Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Essential Element #2: Take Time to do Business Planning before You Jump.

More often than not start-up companies do very little product planning or basic product or market due diligence before they decide what path is best for their company. This “read, fire, aim” approach to business planning has caused many start-up companies to fail or at best restart their planning process after multiple failed efforts in meeting with investors. The old adage “you never get a second chance to make a first impression” is true – especially in the private equity funding community. More often than not, given the small, insular characteristics of the finance community, you will not get a second chance to restart your company and secure investor interest. So take time to do business planning before you jump.

Business Planning and Business Plans – What’s the Difference?

The difference between business planning and a business plan is that one is a process – business planning – and the other is the result of the business planning process – a business plan.

The Business Planning Process
Business planning is a process. Many large- and medium-sized corporations go through their business planning process on an annual basis. This process determines where they are going to spend their resources (capital equipment, human resources, etc.) in the future based on the dynamics of the market place. This annual process is sometimes very well defined, with an end date and deliverables that are provided at all different levels of management. In other cases, the business planning process is very informal and does not require the same level of due diligence. In small companies, especially start-ups, the business planning process can be non-existent. Whether well defined or informal, the objective of the business planning process is to set the direction of the corporation for the next three to five years based on the dynamics of the market place. Business planning provides a process that all levels of the organization can review and agree to, such that everyone from the lowest to the highest level of the organization is moving in the same direction.

With the stated goal of optimizing the return on investment for the corporation, and ultimately the shareholders, the business planning process is the key for successful start-up companies. By going through this business planning process, you can determine the best way to spend the company’s resources for the next three to five years. Many times, various technology, product, or service ideas or concepts do not make it through the business planning process. This is the “stated goal” of the business planning process – to weed out those technologies, products, or service offerings that do not provide a sufficiently high enough return on investment opportunity for which a company should spend its valuable resources.

The Business Plan
The business plan is the end result of a start-up company’s business planning process. The business plan is a document that delineates, in detail, the technology, product, or service offering that is being funded for the next three to five fiscal years and possibly beyond. The business plan is a single document that provides all the details of the technology, product, or service offering, from expected development costs to projected market penetration over the foreseeable period of interest to the expected financial return on investment. The business plan is often developed over a period of time and goes through multiple iterations. The end result is a “complete” document that provides all of the necessary details for a given technology, product, or service offering.

Why Both Business Planning and Business Plans are Necessary

The business planning process, and the result, the business plan, are necessary for companies to rationally determine where to spend their valuable resources, over the projected period of interest. For large corporations, the business planning process can result in the development of multiple technology, product, or service business plans. Refer to the following figure. On the other hand, for start-up companies the business planning process generally results in the development of a single business plan. Refer to the following figure.

The Business Planning Process – “Provides the Roadmap”
The business planning process is used to provide the “roadmap” for your corporation. If not done, your corporation, public or private, has no rational path forward in which to invest its resources. In addition, there is no ultimate understanding of the “topography” of the market. The result is that your corporation is walking down the road with a “blindfold” on, not knowing what to do or where to invest its resources. Even if the blindfold is taken off and there are multiple paths in which to take, your corporation does not know based on a rational planning process, which path forward will be the best for the company. There are no defined strategies or tactics that allow your company to navigate the turns or bumps in the road. In addition, there is no way to define your company and how you plan to position yourself, relative to your competitors, in the market.

The exercise of going through the business planning process and at the same time using this process as a tool in which to vet your company’s business ideas, resulting in a focused business plan does several things for your company. First, this process allows all business concepts and ideas to be reviewed on a level playing field. This gives each business idea and resulting business plan the ability to be presented and evaluated on its own merits. Second, this process provides the ability for the company to review each business plan on its investment requirements and return on investment. This provides a financial basis in which to evaluate all business plans. Finally, once completed it provides a corporate-level vetted roadmap in which your company can move forward to introducing its new technologies, products, or services into the market.

The Business Plan – “Sets the Bar”
The business plan “sets the bar” in which a corporation measures itself and its overall performance. Based on a business plan or multiple business plans, a corporation then has a way to determine if it is performing up to the its own projected goals and standards, as well as the generally accepted standards that define a successful company in the industry in which they are participating. These can include, but are not limited to:
• Revenue growth objectives,
• Market share gains,
• Gross margin targets,
• Sales and marketing objectives,
• Customer traction goals,
• Operational margin goals,
• Earnings growth objectives, and
• Return on investment targets.

The business plan can also determine if the technology, product, or service offering is maximizing the return on investment for your corporation by comparing projected and actual performance over a given period of time.

By going through the business planning process and developing the resultant business plan, your corporation can then develop a proactive, rational plan for addressing the market for its underlying technology, product, or service offerings.

The information outlined in this article comes from my new book entitled “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up companies. This book is available at www.carlsbadpublishing.com.

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February 2, 2009 - Posted by | Venture Capital | , , , , ,

2 Comments »

  1. Robert, really enjoyed your post. I found your blog via LinkedIn as I am also a part of the SoCal Venture group. I’m a San Diego native living in the mid-west (relocated for a job) but plan on returning west (hopefully soon!). Would love to connect sometime!

    shoot me an email if you have the time graves.ryan[at]gmail.com

    Cheers.

    Comment by Ryan Graves | February 2, 2009 | Reply

  2. Hello Robert,
    Very interesting post. I am in the oil business, India and in plans to start my own project. Am interested in forming cross-border partnerships to take back into India. Your notes on the business plans are really helpful.
    Thanks,
    Ronak
    (ronak.rajan at gmail.com)

    Comment by ronakrajan | March 12, 2009 | Reply


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