A recent report published by Octopus revealed that “not knowing where to start” is one of the key barriers to young people taking up the path towards becoming an entrepreneur. As part of our Future Founders series, we’re sharing insight and know-how from the people at Octopus who know what it takes to start a business from scratch. In this piece, we take a look at one of the most challenging aspects of getting a business off the ground: the business plan.
Okay, so you’ve got a fantastic business idea. Now it’s time to put some shape, milestones and numbers together. Writing a business plan can be a valuable step on the journey towards becoming a full-fledged entrepreneur. But how do you make sure you’ve gotten your business plan right? We asked George Whitehead, Venture Partner Manager at Octopus Ventures, to guide us through the process.
Tip 1: be clear on the purpose of your business plan
Every entrepreneur should expect to write a business plan at some point. Start with a clear view of why you’re doing it and you’ll avoid some common mistakes. As George explains: “A lot of people get caught up in thinking of their business plan as a pitch. They write to communicate the pitch and the plan ends up being a sales document. And in doing this, they miss the opportunity to think strategically.
“You need to write something that’s genuinely a plan for your business. This is your chance to really understand how aligned you and your partners are, and to get clear on your expectations. Approaching it this way, you’ll create a document that’s helpful to everybody, internal and external, who wants to understand your business direction”.
Tip 2: make sure your business plan covers all the right points
You need to explain why you think your idea is going to work, and be clear on your idea’s weaknesses as well as its strengths. There are plenty of business plan formats available around the web, but yours should aim to include the following:
- Executive summary: start by telling the reader who you are, what your business will do and your financial goals (an outline is fine). This might be all a potential investor reads, to begin with, so keep it concise and make every word count.
- Business description: talk about your company and how it’s different.
- Product or service: what you’ll sell and how might you expand in future.
- Market analysis: give your insight into the market you’re planning to enter, your competitors and how your business fits into this landscape.
- Marketing and sales: how you’ll reach your customers, how you’ll market yourself, the sales channels you’ll use, and whether you’ve sold anything yet.
- Management team: you and your team, your experience and your plan for leadership structure.
- Financial projections: the money you need and at what points, projections for expenses, cash flow and balance sheet.
Tip 3: Make your business plan open, honest and user-friendly
Having read thousands of business plans, both from a venture capital and angel investor perspective, George sees writing a business plan as a two-phase process. Phase one is creating a genuine strategy for action, alone or with your team. Then phase two, writing it up, is simply about communicating it and adding a little polish.
Be completely honest. “It’s not in anyone’s interest to present something glossy you don’t believe in”, George cautions. “An investor is going to expect you to broadly follow the plan you’ve presented. If you have another agenda, it may well come back and bite you later on when you start to go off course.
“From a venture capital perspective, more and more people are looking to back an A-grade entrepreneur who’s completely straight talking and honest. Someone who reports openly when things go wrong and adapts their plans to be as effective as possible when they hit the market. They don’t want an entrepreneur who over-promises, then surprises investors and employees later on. And,” George hastens to add: “make sure your business plan is user-friendly. Take a step back and look at your plan with your ‘external’ hat on, adding enough context for a new reader and taking out the jargon”.
Tip 4: Make sure your business plan is the right length
Your business plan doesn’t have to be a lengthy document, but it should offer a considered evaluation of the strengths and weaknesses of your idea and how you plan to test it. And George advises that any plan should be relatively brief; “you ought to be able to use a normal stapler to secure the pages”.
You may choose to create it as a PowerPoint presentation or prefer a Word document, but regardless of the format, you should consider the challenge of presenting the guiding principles that will drive your business towards success. As George explains: “This is what you’ll use to test your business, and if it doesn’t work, that’s fine. You can always go back to the business plan at a later stage and think of how to plan for the future again”.
Tip 5: Be honest with yourself
Being an entrepreneur is hard work. There’ll be highs and lows and plenty of sacrifices needed along the way. Think about your personal goals and the lifestyle you want in future.
George says, “it’s good to work out with whoever you’re in business with what your long-term plans for the company are. Let’s say you want to exit the company in a few years because your kids are older, this is your fourth business, and you feel you’ve done your time. If your partner wants to grow something huge and exit in ten years’ time, your strategy to grow the company is going to be completely different.
“Have those difficult conversations with whoever you’re working with, whether they’re investors, colleagues or co-founders. Are you going after VC funding with all the risk, dilution and scale you’ll need to accept? Are you comfortable with a heavy travel schedule? Use the challenge of writing your business plan as the prompt to discuss these things. It could make life a lot easier in years to come”.
Tip 6: Choose the right time frame
Your business plan should outline what success for the business looks like, and feature some Key Performance Indicators (KPI) that you can measure your success by. Ask yourself: what proof points do we need to measure our success? What’s the next milestone we can reach? Business plans usually focus on the next one to three or five years, but the time frame for your plan needs to reflect the business itself.
George says, “KPIs are really important to see if you’re on the right track. It comes back to the nitty-gritty of your key objectives. What’s in the line of sight in the next six months, 12 months, 24 months? What are the key things you’ve got to get right to do this? It’s easy to pretend one more month will make a difference and not adapt to the changing market”.
Tip 7: Remember to talk about yourself
How you write about yourself will depend on the audience for your business plan, but it’s essential you do. If you’re just writing for you and a possible co-founder, have an open discussion about your mutual strengths and weaknesses. What are you good at and what would you be better off hiring someone else to take over?
George explains, “even if it’s your business idea, it’s crucial for you to lay out why you’re suited to the role of business founder. Ask yourself the tough questions before other people ask them of you – what are your skills, and what are all the skills you’ve pulled together as a team? Any potential investor will want to see your thought processes, and if you’ve identified any knowledge or technical skills gaps, how you intend to fill them”.
Tip 8: Accept that your business plan will change
‘Rolling with the punches’ is a necessary skill when you’re starting a business. Successful entrepreneurs accept their plan will evolve constantly.
George explains, “your business plan helps you form a vision for the future to then start testing against. It lets you get on and do things. What matters is that you take action and keep iterating as you hit challenges in the real world.
“No one expects you to stick to the plan rigidly”. And George notes, “the best entrepreneurs are data junkies. They take in so much information and are constantly iterating on the back of this data feed”.
Tip 9: Know where investors will turn to first in your business plan
You’ve had the tough discussions, you’ve created your road-map and you’ve polished your business plan. It’s time to hand it over. Where will a potential investor start reading?
George’s approach is always the same, “I think the executive summary is really important and it tends to be what people send me first of all. I’ll scan to see if the sector and the sums of money involved are a fit with my interests. How scalable is this? Is it massively competitive to something already in our portfolio? There are lots of reasons an opportunity is a fast ‘No’.
“And then I go to the people section, because there’s overwhelming evidence a really competent team can help to turn a B-grade idea into an A-grade company. You can be forgiving about so many other things if you see some outstanding people at the front”.
Tip 10: Take the opportunity to create something meaningful
If you’re reading this, your idea will likely be at an early stage. But planning ahead is a big step towards making it a reality. Taken seriously, creating a business plan is a powerful process to align you and your team for the future. Writing it up is simply putting structure to the goals you identify.
Take the opportunity to ask yourself the tough questions and be honest. You’ll create something of enormous value to you and to your potential investors.