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HUMBOLDT-UNIVERSITÄT ZU BERLININSTITUT FÜR INFORMATIK

TECHNICAL ENTREPRENEURSHIP

Vorlesung 2

BUSINESS PLAN

Wintersemester 1999

Leitung: Prof. Dr. Miroslaw MalekBetreuer: Peter K. Ibach

www.informatik.hu-berlin.de/~rok/entrepreneurship

TECHNISCHE UNIVERSITÄT BERLININSTITUT FÜR INFORMATIK

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OPPORTUNITY

• Types of startup firms:– 1) mom-and-pop business (marginal firm, life-style firm)– 2) high potential firm– 3) foundation firm

• Types 2) and 3) have at least $500,000 in sales and grow at a rate of minimum 10% per year.

• 2) and 3) have much bigger success potential than mom-and-pop businesses.

• 7 % of 7 million US companies grew over 20 % per year• Over 1 % of 7 million (80,000) grew over 50 % per year• Venture capital founded firms have a 60 % plus success rate

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THE WINDOW OF OPPORTUNITY

$1 billion

$500 million

$250 million

$100 million

Mar

ket s

ize

Window ofopportunity

5 10 20

Market

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THE DIFFERENCE BETWEEN IDEAS AND OPPORTUNITIES

• 1 - 3 % of ideas are considered opportunities by VC's.• A good opportunity must be

– attractive– durable – timely

• Lemons (loosers) ripen in about 2 1/2 years.• Pearls (winners) take seven to eight years.

OPPORTUNITIES

SKY IS THE LIMIT

IDEAS

GETTING REAL

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SALES VOLUME OF U.S. COMPANIES

• 20% of businesses have sales over $ 1M

• 10 % of businesses have sales over $ 2M

• 1.25 % of businesses have sales over $ 10M

• 0.67 % of businesses have sales over $ 25 M

• (U. S. government data for 1980) In 1990 these figures have doubled

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ONE-YEAR SURVIVAL RATES BY FIRM SIZE

Firm size

(employees)

Survival percentage

0-9 77.8

10-19 85.5

20-99 95.3

100-249 95.2

250 and more 100.0

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FOUR-YEAR SURVIVAL RATES BY FIRM SIZE

Firm size

(employees)

D&B study

(1969-76)

California

study

(1976-80)

0-19 37.4 % 49.9 %

20-49 53.6 % 66.9 %

50-99 55.7 % 66.9 %

100-499 67.7 % 70.0 %

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SIX MOST IMPORTANT FACTORS (FROM VC'S PERSPECTIVE) FOR SUCCESSFUL COMPANY

• 1. the best entrepreneur and the quality of the team (people)

• 2. the best entrepreneur and the quality of the team (people)

• 3. the best entrepreneur and the quality of the team (people)

• 4. the best entrepreneur and the quality of the team (people)

• 5. Market potential and marketing

• 6. Idea

• The management team must have quality, depth and maturity.

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MARKET STRUCTURE

• Market structure is characterized by:– The number of sellers– The size distribution of sellers– The differentiation of products– The conditions of entry and exit– The number of buyers– The cost conditions– The sensitivity of demand to changes in price

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ENTRY STRATEGIES FOR ENTERING BUSINESS

• Developing a new product or service (innovation)

• Developing a similar product or service (imitation)• Buying a franchise• Exploiting an existing product or service• Sponsoring a startup enterprise• Acquiring a going company

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WAYS TO GENERATE IDEAS: WHAT IF ...?

1. WHAT IF it were longer? or smaller? inside out, different material, color, thinner, lighter, shorter, etc.

2. TURN PROBLEMS INTO PROFITS (eco industry, new civilization headaches)

3. VISUALIZE (mental pictures)

4. IDENTIIFY NEEDS

5. FORCED CONNECTIONS (e. g., clock radio and wrist watch)

6. KEEP A RECORD OF YOUR IDEAS ("creativity file")

7. CULTIVATE YOUR IDEAS

8. BE RECEPTIVE TO IDEAS

9. STOP BEING PRACTICAL

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WAYS TO GENERATE IDEAS: WHAT IF ...?

10. TRY SOMETHING NEW

11. BE PROGRESSIVE, NOT REGRESSIVE

12. BRAINSTORMING

13. IMPROVE EXISTING IDEAS

14. BRAINWRITING

15. SERENDIPITY TECHNIQUE ("BY CHANCE")

16. CREATIVE UNHAPPINESS

17. MIND MAPPING

18. SPEAK UP AND LISTEN

19. GAME STRATEGY METHOD (CHESS, JIGSAW, etc.)

20. JOIN BUSINESS OR ENTREPRENEURS ORGANIZATIONS

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MIND MAPPING

CHOOSING A BUSINESS

5-POINT SCALE ASSESSMENT

INSURANCE

SELF-

ASSESSMENT

STRATEGIC

PLANNING

PERMITS PATENTS/

TRADE

MARKS

BUSINESS

LOCATION MARKETING

LEGAL

ISSUES BUSINESS

IDEA BUSINESS

PLAN

TAXATION

LICENCES GENERATING

IDEAS

PERSONNEL FINANCING

PPC TECHNIQUE SWOT ANALYSIS

POSITIVES

POSSIBILITIES

CONCERNS

STRENGTHS

WEAKNESSES

OPPORTUNITIES

THREATS

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WRITING A SUCCESSFUL BUSINESS PLANDEFINING A BUSINESS PLAN

• A good definition: A business plan is a document that convincingly demonstrates the ability of your business to sell enough of its product or service to make a satisfactory profit and be attractive to potential backers.

• A better definition: A business plan is a selling document that conveys the excitement and promise of your business to any potential backers or stakeholders.

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EIGHT REASONS FOR WRITING A BUSINESS PLAN

1. To sell yourself on the business - "sanity check".

2. To obtain bank financing.

3. To obtain investment funds.

4. To arrange strategic alliances.

5. To obtain large contracts.

6. To attract key employees.

7. To complete mergers and acquistions.

8. To motivate and focus your management team.

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TYPES OF PLANS

• The Summary Business Plan - up to ten pages

• The Executive Summary - up to two pages

• The Full Business Plan - 10 - 50 pages

• The Operational Business Plan - 40 - 200 pages

GETTING STARTED TO WRITE

BRAINSTORMING

• Step 1 Posing the Right Questions or Subjects

• Step 2 Providing Bite-Size Answers

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WHAT SHOULD THE BUSINESS PLAN COVER

1. COVER PAGE

2. TABLE OF CONTENTS

3. EXECUTIVE SUMMARY

4. THE COMPANY

5. THE MARKET

6. THE PRODUCT/SERVICE

7. SALES AND PROMOTION

8. FINANCES (CASH FLOW, INCOME/LOSS, BALANCE SHEET)

9. APPENDICES (e. g., EXECUTIVES PROFILES)

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ALTERNATIVE CONTENTS

1. COVER PAGE

2. SUMMARY

3. TABLE OF CONTENS

4. INTRODUCTION

5. DESCRIPTION OF VENTURE

6. MARKETING STRATEGY

7. FINANCIAL STRATEGY

8. FINANCIAL SCENARIOS

9. OPERATING STRATEGY

• APPENDICES

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BUSINESS PLAN TARGETING SUMMARYStakeholder Issues to

emphasizeIssues to

deemphasizeLength

Banker Cash flow, assets,

solid growth

Fast growth, hot

market

10-20 pp.

Investor Fast growth, potential

large market,

management team

Assets 20-40 pp.

Strategic partner Synergy, proprietary

products

Sales force, assets 20-40 pp.

Large customer Stability, service Fast growth,hot

market

20-40 pp.

Key employees Security, opportunity Technology 20-40 pp.

Merger &

acquisition

specialist

Past accomplishments Future outlook 20-40 pp

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CRITERIA FOR EVALUATING VENTURE OPPORTUNITIES (1)

Attractiveness

Criterion Higher Potential Lower Potential

Market Issues

Need Identified Unfocused

Customers Reachable; receptive Unreachable or loyal to others

Payback to user Less than one year Three years plus

Value added or created High Low

Product life Durable; beyond time to recover investment plus profit

Perishable; less than time to recover investment

Market structure Imperfect competition or emerging industry

Perfect competition or highly concentrated or mature industry or declining industry

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Attractiveness

Criterion Higher Potential Lower Potential

Market Issues (continued)

Market size $100 million sales Unknown or less than $10 million sales or multibillion

Market growth rate Growing at 30% to 50% or more

Contracting or less than 10%

Gross margins 40% to 50% or more; durable

Less than 20%; fragile

Market share attainable (year 5)

20% or more; leader Less than 5%

Cost structure Low cost provider Declining cost

CRITERIA FOR EVALUATING VENTURE OPPORTUNITIES (2)

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Attractiveness

Criterion Higher Potential Lower Potential

Economic/harvest issues

Profits after tax 10% to 15% or more; durable

Less than 20%; fragile

Time to:

Break even Under 2 years More than 3 years

Positive cash flow Under 2 years More than 3 years

ROI potential 25% or more/year; high value

15%-20% or less/ year; low value

Value High strategic value Low strategic value

Capital requirements Low to moderate; fundable Very high; unfundable

Exit mechanism Present or envisioned harvest options

Undefinded; illiquid investment

CRITERIA FOR EVALUATING VENTURE OPPORTUNITIES (3)

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Attractiveness

Criterion Higher Potential Lower Potential

Competitive advantages issues

Fixed and variable costs:

Production Lowest Highest

Marketing Lowest Highest

Distribution Lowest Highest

Degree of control:

Prices Moderate to strong Weak

Costs Moderate to strong Weak

Channels of supply/resources

Moderate to strong Weak

Channels of distribution Moderate to strong Weak

CRITERIA FOR EVALUATING VENTURE OPPORTUNITIES (4)

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Attractiveness

Criterion Higher Potential Lower Potential

Competitive advantages issues (continued)

Barrier to entry:

Proprietary protection/ regulation advantage

Have or can gain None

Response/lead time advantage in technology, product, market innovation, people, location, resources or capacity

Resilient and responsive; have or can gain

None

Legal contractual advantage

Proprietary or exclusive None

Contacts and networks Well developed; high-quality; accessible

Crude; limited inaccessible

CRITERIA FOR EVALUATING VENTURE OPPORTUNITIES (5)

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Attractiveness

Criterion Higher Potential Lower Potential

Management team issues

Team Existing, strong proven performance

Weak or solo entrepreneur

Competitor`s mind set and strategies

Competitive; few; not self-destructive

Dumb

Fatal flaw issue

Fatal flaws None One or more

CRITERIA FOR EVALUATING VENTURE OPPORTUNITIES (6)

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BUSINESS PLAN A MORE DETAILEDTABLE OF CONTENTS

Cover Page

Executive Summary 1

1. Introduction-Industry, the company and its products 2– The industry– The company– The products or services

2. Market research and analysis 3– A. Customers– B. Market Size and Trends– C. Competition– D. Estimated Market share and sales– E. Ongoing Market evaluation

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BUSINESS PLAN A MORE DETAILEDTABLE OF CONTENTS (continued)

3. Marketing plan 6– A. Overall marketing strategy

– B. Pricing

– C. Sales tactics

– D. Service and warranty policies

– E. Advertising and promotion

4. Design and development plans 8– A. Development status and tasks

– B. Difficulties and Risks

– C. Product improvement and New products

– D. Costs

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BUSINESS PLAN A MORE DETAILEDTABLE OF CONTENTS (continued)

5. Manufacturing and operations plan 9– A. Geographic Location

– B. Facilities and improvements

– C. Strategy and plans

– D. Labor Force

6. Management team 11– A. Organization

– B. Key management Personnel

– C. Management compensation and ownership

– d. Board of directors

– E. Management assistance and training needs

– F. Supporting professoinal services

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BUSINESS PLAN A MORE DETAILEDTABLE OF CONTENTS (continued)

7. Overall schedule 13

8. Critical risks and problems 15

9. Community benefits 16– A. Economic benefits

– B. Human development

– C. Community development

10. The financial plan 17– A. Profit and loss forecast

– B. Pro forma cash flows analysis

– C. Pro forma balance sheets

– D. Breakeven chart

– E. Cost control

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BUSINESS PLAN A MORE DETAILEDTABLE OF CONTENTS (continued)

PRO FORMA INCOME STATEMENTS

PRO FORMA CASH FLOWS STATEMENTS

PRO FORMA BALANCE SHEETS

BREAKEVEN CHART

11. PROPOSED COMPANY OFFERING 24– A. Desired financing

– B. Securities offering

– C. Capitalization

– D. Use of funds

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EXHIBIT 1

PRO FORMA INCOME STATEMENTS (1)

1st Year - Months 2nd Year - Quarters 3rd Year - Quarters1 2 3 4 5 6 7 8 9 10 11 12 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Sales

Less: Discounts

Less: Bad Debt Provision

Less: Materials Used

Direct Labor

Manufacturing Overhead (2)

Other Manufacturing Expense (Leased Equip.)

Total Cost of Goods Sold

Gross Profit (or Loss)

Less: Sales Expense

Engineering ExpenseGeneral and Administrative

Expense (3)

Operating Profit (or Loss)

Less:Other Expense (e.g., interest, depreciation)

Profit Before Taxes (or Loss)

Income Tax Provision

Profit (Loss) After Taxes(1) See also the Financial Statement Guidelines you received at the workshop, to decide which is more appropriate for your venture.(2) Includes rent, utilities, fringe benefits, telephone.(3) Includes office supplies, accounting and legal services, management, etc.

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EXHIBIT 2PRO FORMA CASH FLOWS

1st Year - Months 2nd Year - Quarters 3rd Year - Quarters1 2 3 4 5 6 7 8 9 10 11 12 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Cash Balance: Opening

Add: Cash Receipts

Collection of Accounts

Misc. Receipts

Bank Loan Proceeds

Sale of Stock

Total Receipts

Less: Disbursements

Trade Payables

Direct Labor

Manufacturing Overhead

Leased Equipment

Sales Expense

Warranty ExpenseGeneral and Administrative Expense

Fixed Asset Additions

Income Tax

Loan Interest @___%

Loan Repayments

Other Payments

Total Disbursements

Cash Increase (or Decrease)

Cash Balance: Closing

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EXHIBIT 3PRO FORMA BALANCE SHEET

1st Year - Quarters 2nd Year 3rd Year1Q 2Q 3Q 4Q

ASSETS

Current

Marketable Securities

Accounts Receivable

Inventories

Raw Materials and Supplies

Work in Process

Finished Goods

Total Inventory

Prepaid Items

Total Current Assets

Plant and Equipment

Less: Accumulated

Depreciation

Net Plant and Equipment

Deferred Charges

Other Assets (Identify)

TOTAL ASSETS

LIABILITIES AND STOCKHOLDER'S EQUITY

Notes Payable to Banks

Accounts Payable

Accruals

Federal and State Taxes

Other

TOTAL CURRENT LIABILITIES

Long Term Notes

Other Liabilities

Common Stock

Capital Surplus

Retained Earnings

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY