points Perception

Cook Spencer, IN 300, incl mnf $25.1M Stents, Medium Good productsUrological (4,000 all baskets, wires, and innovative—(private) Cook) and other strong company lithotripsers (#1 in biliary market)

BARD Covington, 8,100 (all $95M w/out Stents, baskets, Low-end Slow, no(urological) GA BARD) Foleys ($360M laser, and other innovation total) 1999 lithotripsers

Microvasive Natick, MA 14,400 (all $143M Stents, High-end Innovative (with(Boston BSC) $133M baskets, laser, acquisitions),Scientifi c) (stones) and other good sales force, 1999 lithotripsers good products

Surgitek Southboro, MA $17M Stents, baskets, Low-end Based on(ACMI) (HQ); Racine, stents scopes, lasers quantity, but no(private) WI (Urology) innovation, hungry for new products

Applied Rancho Santa 375, incl $31M (all Various dilators High-end Interesting, good,Medical Margarita, CA mnf three and specialty clever products, divisions) items not full product 2001 line

2 Dr. Jean-Luc Boulnois , an adjunct professor at Babson College, was founder and president of Interactive Consulting, Inc., a management consulting firm specializing in business development for European early-stage medical technology companies entering the U.S. market.


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While attending the Olin School, Foster spent much of her time looking for the $1.7 million in venture funding she estimated Newland would need to commercialize the SRS device. After pitching her plan to numerous in-vestors, angel groups, and business plan forums in the Boston area, Foster came across a business development foundation in Rhode Island. They agreed to put up $65,000—as long as 20 percent was spent directly in Rhode Island. As a result, Foster began working with a company in that state to produce prototypes in a manner that would satisfy the stringent FDA production and qual-ity requirements. The company was also offering a total solution under one roof—from extrusion to packaging. By the time she had graduated in January 2004, Foster had attracted two additional team members—an engineer she had met at a previous job and a business development talent who had approached her at a busi-ness plan forum. Because she had no money to pay them, in both cases she offered to “back pay” their

an established category of medical devices, we got our reimbursement codes in far less time than it would nor-mally take a company with a brand new technology. 3

EXHIBIT 6

Newland Pro Forma Income Statement

2004 2005 2006 2007 2008

Net Revenues 0 721,000 8,380,000 22,327,000 34,811,625

Total Cost of Goods Sold (see below) 0 335,160 2,692,135 6,620,487 9,434,219 Percentage of Revenues 46.5% 32.1% 29.7% 27.1%

Gross Profit 0 385,840 5,687,865 15,706,513 25,377,406 Percentage of Revenues 53.5% 67.9% 70.3% 72.9%

Operating Expenses Sales & Marketing 166,200 939,900 1,573,016 2,379,059 2,858,596 Research & Development 225,240 448,795 600,140 947,216 1,105,338 General & Administrative 153,800 315,700 680,055 1,057,531 1,398,100

Total Operating Expenses 545,240 1,704,395 2,853,211 4,383,806 5,362,034

Net Earnings before Taxes (545,240) (1,318,555) 2,834,654 11,322,707 20,015,372

Taxes 0 0 498,899 4,529,083 8,006,149

Net Earnings (545,240) (1,318,555) 2,335,755 6,793,624 12,009,223

Cost of Goods Sold Breakdown (e.g., 2005)

Direct Costs Average Material Cost per Unit 8 Average Labor Cost per Unit 14 Sterilizing and Packaging per Unit 8 Manufacturer per Unit Markup (20%) 6

Total per Unit Direct Costs 36 Direct Costs: 6,200 Units (2005) 223,200

Indirect Costs Salaries and Benefits 84,750 Facility; Shipping 7,210 Depreciation 20,000

Total Indirect Costs 111,960

Cost of Goods & Services 335,160

3 By the early 2000s, the Centers for Medicare & Medicaid Services (CMS) had become a bottleneck challenge for many ventures seeking to commercialize a medical device product. The CMS was charged with the subjective task of evaluating the costs and benefits of particular technologies—an evolving field with plenty of room for debate. Reim-bursement issues could be so complex and complicated that receiving payment for new products had become the greatest stumbling block for early entrants—and CMS was only one piece of the coverage ap-proval puzzle. To achieve reimbursement coverage and payment throughout the country for a new technology, medical device ventures were required to weave their way through a maze of several hundred payers. Moreover, new products had to struggle to get assigned a unique code that would distinguish them from existing technologies. Even after that code was assigned, it might take several years for Medicare to recognize that device as a new cost. Since health care facilities wouldn’t use products that had not received proper payment approvals, it was not unusual for reimbursement gaps to derail the im-plementation of viable, FDA approved medical device innovations.


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design stage. For example, we chose an insertion guide wire that was larger than the standard—but one that an advisor said ought to be fine. We had created a device that worked—it could stay in the body, it dilated the ureter , patients didn’t feel any pain, and it caught stones—but because our design was far more difficult to place than a standard stent , we had failed to create a salable product. When it became clear that this was never going to take off as a commercial venture, we went back to the drawing board.

Significantly compounding this challenge was that her chosen manufacturer had turned out to be not even remotely capable of being a one-stop shop. As a result, the team was compelled to assemble a supply chain of specialists: an extruder, a fine-tooling shop, a coating company, a sterilization expert, and a medical pack-ager. Although Foster was pleased that this arrange-ment gave them more control over quality at each level of production, she understood that the need to pass off work-in-process between several companies would ex-tend lead times and increase the possibility of communi-cation challenges. From a strategy perspective, she explained that developing a single-site manufacturing capability may not have been the way to go anyway:

I have found no consensus on whether medical device companies like ours should spend time and money per-fecting a manufacturing capability. Some investors feel that having a production capacity would boost our ap-peal as an acquisition. Other investors feel just the op-posite, that a big company like Boston Scientific would acquire Newland for the value of its patented devices, and would probably prefer to develop their own manu-facturing systems.

Rebirth and Conception

In late 2004 the team—bolstered by 60 successful pa-tient trials and very positive feedback from a range of physicians—began their full-scale effort to build a criti-cal mass of advocates and attract at least one major distributor. They got a significant boost in March 2005, when Boston-based Taylor Medical Supply (TMS) agreed to test Newland’s stent in a few of their major markets in the United States. Meanwhile, Foster focused on raising funds to re-store coffers depleted from the struggle to get back to the point where they had thought they had been months earlier. At an angel investor breakfast in late May, she met a pair of harvested entrepreneurs looking for invest-ment opportunities. Chris Fallon had made his money when his single-product banking software venture was acquired by a major financial corporation in New York. Claudia Grimes was the cofounder of an adventure sports vacation portal that was snapped up by a multi-national travel agency—just eight months after her ven-ture had proven sales and profitability.

earned salaries from the next round of funding she ex-pected to raise. Even though the economy had substantially recovered following the 2001 recession, investors were still very cautious. Ever since they had received FDA approval, Foster had been meeting with and receiving helpful feed-back and additional contacts from numerous venture capitalists. She finally concluded, however, that Newland was at too early a stage for that type of investor. At a business plan competition in spring 2004, a fellow Babson graduate recommended that she speak with his uncle, a local philanthropist and retired venture investor. Foster recalled that at first the lead appeared to be yet another dead end:

Peter Cunningham is in his seventies, and he had told his nephew Bill that he wasn’t doing any more invest-ments. But Bill said, “You’ve got to meet this woman and see what she is doing.” So I met him in November, and soon after, he became our first angel investor.

Cunningham invested $250,000 and attracted two other local angels, who each invested $75,000. The capital was a long way from full funding, but it provided sustaining salaries for the team and a one-room incuba-tor space in Boston’s south end—halfway between two major medical research centers. Their proximity to those research labs would prove immediately critical.

Setbacks

By getting to know the researchers at the animal testing facilities at New England Medical, Foster noted that they were able to further Newland’s research at almost no cost:

The labs were doing their cardio work on pigs in the morning and working with the urinary tract system most every afternoon. They were curious about the SRS capa-bilities and were willing to add our stent to their work with the ureters . It was great; we didn’t have to hang around for it, and we could just walk over to discuss what sorts of indications and challenges they had identified.

While pre-FDA approval trials had confirmed that the SRS would perform as expected once the device was placed in the ureter , these latest tests brought to light some serious design flaws. Foster explained,

Back when we started, the first five stents we designed wouldn’t fit in the ureter . So our focus became making the baskets small enough to fit inside a sheath. We made a bunch, and when 15 in a row deployed successfully and worked as expected, I immediately began to move forward on developing the business plan. Then when we got FDA approval and the reimbursement codes, I fig-ured we were ready to go out into the market.

The problem was Dr. Grainer and I hadn’t talked to enough doctors early on when we were still in that


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of the relationship provided them with a good deal of latitude with regard to setting the pace and direction of the acquisition strategy that Foster and her original inves-tors had signed off on, and it wasn’t long before Fallon and Grimes began to demand changes in the deal struc-ture that would provide them with better returns. In mid-October 2005 their investment banker brought an offer to the table from a middle-tier medical supply distributor based in Florida. The $9.5 million term sheet provided a generous five-year earn-out for Foster and her team—provided they stayed on in Boston to develop a line of innovative stents . The terms also required that Foster serve as president, and it was contingent upon FDA approval of Newland’s latest innovation—now in early trials. 4 The offer provided no funds to make that happen, and when Fallon and Grimes said that any fur-ther capital would have to come with additional equity, Foster finally decided to confide in her original investors:

I had kept Chris Cunningham and his group apprised of our decision to seek an acquisition, and they had agreed with that. But these two entrepreneur angels were so difficult to work with, and neither of them had any experience in the medical industry. Maybe that’s not a crucial requirement, but overall, they just didn’t seem to get what we were about. Mr. Cunningham looked at me and said, “Well, if what has been stop-ping you from tossing these two aside was the money, you should have come to me earlier.”

But for Foster this wasn’t just about the money, the equity split, or the harvest: It was about developing new and exciting medical products that could make a differ-ence. Nevertheless, as president she felt that if Newland could strike a deal with a large company that would give current investors a decent return and provide New-land with a base of resources to further new product development, then that was the path she ought to pur-sue. On the other hand, staying the course and building a line of innovative products would significantly in-crease their acquisition value. If not for her pregnancy, Foster wouldn’t hesitate for a moment; she’d return to their original strategy—and to her passion for building an innovative medical device enterprise. To pursue that course now, however, she would be facing the prospect of being a new mother and running a growing business. With an offer on the table and funds running short, she swallowed hard against a particularly acute bout of morning sickness. It was time to make some tough decisions.

Both investors expressed interest in Newland, partic-ularly because they felt that the company was at an ex-cellent point for a lucrative early-stage acquisition. Foster explained,

There are a few times when you can sell a medical de-vice company like ours: after a product development milestone like proof of concept on animals, after FDA approval, after a series of successful clinical trials, and after your first million or so in sales.

Chris and Claudia were certain that since we had a patented product that had FDA approval and payment codes, it was an excellent time for us to sell. They could see we were ready for market, and they were talking about putting up at least $200,000 apiece—as long as we pursued an acquisition strategy. Although an early-stage acquisition (pre-sales) was never in our plan, the more we thought about it, the more it sounded like an attractive option.

One constituent that was not pleased with what they saw as an abrupt shift in strategy was Taylor Medical Sup-ply. Foster thought that their displeasure was particularly acute because of the way they learned about the change:

Things had started to move very fast. We chose an invest-ment banker whose initial task was to act as an intermedi-ary between Newland and potential buyers. He called TMS to let them know we were pursing an acquisition, and to ask if they wanted in on it. They were definitely taken aback. They told the investment banker that from their perspective we’d been moving toward a distribution deal. That was news to me; they had never seemed more than lukewarm about taking on our device. Not only did they decline to put in an offer, but they suspended their test marketing of the SRS. Still, they did indicate that ini-tial feedback from their clients had been very positive.

With endorsements from two prominent medical cen-ters, and a few promising acquisition prospects consid-ering the possibilities, it seemed that momentum was building for a speedy harvest. Encouraged by Newland’s progress, that summer, Foster and her husband ran the numbers—with an allowance for misconceptions—and estimated that it was an excellent time to start a family. On paper, their planned parent-hood coincided well with the harvest schedule that Newland’s newest investors were espousing. The couple was a bit shocked, but thoroughly delighted, when Foster became pregnant that very month. Well, she mused, maybe the acquisition strategy would continue to charge down a similar fast track. It didn’t.

A Fork in the Road with a Baby on Board

Despite assurances that all was going according to their plan, by the fall Foster was having a hard time dealing with the aggressive angels she’d brought on. The nature

4 Newland Medical was working on a line of stents designed to hold the ureter open against, for example, external compression from a tumor. Newland’s ureteral structural stents would be significantly more resistant to compression than any product that was currently on the market. These devices would allow patients with locally and regionally invasive tumors (typically end-stage and terminal) to sur-vive longer with healthy kidney function. Taking into account na-tional occurrence rates for diseases that tended to exert pressure on urinary passageways, the team estimated that this represented a $25 million market opportunity.


new venture creation - chapter 8

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